Corporate Law SHIVDAS

Shiv Das
Delhi University Series
CBCS
B.Com (Hons)
CORPORATE LAWS
PAST YEARS
Examination Papers
(Solved)
Shiv Das & Sons

Educational Publishers
.
SYLLABUS
CORPORATE LAWS
Duration: 3 hours Marks: 100 Credits: 6
Course Objective. To impart basic knowledge of the provisions of the Companies Act
2013 and the Depositories Act, 1996. Case studies involving issues in corporate laws are
required to be discussed.
Course Learning Outcomes. After completing the course, the student shall be able to:
CO1: understand the regulatory aspects and the broader procedural aspects involved in
different types of companies covering the Companies Act 2013 and Rules there
under.
CO2: follow the basic legal documents and their usage essential for operations and
management of company.
CO3: enable the students to synthesise company processes, meetings and decisions.
CO4: equip the students with framework of dividend distribution and role of auditors
in a company.
CO5: comprehend and evaluate working of depositories and their functions in stock
markets.
COURSE CONTENTS
Unit I: Introduction. Meaning and characteristics of a company; Lifting of corporate
veil; Administration of Company Law [including National Company Law Tribunal
(NCLT), National Company Law Appellate Tribunal (NCLAT), Special Courts]; Types
of companies including private and public company, government company, foreign
company, one person company, small company, associate company, dormant company
and producer company; Association not for profit; Illegal association; Formation of
company, promoters, their legal position and pre incorporation contracts; Online
registration of a company.
Unit II: Documents and shares. Memorandum of Association and its alteration, Articles
of Association and its alteration, doctrine of constructive notice, doctrine of ultra vires
and indoor management; Prospectus, Shelf and Red herring prospectus, misstatement in
prospectus; book building; Allotment and Forfeiture of shares, Sweat Equity, ESOPs,
Bonus issue, and Further issue of shares, buyback and provisions regarding buyback;
Membership of company.
Unit III: Management and Meetings. Classification of directors—Additional, Alternate
and Casual directors, Women directors, Independent director, Small shareholder’s
director; Director Identity Number (DIN); Appointment, Disqualifications, Removal of
directors; Legal positions, Powers and Duties; Key managerial personnel, Managing
director, Manager and Whole Time Director; Board Meetings: meetings through video
conferencing; Shareholder meetings: AGM and EGM. Convening and Conduct of
meetings: Requisites of a valid meeting; Resolutions; Postal ballot; e-voting.
Unit IV: Dividends, Audit and Winding up. Provisions relating to payment of
Dividend, Company Audit—auditor’s qualifications and disqualifications, Auditor’s
appointment, Rotation of auditors, Auditor’s removal, Auditors’ report and Auditor’s
powers.
Winding Up: Concept and Modes of Winding Up
Unit V: The Depositories Act 1996. Definitions; Depository system; Rights and
obligations of depositories; Participants, issuers and beneficial owners; Inquiry and
inspections; Penalty.
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(iii)
CONTENTS
1. Company: Meaning and Nature ... ... 1
2. Types of Companies ... ... 8
3. Formation of Company ... ... 18
4. Memorandum of Association ... ... 24
5. Articles of Association ... ... 33
6. Prospectus ... ... 41
7. Allotment of Securities ... ... 52

(Shares & Debentures)
8. Shares and Share Capital ... ... 57
9. Forfeiture and Surrender of Shares ... ... 67
10. Transfer and Transmission of Securities ... ... 70

(Shares & Debentures)
11. Management ... ... 74
12. Convening & Conduct of Shareholders’ Meetings ... ... 99
13. Dividend Provisions ... ... 115
14. Books of Accounts ... ... 120
15. Audit and Auditors ... ... 129
16. Concept and Modes of Winding up ... ... 137
17. Miscellaneous Provisions—

E-filing, National Company Law Tribunal
and Special Courts ... ... 142
18. The Depositories Act ... ... 147
Voluntary Winding up and Insolvency come under ... ... 155-156

the perview of Indian Bankruptcy Code, 2016
University Question Papers with

their Answers ... 157 onwards
(iv)
COMPANY:
1
MEANING AND NATURE
Q. 1. Define a Company, giving its characteristics.

Ans. Company. A company is a voluntary association of a number of persons
formed for some common objective or purpose.
Section 2(20) of the Companies Act, 2013 defines a company as “a company
incorporated under this Act or under any previous company law.” Important amongst
previous Company laws are the Indian Companies Acts passed in the years
1850, 1866, 1882 1913 and 1956.
The definition contained in the Act does not highlight the features of a
company. Some of the important definitions of a company are as follows:
“By a company is meant an association of many persons who contribute money or
money’s worth to a common stock and employ it in some trade or business and who share
the profit and loss (as the case may be) arising therefrom. The common stock so
contributed is denoted in money and is the capital of the company. The persons who
contribute it, or to whom it belongs, are members. The proportion of capital to which each
member is entitled is his share. Shares are always transferable although the right to
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transfer them is often more or less restricted.” —Justice Lindley
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“A company is an incorporated association, which is an artificial person created by
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law, having a separate entity, with a perpetual succession and a common seal.”
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—Prof. Haney
The Companies Amendment Act, 2015 has made the commom seal optional
by omitting the words “and a common seal” from Section 9.
Thus, a company may be defined as “an incorporated association which is an
artificial person created by law, having a separate entity, with a perpetual succession, a
common seal, capital divided into transferable shares and carrying limited liability.”
Characteristics / Features of a Company:
An analysis of the above definitions reveals the following characteristics of a
company:
1. Incorporated Association. Company is an incorporated association of
persons which is created by registration under the prevalent Companies Act. To
form a public company, at least seven persons and for forming a private
company, at least two persons are required. To form a one person company, as a
private company, only one person is required.
2. Artificial Legal Person. A company is an artificial legal person. It is artificial
because it is created by a process other than the natural birth. It comes into
existence through the operation of law. It is a legal person because it exists in the
eyes of the law. It can do a number of things which can be done by a natural
person, e.g., a company can enter into a contract, it can purchase and sell assets, it
can be fined, it can file a suit, and so on. It acts through a Board of Directors
elected by its shareholders.
3. Independent Legal Entity (Doctrine of Corporate Veil). A company is a
legal person and is different from its members. The property of the company
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2 SHIV DAS DELHI UNIVERSITY SERIES
belongs to the company alone and the members, individually or collectively, can
not claim ownership rights, in the assets of the company during its existence or in
its winding up. A company can file a suit against its members and the members
can also file a suit against the company. Further, the members are not liable for
the liabilities of the company. Their liability is limited to the extent of their
shareholdings. Creditors of the company are the creditors of the company alone
and they cannot proceed directly against the members of the company. The
concept of separate legal entity was recognized in the famous case of Solomon
vs. Solomon & Co. Ltd.
In this case, Mr. Solomon floated a company Solomon & Co. Ltd. and sold his
business to the Company for £30,000. Seven members of the company were
Solomon, his wife, daughter and four sons. The purchase consideration of
£30,000 was paid by the company in the form of 20,000 equity shares of £1
each and £10,000 in the form of debentures. The debentures had a charge on
the assets of the company. One share of £1 each was subscribed for in cash by
the remaining six members of his family. After a period of one year, the
company became insolvent and went into liquidation. At the time of
liquidation, the position of the company was roughly like this: assets £6,000,
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secured creditors (debentures issued to Mr. Solomon) £10,000 and unsecured
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creditors £7,000. The unsecured creditors claimed priority over the debenture-
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holder (Mr. Solomon) on the ground that Solomon and Solomon & Co. were
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one and the same person. Therefore, the assets of the company should be
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applied for the payment of their debts. The lower court held that the company
was merely an agent for Solomon who had to indemnify it against the losses.
Mr. Solomon appealed in the higher court and the decision was reversed. It
was held that as soon as the company was duly incorporated, it became, in the
eyes of law, a separate and independent person from its members. Thus, the
assets of the company must be applied in payment of the debentures first in
priority to the unsecured creditors. Thus, unsecured creditors could not get
anything.
In another case Lee vs. Lee’s Air Farming Ltd., Lee formed a company Lee’s
Air Farming Ltd. He held 2,999 shares out of 3,000 shares of the company. He
appointed himself as the Managing Director of the company as well as the
Chief Pilot at a salary. While carrying out his duties, he died in the air crash.
His widow claimed compensation on the plea that Mr. Lee was an employee
of the company. The company opposed the claim on the ground that the same
person can not be employer as well as the employee. But the court decided
that Lee and the company were separate in the eyes of law.
4. Perpetual Succession. A company never dies except that it can be brought to
an end only through the process of law, called winding up. Life of the company is
not at all affected by insolvency, lunacy or death of its members. It continues to
exist even where all its members are killed by, say, a bomb while they are in a
general body meeting.
5. Limited Liability. A company may be either a company limited by shares or
limited by guarantee. If it is a company limited by shares, then the liability of its
CHAPTER 1: COMPANY: MEANING AND NATURE 3
members is limited only to the extent of the unpaid amount on the shares. For
example, if on his share of ` 10 each, a member has already paid ` 6 per share,
then his liability is limited only to the extent of the remaining ` 4 per share.
If the company is limited by guarantee, then the liability of its members is
limited only to such an amount as the individual members have agreed to
undertake. However, this amount is required to be paid by the members in the
event of the company being wound up and not before that.
6. Transferability of Shares. The shares of a company are freely transferable
in the case of public companies whereas this is not so in the case of private
companies.
7. Common Seal. Every company has its own common seal which is affixed
on all the important documents of the company. The common seal, with the
name of the company engraved on it, is used as a substitute of its signature.
The Companies (Amendment) Act, 2015 has made the common seal optional by
omitting the words “and a common seal” from Section 9. The amendment provides that
if the company opts to have a common seal, the documents which need to be authenti-
cated by a common seal would be required to be so done. If the company does not have a
common seal, the documents would be authenticated by two directros or by a director
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and the Company Secretary, where the company has appointed a Company Secretary.
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8. Separate Property. A company can hold property in its own name. The pro-
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perty of the company is in its own name and managed and controlled by it. As
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such, property of the company is its own property and its members have no
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insurable interest in it. Members, thus, cannot get insurance-claim of the
company’s property. This was so decided in the case of Macaura vs. Northern
Assurance Co. Ltd.
In the case of Macaura vs. Northern Assurance Co. Ltd., Macaura (M), the
owner of a timber estate sold all the timber to a registered company in
exchange for the shares in the company. The timber continued to be insured
in M’s name personally. He held all the shares of the company except one.
He had also advanced loan to the company. Bulk of the timber was
destroyed by fire. M claimed the loss from the insurance company. Held, the
insurance company was not liable as M had no insurable interest in the
company’s property. M, neither as shareholder nor as creditor, could insure
the company’s property.
Q. 2. “The term body corporate connotes a wider meaning than the term
company.” Comment.
Ans. Company and Body Corporate. ‘Body Corporate’ or ‘Corporate Body’
refers to a body which is incorporated under a special statute and has a
perpetual succession with a common seal and is an entity separate from the
members constituting it.
As per Section 2(11) of the Companies Act, 2013, ‘Body Corporate’ or ‘Corpo-
ration’ includes a company incorporated outside India, but does not include:
(i) a cooperative society registered under any law relating to cooperative
societies;
(ii) any other body corporate (not being a company as defined in the Act)
which the Central Government may notify in this behalf.
The term ‘Body Corporate’ or ‘Corporation’ is, thus, wider than the word
‘Company’ and includes the following:
(a) Foreign companies.
(b) Corporations formed under the Special Acts of Central Government or
State Government.
(c) Public Financial Institutions under Section 2(72), e.g., LIC, ICICI, IDBI etc.
(d) Nationalised Banks.
(e) All Indian Companies.
(f) Limited Liability Partnership registered under the Limited Liability
Partnership Act, 2008.
Q. 3. “A company is a legal person but not a citizen.” Comment.
Ans. A company is a legal person in the eyes of law and can hold property, sue
and be sued in its own name. But, like a natural person, it can not be a citizen. It
does not enjoy the fundamental rights which are enjoyed by a citizen as was
decided in the case of State Trading Corporation of India vs. Commercial Tax
Officer. Even if all the members who form the company are citizens of India, the
company does not become a citizen of India. Though a company can not be a
citizen, yet it has a nationality, domicile and residence. The nationality of the
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company is decided by the place of its incorporation. Similarly, the domicile of
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the company is the place of its registration. A company can have only one
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nationality and one domicile, but it may have several residences. Residence is
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important from the view point of taxation.
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Q. 4. What is “Corporate Veil”? When or under what circumstances is it
lifted or pierced?
Ans. The term “Corporate Veil” means that in the eyes of law, a company is a
separate legal entity distinct from its members. ‘Veil’ means a line of demarcation
existing between the two, i.e., One the company and the Other its members [case
of separate entity as held in the famous case of Solomon vs. Solomon & Co. Ltd.]
When this veil is used as a means to commit fraud or wrong conducts, then it
becomes necessary for even courts to lift or pierce this veil and to look at the
members who are behind the company and to hold them liable for the wrongful
acts of the company.
Lifting of corporate veil or exceptions to the separate legal entity concept can
be studied under the following heads:
1. Under statutory provisions; 2. Under judicial interpretations
1. Under statutory provisions:
(i) For establishing the relationship of holding and subsidiary company.
When one company controls another company, the former is called the
holding company and the latter subsidiary company. Section 129(3)
provides that every holding company shall attach along with its Balance
Sheet and Statement of Profit & Loss, copies of Balance Sheet, Statement
of Profit & Loss etc. in respect of each subsidiary company.
(ii) Investigation in the affairs of a company. If an inspector has been
appointed under Section 210 or 212 or 213 of the Companies Act to
investigate the affairs of a company, he can investigate the affairs of any
other related company under the same management.
(iii) For investigation of ownership of company. Under Section 216, the

Central Government may appoint an inspector to investigate the
membership of any company for the purpose of determining the persons
who have financial interest in the company and control or materially
influence its policies.
(iv) Misrepresentation in Prospectus. If there is misrepresentation in
prospectus then every promoter, director or any other person who
authorises the issue of such a prospectus shall be liable to the investors
who purchased the shares on the basis of misleading prospectus. They
shall also be criminally liable under Section 34 and punishable under
Section 447 for fraud.
(v) Failure to return application money. If minimum subscription is not
received within a period of 30 days from the date of issue of prospectus,
or such other period as specified by SEBI, the application money should
be returned in such time and manner as may be prescribed [Section
39(3)]. In case of default, company and its officer who is in the default
shall be liable to a penalty, for each default, of `1,000 for each day during
which default continues or ` 1 lakh, whichever is less. [Section 39(5)]
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(vi) Fraudulent conduct of business. If in the course of winding up of a
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company, it appears that any business of the company has been carried
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on with the intention to defraud Creditors of the company or any other
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persons, the Tribunal on an application of the Official Liquidator or the
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Company Liquidator, or on application of any other Creditor or
Contributory of the company, may, if it thinks it proper to do so, declare
that any persons who were knowingly parties to the carrying on of the
business in the manner aforesaid, shall be personally responsible
without any limitation of liability for all or any of the debts or other
liabilities of the company as the Tribunal may direct [Section 339].
(vii) Directors with unlimited liability. Sometimes when the directors,
through a written agreement, agree to have their liability made
unlimited, they become personally liable for all the debts of the company.
(viii) Liability of promoters for pre-incorporation contracts. Promoters will
be personally liable for all those pre-incorporation contracts which are
not adopted by the company after incorporation.
2. Under judicial interpretations:
(i) For the protection of Revenue. The court will ignore the separate entity
of the company if the company has been formed for the purpose of
evading income-tax.
In the case of (Re) Dinshaw Maneckjee Petit, the assessee was earning huge
income by way of dividend and interest. He formed four private companies
and transferred his investments to each of these companies in exchange for
their shares. The dividend and interest income received by the company was
handed back to Dinshaw as a pretended loan. The court decided that the
company was formed by the assessee for avoiding tax and the companies
and the assessee were one and the same.
(ii) Fraud or improper conduct. The court has lifted corporate veil where the
company seems to have been formed to defraud creditors or to avoid
legal obligations.
In the case of Gilford Motor Co. Ltd. vs. Horne, Mr. Horne was an ex-
employee of the company. He was under an agreement with the company
not to solicit its customers. He fraudulently formed a company to carry on a
similar business which he was not allowed to do in his personal capacity as
per his agreement with the Company. His Company was held to be a mere
sham or hoax formed for the sole purpose of allowing him to commit a
breach of the agreement which he had entered into with his former
employer.
(iii) For determination of the enemy character of the company. Sometimes, it
becomes necessary to find out whether the individuals running the
company are friends or enemies, especially during war.
In the case of Daimler Co. Ltd. vs. Continental Tyre and Rubber Co. (Great
Britain) Ltd., a company was incorporated in London for the purpose of
selling tyres manufactured in Germany, by a German company. Its majority
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shareholders and all its directors were Germans. During the war between
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England and Germany in 1914, it was held that the Board of Directors as well
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as the shareholders were Germans, the company was a German company
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and hence an enemy company. Thus, the suit filed by the company to
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recover a trade debt was dismissed as it amounted to trading with the
enemy.
PRACTICAL PROBLEMS
1. During a war all the members of a private company, while in general meeting are
killed by a bomb. Does the company cease to exist because all the members die?
State reasons.
Hint:A company has a perpetual succession. It is independent of the life of
its members and its existence is in no way affected by the death of all its
members. For Details: (Refer to Q. 1, Point 4). [Page 2
2. M holds all the shares (except one) in a timber concern and is also its substantial
creditor. He gets the company’s timber insured in his own name. Unfortunately,
the timber is destroyed by fire and M claims the reimbursement of loss from the
insurance company. Is the insurance company liable to reimburse the loss and pay
to M?
Hint: A company is separate and distinct form its members. Thus
company’s property is not the property of its members.
For Details: (Refer to the case “Macaura vs. Northern Assurance Co. Ltd.”)
[Page 3
3. ‘A’ was a managing director of the company. His appointment condition was that
he shall not during his service or afterwards entice the customers of the company.
His employment was terminated and after some time he formed a company to
carry his own business that enticed the customers of his previous employers. He
wanted the separate entity protection, that it is the company and not he who is
enticing the customers. Decide, if he and his company are one and the same.
Hint: This is an example of lifting of the corporate veil. Yes, he and his
company are one and the same as the company is formed for indulging in
improper conduct or fraud.
For Details: (Refer to the case Gilford Motor Co. vs. Horne). [Page 5
4. X an employee of a Company had not been paid salary for several months. He
sued the Managing Director of the Company for recovery of the salary due to
him. Would he succeed?
Ans. In this case, X would not succeed since the managing director is an
employee of the company and company is a separate entity from its
members. The suit to recover salary due from a company lies against the
company and not against the managing director. The facts of the given
problem relate to the case Abdul Haque vs. Das Mal.
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Das
Shiv
2 TYPES OF COMPANIES
Q. 1. What is a private company? What are the privileges enjoyed by such a

company?
Ans. Section 2(68) of the Companies Act, 2013 defines a private company as
a company having a minimum paid-up share capital as may be prescribed and
which, by its Articles of Association:
— restricts the right of transfer of shares;
— except in case of one person company, limits the number of its members
to 200 excluding its employees or ex-employees who still continue to be
its members; and
— prohibits the company to invite public to subscribe to its securities.
However, if two or more persons hold shares in joint names, then they are
regarded only as one single member.
Exemptions and Privileges enjoyed by Private Companies:
(i) Only two persons (minimum) are required to form a private company.
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(ii) Only two directors (minimum) are needed to run such a company.
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(iii) A private company is not required to issue a prospectus.
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(iv) Condition of minimum subscription does not apply to it.
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(v) Only two members constitute the quorum for meeting of its shareholders.
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(vi) Rules regarding the overall or maximum limit for managerial
remuneration do not apply to such companies.
(vii) It is not required to comply with certain provisions and restrictions
relating to directors. For example:
(a) All its directors can be permanent life directors.
(b) It may, by its Articles of Association, provide special disqualifications
for appointment of directors.
(c) A person can be a director in 20 private companies at a time.
(viii) It is exempted from the requirement of rotation of auditors.
(ix) It is exempted from the requirement of having independent director on
its Board of Directors.
(x) Every listed public company has to mandatorily constitute a
‘Nomination and Remuneration Committee’ whereas a private
company is exempted from such requirement.
Q. 2. Define a Public company. How does it differ from a Private Company?
Ans. Public Company. A public company means a company as defined under
Section 2(71) of the Companies Act, 2013 and it means a company
— which is not a private company;
— has a minimum paid up capital as may be prescribed from time to time;
and
— Is a private company which is subsidiary of a public company.
Private Company. See Q. 1 above.
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CHAPTER 2: TYPES OF COMPANIES 9
Distinction between a Public Company and a Private Company

Point of Distinction Public Company Private Company
1. Minimum number A public company must A private company must
of members have at least 7 members. have at least 2 members.
2. Maximum number No limit. Its members should not
of members exceed 200 in number (ex-
clusive of past and present
employee members).
3. Minimum number Three Two
of Directors
4. Public invitation for It is free to invite the public It cannot invite the public to
capital to buy its shares and buy its shares and deben-
debentures. tures.
5. Prospectus It must issue and file a Need not issue and file a
prospectus before allotting prospectus.
its shares.
6. Allotment of shares It cannot allot shares It can allot shares without
without receiving the raising the minimum subs-
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minimum subscription. cription.
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7. Transfer of shares Its shares are freely Its shares are not freely
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transferable. transferable.
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8. Managerial remu- Total managerial remu- No such restriction applies to
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neration neration in a public comp- a private company.
any cannot exceed 11% of
the net profits.
9. End-words of the Public Ltd. or Ltd. Private Ltd.
name
10. Quorum for a If the number of members It is 2 in the case of a
General Meeting as on the date of the private company.
meeting is:
Not more than 1,000—5
members personall present
Above 1,000 and up to
5,000—15 members per-
sonally present
More than 5,000—30 mem-
bers personally present.
11. Retirement of Directors to retire by Directors need not retire by
directors by rotation rotation. rotation.
12. Appointment of Inde- Required to appoint in Not required to appoint.
pendent Directors prescribed company.
13. Constitution of Audit Required to constitute an Not required to constitute
Committee Audit Committee in pre- an Audit Committee.
scribed public companies.
Q. 3. State the procedure for converting a private company into a public
company.
Ans. Procedure for converting a private company into a public company. For
converting a private company into a public company, Articles has to be altered in

such a manner that the restrictions with respect to transfer of shares, number of
members etc. are removed from it. From the date of alteration, the company
ceases to be a private company. A copy of the altered Articles, along with the
fees, should be filed with the Registrar, who shall register the same.
Steps for converting a private company into a public company:
(i) Special Resolution. A special resolution has to be passed to alter the
Articles of the company to delete the restrictions of Section 2(68).
(ii) Copy of Resolution and altered Articles. Within 15 days of passing the
resolution, copy of the same along with a printed copy of altered
Articles, along with fees must be filed with the Registrar of Companies.
(iii) Increasing the number of members. If the number of members is less
than seven, it must be raised to minimum seven.
(iv) Increasing the number of Directors. If the number of directors is less
than three, it must be raised to minimum three.
(v) Deleting the word Private from the name of the Company. The word
private shall be deleted from its name by passing a special resolution.
Q. 4. State the procedure for converting a public company into a private
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company.
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Ans. Procedure for converting a public company into a private company:
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(i) Special Resolution. A special resolution is to be passed to alter the
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Articles to include the provisions of Section 2(68).
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(ii) Copy of Special Resolution. Within 30 days of passing the resolution, a
copy has to be filed with the Registrar of Companies.
(iii) Government’s Approval. Alteration made in the Articles of a company
should be approved by the Central Government. The company becomes
a private company from the date of the order of approval.
(iv) Filing copy of altered Articles and Government’s approval. Within 15
days of receiving the approval, copy of the C.G.’s letter of approval along
with a copy of altered Articles, must be filed with the Registrar of
Companies.
(v) Adding the word Private to the name of the company. The word
‘Private Limited’ should be included in the name of the company.
(vi) Reduction in membership. The number of members, if more than 200,
should be limited to 200, excluding past and present employee members.
Q. 5. Write a note on ‘One Person Company’ (OPC).
Ans. According to Section 2(62) “One person company means a company which has
only one natural person as a member.”
Section 3 of the Companies Act, 2013 classifies an OPC as a private company
for all the legal purposes with only one member. Therefore, all the provisions
related to the private company under the Companies Act, 2013 are applicable to
an OPC, unless otherwise expressly excluded in the Act.
The words ‘One Person Company’ should be mentioned below the name of the
company, wherever the name is affixed, used or engraved.
Salient Features of OPC:
(i) It has only one member.
(ii) It has at least one director. The maximum number of directors is fifteen.
(iii) It is registered as a private company.
(iv) An OPC can be formed under any of the following categories:
• company limited by guarantee,
• company limited by shares, or
• an unlimited company.
(v) An OPC limited by shares is required to comply with the following
requirements:
• it shall restrict the right to transfer its shares, and
• prohibit any invitation to public to subscribe for the securities of the
company.
(vi) The member of an OPC has to nominate a nominee with the nominee’s
written consent, and file it with the Registrar of Companies. This
nominee, in the event of death or in the event of any other incapacity,
shall become the member of an OPC. The member of an OPC, at any
time, can change the name of the nominee after giving a notice to the
Registrar of Companies in such manner as may be prescribed. On
account of death of the member, the nominee automatically becomes the
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member of the company. He also becomes liable for all the liabilities of
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OPC.
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(vii) Only a natural person who is an Indian citizen and resident in India can
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incorporate OPC. Same rule applies to the nominee of the sole member.
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(viii) A person can incorporate only one OPC.
(ix) The share capital should not exceed ` 50 lakhs and the average turnover
should not exceed ` 2 crores.
Exemptions enjoyed by an OPC. An OPC enjoys the following exemptions:
• It is not required to prepare Statement of Cash Flows.
• It is not required to rotate auditors in accordance with Section 39(2).
• The Annual Return can be signed by the company secretary or by the
director of the company if there is no company secretary.
• It is exempt from holding the Annual General Meetings.
Q. 6. What is a Small Company?
Or, Write a note on Small Company.
Ans. Section 2(85) of the Companies Act, 2013 defines a ‘Small Company’ as a
company other than a Public Company
(i) whose paid-up share capital does not exceed ` 50 lakhs or such amount
as may be prescribed and the prescribed amount shall not be more than
` 10 crore; or
(ii) whose turnover as per its last Profit & Loss Account does not exceed ` 2
crore or such amount as may be prescribed and the prescribed amount
shall not be more than ` 100 crore.
The following companies are not treated as a small company:
• a holding company or a subsidiary company.
• a company registered under Section 8; or
• a company or body corporate governed by any special Act.
The Companies Act, 2013 provides certain flexibility to small companies. Some
of the relaxations provided are as follows:
• Statement of Cash flows is not required to be prepared.
• Annual Return can be signed by the company secretary or one director if
there is no company secretary.
• Board meeting is required to be held at least once in each half of a
calendar year and the gap between the two meetings should not be less
than 90 days.
Q. 7. What is a producer company? Explain provisions of the Companies Act
in respect of such a company.
Ans. Producer Company. Reference Section 465(1) of the Companies Act,
2013—As per Section 581A(1) of the Companies Act, 1956, ‘Producer Company’
means a body corporate having objects or activities specified in Section 581-B
and registered as a producer company under this Act.
This Section allows formation of cooperative business as companies and also to
allow conversion of the existing cooperatives into companies called ‘Producer
Companies’.
Features or Characteristics of Producer Companies:
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– Minimum number of members is 10.
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– No limit as to maximum number of members.
iv
– Formed only as a private company.
h
– Use of word ‘Private’ as part of its name is not necessary.
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– Its shares are not allowed to be traded publicly.
– Name must end with words “...Producer Company Ltd.”
– Minimum number of directors—5 and Maximum number of
directors—15.
Objects of a Producer Company (Section 581B):
(a) production, harvesting, procurement, grading, pooling, handling
marketing, selling, export of primary produce of the members or import
of goods or services for their benefit.
(b) processing including preserving, drying, canning and packaging of
produce of its members;
(c) manufacture, sale or supply of machinery, equipment or consumables
mainly to its members;
(d) providing education on the mutual assistance principles to its members
and others;
(e) rendering technical services, consultancy services, training, research
and development and all other activities for the promotion of the
interests of its members;
(f) generation, transmission and distribution of power, revitalisation of
land and water resources, their use, conservation and communications
relatable to primary produce;
(g) insurance of producers or their primary produce;
(h) promoting techniques of mutuality and mutual assistance;
(i) welfare measures or facilities for the benefit of members as may be
decided by the Board;
(j) any other activity ancillary or incidental to any of the above activities
or other activities which may promote the principles of mutuality and
mutual assistance amongst the members in any other manner.
(k) financing of procurement, processing, marketing or other activities
specified in above clauses which includes extending of credit facilities
or any other financial services to its members [Section 581B(1)].
Formation of a Producer Company:
(i) The following are entitled to form a producer company:
• any ten or more individuals who are producers,
• any two or more producer institutions;
• a combination of ten or more individuals and producer institutions.
(ii) The objects for which a producer company is to be formed must be as
specified in the Act.
(iii) The necessary documents including Memorandum of Association and
Articles of Association should be filed with the Registrar of Companies.
(iv) If the Registrar is satisfied that all the requirements of the Act have been
complied with in respect of registration and matters precedent and
incidental thereto, he shall, within 30 days of the receipt of the
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documents required for registration, register the Memorandum, the
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Articles and other documents, if any, and issue a Certificate of
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Incorporation under this Act.
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On registration, the Producer Company shall become a body corporate as if it is
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a Private Limited Company, without, any limit to the number of members thereof.
Provisions of Company Law regarding Producer Companies:
— It is a company registered and incorporated under the Companies Act.
— It has its own Memorandum of Association (M/A).
— It has its own Articles of Association (A/A).
— Both M/A and A/A have to be filed with the Registrar of Companies.
— A/A contains one clause of ‘Mutual Assistance Principle’.
— It has share capital consisting of only equity shares.
— A certificate of incorporation is issued to it by the Registrar of Companies.
— Liability of its members is limited to the nominal value of the shares
taken up by its members.
— A Producer Company can distribute dividends on its shares out of its
profits, if any.
— Membership, generally, consists of individuals based on “one person one
vote” principle.
— Membership may be made open to Producer Institutions as well.
— A Producer Company shall be managed by the Board of Directors
headed by a Chief Executive.
— A Producer Company shall have and hold its meetings—Board Meetings
and General Meetings.
Note: The Companies Act, 2013 does not define a ‘Producer Company’.
Q. 8. Explain the following:
(a) Holding Company and Subsidiary Company,
(b) Government Company,
(c) Association not for Profit,

(d) Companies with Unlimited Liability,
(e) Illegal Association,
(f) Associate company.
Ans. (a) Holding Company and Subsidiary Company. A company which
controls another company, is a holding company and the company being so
controlled is called the subsidiary company.
According to Section 2(46) ‘Holding Company,’ in relation to one or more other
companies, means a company of which such companies are subsidiary companies.
According to Section 2(86) ‘Subsidiary Company’ or ‘Subsidiary’ in relation
to any other company (that is to say the holding company), means a company in
which the holding company
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one half of the total voting power either
on its own or together with one or more of its subsidiary companies.
A company which is subsidiary of a subsidiary company, shall also be a
subsidiary of the holding company. For example, if company C is a subsidiary of
company B and company B is a subsidiary of company A, company C will
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become a subsidiary of company A.
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Though a holding company and its subsidiary enjoy separate legal entities, yet
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a holding company is required to prepare, in addition to its own financial state-
h
ments, a consolidated financial statement of the company and all its subsidiaries.
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(b) Government Company. Section 245 of the Companies Act, 2013 defines a
Government Company as one in which not less than 51% of the paid-up share
capital is held by:
— either the Central Government; or
— any State Government or Governments; or
— jointly by Central Government and any one or more of the State
Governments.
Furthermore, the subsidiary of a Government Company is also called a
Government Company. The Companies Act makes some special provisions for
such Government Companies which are as follows:
1. The auditor of such Government Company shall be appointed or re-
appointed by the Central Government on the advice of the Comptroller and
Auditor General of India (CAG).
2. The Comptroller and Auditor General of India has the following powers in
this regard:
— He can direct the manner in which the accounts of the company shall be
audited by the auditor.
— He can conduct a supplementary or test audit of the company’s accounts
through certain persons authorising them in this respect.
— He can require any information or additional information to be furnished
to the persons authorised to conduct a supplementary or test audit of a
Government Company.
— He has a right to comment upon or supplement the audit report in such
manner as he may think fit.
3. The auditor will submit a copy of the audit report to the Comptroller and
Auditor General of India.
4. The report of the auditor together with the comments or supplements thereto
by the Comptroller and Auditor General of India shall be placed before the
Annual General Meeting of the company.
5. Where the Central Government is a member of the Government Company,
the Central Government shall prepare the annual report on the working and
affairs of the company within three months of its Annual General Meeting before
which the audit report is placed. The annual report is to be laid before both the
Houses of Parliament together with a copy of the audit report and the comments
or supplementary report of the Comptroller and Auditor General of India.
Where the State Government is also a member, the report shall be laid before
the State Legislature as well. But where the Central Government is not a member
of the Government Company, the State Government concerned shall cause the
above documents to be prepared and laid before the State Legislature.
6. The Central Government may, by notification in the Official Gazette, direct
that any of the provisions of the Act:
• shall not apply to any Government Company; or
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• shall apply to any Government Company with specified exceptions,
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modifications and adaptations.
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However, such exemptions, modifications and adaptations need to be
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approved by the Parliament.
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(c) Association not for Profit [Section 8]. The Companies Act permits or allows
the registration under a licence by Central Government of an association not for
profit with ‘Limited Liability’. Such a company may or may not even use the
word ‘Limited’ or words ‘Private Limited’ or ‘Public Limited’ to its name.
However, generally such a licence is given by the Central Government to an
association of persons only if these conditions are fulfilled:
— It is formed for promoting art, commerce, science, religion, charity or any
other such objectives.
— It intends to use all its profits, if any, or other incomes for promoting
above objectives only.
— It does not allow distribution of any of its profits as dividend amongst its
members.
Such an association is even allowed to name itself as Club, Association, Trust,
Chamber or so instead of calling itself a company.
Provisions in respect of a Licensed Company:
(i) Such company shall enjoy all the privileges and be subject to all the
obligations of limited companies.
(ii) A firm may be a member of such a company.
(iii) The licence is granted by the Central Government on such conditions and
subject to such regulations as it thinks fit.
(iv) It is not necessary for the company to use the word ‘Limited’ or the
words ‘Private Limited’ or ‘Public Limited’ as a part of its name.
(v) Such a company shall not alter the provisions of its Memorandum with
respect to its objects except with the prior approval of the Central
Government.
(vi) The licence may at any time be revoked by the Central Government. In
such a case the company shall cease to enjoy the exemption granted
under Section 8.
(vii) These companies are not required to have a minimum paid up capital as
in case of other companies.
(d) Unlimited Company. According to Section 2(92) of the Companies Act, a
company having unlimited liability of its members is an unlimited company.
Members are personally liable for whole amount of the company’s debts and
liabilities. Memorandum of Association of such a company must mention that the
liability of its members is unlimited. An unlimited company may be incorporated
with or without share capital.
Unlimited Company is different from partnership. The liability of its members
arises only on the winding up of the company. The creditors cannot file a suit
against the members directly. Claims can be enforced only against the company.
But in case of partnership, creditors can directly sue the partners for the debts of
the firm.
The Articles of an Unlimited Company should also mention the number of
members with which the company is being incorporated.
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Ordinarily the name of an unlimited company ends with the words
a
unlimited. Such companies are not very popular in India.
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(e) Illegal Association. As per Section 464, no company, association or partner-
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ship consisting of more than 50 persons shall be formed for the purpose of
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carrying on any business that has for its object, the acquisition of gain, by the
association or partnership or by the individual member thereof, unless it is
registered under the Companies Act or any other Indian law.
Section 464 does not apply to the following:
(i) Joint Hindu family. For counting the number of persons, a person,
natural or artificial, would be counted as one. A company, being artificial
person would be treated as a single person.
A Joint Hindu Family, similarly, is treated as a single person.
(ii) An association or partnership, if it is formed by professionals who are
governed by Special Acts. (e.g., LLP Act, 2008)
(iii) Charitable Institutions
(iv) Stock Exchanges
(v) Chit Funds
(vi) Literary/ Scientific/ Religious Associations and Clubs
In a partnership firm, all the partners would be treated as different persons. If
two or more persons hold a share jointly, they would be treated as one single person.
Consequences of an Illegal Association. The consequences of an illegal
association are as follows:
1. No legal existence. An illegal association has no legal existence, i.e., the law
does not recognise its existence. Consequently, it (i) cannot enter into any
contract, (ii) cannot sue any member or outsider if the illegality becomes
apparent, (iii) cannot be sued by any member or outsider, (iv) cannot be wound
up under the Companies Act either at the instance of a creditor, a member or the
association itself. Further, the members of an illegal association cannot sue for
partition of its assets.
2. Unlimited personal liability of the members. Every member is personally

liable for all liabilities incurred in the business, i.e., the members of an illegal
association have unlimited liability.
3. Fine. Every member of an illegal association is punishable with fine
extending upto ` 1,00,000 and is also personally liable for all liabilities incurred in
such business.
4. Subsequent registration of an illegal association does not validate its past acts
(Gujarat Trading Co. Ltd. vs. Tricumji).
5. The illegality of an illegal association cannot be cured by subsequent
reduction in the number of its members (Kumaraswami Chettiar & ... vs. M.S.M.
Chinnathambi Chettiar & ...).
6. The profits made or earned by such illegal association are, however, liable to
tax.
(f) Associate Company. As per Section 2(6) of the Companies Act, 2013,
‘Associate Company’ in relation to another company, means a company which is
significantly influenced by that other company. An associate company is not a
subsidiary company of the company having such influence and includes a joint
venture company.
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A company is said to be significantly influenced if at least 20% of its total
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equity share capital (but not more than 50%) or business decisions under an
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agreement are controlled by the other company.
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If more than 50% of the equity share capital of a company is controlled by
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another company, it would not be an associate company. It would become a
subsidiary company.
PRACTICAL PROBLEM
1. The paid-up share capital of ABC (Pvt.) Ltd is ` 50 lakhs consisting of 5,00,000
shares of ` 10 each fully paid-up. XYZ (Pvt.) Ltd. and its subsidiary PQR (Pvt.)
Ltd are holding 1,50,000 and 1,20,000 shares respectively in ABC (Pvt.) Ltd.
Examine with reference to the provisions of the Companies Act, 2013, whether
ABC (Pvt.) Ltd is a subsidiary of XYZ (Pvt.) Ltd. Would your answer be different
if PQR (Pvt.) Ltd is holding 2,70,000 shares in ABC (Pvt.) Ltd and no shares are
held by XYZ (Pvt.) Ltd in ABC (Pvt.) Ltd.
Hint: As per Section 2(86) of the Companies Act, 2013 if more than one
half of the total share capital of a company is controlled by another
company of its own or together with one or more of its subsidiary
companies, the company would be a subsidiary company in relation to
another company. In this problem, more than 50% of the total share capital
(`1,50,000 + `1,20,000 i.e., `2,70,000) of ABC (Pvt.) Ltd. is held by XYZ
(Pvt.) Ltd. and its subsidiary PQR (Pvt.) Ltd. Therefore, ABC (Pvt.) Ltd. is a
subisidiary of XYZ (Pvt.) Ltd.
In the second situation, a company which is a subsidiary of a subsidiary
shall also be deemed to be the subsidiary of the holding company. Thus,
“ABC (Pvt.) Ltd. shall be a subsidiary of XYZ (Pvt.) Ltd.”
For Details: (Refer to Q. 8(a), [Point (ii)], Chapter 2). [Page 14
_________
3 FORMATION OF COMPANY
Q. 1. “A promoter stands in a fiduciary relationship towards the company he

promotes.” Explain.
Or, Who is a promoter? Discuss his position in relation to the company of
which he is the promoter.
Ans. A promoter is a person who does all the necessary preliminary work
incidental to the very formation of the company. The legal or actual position of a
promoter is very peculiar. He is not a trustee of the company because there is no
company yet in existence. For the same reason, he cannot be the company’s agent
either. A promoter stands in a fiduciary position or relationship to the company.
Fiduciary position means that he holds a position of good faith (complete
confidence) and trust. In this position, he is required to act in the following manner:
(i) Transfer of benefits. A promoter, if he has secured any benefits from the
negotiations/contracts entered into by him for the company, must pass
on all such benefits to the company.
(ii) Not to make any profit at the expense of the company. A promoter
must not make any profit directly or indirectly at the expense of or by
using the name of the company. If any secret profit is made in violation
of this rule, the company may, on discovering it, compel him to account
for and surrender such profit.
(iii) Not to make unfair use of his position. A promoter must not make an
unfair or unreasonable use of his position and must take care to avoid
anything which has the appearance of undue influence or fraud.
(iv) Full disclosure to the company. A promoter must make full disclosure
of material facts and of his personal interest or profits to the company
regarding the transactions, conducted with it. He can sell his own
business to the company at a profit. It is not forbidden by law. However,
he has to make a full disclosure in this connection before the independent
Board of Directors.
(a) Preliminary or Pre-incorporation Contracts
(b) Provisional Contracts
Ans. (a) Preliminary Contracts. During promotion of the company, the pro-
moters of the company enter into various contracts with third parties e.g.,
purchasing some property or hiring the services of professionals like lawyers,
technicians, etc. Legally, such contracts are not binding on the company after it is
incorporated.
All such contracts which are entered into by the promoters before the
incorporation of the company are called ‘Preliminary Contracts.’ The Company
can neither sue nor it can be sued on the basis of such contracts because the
company was not a party to such contracts. A company cannot even ratify or
adopt such contracts to get the benefit of such contracts.
18
CHAPTER 3: FORMATION OF COMPANIY 19
Features of Preliminary Contracts:

(i) These contracts are entered into by the promoters on behalf of the
company which is yet to be incorporated.
(ii) Company is not bound by pre-incorporation contracts.
(iii) Company cannot sue on the basis of such contracts.
(iv) Promoters themselves, remain personally liable on all such contracts,
unless a new contract on the same terms as that of the old one is made by
the company after incorporation.
(v) Company, after its incorporation, cannot even ratify such contracts.
(vi) Specific performance of such contracts can be enforced by other parties
against the company if such contracts are for the purposes of the
company and are warranted by the terms of incorporation of the
company. This is so provided under the provisions of Specific Relief
Act, 1963. For this, the company has to adopt such contracts in writing
after its incorporation and communicate such acceptance to the other
party to the contract.
However, whether a contract is for the purposes of the company depends upon
the facts of each case.
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(b) Provisional Contracts.* Contracts made after incorporation of the company
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but before it is entitled to commence business are termed as Provisional
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Contracts. Any contract made by a company before the date on which it is
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entitled to commence business shall be provisional only and binding on the
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company until that date, and on that date, it shall become binding.
In reference to Otto Electrical Manufacturing Company, Jenkin’s claim, a
supplier of furniture to the company failed to recover his claim from the
company since the company never became entitled to commence business. The
term ‘Provisional Contract’ applies only to the companies with share capital.
Q. 3. Distinguish between Pre-incorporation contracts and Provisional contracts.**
Ans. Distinction between Pre-incorporation contracts and Provisional contracts.
Point of Distinction Pre-incorporation contracts Provisional contracts
1. When entered Before the formation of the After incorporation of the comp-
into company. any but before its entitlement
to commence business.
2. Enforcement of The company can neither sue The company cannot be sued
the contract nor can it be sued to enforce for enforcing these contracts till
these contracts. it is entitled to commence
business.
3. Companies that Both public and private compa- Only companies with share
can enter into nies with or without share capital (both public as well as
such contracts capital. private).
4. Governed by Specific Relief Act, 1963. Companies Act, 2013
* As per Companies (Amendment) Act, 2015, Section 11 relating to Commencement of Business has now
been omitted. A company, now, can commence business immediately after incorporation. Therefore, these
contracts have, now, become redundant.
5. Ratification Can be made binding by Become binding as soon as the

ratification under the Specific company is entitled to
Relief Act. commence business. These
contracts do not require any
ratification.
Q. 4. Write a short note on remuneration of promoters.
Ans. Remuneration of Promoters. The promoters get remuneration from the
company for the services rendered by them for the company which was not in
existence at the time when services were rendered. For getting such remu-
neration, the promoters have to enter into an agreement with the company after
it comes into existence. Unless there is such an agreement, the promoters cannot
recover or claim any such remuneration from the company. Not only this, in the
absence of such an agreement, the promoters cannot even recover or claim pay-
ment of expenses incurred by them for the company before its coming into existence.
Example. A Syndicate comprising a group of persons promoted a company
and had even paid certain amount in respect of registration fee and stamp
duty etc., which were necessary for the formation of the company. This
company was later wound up. It was held that the Syndicate was not entitled
as
to recover the amounts spent by it [Case of Clinton’s Chain].
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Not only this, even where the Articles of Association of the company
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specifically provide that a specified amount be paid to promoters for their
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services, it does not give promoters a right to claim remuneration or to sue the
company for the same.
So, there has to be a contract between the promoters and the company to
receive such a remuneration. Generally the company itself pays or agrees to pay
some amount as remuneration for the services rendered by the promoters. This
remuneration may be paid either in cash or in the form of allotment of certain
number of shares of the company to the promoters or partly in cash and partly
in the form of shares of the company. Any such remuneration paid to the
promoters has to be disclosed in the prospectus to be issued by the company
while issuing its shares or debentures.
Q. 5. “The validity of a Certificate of Incorporation cannot be disputed on
any ground whatsoever.” Comment.
Ans. Certificate of Incorporation. Incorporation of a company is the second
stage of the company. It is effected by registration with the Registrar of
Companies. For getting a company registered, certain documents such as Memo-
randum of Association etc. have to be filed with the Registrar of Companies of
the State wherein the Registered Office of the company is to be situated.
Along with the necessary documents, filing fees and registration fees at the
prescribed rates are also to be paid. On going through the documents submitted,
if the Registrar is satisfied, he issues a Certificate of Incorporation to the promoters.
Conclusiveness of the Certificate of Incorporation. As per Section 34 of the
Companies Act, 1956, the life of the company commenced from the date
mentioned in the Certificate of Incorporation. The Certificate of Incorporation
brings the company into existence as a legal person.
Section 35 of the Companies Act provided that the Certificate of Incorporation

was the conclusive evidence that all requirements of this Act had been complied
with in respect of registration, and matters precedent and incidental thereto; and
that the association was a company authorised to be registered; and duly
registered under this Act.
Once the Certificate of Incorporation had been received, no one could question
the regularity of the incorporation. It could not be challenged even if
irregularities prior to incorporation were discovered later on.
In the case of Re Peel’s case, the proposed Memorandum of Association,
after signatures, but before registration, was materially altered without the
consent of the subscribers. The registrar issued the Certificate of
Incorporation. It was objected by the subscribers that they did not sign the
Memorandum of Association with which the company was registered. It was
held that the Certificate of Incorporation was conclusive evidence and the
incorporation of the company could not be questioned.
In another case Moosa Goolam Ariff vs. Ebrahim Goolam Ariff, the
Memorandum of a company was signed by two adults and by the guardian
of the other five members, who were minors at that time. The Registrar,
as
however, registered the company. It was contended that there were not
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seven signatories to the Memorandum. But it was decided by the court that
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the Certificate of Incorporation was conclusive.
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In the case of Jubilee Cotton Mills Ltd. vs. Lewis, the Memorandum and
Articles of Association of a company were accepted by the Registrar on
January 6 and he issued a Certificate of Incorporation on January 8, but
dated it January 6. On January 6, the company allotted shares to Lewis. It
was objected that the allotment was void on the ground that it was made
before the company came into existence. It was held by the court that the
Certificate was conclusive evidence of incorporation of the company on
January 6, and hence the allotment was valid.
Is Certificate of Incorporation really conclusive?
Section 34 and 35 of the Companies Act, 1956 provided for the conclusiveness
of the Certificate of Incorporation. But this concept seems to have lost its efficacy
because Section 7(7) of the new Companies Act, 2013 empowers the Tribunal to
pass an order for the winding up of the company or remove the name of the
company from the Register of Companies. The Tribunal can take such an action
when it is proved that the company had been incorporated by furnishing any
false or incorrect information or representation or by suppressing any material
fact or information in any of the documents or declaration filed or made for
incorporation or by any fraudulent action.
However, before making any order, the Tribunal shall give the company a
reasonable opportunity of being heard. Thus, as per Section 7(7) of the
Companies Act, 2013 the Certificate of Incorporation is not conclusive any more.
Q. 6. Write a note on Online registration of a new company.
Ans. Online Registration of a new company:
Step 1: Login on MCA Website. The Applicant has to login into their account
on MCA Website. (Pre-existing users can use the earlier account or new users
have to create a new account.)
Step 2: Get Digital signatures of all the subscribers
Step-3: Application to reserve proposed name. The Applicant will have to
make use of “RUN” services after login and apply for proposed name (maximum
two names in order of preference). The name once approved shall be available
for 20 days from the date of approval. It is an option, an applicant can also
directly apply in Spice e-Form with all the declarations and required documents.
Step-4: Prepare E-MOA and E-AOA in form INC-33 and INC-34 respectively
and get these digitally signed by all the subscribers.
Step-5: Apply in integrated eForm Spice (INC-32) with the following
documents for Registration of the company, Application for PAN & TAN,
Registration under Employees Provident Fund and Registration under
Employees’ State Insurance (ESIC):
• Declaration in form INC-9 from subscribers
• Declaration in Form DIR-2 from first Directors
• Copy of PAN, address proof and one identity proof, etc.
• Application for GST registration can also be simultaneously made in
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e-Form AGILE
a
Step-6: Issuance of Certificate of Incorporation. If the registrar is satisfied
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with all the details provided, he shall issue certificate of incorporation under his
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hand which shall be conclusive evidence of existence of the Company.
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Q. 7. Write a note on Corporate Identity Number.
Ans. Corporate Identity Number (CIN). Corporate Identity Number (CIN) is
the number allotted by the Registrar of Companies to each company registered
under the Companies Act. CIN is required to be quoted on all forms. Once this
number is filled by the company, its details are automatically retrieved by the
Ministry of Corporate Affairs. This can help a lot in identifying a company easily
and legal action against it can be taken immediately for any fraud or
contravention of law. This Corporate Identity Number (CIN) has a defined
structure of 21 digits as per the table given below:
Digit No. What does it show? Remarks
1st digit Listing Status of the Company For listed companies it will start
with ‘L’ and for unlisted
companies it will start with ‘U’.
Next 5 Digits Code of the Industry
Next 2 Digits Code of the State e.g., MH for Maharashtra
Next 4 Digits Year of Incorporation i.e., for company in-corporated in
the Calendar Year 2020, the same
will be 2020.
Next 3 Digits Type of the Company For Public Limited Company—PLC
For Private Limited Company—
PTC
Next 6 Digits The registration number which e.g., 090868 for ROC Mumbai
includes the code of the ROC e.g., 090633 for ROC Kolkata.
with whom the Company has
been registered.
PRACTICAL PROBLEMS
1. Few friends purchased a property. Later on they promoted a company and sold this
property to the company at a huge profit. Can the company recover this profit from
the promoters?
Hint: Yes, the company can recover this profit from the promoters as this
has not been disclosed by them before the independent Board of Directors.
For Details: (Refer to Q. 1, Chapter 3). [Page 19
2. (i) A company was formed on the basis of a Certificate of Incorporation obtained
by threatening the Registrar of Companies. Is the company legally formed?
(ii) All the seven signatures on a Memorandum of Association were forged by a
person and Certificate of Incorporation was duly obtained. Is the Certificate
of Incorporation valid? Explain.
(iii) Four of the seven signatures on the Memorandum of Association of a
company are forged. The Memorandum is duly presented, registered and a
Certificate of Incorporation is issued. Can the existence of the company be
subsequently questioned on the ground that the registration is void. Decide.
Ans. As per Companies Act, 1956, a Certificate of Incorporation once issued is
s
conclusive evidence of the fact that the company was duly registered.
a
Thus, once the certificate was issued, no one could question the validity
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of the incorporation, on any grounds whatsoever. As per Section 7(7) of
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the Companies Act, 2013, the Tribunal can pass an order for the winding
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up of the company or remove the name of the company from the Register
of Companies. The Tribunal can take such an action when it is proved
that the company had been incorporated by furnishing any false or
incorrect information or representation or by suppressing any material
fact or information in any of the documents or declaration filed or made
for incorporation or by any fraudulent action.
However, before making any order, the Tribunal shall give the company
a reasonable opportunity of being heard.
3. ‘A’, on the instructions of promoters of a company, prepared Memorandum of
Association and Articles of Association, paid the registration fees and got the
company incorporated. ‘A’ claims his costs and charges from the company. The
company refuses to pay. Will ‘A’ succeed?
Ans. Though ‘A‘ prepared the Memorandum of Association and Articles of
Association of the company on the instructions of promoters, the company
is not bound to pay ‘A’ because the company did not exist when the
expenses were incurred and services rendered. The case is also not
covered by Specific Relief Act because the company, after coming into
existence, has not accepted the contract. Had the company adopted the
contract in writing and communicated such acceptance to ‘A’, ‘A’ would
have succeeded.
___________
4 MEMORANDUM OF ASSOCIATION
Q. 1. What is a Memorandum of Association? Explain its importance.

Ans. Memorandum of Association. The Memorandum of Association of a
company is its main or principal document. No company can be registered
without it. It is, as such, also regarded as a life-giving document or the charter of
the company. Like Constitution of a country, the Memorandum of Association
contains fundamental conditions on the basis of which a company is allowed to
come into existence. All such conditions are ultimately necessary in the interests
of all the parties going to deal with the company in future. These parties may be
creditors, debtors, general public or even shareholders.
Importance of Memorandum of Association/Purposes served by the Memorandum:
(i) It lays down the powers and limits of the company beyond which the
company cannot go. Any acts of the company outside the scope of the
Memorandum of Association are all regarded as void.
(ii) The Memorandum of Association is a public document and is open for
inspection by any person even from public. All those dealing with the
company are presumed to have gone through it and presumed to have
knowledge of its contents. It is through the Memorandum of Association
that all those dealing with the company are enabled to know what the
permitted range of the company is.
Q. 2. Explain the Clauses (contents) of the Memorandum of Association.
Ans. Clauses (contents) of the Memorandum of Association. The Memo-
randum of Association of a company must have the following clauses:
1. The Name Clause. The name of the company is given in this clause. The
name must have the word ‘Limited’ as the last word of the name in case of a
Public Limited Company and “Private Limited” as the last words of the name in
case of a Private Limited Company.
A company may choose any name but it must not be undesirable in the opinion
of the Central Government. The proposed name should not be identical with or
should not too closely resemble the name of an already existing company.
Unless the previous approval of the Central Government is obtained, a
company shall not be registered with a name which contains any word or
expression which suggests of any connection with the Government or of State
patronage or which contains such word or expression, as may be prescribed.
The Central Government can any time, by order, direct a company to change its
name if in the opinion of the Central Government it too closely resembles the
name of an already existing company.
2. Situation or Registered Office Clause. The name of the State in which the
registered office of the company is to be situated must be given in the
Memorandum. But the exact address of the registered office is not required to be
stated therein.
24
CHAPTER 4: MEMORANDUM OF ASSOCIATION 25
As per Section 12, a company, on and from the 15 day of its incorporation,
shall have a registered office. The company shall furnish to the Registrar
verification of its registered office within a period of 30 days of its incorporation.
The importance of the registered office is that it is the address of the company
where all communications and notices are to be sent and where register of
members, register of debentureholders, charges, minutes book of general
meetings etc. are kept.
3. Objects Clause. It is the most important clause of the Memorandum because it
sets out the objects of the company. A company cannot do anything beyond or
outside the objects clause and any act done beyond the objects clause shall be void.
According to Section 4(1)(c), the Memorandum of Association of a company
must state the objects for which the company is proposed to be incorporated and
any matter considered necessary in furtherance thereof.
The objects of the company must not be illegal, immoral or opposed to the
public policy or against the provisions of the Companies Act.
4. Liability Clause. This clause of the Memorandum of every company must
state whether the liability of its members is limited by shares or limited by
guarantee or is unlimited.
s
In a company limited by shares, no member can be called upon to pay more
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than what remains unpaid on his shares. If a member’s shares are fully paid-up,
iv
his liability is nil.
h
In a company limited by guarantee, the liability clause will state the amount,
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which each member should undertake to contribute to the assets of the company
in the event of its liquidation.
In an unlimited company, this clause shall specify that the liability of members
is unlimited and can extend to personal assets of the members.
5. The Capital Clause. This clause must indicate the amount of capital with
which the company is registered and is known as authorised or nominal capital.
This clause shall also state the number and value of shares into which the capital
is divided. The company may issue equity shares and preference shares. The
number of shares in each category and their value should also be given.
6. Association Clause and Subscription. In this clause, the persons (including
a body corporate) subscribing to the Memorandum of Association declare their
desire to be formed into a company and agree to take the shares indicated
opposite to their respective names.
Statutory requirements regarding subscription of Memorandum:
(i) The Memorandum of Association must be signed by each subscriber in
the presence of at least one witness who must attest the signatures;
(ii) Each subscriber must take at least one share; if any and
(iii) Each subscriber must write opposite to his name the number of shares (if
any) which he agrees to take.
There must be at least seven signatories in case of a Public Company, two in
case of a Private Company and only one in case of One Person Company.
7. Succession Clause (only in the case of OPC). This clause shall state the
name of the person who, in the event of the death of the subscriber, shall become
the member of the company.
The above clauses are compulsory and are designated by the Companies Act as
’conditions’, on the basis of which alone a company is incorporated.
Q. 3. Explain the law related to alteration of name clause of Memorandum of
Association.
Ans. Alteration in the Name Clause. The name of a company can be changed
any time by passing a special resolution at the general meeting of the company,
and getting the approval of the Central Government in writing.
A change of name involving only the deletion or addition of the word ‘private’
on the conversion of a public company into private or vice versa doesn’t require
the approval of the Central Government.
As per Rule 29 of the Companies (Incorporation) Rules, 2014, a company
which has defaulted in filing its annual returns or financial statements or any
document due for filing with the Registrar or defaulted in the repayment of
mature deposits or debentures or interests on deposits and debentures will not
be allowed to change its name.
If, through inadvertence or otherwise, a company, on its first registration or on
its registration by a new name, is registered by a name which—
(a) in the opinion of the Central Government, is identical with or too nearly
s
resembles the name of an already existing company, it may direct the
Da
company to change its name and the company shall change its name or
iv
new name, as the case may be, within a period of three months from the
h
issue of such direction, after passing an ordinary resolution for this
S
purpose;
(b) on an application by a registered proprietor of a trade mark that the
name is identical with or too closely resembles a registered trade mark of
such proprietor under the Trade Marks Act, 1999, made to the Central
Government within three years of incorporation in the opinion of the
Central Government, it may direct the company to change its name and
the company shall change its name or new name, as the case may be,
within a period of 6 months from the issue of such direction, after
passing an ordinary resolution for this purpose.
Where a company changes its name or obtains a new name, it shall, within a
period of 15 days from the date of such change, give notice of the change to the
Registrar along with the order of the Central Government, who shall carry out
necessary changes in the Certificate of Incorporation and the Memorandum.
Q. 4. Explain the procedure for alteration of registered office clause.
Ans. Alteration of Registered Office Clause. Shifting of the Registered Office
can be studied under the following heads:
1. Change within the local limits of same town [Section 12]. A company, can
change its registered office from one place to another within the local limits of the
city, town or village, where it is situated by passing a Board Resolution.
This change of registered office does not involve alteration of Memorandum.
A notice of the change is to be given to the Registrar of Companies within 15
days of such change.
2. Change from one city to another within the same State [Section 12]. If the
registered office is to be shifted from one city, town or village to another city,
town or village within the same State and which does not involve the change of
jurisdiction of Registrar of Companies, a special resolution has to be passed in
the general meeting of the company. This change of registered office also does
not involve alteration of Memorandum.
A copy of the special resolution shall be filed with the Registrar of Companies
within 30 days of passing the special resolution. Also, within 15 days of the
change of the registered office, a notice to the Registrar should be given of the
new location of the office.
The aforesaid Special Resolution shall be passed by Postal Ballot rather than at the
General Meeting. However, it is not so required in the case of OPC and other companies
having members not more than Two Hundred (200).
3. Change from one city to another within the same State involving change
of jurisdiction of Registrar of Companies [Section 12]. If a company wants to
shift its registered office from one city to another city within the same State and
which involves the change of jurisdiction of Registrar of Companies; a special
resolution in general meeting has to be passed and it must be confirmed by the
Regional Director. This change also does not involve alteration of
Memorandum.
s
The confirmation of Regional Director shall be communicated within a period
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of 30 days from the date of receipt of application and the company shall file the
iv
confirmation with the Registrar within a period of 60 days of the date of
h
confirmation The Registrars shall register the same and certify the registration
S
within a period of 30 days from the date of filing of such confirmation.
A copy of the Special Resolution shall be filed with the Registrar of Companies
within 30 days of passing the special resolution. Also, within 15 days of the
This provision is applicable only in those States where there are more than one
offices of Registrar of Companies. At present there are two States having more
than one offices of ROCs. They are Maharashtra and Tamil Nadu. In
Maharashtra, the two offices of ROCs are located at Mumbai and Pune; whereas
in Tamil Nadu, the two offices of ROCs are located at Chennai and Coimbatore.
4. Change from one State to another State [Section 13]. If a company wants to
shift its registered office from one State to another State; a special resolution in
general meeting is required to be passed, which must be confirmed by the
Central Government. This change involves alteration of Memorandum of
Association.
The Central Government shall dispose of the application within a period of 60
days. The Central Government, before passing its order, may satisfy itself that the
application has the consent of the creditors, debenture holders and other persons
concerned with the company or that the sufficient provision has been made by
the company either for the due discharge of all its debts and obligations or that
adequate security has been provided for such discharge.
In case of shifting the Registered Office from one State to another State, a
certified copy of the order of the Central Government approving the alteration
has to be filed by the company with the Registrar of both the States within such
time and in such a manner as may be prescribed. Both the Registrars would
register the same and the Registrar of the State where the Registered office has
been shifted would issue a fresh Certificate of Incorporation. The Certificate
would indicate the alteration.
A copy of Special Resolution shall be filed with the Registrar of Companies
within 30 days of passing the special resolution. Also within 15 days of the
Q. 5. Explain the law relating to alteration of objects clause.
Ans. Alteration in the Objects Clause. A company may, by a special
resolution and after complying with the procedure specified in Section 13, alter
the objects clause of its Memorandum. However, a company, which has raised
money from public through prospectus and still has any unutilised amount out
of the money so raised, shall not change its objects for which it raised the money
through prospectus unless a special resolution is passed by the company and:
(i) the details, as may be prescribed, in respect of such resolution shall also
be published in the newspapers (one is English and one in vernacular
language) which is in circulation at the place where the registered office
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of the company is situated and shall also be placed on the website of the
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company, if any, indicating therein the justification for such changes;
iv
(ii) the dissenting shareholders shall be given an opportunity to exit by the
h
promoters and shareholders having control in accordance with
S
regulations to be specified by the Securities and Exchange Board.
The Registrar shall register any alteration of the Memorandum with respect to
the objects of the company and certify the registration within a period of 30 days
from the date of filing of the special resolution.
The aforesaid Special Resolution shall be passed by Postal Ballot rather than at the
General Meeting. However, it is not so required in the case of OPC and other companies
having members not more than Two Hundred (200).
Q. 6. Write a note on alteration of capital clause.
Ans. Alteration of Capital Clause [Section 61]. A limited company having a
share capital may, if so authorised by its Articles, alter its share capital in a
general meeting as follows, that is to say, it may
(i) increase its authorised share capital by such amount as it thinks
expedient;
(ii) consolidate and divide all or any parts of its share capital into shares of
large amount;
(iii) convert fully paid-up shares into stock or vice versa;
(iv) sub-divide its shares or any of them into shares of smaller amount; and
(v) cancel shares which have not been taken up and diminish the amount of
its authorised capital by the amount of the shares to be cancelled.
A company can make any of these alterations by simply passing an ordinary
resolution, provided it is authorised by its Articles to do so. If the Articles do
not provide for it, then the Articles must be changed first by passing a special
resolution. Within 30 days of the date of passing the resolution, notice must be
given to the Registrar together with a copy of resolution and altered
Memorandum, who will then register the altered Memorandum. It is from the
date of passing the ordinary resolution that the change becomes effective.
Q. 7. Discuss the procedure for reduction of share capital.
Ans. Reduction of share capital. Company limited by shares or a company
limited by guarantee and having share capital may reduce its issued share capital
by adopting the procedure laid down in Section 66 of the Companies Act.
(i) Special resolution effecting the reduction of capital must be passed and
a copy thereof should be filed with the Registrar within 30 days of
passing the resolution.
(ii) The company has to apply, by petition to the Tribunal for an order
confirming the reduction.
No such reduction shall be made if the company is in arrears in the
repayment of any deposits accepted by it or the interest payable thereon.
The Tribunal shall give notice of every application made to it for
reduction of share capital to the Central Government, Registrar and to
the Securities and Exchange Board (in the case of listed companies), and
the creditors of the company and shall take into consideration the
representations, if any, made to it by the Government, Registrar, the
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Securities and Exchange Board and the Creditors within a period of three
Da
months from the date of receipt of the notice.
iv
Where no representation has been received from the Central
h
Government, the Registrar, the Securities and Exchange Board or the
S
Creditors within the said period, it shall be presumed that they have no
objection to the reduction.
(iii) The Tribunal will satisfy itself that the interests of the creditors and
different classes of shareholders, if any, are not affected adversely by the
said reduction of capital. The Tribunal will see: (a) that sufficient notice
has been given to every person whose interests may be affected by the
alteration; (b) that every objecting creditor has either been paid in full or
his consent has been obtained; and (c) that the proposed reduction of
share capital is fair and equitable to all kinds of shareholders.
(iv) The Tribunal may, if it is satisfied that the debt or claim of every creditor
of the company has been secured or his consent is obtained, make an order
confirming the reduction of share capital on such terms and conditions as it
deems fit.
(v) The order of confirmation of the reduction of share capital by the
Tribunal shall be published by the company in such a manner as the
Tribunal may direct.
(vi) A certified copy of the Tribunal’s confirmation order and changed
Memorandum must be filed with the Registrar for registration, within 30
days of the receipt of the copy of the order. The Registrar shall then
register the same and issue a certificate of registration. Reduction will
take effect from the date of registration.
Share Capital of a company can be reduced in any of the following ways:
(i) By extinguishing or reducing the liability of members in respect of uncalled
capital.
(ii) By refunding surplus of the fully paid-up capital.

(iii) By refunding part of the fully paid-up capital on the condition that it may
be called up again.
(iv) By writing off the lost capital which is not represented by the available
assets.
(v) By any other method approved by the NCLT.
Q. 8. Write a note on alteration of liability clause.
Ans. Alteration of Liability clause. The liability of a member of a company
cannot be increased without his written consent to the same, either before or after
the alteration. The liability of a director or managing director or manager can be
made unlimited by passing a Special Resolution provided the Articles authorise
so, and the person concerned, gives his consent in writing for the same.
However, where the company is a club or any similar association, any
alteration in its Memorandum, which requires the members to pay a higher
subscription, shall be binding upon the members, even though they may not have
given their consent in writing to the same.
In case of an unlimited company, the liability of the members may be made
limited or reduced by re-registration of the company. The registration, however,
s
will not affect any debts, liabilities, obligations or contracts entered into by or
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with the company before registration as a limited company.
iv
Q. 9. Discuss the doctrine of “ultra-vires”.
h
Ans. ‘Ultra’ means ‘beyond’ and ‘Vires’ means ‘powers’. An action outside the
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Memorandum of Association is ultra-vires the company. The doctrine of ultra-
vires states that an act which is beyond the powers of the company, i.e., which is
not stated in the objects clause of its Memorandum of Association is wholly
inoperative and void. Consequently, it does not bind the company. Moreover, the
whole body of shareholders cannot ratify it.
The doctrine of ultra-vires has been established to provide security to the
investors and creditors of the company for it provides that ultra-vires activities
shall not be financed out of their money. Their money shall be utilised in a
specified area only and consequently, it reveals the risk their investment faces.
The doctrine of ultra-vires and its effects were brought out clearly in the
famous case of Ashbury Railway Carriage and Iron Co. Ltd. vs. Riche. The
objects of the company, in this case, were “(a) to make, sell or lend on hire, railway
carriages and wagons; (b) to carry on the business of mechanical engineers and general
contractors, etc.”
The company entered into a contract with Riche for financing the construction
of railway line in Belgium. The question raised was whether the contract was
covered within the meaning of ‘general contractors’. Held, the contract was
ultra-vires the company and even the whole body of shareholders could not
ratify it.
Effects of ultra-vires transactions:
(i) Injunction. In case a company is about to undertake an ultra-vires act, the
members (even a single member) can get an order of injunction from the
court restraining the company from going ahead with the ultra-vires act—
Attorney General vs. Great Eastern Railway Company.
(ii) Personal liability of directors. It is one of the duties of directors to see

that the corporate capital is used only for the legitimate business of the
company. If any part of it has been diverted to purposes which are
beyond or outside the limits of the company’s Memorandum of
Association, then the company’s directors are held personally liable to
compensate the company for any loss which it suffers.
(iii) Breach of warranty of authority. It is a general law of agency that an
agent must only act within the scope of his authority. So, if he goes
beyond or outside it, then he becomes personally liable towards the
third parties. The same is applicable to the company’s directors who are
only regarded as its agents. The directors also have to play or act within
the limits of company’s powers. So they should not make any outsider
to enter into an ultra-vires contract with the company. If they do so, then
they become personally liable towards all such third parties.
(iv) Ultra-vires contracts are all void in law. These contracts are not
enforceable either by the company or against the company.
(v) Ultra-vires acquired property, if any, under the ultra-vires acts; for
consideration paid by the company, can be enjoyed by or held by the
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company.
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(vi) Ultra-vires torts, if committed by the employees of the company, while
iv
pursuing its objectives in the course of their employment, then company
h
is held liable. If any torts are committed while acting outside the objects,
S
then the company is not liable.
All ultra-vires acts are null and void. Therefore, any such acts cannot be ratified
by the company even by unanimous approval of its shareholders or members.
However, if an act is ultra-vires its Articles of Association, but intra-vires the
Memorandum of Association, it can be ratified by the company by making
changes in the Articles of Association.
PRACTICAL PROBLEMS
1. A company put up telephone wires in a certain area. There was no power in the
Memorandum to put up wires there. The defendants cut them down. Can the
company sue for the damage done to the wires?
Hint: Companies right over ultra-vires acquired property is held secure.
For details: (Refer to Q. 9, [Point v], Chapter 4). [Page 33
st
2. India Computers Ltd. was registered as a Public Company on 1 July, 2012 in
the State of Maharashtra. Another company by the name ‘All India Computers
Ltd.’ was registered in Delhi on 15th July, 2012. The promoters of India
Computers Ltd. have failed to persuade the management of All India Computers
Ltd. to change the company’s name, as it closely resembles with the name of the
first registered company. Advise the management of India Computers Ltd. about
the remedies available to them under the provisions of the Companies Act,
2013.
Hint: The name of India Computers Ltd. was registered prior to the
registration of All India Computers Ltd. Therefore, the promoters of India
Computers Ltd. have the right to ask the management of All India
Computers Ltd. to change the company’s name, as it closely resembles
with the name of a previously registered company. Since the management
of All India Computers Ltd. has not agreed, the promoters of India
Computers Ltd. can approach the Central Government to get the name of
the company registered subsequently rectified.
For details: (Refer to Q. 2, Chapter 4). [Page 26
3. RSP Ltd. is a Public Limited Company with liability of each of its members
limited to the extent of guarantee of ` 10 lac. The company increases the liability
of the members from ` 10 lac to ` 15 lac by an alteration made in the liability
clause of the Memorandum of Association. In the light of the provisions of the
Companies Act, 2013, decide whether the members of the company are liable for
the increased liability.
Hint: As per the provisions of the Companies Act, 2013, no member of the
company shall be bound by an alteration made in the Memorandum
which increases his liability unless the member agrees in writing. Hence,
members of RSP Limited are not liable for the increased liability.
as
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5 ARTICLES OF ASSOCIATION
Q. 1. What are “Articles of Association”? Is it essential for every company to

prepare its own Articles? How are Articles different from Memorandum of
Association?
Ans. Articles of Association of a company contain rules, regulations or bye-
laws meant for the internal management of the company and for attainment of its
objects as given in the Memorandum of Association. Generally, the Articles of
Association of a company contain rules regarding matters such as:
(i) Share Capital
(ii) Calls on Shares
(iii) Transfer of Shares
(iv) Transmission of Shares
(v) Buy back of Shares
(vi) Alteration of Capital
(vii) Forfeiture of Shares
(viii) Rights of Shareholders
(ix) Holding of Meetings
(x) Voting Rights
(xi) Dividends, Reserves and Capitalization of Profits
(xii) Accounts and Audit
(xiii) Borrowing powers of the Directors
(xiv) Manager
(xv) Secretary
(xvi) Winding-up
In addition to the above matters, the Articles of a private company having a
share capital must contain the three restrictions as given by Section 2(68) under
sub-clauses (a), (b) and (c), namely:
(a) restriction on the right of the members to transfer shares;
(b) limitation of the number of its members to 200, excluding past and
present employee members.
(c) prohibition of any invitation to the public to subscribe for any securities
of the company.
As per Section 7(a)(1) of the Companies Act, 2013, it is compulsory for the
companies to file a copy of the Memorandum of Association and Articles of
Association. These shall be filed with the Registrar within whose jurisdiction
the registered office of a company is proposed to be situated. The following
documents and information for registration are filed, namely:
(a) The memorandum and articles of the company duly signed by all the
subscribers to the memorandum in such manner as may be prescribed.
In the case of a private company not having a share capital, the Articles must
contain provisions relating to the matters specified in the above mentioned sub-
33
clauses (b) and (c) only.

Preparation of Articles:
Articles of various companies are drawn based on Tables F-J of Schedule I:
Table F: Articles of Association of a Company Limited by Shares.
Table G: Articles of Association of a Company limited by Guarantee and
having Share Capital.
Table H: Articles of Association of a Company Limited by Guarantee and not
having Share Capital.
Table I: Articles of Association of an Unlimited Company and having Share
Capital.
Table J: Articles of Association of an Unlimited Company and not having
Share Capital.
At the time of incorporation, a copy of the Articles has to be submitted to the
Registrar for incorporation.
As per Rule 11 of the Companies (Incorporation) Rules, 2014, the model
articles as prescribed in Tables F, G, H, I and J of Schedule I may be adopted by
a company either in full or otherwise.
Distinction between Memorandum of Association and Articles of Association:
s
Point of Memorandum of Articles of
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Distinction Association Association
iv
1. Contents It defines and confines the Articles lay down the rules
Sh
objectives of the company. and regulations for the
internal management of the
company.
2. Subordinate It is subordinate to the They are subordinate to
to whom Companies Act. both the Memorandum and
the Companies Act.
3. Compulsory It has to be compulsorily filed Public company limited by
or optional by every company. shares need not file the
Articles of Association. It
may adopt Table F for its
incorporation purposes.
4. Relationship It defines the relationship of Articles define the
defined the company and the relationship between the
outsiders. company and its members.
5. Alteration It cannot be altered easily. The Articles can be altered easily
company has to follow a strict by passing a special
procedure for the alteration of resolution.
its clauses.
6. Binding effect Acts done by a company and Acts ultra-vires the Articles
of ultra-vires ultra-vires the Memorandum can be ratified by a special
acts are void. They cannot be resolution of the members
ratified even by the provided they are intra-
unanimous consent of all the vires the Memorandum.
members.
CHAPTER 5: ARTICLE OF ASSOCIATION 35
Q. 2. How can the Articles of a company be changed?

Ans. Alteration of Articles. Articles can be altered simply by passing a special
resolution. Approval of the Tribunal is required where a public company is to be
converted into a private company.
Restrictions (Limitations) Regarding Alteration of Articles:
1. Alteration should not be inconsistent with the provisions of the
Companies Act, 2013 or other statute. A company cannot alter its Articles so as
to pay divided out of capital in case of inadequate profits. It is contrary to
Section 123 of the Companies Act. Similarly, a Subsidiary Company cannot alter
its Articles so as to hold shares in the Holding Company. It is contrary to the
provisions of Section 19 of the Companies Act.
2. Alteration must not be inconsistent with the conditions contained in the
Memorandum [Section 14]. The Articles are subordinate to the Memorandum
and hence should not over-ride the Memorandum. There can not be any
alteration which gives powers not given by the Memorandum.
3. Alteration must be bonafide for the benefit of the company. The alteration
should be in the interest of the company as a whole and must be bonafide for its
benefit.
as
In the case of Brown vs. British Abrasive Wheel Co., certain shareholders
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held 98 per cent of the company’s shares. The company passed a special
iv
resolution that a shareholder, upon the request of the holders of 90 per cent
Sh
of the issued shares, shall be bound to sell and transfer his shares to the
nominee of such holders at a fair value. It was held that the alteration was
not for the benefit of the company as a whole but for the benefit of the
majority shareholders and an injunction was granted restraining the
company from carrying out the resolution.
On the other hand, alteration made bona fide in the interests of the company
shall be valid even if it is likely to affect adversely the personal interests of some
of the members of the company.
4. Alteration should not be oppressive to the minority. The alteration should
not be oppressive to the minority and must not constitute a fraud on the minority.
In the case of Menier vs. Hooper’s Telegraph works, Majority of the
members of Company ‘A’ were also members of Company ‘B’. At a meeting of
Company ‘A’, they passed a resolution to compromise an action against
Company ‘B’ in a manner alleged to be favourable to Company ‘B’ but
unfavourable to Company ‘A’. On an action by minority members of
Company ‘A’, the resolution was held invalid and the compromise was set
aside.
5. Alteration must not increase the liability of the existing members. By
altering the Articles, shareholders cannot be asked to pay more than their
liability, unless they give their consent in writing. Where the company is a club or
association and the alteration requires a member to pay subscription at a higher
rate, it would be binding on the member.
6. Alteration must not allow anything which is illegal or unlawful. Alteration
must not allow anything which is illegal or unlawful or opposed to public policy.
7. Alteration must not deprive any person of his rights under a contract. The
alteration should not enable a company to commit a breach of contract with the
third parties. If the alteration enables the company to commit a breach of
contract, the company shall be liable to the contracting party for damages. Thus,
in Southern Foundries Ltd. vs. Shirlaw, where a Managing Director was
appointed for a term of 10 years, but was removed earlier under the new Articles
on amalgamation with another company, the company was held liable for breach
of contract.
Similarly, a person appointed in accordance with the provisions or the Articles as a
director on a fixed remuneration of ` 2,000 p.m. under an independent contract of
service, cannot be made to accept a lesser amount by altering the Articles.
If a person accepts the appointment purely on the terms of the Articles, the
alteration shall be valid and binding upon such a person.
For example, In the case of C.Chettiar vs. Krishna Aiyanger’s, the Articles
provided ` 250 p.m. as pay for the company secretary. The post was accepted
by the plaintiff and in the specific agreement with him the Articles were
referred to show the terms of the contract. Later on the company changed the
Articles so as to reduce the secretary’s pay to ` 25 p.m. The alteration was
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held valid and operative.
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Q. 3. Discuss the binding effect of Memorandum and Articles of Association
of a company on the shareholders (members), outsiders and company itself.
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Ans. Binding effects (force) of Memorandum and Articles. Section 10 of the
Companies Act provides that, “subject to the provisions of this Act, the Memorandum
and Articles shall, when registered, bind the company and the members thereof to the
same extent as if they respectively had been signed by the company and by each member,
and contained covenants on its and his part to observe all the provisions of Memorandum
and of the Articles.” Thus, the Memorandum and Articles bind the company to its
members, the members to the company, the members to each other in an
exceptional case, but they do not bind the company or its members to outsiders.
1. Company is bound to its members. The Memorandum and Articles
constitute a contract between the company and its members. A company is
bound to comply with the provisions of these documents. Each member can
restrain the company from committing a breach of the Memorandum or/and
Articles which would affect his membership rights such as his right to vote or his
right to recover dividend which has been declared or his right to receive notice of
any general meeting etc.
These documents bind the company to members and vice-versa in respect of
their membership rights only and not contractual rights of other kinds.
2. Each member is bound to the company. Members are bound to the
company and they have to follow the provisions of the Memorandum and
Articles. All money payable by any member to the company under the
Memorandum or Articles shall be a debt due from him to the company
(Section 10). A company can sue its members for the enforcement of its Articles
as well as for restraining their breach.
In the case of Borland Trustees vs. Steel Bros. & Co. Ltd., the Articles of
company provided that the shares of any member who became bankrupt
should be sold to certain other persons at a certain price to be fixed by the
directors. Borland became bankrupt. Borland’s trustee in bankruptcy claimed
that Borland was not bound by the Articles and he could dispose of the shares
at their true value. It was held that he was bound by the provisions of the
Articles.
3. Each member is bound to other members in exceptional case.
Memorandum or/and Articles do not create a contract between the members of
the company, inter-se. Usually a member can not sue another member directly.
Such rights can be enforced through the company only. When the persons against
whom relief is sought control the majority of shares and will not allow an action
to be brought in the name of the company and the acts complained of, are either
fraudulent or ultra vires a member can sue the other members directly.
4. Neither the company nor the members are bound to outsiders. The
Memorandum and Articles do not create a contract between the company and
the outsiders i.e., vendors, solicitors, secretary etc. Neither the company nor the
members are bound to the outsiders to give effect to the provisions of the
as
Memorandum and Articles.
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In the case of Eley vs. Positive Government Security Life Assurance Co.
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Ltd., the Articles provided that Eley would be the company’s solicitor for life.
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He would not be removed except for misconduct. He became member in the
company also. He acted as solicitor of the company but the company
removed him after some time. He filed a suit against the company for breach
of the Articles. It was held that he had no cause of action, because the Articles
did not constitute any contract between the company and himself.
Q. 4. Explain the doctrine of:
(a) Constructive Notice of Memorandum of Association and Articles of
Association.
(b) Doctrine of Indoor Management.
Ans. (a) Constructive Notice of Memorandum of Association and Articles of
Association. This doctrine says that every person dealing with the company is
presumed to have had notice of the contents of both the Memorandum of
Association as well as the Articles of Association. This is so because both these
documents are already registered or filed with the Registrar of Companies. As
such, these are considered to be public documents. Not only this, even the office
of the Registrar of Companies is also regarded as a public office. Both these
documents are accessible to all. All outsiders dealing with the company are
presumed not only to have read these documents but it is also presumed that
they have understood their contents. This doctrine actually is an extension of the
rule of ‘estoppel’ which prevents any outsider from saying that he or she did not
know the contents of the Memorandum of Association or the Articles of
Association.
(b) Doctrine of Indoor Management. As against the doctrine of ‘Constructive
Notice’, the doctrine of ‘Indoor Management’ states that an outsider is not
bound to look into the formalities of company’s internal functioning or the

company’s internal management. He is not affected by any irregularity in the
internal management of the company’s functioning. This is known as doctrine of
‘Indoor Management’. This doctrine was laid down in the famous case of Royal
British Bank vs. Turquand.
In this case, a bond had been issued by the company’s directors to Mr.
Turquand (T). Company’s Articles of Association provided that bonds could
be issued only if directors were authorised by a resolution at the company’s
Board meeting. In the present case, no such resolution had been passed.
However, the Court held in favour of T and he was entitled to have assumed
that such resolution had been passed.
The doctrine of Indoor Management is also known as Turquand’s Rule.
So, whereas the doctrine of ‘Constructive Notice’ helps to protect the
company, the doctrine of ‘Indoor Management’ helps to protect the persons
(outsiders) dealing with the company. The latter is based on the principle of
justice and public convenience as internal formalities of the company are not
open to the public or outsiders.
Exceptions to the Doctrine of Indoor Management. No doubt that the doctrine
as
of indoor management is of great practical utility and has also been applied in a
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variety of cases involving rights and liabilities of the companies and the
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outsiders, yet it has the following exceptions, i.e., a person dealing with the
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company cannot take the benefit of this doctrine in the following situations:
(1) Knowledge of Irregularity. Where a person dealing with a company has
actual or constructive (virtual) knowledge of the irregularity as regards internal
management, he cannot claim the benefit of the doctrine of indoor management.
In the case of Howard vs. Patent Ivory Manufacturing Co., the directors of
the company could borrow on behalf of the company any amount upto
£1,000 and for any amount beyond £1,000 they were required to obtain the
consent of the shareholders in General Meeting. The Directors themselves
lent to the company an amount in excess of £1,000 without the consent of the
shareholders. Held, the directors had notice of the internal irregularity and
hence the company was liable to them only for £1,000.
(2) Suspicion of irregularity or ‘put to an enquiry’. Where a person suspects
the existence of some irregularity on the basis of available circumstances or
where he could have discovered the irregularity, had he put himself to an
enquiry into the matter, but he fails or ignores to take such proper steps, he
cannot claim the benefit of the rule of indoor management. Under such
circumstances one must make enquiry before hand to ensure regularity of
regulations, etc.
In the case of Underwood Ltd. vs. Bank of Liverpool, the sole director of the
company in this case paid into his own account cheques drawn in favour of
the company. Held, the bank was liable as it ought to have made proper
enquiries before crediting the account of the Director.
(3) No knowledge of Articles. This rule cannot be invoked in favour of a person
who did not read the Memorandum and Articles and thus did not rely on them.
In Rama Corporation vs. Proved Tin and General Investments Ltd., the
plaintiff contracted with a director of the defendant company and gave him a
cheque who, under the company’s Articles of Association, was not authorised
to receive the same. The director misappropriated the cheque. As a result, the
plaintiff company sued the other company. It was held that the defendant
company was not liable as the act of the director was outside the authority of
the director. Knowledge of the provisions of the Articles of Association
providing such authority was necessary.
(4) Where there is forgery. If an outsider relies or acts on a forged document,
then also the rule of indoor management does not apply. This doctrine only
applies to matters involving irregularities and not to those involving illegalities.
In a case the company secretary had issued a share certificate forging the
signatures of two directors as required under the company’s Articles of
Association. Held, the shareholder’s claim to be member was turned down.
(Ruben vs. Great Fingall Consolidated Co.)
(5) Acts which are beyond or outside apparent authority. In such cases also
the company is not liable. So, where a person had accepted transfer of company’s
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property from its accountant, the transaction was held to be just null and void as
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it was outside the apparent authority of an accountant.
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PRACTICAL PROBLEMS
1. The directors of a company borrowed ` 5,00,000 from Tarun. They had the power
to borrow such money, but only subject to the ordinary resolution passed at the
general meeting of the company. In fact, no such resolution had been passed. Is the
company bound to repay the loan to Tarun? Give reasons.
Hint: Yes, the company is bound to repay the loan to Tarun as he is
protected by the Doctrine of Indoor Management.
For details: (Refer to the Doctrine of Indoor Management). [Page 39
2. The secretary of a company issued a share certificate in favour of R which
apparently complied with company’s Articles as it was purposed to be signed by
two directors and the secretary, and it had the company’s seal affixed to it. In fact,
the secretary had forged the signatures of the directors and affixed the seal without
authority. Is the certificate binding on the company?
Hint: A company is not bound by the forgeries committed by its officers.
The share certificate is, therefore, not binding on the company.
For details: (Refer to Q. 4(b), Chapter 5, under the heading Exceptions to
the Doctrine of Indoor Management (iv)). [Page 40
3. The Articles of a company empowered the directors to determine who should have
the authority to draw bills on behalf of the company. ‘C’, the manager of a branch
of the company, drew bills on behalf of the company in favour of ‘K’, who took
them in good faith believing that ‘C’ was authorised to draw them. In fact ‘C’ had
no such authority. Is the company liable on the said bill? Will it make any
difference if ‘C’ had been a director of the company?
Hint: No, the company shall not be liable on the said bill. The Doctrine of
Indoor Management does not protect those who act negligently. Suspicion
should arise from the fact that the manager of the company drew bills
which ordinarily was not within his authority.
However, if ‘C’ had been a director, the company would have been liable
on the said bill as it is within the ostensible authority of a director to draw
bills on behalf of the company.
For details: (Refer to Q. 4(b), Chapter 5, under the heading Exceptions to
the Doctrine of Indoor Management (ii)). [Page 40
4. Under the Articles, the Directors of a Company had power to borrow up to
`1,00,000 without the consent of the general meeting. The Directors themselves
lent ` 3,50,000 to the Company without such consent and took debentures. Is
the Company liable for ` 3,50,000?
Ans. The rule of Indoor Management is that the persons dealing with the
Company in good faith have the right to assume that internal formalities
prescribed in public documents have been observed. The outsiders are
not bound to enquire into the regularity of the internal proceedings.
But this protection cannot be claimed by a person who has actual or
constructive notice of the internal irregularity. (Here the directors have
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the knowledge of irregularity). Therefore, in this case the company shall
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be liable only upto ` 1,00,000.
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5. Articles of a limited company state that ‘A’ shall be the law officer of the company
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and shall not be removed except on the ground of proved misconduct. The
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company removed him even though he was not guilty of misconduct. State
whether company’s action is valid or not.
Hint: The company’s action is valid because the Articles do not constitute
any contract between the company and ‘A’,
For details: (Refer to Q. 3(Point 4), Chapter 5). [Page 39
6. The Articles of a company provided that the shares of a member who becomes
bankrupt would be offered for sale to other shareholders at a certain price. Is the
provision binding on the shareholders?
Ans. Yes, the provisions of the Articles are binding on the shareholders.
According to Section 10 of the Companies Act, 2013, “Subject to the
provisions of the Act, the Memorandum and Articles shall when registered, bind
the company and the members thereof to the same extent as if they respectively
had been signed by the company and each member and contained covenants on its
and his part to observe all the provisions of Memorandum and of the Articles”.
Thus, it follows from the provisions that the Memorandum and Articles
bind the company to its members, and the members to the company.
The facts of the given case relate to the facts of Borland Trustees vs. Steel
Bros & Co. Ltd. The Articles of the company provided that the shares of
any member who became bankrupt should be sold to certain other
persons at a certain price to be fixed by the directors. Borland became
bankrupt. His trustees in bankruptcy claimed that Borland was not bound
by the Articles and he could dispose of the shares at their true value. It
was held that he was bound by the provisions of the Articles.
___________
6 PROSPECTUS
Q. 1. What is a “Prospectus”? What are the legal requirements as to the issue

of a prospectus?
Ans. According to Section 2(70), of the Companies Act, a prospectus is defined
as “Any document described or issued as a Prospectus and includes a Red herring
prospectus referred to in Section 32 or Shelf prospectus referred to in Section 31 or any
notice, circular, advertisement or other document inviting deposits from the public or offers
from the public for the subscription or purchase of any securities of a body corporate.”
The following ingredients constitute a ‘Prospectus’:
— there must be an invitation of offer to the public;
— the invitation must be made “by or on behalf of the company or in relation to
an intended company”;
— the invitation must be “to subscribe or purchase”;
— the invitation must relate to shares or debentures or such instruments.
Thus, a prospectus is an invitation issued to the public to offer for purchase/
subscribe shares or debentures of the company.
‘Public’ is a general word, and includes any section of the public. This means
that if a document inviting persons to buy shares is issued, for example, to all
advocates, or to all doctors, or to all foreigners living in India, or to all Indian
citizens, or to all shareholders in a particular company, it will still be issued to the
public within the meaning of the Act.
Issue of Prospectus. The legal requirements of a prospectus are as follows:
1. Compliance of SEBI Regulations. The ‘SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2009’, as amended from time to time, regarding
capital issues to the public should be complied with for the proposed issue of
securities (shares or debentures) to the public. A statement should also be made
to this effect in the prospectus.
2. Registration. A copy of the prospectus, duly dated and signed by all the
directors must be registered with the Registrar. This fact must be stated on the
face of the prospectus. The copy for registration must be accompanied with the
following documents:
(i) the consent of the expert if his report is to be published in the prospectus;
(ii) a copy of every material contract and a copy of every contract regarding
appointment and remuneration of managerial personnel and their
written consent to act as such;
(iii) written consent of auditors, legal advisors, bankers and brokers of the
company to act in that capacity.
3. Issue of prospectus. The prospectus must be issued within 90 days of its
registration. A prospectus issued after the said period shall be deemed to be a
prospectus, a copy of which has not been delivered to the Registrar for
registration.
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The company and every person who is knowingly a party to the issue of the
prospectus without registration shall be punishable with fine ranging from
`50,000 to ` 3,00,000.
4. Terms of prospectus not to be varied or changed. According to Section 27,
a company shall not vary terms of a contract referred to in the prospectus or
objects for which the prospectus was issued except by way of special resolution.
Dissenting shareholders shall be given an exit offer by promoters or controlling
shareholders subject to such manner and conditions as may be specified by SEBI.
5. Application form to accompany abridged prospectus. Application form for
shares or debentures must accompany abridged prospectus.
(a) Contents of a Prospectus (b) Deemed Prospectus
(c) Abridged Prospectus (d) Shelf Prospectus
(e) Red-herring Prospectus
Ans. (a) Contents of a Prospectus. A Prospectus is a document in the form of
an invitation to the public to subscribe for the company’s shares or debentures. It
is through this document that an investor can judge the soundness of a company.
It must give full disclosure of all the needed and essential matters likely to affect
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the decision of the prospective investors.
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Following matters or particulars have to be stated in the Prospectus:
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1. General information:
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(i) Name and address of the registered office of the company.
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(ii) Dates of the opening and closing of the issue and declaration about the
issue of allotment letters and refunds within the prescribed time.
(iii) A statement by the Board of Directors about the separate bank account
where all monies received out of the issues are to be transferred and
disclosure of details of all monies including utilised and unutilised
monies out of the previous issue in the prescribed manner.
(iv) Details about underwriting of the issues.
(v) Consent of the directors, auditors bankers to the issue, expert’s opinion,
if any, and of such other persons, as may be prescribed.
(vi) Authority for the issue and the details of the resolution passed therefor.
(vii) Procedure and time schedule for allotment and issue of securities.
(viii) Capital structure of the company in the prescribed manner.
(ix) Main objects of public offer, terms of the present issue and such other
particulars as may be prescribed.
(x) Main objects and present business of the company and its location,
schedule of implementation of the project.
(xi) Particulars relating to:
• management’s perception of risk factors specific to the project;
• gestation period of the project;
• extent of progress made in the project;
• deadlines for completion of the project; and
• any litigation or legal action pending or taken by a Government
Department or a statutory body during the last 5 years immediately
preceding the year of the issue of prospectus against the promoter of
the company.
CHAPTER 6: PROSPECTUS 43
(xii) Minimum subscription, amount payable by way of premium, issue of

shares otherwise than for cash.
(xiii) Details of directors including their appointments and remuneration and
such particulars of the nature and extent of their interests in the company
as may be prescribed.
(xiv) Disclosure in such manner as may be prescribed about source of
promoters’ contribution.
2. Report containing financial information and audit report:
(i) Report by the auditors of the company with respect to its profits and
losses and assets and liabilities and such other matters as may be
prescribed.
(ii) Reports relating to profits and losses for each of the five financial years
immediately preceding the financial year of the issue of prospectus. A
company which is not incorporated for a period of five years, the
prospectus shall set out, the reports relating to profits and losses for each
of the financial years immediately preceding the financial year of the
issue of prospectus.
(iii) Audit report in the prescribed manner upon 5 years profits and losses as
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mentioned in (ii) above or audit report on profits and losses information
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for lesser number of years than 5 years.
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(iv) Reports about the business or transaction to which the proceeds of the
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securities are to be applied directly or indirectly.
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3. Declaration. A declaration has to be made about the compliance of the
provisions of this Act and a statement to the effect that nothing in the prospectus
is contrary to the provisions of this Act, the Securities Contracts (Regulations)
Act, 1956 and the Securities and Exchange Board of India Act, 1992 and the rules
and regulations made thereunder.
4. State such other matters and set out such other reports as may be prescribed.
(b) Deemed Prospectus or Prospectus by Implication [Section 25]. Section 25
provides that any document by which the offer for sale of shares or debentures to
the public is made shall, for all purposes, be treated as prospectus. The document
‘Offer for Sale’, is an invitation to the general public to purchase the shares or
debentures of a company. It may also be issued through an intermediary, such as
an issuing house or a merchant bank. A company may allot or agree to allot any
shares or debentures to an ‘issue house’ without its any intention to make shares
or debentures available directly to the public through issue of prospectus. The
issue house in turn makes an ‘Offer for Sale’ to the public.
In order to constitute ‘Offer for Sale’, either of the two conditions must be
satisfied:
• ‘Offer for Sale’ to the public was made within six months after the
allotment or agreement to allot; or
• At the date when the offer was made, the whole consideration to be
received by the company in respect of the securities had not been
received by it.
This section provides an exception to the issue of prospectus. Here, the
company allots the shares to an Issue House, which in turn makes an ‘Offer for
Sale’ to the public. The document by which an ‘Offer for Sale’ is made by the
Issue House to the public although not being issued by the company, shall be
deemed to be a prospectus issued by the company. That is why the document by
which an Issue House makes an offer for sale is known as deemed prospectus or
prospectus by implication.
Further, Section 28 permits certain members of a company, in consultation
with Board of Directors, to offer the whole or a part of their holdings of shares to
the public. The document by which the Offer for Sale to the public is made shall
be deemed as prospectus issued by the company.
(c) Abridged Prospectus. Abridged Prospectus means a memorandum contain-
ing such salient features of a prospectus as may be specified by the Securities and
Exchange Board of India by making regulations in this behalf [Section 2(1)]. It is
a brief version of the information contained in the ‘prospectus’ so that cost of
public issue of capital may be reduced.
Section 33(1) states that every application form for the purchase of any of the
securities of a company should be accompanied by an abridged prospectus.
However, the full prospectus is to be made available to a person who makes a
request for it before the closing of the subscription list. If a company violates this
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provision, it shall be punishable with a fine of fifty thousand rupees for each
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default.
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Exceptions. There are, however, certain exceptions to the above provision,
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where ‘an abridged prospectus’ containing all the prescribed details need not
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accompany the application forms sent out. These exceptions are:
— in case of bonafide underwriting agreement;
— when shares or debentures are not offered to the public;
— in relation to rights issue of shares or debentures; and
— in respect of shares or debentures similar to those already issued and
dealt in on a recognized stock exchange.
(d) Shelf Prospectus. The expression ‘shelf prospectus’ means a prospectus in
respect of which the securities or class of securities included therein are issued
for subscription in one or more issues over a certain period without the issue of a
further prospectus.
Provisions of the Act:
(i) Any class or classes of companies, as the Securities and Exchange Board
may provide by regulations in this behalf, may file a shelf prospectus
with the Registrar at the stage of the first offer of securities included
therein.
(ii) The shelf prospectus shall indicate a period not exceeding one year as the
period of validity of such prospectus and this period shall commence
from the date of opening of the first offer of securities under that
prospectus.
(iii) In respect of a second or subsequent offer of such securities issued during
the period of validity of that prospectus, no further prospectus is required.
(iv) A company filing a shelf prospectus shall be required to file an Infor-
mation Memorandum containing all material facts relating to new
charges created, changes in the financial position of the company as have
occurred between the first offer of securities or the previous offer of

securities and the succeeding offer of securities and such other changes
as may be prescribed, with the Registrar within the prescribed time, prior
to the issue of a second or subsequent offer of securities under the shelf
prospectus.
(v) Where an Information Memorandum is filed, every time an offer of
securities is made, such Memorandum together with the shelf prospectus
shall be deemed to be a prospectus.
(e) Red-herring Prospectus. The expression “red-herring prospectus” means a
prospectus which does not include complete particulars of the quantum or price
of the securities included therein.
Provisions of the Act:
(i) A company proposing to make an offer of securities may issue a red-
herring prospectus prior to the issue of a prospectus.
(ii) A company proposing to issue a red-herring prospectus shall file it with
the Registrar at least 3 days prior to the opening of the subscription list
and the offer.
(iii) A red-herring prospectus shall carry the same obligations as are
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applicable to a prospectus and any variations between the red-herring
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prospectus and a prospectus shall be highlighted as variations in the
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prospectus.
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(iv) Upon the closing of the offer of securities under this section, the
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prospectus stating therein the total capital raised, whether by way of
debts or share capital, and the closing price of the securities and any
other details as are not included in the red-herring prospectus shall be
filed with the Registrar and the Securities and Exchange Board.
Q. 3. Who are liable and to what extent for mis-statements, if any, in a
Prospectus? Explain.
Or
What are the remedies open to an allottee who has subscribed for the shares
on the faith of a misleading prospectus?
Ans. Misleading Prospectus. A prospectus constitutes the basis of the contract
between the company and the shareholders and therefore, it must disclose all
material facts which are likely to influence the decision of a prospective investor
very accurately. It must not state as fact any matter or thing which is not so. Not
only this, it must also not omit any material facts. A person who has subscribed
to the shares of a company or one who has been allotted shares on the basis of a
misstatement in its prospectus has got certain remedies against the company as
well as against the person or persons responsible for the issue of such prospectus.
In order to call a prospectus a ‘misleading prospectus’, there must be
misrepresentation of material facts and not of law or opinion. For example, if a
prospectus states that the company’s shares will be issued at a discount of 10 per
cent, it is misrepresentation of law because as per Section 53, shares cannot be
issued at a discount, and a person deceived by it will have no remedy.
Further, opinion given by the directors does not constitute misstatement. For
example, if the directors state that in their opinion, the company would be able to
pay dividend in the very 5 year of its operations, it would not constitute
misstatement.
Remedies for mis-statement and omission in a prospectus. The remedies
available to a person who has subscribed for shares on the faith of a misleading
prospectus, may be grouped into two categories:
I. Remedies against the company.
II. Remedies against the directors, promoters and experts.
I. Remedies against the company. The following two remedies are available to
an injured party against the company for misrepresentation in the prospectus
under general law:
(a) Rescission of the contract to take or accept shares. For this, the shareholder
has to seek the remedy within a reasonable time and has to surrender the shares
to the company. Further, the following conditions must be satisfied:
(i) The prospectus was issued by the company or on its behalf by the
directors or it was deemed to be a ‘prospectus issued by the company
by implication’ under Section 25 or Section 28.
(ii) The prospectus contained a misrepresentation of facts and not of law or
of opinion.
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(iii) The misrepresentation was material and related to such facts as are likely
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to influence the judgement of the prospective investor.
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(iv) It must be proved that the subscriber actually relied upon the mis-
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statement while applying for shares.
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Loss of the right of rescission. The right of rescinding the contract, however, is
lost under the following circumstances:
• If the allottee does not start the proceedings within a reasonable time
after coming to know of the misrepresentation.
• If he expressly or impliedly affirms his contract after becoming aware of
the falsity of the statement, for example, accepts dividend, pays call-
money or tries to sell the shares.
• If the company goes into liquidation before he has started the
proceedings to rescind the contract.
• If he is a man of such experience that he is not likely to be misled by the
misstatements.
(b) Damages for fraudulent misstatement or concealment. Any person induced
by such statement or omission is also entitled to sue the company for damages.
For this, he has to first rescind his contract and give up or surrender his shares to
the company, as an allottee of the shares cannot claim damages and also, side by
side, retain his shares. But to avail this remedy, the subscriber has to prove (i)
that the misstatements were made fraudulently and (ii) that he has actually been
deceived, in addition to proving other facts necessary to succeed in a suit of
rescission.
The usual claim against the company is for rescission of the contract of
allotment. Damages are generally claimed from the Directors, Promoters and
other persons who had authorised the issue of the Prospectus personally, or from
experts who had signed the report referred to in the Prospectus.
II. Remedies against Directors, Promoters and Experts. A shareholder, who
had been induced to buy shares, may claim from the Directors, Promoters or
from any one else responsible for untrue statement occurring in the Prospectus;
(i) Damages for fraudulent misrepresentation;
(ii) Compensation under Section 35;
(iii) Damages for loss suffered due to omission of statement under Section 56
of the Act.
(i) Damages for fraudulent misrepresentation. Under the general law, an
allottee of shares can hold persons responsible for the issue of Prospectus
(Directors, Promoters etc.) liable for damages for any fraudulent
misrepresentation or misstatement in the Prospectus, if he was deceived
by reason of acting on the faith of such Prospectus. But the Directors (or
Promoters etc.) will not be liable for the tort or deceit if they honestly
believed the statement to be true [Derry vs. Peek].
(ii) Compensation under Section 35. An allottee of shares or debentures is
entitled to claim compensation from the Directors, Promoters and any
other person who authorised the issue of the Prospectus, for damages
sustained by reason of any untrue statement in it.
Defences available to avoid civil liability [Section 35]. No person
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(Director, Promoter or any other person) shall be liable if he proves that
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• he withdrew his consent to become a director before the issue of the
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Prospectus and gave public notice to that effect; or
h
• the Prospectus was issued without his consent or authority and on coming
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to know this fact, he gave public notice that such a Prospectus was
issued without his knowledge, or
• that, he was ignorant of the untrue statement and on becoming aware of
the same, after the issue of the Prospectus and before allotment, he
withdrew his consent and gave a public notice to that effect; or
• that he believed on reasonable grounds that the statement was true; or that it
was made on the authority of some government publication or an
expert.
(iii) Damages under Section 26. Section 26 imposes liability for omissions,
i.e., leaving out items which the IInd Schedule of the Act requires to be
disclosed in a Prospectus. If any subscriber suffers any loss due to an
omission, all those persons who authorised the issue of the Prospectus
shall be liable to pay damages to each subscriber at his instance.
But a person can escape liability if he proves that
• he was ignorant of the omission; or
• the non-disclosure arose from an honest mistake of fact on his part; or
• the court regards such omission as immaterial and excusable.
Criminal liability [Section 34]. Criminal liability involves a fine or a term of
imprisonment or both on the guilty party.
Section 34 states that where a prospectus includes an untrue statement, every
person who authorises the issue of such prospectus shall be liable under Section
447, unless he proves either (i) that the statement or omission was immaterial, or
(ii) that he had reasonable grounds to believe it to be true.
As per Section 447, any person who is found to be guilty of fraud, shall be
punishable with imprisonment for a term ranging from six months to 10 years
and shall also be liable to fine which shall not be less than the amount involved in
the fraud, but which may extend to 3 times the amount involved in the fraud.
Where the fraud in question involves public interest, the term of imprisonment
shall not be less than 3 years.
Note: Criminal liability is not a remedy available to an aggrieved party for mis-
statement in the prospectus.
(a) Fixed price method and Book building method of public issues
(b) Private placement
(c) Global Depository Receipt
Ans. (a) Fixed price method. In fixed price method, the offer price of shares is
decided by the company in consultation with the lead managers much before the
issue actually opens for subscription. The prospective buyers have to subscribe to
shares at the price fixed by the Company.
Book Building. ‘Book building’ means a process undertaken by which a
demand for securities which are proposed to be issued by a body corporate is
elicited and built up and the price for such securities is assessed for the
as
determination of the quantum of such securities to be issued by means of a
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notice, circular, advertisement, document or information memorandum or offer
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document.
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Book building is a process by which shares are offered at a price which is based
on the bids received by the company. The issuer sets a base price and a band
within which the investors (both institutional as well as retail) can bid for shares.
During the period for which the book for the offer is open, the bids are collected
from the investors. That price and quantum which has the maximum demand is
selected.
The process of book building. The steps usually followed in book building
process are as follows:
(i) The issuer company planning to raise capital through Initial Public
Offers (IPOs) or Follow on Public Offers (FPOs) appoints a lead merchant
banker as Book Running Lead Manager or Book Runner.
(ii) With the help of the Book Runner, the issuer company prepares an
Information Memorandum which contains all the contents of a
prospectus except the price of securities or size of the issue. It is
circulated amongst corporate and institutional investors to gauge their
perception and demand for the shares of the company.
(iii) The issuer company files a prospectus with the SEBI and the Registrar of
Companies at least 3 days before the opening of the offer.
(iv) The issuer company specifies the number of securities to be issued and
the price band for the bids.
(v) The issuer company appoints syndicate members such as mutual funds,
stock brokers etc.
(vi) The syndicate members input the orders into an electronic book. The
process is known as bidding.
(vii) The book normally remains open for a period of 5 days.
(viii) Bids are entered within the specified price band.

(ix) Before the close of the book, the bidders can revise their bids.
(x) On the close of the book building period, the book runner evaluates the
bid. The evaluation is done on the basis of the demand at various price
levels.
(xi) The book runner and the issuer company decide the final price at which
the securities shall be issued.
(xii) Generally, the number of shares is fixed, the issue size gets frozen based
on the final price per share.
(xiii) The issuer company files the final prospectus with the Registrar of
Companies specifying the price and size of the offer.
(xiv) Securities are allocated to the successful bidders. Unsuccessful bidders
get the refund orders.
Limitations of the Book Building System:
(i) Book building system is suitable only for those issuer companies which
are fundamentally strong and well known to the investors.
(ii) The system works efficiently in matured market conditions where the
investors are well aware of the various parameters which affect the
market price of the securities.
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(iii) The system is basically meant for big investors having requisite expertise.
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Retail investors find it difficult to participate due to lack of requisite
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expertise and knowledge.
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(b) Private Placement [Section 42]. ‘Private placement’ is an offer of securities
or invitation to subscribe securities to a selected group of persons through issue
of a private placement offer letter. The relevant provisions in this regard are as
follows:
(i) The company may make private placement through “Private Placement
Offer Letter” provided the proposed offer of securities has been
previously approved by the shareholders by a special resolution.
(ii) Such offer or invitation shall be made to not more than 200 persons in a
financial year. Any offer or invitation made to qualified institutional
buyers or to employees of the company under a scheme of employees
stock option shall not be considered while calculating the limit of 200 persons.
(iii) If a company makes an offer to allot, or invites to subscribe securities to
more than 200 persons, the same shall be deemed to be an offer to the
public and such an offer shall be governed by the provisions applicable
to a prospectus.
(iv) No fresh offer or invitation under this section shall be made unless the
allotments with respect to any offer or invitation made earlier have been
completed or that offer or invitation has been withdrawn or abandoned
by the company.
(v) All monies payable towards subscription of securities under this section
shall be paid through cheque or demand draft or other banking channels
but not by cash.
(vi) Company shall not be entitled to use money raised via private placement
unless allotment is made and Return of Allotment in Form PAS-3 is filed
with the Registrar of Companies.
(vii) Securities should be allotted within 60 days from the date of receipt of
the application money. If the company is not able to allot the securities
within that period, it shall repay the application money to the subscribers
within 15 days from the date of completion of 60 days. If the company
fails to repay the application money within the aforesaid period, it shall
be liable to repay that money with an interest at the rate of 12% per
annum from the expiry of the 60 days.
(viii) The monies received on application shall be kept in a separate bank
account in a scheduled bank and shall not be utilised for any purpose
other than:
— for adjustment against allotment of securities; or
— for the repayment of monies where the company is unable to allot
securities.
(ix) All offers covered under this section shall be made only to such persons
whose names are recorded by the company prior to the invitation to
subscribe, and that such persons shall receive the offer by name. A
complete record of such offers and acceptance of offers shall be kept by
the company and complete information about such offers shall be filed
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with the Registrar within 30 days of circulation of relevant private
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placement offer letter.
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(x) A company making a private placement shall not release any public
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advertisements or utilise any media, marketing distribution channels or
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agents to inform the public at large about such an offer.
(xi) The company shall file with the Registrar a Return of Allotment in such
manner as may be prescribed giving full names and addresses of all
security holders and number of securities allotted.
(c) Global Depository Receipt (GDR). A company is allowed to raise funds
from foreign countries by issue of Global Depository Receipts (GDRs). A
company may issue GDRs in any foreign country.
Conditions for issue of Depository Receipts. Following conditions as given
under Rule 4 of the Companies (Issue of Global Depository Receipts) Rules,
2014, should be complied with for issue of Depository Receipts:
(i) The Board of Directors of the company intending to issue depository
receipts shall pass a resolution authorising the company to do so.
(ii) The company shall take prior approval of its shareholders by a special
resolution to be passed at a general meeting.
(iii) The depository receipts shall be issued by an overseas depository bank
appointed by the company and the underlying shares shall be kept in the
custody of a domestic custodian bank.
(iv) The company shall ensure that all the applicable provisions of the scheme
and the rules or regulations or guidelines issued by the Reserve Bank of
India are complied with before and after the issue of depository receipts.
(v) The company shall appoint a merchant banker or a practising chartered
accountant or a practising cost accountant or a practising company
secretary to oversee all the compliances relating to issue of depository
receipts and submission of compliance report. The compliance report
shall be placed at the meeting of the Board of Directors of the company

or of the committee of the Board of Directors authorised by the Board in
this regard to be held immediately after closure of all formalities of the
issue of depository receipts.
PRACTICAL PROBLEMS
1. Anil purchased from Kamal 1,000 shares of XYZ Ltd. on the basis of prospectus
containing wrong statement. What remedies are available to Anil against the
company?
Hint: Since Anil did not buy the shares on the basis of the prospectus, he
has no remedy against the company.
A shareholder who buys the shares from open market does not have right
to remedies for mis-statement in prospectus. The right to remedies is
available only to the subscriber or the person who buys the shares directly
from the company because he buys it on the faith of prospectus.
Only the original allottee of shares who had relied on the prospectus and
not a buyer in the open market is entitled to proceed against those who
misled him.
as
For details: (Refer to Remedies against the Company). [Page 48
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2. A company issued a prospectus advertising that the company has a great ‘potential
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turnover’ of a million bags of cement in a year. It was discovered later that while
Sh
the company has the installed capacity of one million bags, it never produced more
than six lakh bags of cement in a year. Buyers of the shares seek remedy against the
misleading statement. Will they succeed?
Hint: For any prospectus to be termed misleading, there should be a mis-
statement of a material fact and not of law or opinion. The buyers cannot
succeed as statement is only an opinion.
For details: (Refer to Misleading Prospectus, Q. 3, Chapter 6).
[Page 47
3. All statements in a prospectus issued by a public limited company were literally
true but it failed to disclose that the dividends stated in it as paid were not paid out
of the current year’s profits. The statement that the company had paid dividend for
a number of years was true. But the fact that company had incurred losses for all
these years was not disclosed in the prospectus. An allottee of shares wanted to
avoid the contract on the ground that the prospectus did not disclose this fact,
which in his opinion, was very material. Will he succeed? Give reasons.
Hint: Yes, omission of a material fact makes the prospectus misleading.
For details: (Refer to Misleading Prospectus, Q. 3, Chapter 6) [Page 47
4. Bogo Ltd. issued a prospectus which contained some misleading statements. Mr.
Yogi, knowing the fact, did not subscribe to the issue. But he purchased some
shares from the open market and claimed compensation from the company on the
ground that the Prospectus issued for the shares contained misleading statements.
Can he succeed? Give reasons.
Hint: Mr. Yogi cannot succeed as he is not an original allottee of the shares.
For details: (Refer to Remedies against the Company, Q. 3, Chapter 6)
___________ [Page 48
7 ALLOTMENT OF SECURITIES
(Shares and Debentures)
Q. 1. What is meant by allotment of securities (shares)? State various

provisions in respect of allotment of securities (shares). What is the effect of
non-compliance of special provisions?
Ans. Allotment of Securities (Shares). Offer for securities (shares) are made by
the potential investors on the application form provided by the company. When
an application is accepted, it results in allotment of securities (shares). What is
termed as ‘allotment’ is generally neither more nor less than the acceptance by
the company of the offer to take securities (shares). Broadly speaking, allotment
is the appropriation out of the previously unappropriated capital of a company,
of a certain number of securities (shares) to an applicant by a resolution passed
by the Directors of a company in response to an application.
The provisions governing allotment of securities (shares) may be discussed
under the following two heads:
I. General Provisions; II. Special Provisions
I. General Provisions.
(i) Allotment must by made by proper authority. For an allotment to be
valid, it should be made by proper authority, i.e., the Board of Directors
of the company, or by an Allotment Committee or the Managing Director
or Manager authorised to allot securities (shares) on behalf of the Board
of Directors. The allotment should be made as per the provisions of the
Articles of Association.
(ii) Allotment against written request only. No allotment can be made
without a written application for allotment, and the application is to be
made on the form provided by the company in this regard. Allotment
made against oral request is invalid.
(iii) Within reasonable time. Allotment must be made within a reasonable
period of time, otherwise the offer lapses. What is a reasonable period of
time depends upon the facts of each case. A delay of 5 to 6 months
between application and allotment was held to be not reasonable.
(iv) Must be communicated. Allotment is the acceptance of the offer. Hence,
its acceptance must be communicated to the other party. Posting of a
properly addressed and stamped letter of allotment is a sufficient
communication, even if the letter is delayed or lost in the course of post.
(v) Absolute and unconditional. The allotment to be valid should be
absolute and unconditional, i.e., it should be made on the same terms as
are stated in the application.
II. Special Provisions. The Companies Act does not prescribe any restrictions
as to the allotment of securities (shares) in the case of private companies. The Act,
however, lays down certain restrictions regarding the allotment of securities
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CHAPTER 7: ALLOTMENT OF SECURITIES (SHARES & DEBENTURES) 53
(shares) by public companies which raise capital from the public. These
restrictions are as follows:
(i) Registration of prospectus. A copy of prospectus must be duly filed
with the Registrar of Companies. [Section 26(4)]
(ii) Application money. The amount payable on application on every
security (share) should not be less than 5% of the nominal amount of the
security (share) or such other percentage or amount as may be specified
by SEBI. [Section 39(2)]
(iii) Minimum subscription. As per Section 39(1)(a), a company shall not
proceed to allot securities (shares) unless the amount stated in the
prospectus as the minimum subscription amount has been subscribed
for, and the sums payable on application for such amount have been
paid to and received by the company.
Minimum Subscription means the amount which, in the opinion of the
Board of Directors, is enough to meet the following needs, namely:
• Price of any property purchased or to be purchased.
• Preliminary expenses or underwriting commission.
• Payment of any money borrowed for these purposes.
s
• Working capital needs of the company.
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• Any other expenditure stated with its nature and purpose in the
iv
prospectus.
h
If the amount stated in the prospectus as minimum subscription is not
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received within a period of 30 days of the issue of the prospectus or such
other period as prescribed by the SEBI, the money received from the
applicants should be returned within such time and manner as may be
prescribed. In case the money is not returned within the prescribed
period, the company and its officer who is in default shall be liable to a
penalty of one thousand rupees for each day during which such default
continues or ` 1 lakh, whichever is less.
As per SEBI Guidelines, the minimum subscription is 90% of the entire
issue. SEBI Guidelines require this amount to be raised within 60 days of
the closure of the issue. If the minimum subscription is not received
within 60 days of the closure of the issue, all monies received from the
applicants should be returned within next 10 days otherwise the
company would be liable to pay interest @ 15% per annum for the
delayed period.
Rule 11 of the Companies (Prospectus and Allotment of Securities)
Rule 2014 states that if the stated minimum amount has not been
subscribed and the sum payable on application is not received within the
specified period, the amount received from the applicants shall be
returned within a period of 15 days from the closure of such issue. In
case of default, directors and other officers responsible for default shall
be jointly and severally liable to repay that money with interest @15%
p.a.
If the stated minimum amount has not been subscribed and the sum
payable on application is not received within a period of 30 days from
the date of issue of the prospectus, the amount received from the
applicants shall be returned within a period of 15 days from the closure
of such issue. In case of default, directors and other officers responsible
for default shall be jointly and severally liable to repay that money with
interest @ 15% p.a.
In case of any default, the company and its officer who is in default shall
be liable to a penalty for each default, of ` 1,000 for each day during
which such default continues or ` 1 lakh, whichever is less.
Amount of minimum subscription must be received in cash. Minimum
subscription is exclusive of any amount payable other than in cash.
Amount of minimum subscription for this purpose will not include any
amount of securities (shares) allotted for consideration otherwise than in
cash, for example, securities (shares) allotted to promoters for their
services shall not be included in minimum subscription.
(iv) Money to be kept in a scheduled bank [Section 40(3)]. All application
money received from the public for subscription to the securities (shares)
shall be kept in a separate bank account in a scheduled bank and utilised
only for:
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• adjustment against allotment of securities (shares) where the securities
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(shares) have been permitted to be dealt with in the stock exchanges
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specified in the prospectus; or
h
• the repayment of monies received from applicants within the time
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specified by the Securities and Exchange Board, where the company is,
for any other reason, unable to allot securities (shares).
(v) Securities (shares) to be dealt with in stock exchange [Section 40]:
• Every company making public offer shall, before making such offer,
make an application to one or more recognised stock exchange or
exchanges and obtain permission for the securities (shares) to be dealt
with in such stock exchange or exchanges.
• Where a prospectus states that an application under sub-section (1)
has been made, such prospectus shall also state the names of the stock
exchanges in which the securities (shares) shall be dealt with.
(vi) Issue of securities (shares) in dematerialised form [Section 29(1)].
Every company making public offer of any securities (shares) shall issue
the securities (shares) only in dematerialised form by complying with the
requisite provisions of the Depositories Act, 1996.
Effect of Non-compliance of the Special provisions:
(a) If restriction no. (i) (registration of prospectus), no. (ii) (at least 5% of the
nominal amount of the security (share) to be received as application
money), and no. (iii) (minimum subscription amount must be received)
are not complied with, the allotment remains valid but fine is imposed on
the company and every defaulting officer.
(b) If restriction no. (v) (shares and debentures to be dealt with in a
recognized stock exchange) is not complied with, the allotment is void
and penalty shall also be imposed on the company and every defaulting
officer.
CHAPTER 7: ALLOTMENT OF SECURITIES (SHARES & DEBENTURES) 55
(c) If restriction no. (vi) (public offer of securities (shares) to be in demat

form only) is not complied with, the allotment remains valid but fine is
imposed on the company and every defaulting officer.
Q. 2. Write a note on opening and closing of subscription list.
Ans. The Companies Act is silent as to how many days the offer has to remain
open, but as per SEBI guidelines in case of public issues, Subscription list must
be kept open for at least 3 working days and for a maximum of 10 working days
including the days for which the issue is kept open in case of revision of price
band.
In case of public issue made by an infrastructure company, the issue can be
kept open for a maximum of 21 working days.
However, at present, an IPO is open for subscription for a minimum of 5 days
and all category of investors can put their bids till the last hour. In case of Rights
Issue, as per SEBI guidelines Subscription list shall be kept open for at least 15
days and for a maximum of 30 days.
Q. 3. Write a note on ‘Return of Allotment’.
Ans. Return of Allotment. As per Section 39(4), whenever a company, having a
share capital, makes any allotment of securities, it shall file with the Registrar of
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Companies a ‘Return of Allotment’ in such manner and within such time as may
a
be prescribed.
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Rule 12 of the Companies (Prospectus and Allotment of Securities) Rules,
hi
2014 prescribes the following rules in this regard:
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(i) The company shall file with the Registrar a Return of Allotment within
30 days of allotment of securities along with the prescribed fee.
(ii) There shall be attached to the Return Form a list of allottees stating their
names, addresses and occupations and the number of securities allotted
to each of the allottees.
(iii) In the case of securities (not being bonus shares) allotted as fully or partly
paid up for consideration other than cash, actual contracts in writing
constituting the title of the allottee of securities together with the relevant
contracts of sale or service must be attached with the Return Form.
(iv) In case of issue of bonus shares, a copy of resolution passed in the
general meeting authorizing the issue of such shares shall be attached to
the Return Form.
The Return of Allotment must be duly dated and it should be signed by the
Company Secretary.
PRACTICAL PROBLEMS
1. The Board of Directors of XYZ Co. Ltd. has allotted shares to the investors of the
company without filing a prospectus with the Registrar of Companies. Explain the
remedies available to the investors in this respect.
Hint: Penalty for contravention: For details: (Refer to Q. 1, (Chapter 7),
under the heading Effect of Non-compliance of Special Provisions [Point
(a)]). [Page 56
2. After receiving 80% of the minimum subscription as stated in the prospectus, a
company allotted 100 equity shares in favour of ‘X’. The company deposited the
said amount in the bank but withdrew 50% of the amount, before finalisation of
the allotment, for the purchase of certain assets. ‘X’ refuses to accept the allotment
of shares on the ground that the allotment is violative of the provisions of the
Companies Act, 2013. Comment.
Hint: The company has received only 80% of the minimum subscription as
stated in the prospectus. But as per SEBI Guidelines, minimum
subscription should be 90% of the entire issue. Hence, the allotment made
is in contravention of provisions of the Companies Act and the allotment
attracts a penalty for contravention. Allotment remains valid and ‘X’ has to
accept the allotment.
For details: (Refer to Q. 1, (Chapter 7), under the heading Effect of Non-
compliance of Special Provisions [Point (a)]). [Page 56
___________
Das
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8 SHARES AND SHARE CAPITAL
Q. 1. Distinguish between Shares and Stocks.

Ans. Share. Share means ‘a share’ in the share capital of the company. It
includes a stock except where a distinction is made between stock and share.
Shares in a company are a movable property, transferable in the manner
prescribed by the company’s Articles of Association.
Stocks. Stocks means consolidation of fully paid up equity shares. It can be
divided into any amount and transferred into any fractions and sub-divisions
without regard to the original face value of the shares.
Conditions for converting shares into stocks. A company cannot issue stock
originally. The shares could be converted into stocks subject to the following
conditions:
(a) shares should be fully paid,
(b) the Articles empower the company to convert shares into stock and
(c) the conversion requires passing of an ordinary resolution by the members.
Stocks may be reconverted into shares again by an ordinary resolution. A
stockholder enjoys the same rights and privileges as enjoyed by a shareholder.
Distinction between Shares and Stocks
Point of Distinction Shares Stocks
1. Nominal value It has a nominal value, It has no nominal value.
say, ` 10 or ` 100.
2. Paid-up A share may be partly It is only issued in respect
paid-up. of fully paid-up shares.
3. Denomination All shares are always of Stocks may be of
equal denomination. different denominations.
4. Issue Shares can be issued Stocks cannot be issued to
directly to the public. the public directly. These
can only be issued to the
existing shareholders.
5. Transfer in small A share cannot be trans- Stocks can be transferred
fractions ferred in small fractions. in small fractions.
6. Distinctive numbers All shares have distinctive Stocks does not have
numbers except when distinctive numbers.
held in demat form.
Q. 2. Distinguish between a Preference share and an Equity share.
Ans. Preference share. A preference share is a share which enjoys preferential
treatment with regard to payment of dividend as well as return of capital over
other shares in case of winding up of the company.
57
Equity share. An equity share is a share which is not a preference share i.e., it
does not enjoy preferential right in respect of payment of dividend and in regard
to repayment of capital.
Distinction between Preference Shares and Equity Shares
Point of Distinction Preference Shares Equity Shares
1. Right to Dividend Dividend is paid on Dividend is paid on
Preference Shares before Equity Shares after it is
it is paid on Equity paid on Preference
Shares. Shares.
2. Rate of Dividend Rate of dividend is fixed. Rate of dividend is
decided by the Board of
Directors and may vary
from year to year.
3. Degree of Risk Low High
4. Arrears of dividend May accumulate. Cannot accumulate.
5. Convertibility Preference Shares may Equity Shares are not
be converted into Equity convertible.
as
Shares, if the terms of the
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issue so provide.
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6. Redemption • Preference Shares A company may buy
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ought to be redeemed back its equity shares.
(refunded).
• A company cannot
issue any preference
shares which are
irredeemable or which
are redeemable after a
period of 20 years from
the date of issue.
7. Voting Rights Preference shareholders Equity shareholders
have voting rights only have voting rights in all
in special circumstances. the circumstances.
8. Refund of Capital On winding up, On winding up, Equity
Preference Share Capital Share Capital is repaid
is repaid before Equity after Preference Share
Share Capital is paid. Capital is paid.
9. Right to Participate Preference shareholders Equity Shareholders
in the Management do not have the right to have the right to
participate in the participate in the
management of the management of the
company. company.
10. Money invested by Conservative investors. Adventurous investors.
Q. 3. Write a note on Equity Shares with Differential Rights.
Ans. Equity Shares with Differential Rights. The holders of any such equity
CHAPTER 8: SHARES & SHARE CAPITAL 59
shares shall have differential rights as to dividend, voting or otherwise in

accordance with rules laid down in this regard.
A company limited by shares can issue equity shares with differential rights
subject to the following conditions:
(a) The Articles of Association of the company authorise such issue.
(b) The issue of shares is authorised by an ordinary resolution passed at a
general meeting of the shareholders.
Where the equity shares of a company are listed on a recognised stock
exchange, the issue of such shares shall be approved by the shareholders
through postal ballot.
(c) The shares with differential rights shall not exceed 26% of the total post-
issue paid up equity share capital;
(d) The company has had distributable profits for the previous 3 years;
(e) The company has not defaulted in filing financial statements and annual
returns for three financial years immediately preceding the financial year
in which it has decided to issue such shares; in repaying deposits or
paying interest thereon; in redeeming debentures or paying interest
thereon; or redemption of preference shares or paying dividend thereon;
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or repayment of any term loan or payment of interest thereon to a bank
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or financial institution; and paying dividend after declaration.
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(h) The company has not been penalised by the Court or Tribunal during the
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last three years of any offence under the Reserve Bank of India Act, 1934;
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the Securities and Exchange Board of India Act, 1992; the Securities
Contracts Regulation Act, 1956; the Foreign Exchange Management Act,
1999 or any other special Act, under which such companies are being
regulated by sectorial regulators.
Q. 4. Write notes on—(a) Redemption of Preference Shares, (b) Issue of
securities at Premium and (c) Issue of shares at Discount.
Ans. (a) Redemption of Preference Shares [Section 55]. The Companies Act
authorises a company limited by shares to issue ‘Redeemable Preference
Shares’. Capital received on such shares can be paid back to the holders of such
shares during the life-time of the company. The paying back of capital is called
‘redemption’. Preference shares can be redeemed subject to the following
conditions:
(i) The Articles must permit the issue of such shares.
(ii) The shares to be redeemed must be fully paid up.
(iii) Redemption should be carried only out of accumulated profits or out of
the proceeds of a fresh issue made for the purpose of redemption.
(iv) A sum equivalent to the amount paid on redemption shall be transferred
to a reserve fund, called “The Capital Redemption Reserve Account”.
This account may be utilised for the issue of fully paid bonus shares.
(v) If any premium is payable on redemption, the amount must have been
provided for, either out of the profits of the company or out of the
company’s Securities premium account before the shares are redeemed.
(vi) Where a company is not in a position to redeem preference shares, it may
issue further preference shares, with the consent of holders of 75% in
value of such preference shares and approval of NCLT.
The NCLT, while giving approval, shall order the redemption forthwith
of preference shares of such persons who have not consented to the issue
of further redeemable preference shares.
A company limited by shares cannot issue preference shares which are
irredeemable or redeemable after a period of 20 years.
(b) Issue of Securities at Premium. When securities are issued at a price higher
than the face value (also called par value or nominal value), it is called ‘Issue of
Securities at Premium’. Excess of issue price over the face value is the amount of
premium (Securities Premium). It is a capital profit for the company and the
amount so earned has to be credited to a separate account called ‘Securities
Premium Account’.
According to Section 52 of the Companies Act, 2013, the securities premium
may be applied only for the following purposes:
(i) For issuing fully paid bonus shares to the members;
(ii) For writing off preliminary expenses of the company;
(iii) For writing off the expenses of or the commission paid or discount
allowed on any issue of shares or debentures of the company;
(iv) For providing premium payable on the redemption of redeemable
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preference shares or debentures;
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(v) For purchasing its own shares (buy back) [Section 77A].
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When securities are issued at a premium for consideration other than cash, a
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sum equal to the amount of premium must be transferred to ‘Securities
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Premium Account’.
Section 52 applies to all the companies, public as well as private.
(c) Issue of Shares at a Discount. Provisions in respect of issue of shares at
discount are as follows:
(i) A company shall not issue shares at discount except for sweat equity
shares under Section 54.
(ii) Any share issued by a company at a discounted price shall be void.
(iii) Where a company contravenes the provisions of this Section, the
company shall be punishable with fine which shall not be less than
` 1 lakh but which may extend to ` 5 lakh and every officer who is in
default shall be punishable with imprisonment for a term which may
extend to 6 months or with fine which shall not be less than ` 1 lakh but
which may extend to ` 5 lakh, or with both.
Q. 5. “A company cannot buy back its own shares/securities”. Explain. Are
there any exceptions to this rule?
Or
What do you mean by ‘buy-back of shares/securities’? Explain the legal
provisions relating to buy-back of shares/securities by a company.
Ans. Buy-back of shares/securities: The term buy-back of shares (or other
securities) implies the act of purchasing its own shares (or other securities) by a
company.
Section 67 of the Companies Act imposes restrictions on the purchase by the
company of its own shares or of its holding company. According to this section,
a company limited by guarantee and having a share capital or a company limited
by shares cannot buy its own shares, unless the purchase is affected under the
provision of Section 66 (which deals with reduction of share capital). However, a
company with unlimited liability is free from the restrictions of Section 67.
Section 68 of the Companies Act, 2013 allows companies to purchase their
own shares or other securities subject to certain conditions which are as follows:
1. Source of buy-back. A company may purchase its own shares or other
securities (specified ones) from out of:
(i) its free reserves; or
(ii) Securities Premium A/c; or
(iii) proceeds of issue of shares or securities made at the time of such buy-
back.
2. Conditions to be fulfilled before buy-back.
(i) Buy-back should be permitted by its Articles of Association.
(ii) A company may, by a Board Resolution, buy-back up to 10% of the
aggregate of paid-up equity capital and free reserves. The Board
resolution must be passed at a Board Meeting only and not by
circulation.
If the company wants to buy-back more than 10% of the aggregate of
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paid-up equity capital and free reserves but up to 25% of the aggregate
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of the paid-up capital (equity & preference) and free reserves, then a
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Special Resolution in the general meeting is required.
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(iii) Buy-back does not or should not exceed 25% of the total paid-up share
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capital and free reserves of the company.
(iv) In any 1 year, buy-back should not exceed 25% of its paid-up share capital.
(v) After the buy-back, the debt-equity ratio including its free reserves
should not be more than 2 : 1 or such higher ratio as fixed by the Central
Government.
(vi) Shares or such other specified securities as are being bought back should
be fully paid.
(vii) Regulations, if any, of the SEBI should also be complied with.
(viii) Buy-back must be completed within 12 months from the date of passing
the Special Resolution at the General Meeting.
3. Buy-back from whom. Buy-back can be done:
(i) either from all the existing shareholders or security holders on pro-rata
basis; or
(ii) from the open market; or
(iii) from the employees out of the shares/securities held by them under a
scheme of stock option or ‘sweat equity’.
4. Declaration of solvency. A declaration of ‘Solvency’ in a prescribed form
has to be filed with the ROC as well as SEBI in this regard.
5. Physical destruction of securities. After the buy-back operation is
completed, the securities should be destroyed physically within 7 days of the last
day of completion of buy-back.
6. Further issue after buy-back. After buy-back, the company cannot make a
further issue of the same kind of securities within a period of 6 months from the
date of completion of buy-back.
7. Register of securities bought back. The company is required to maintain a

register containing the particulars of the securities bought back.
8. Return of buy-back. The company has to file a return in the prescribed form
with the Registrar of Companies and SEBI within 30 days from the date on which
the buy-back operations were completed.
9. Default. If a company makes any default in complying with the provisions
of the Companies Act or any regulations made by the Securities and Exchange
Board, the company shall be punishable with fine which shall not be less than ` 1
lakh but which may extend to ` 3 lakh and every officer of the company who is
in default shall be punishable with imprisonment for a term which may extend to
3 years or with a fine which shall not be less than ` 1 lakh but which may extend
to ` 3 lakh, or with both.
Transfer to Capital Redemption Reserve [Section 69]. Where a company
purchases its own shares out of free reserves, then a sum equal to the nominal
value of the shares so purchased shall be transferred to the capital redemption
reserve account and details of such transfer shall be disclosed in the balance
sheet. The capital redemption reserve account shall be utilised by the company
only for the purposes of issuing fully paid bonus shares.
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Prohibitions on Buy-back [Section 70]:
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1. No company shall, directly or indirectly, purchase its own shares or other
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specified securities through any subsidiary or investment company.
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2. Further, a company is prohibited to buy-back its own shares or other
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specified securities, if it has defaulted in:
(i) repayment of deposits or interest accrued thereon; or
(ii) redemption of debentures/preference shares; or
(iii) payment of dividend; or
(iv) repayment of any term-loan or interest payable to any financial
institution or bank.
3. Further, no company is allowed to ‘buy-back’ if the company has not
complied with the provisions of Section 92 (filing of annual return), Section 123
(declaration of dividend), Section 127 (failure to distribute dividend within 30
days of declaration) and Section 129 (preparation of Financial Statements in
accordance with Schedule III).
Q. 6. Explain Sweat Equity Shares.
Or
What are the conditions to be fulfilled by a company proposing to issue
Sweat Equity Shares under the Companies Act, 2013?
Ans. Sweat Equity Shares. The issue of such shares is governed by Section 54
of the Companies Act, 2013. ‘Sweat Equity Shares’ are the shares issued by a
company to its employees or directors either at a special discount or for
consideration other than cash for providing knowhow to the company or certain
rights such as Intellectual Property Rights (IPRs). If such shares are issued at a
discount, then these must be of a class already issued by the company.
Conditions for the issue of Sweat Equity Shares:
(a) Must be authorised by a special resolution passed at the General Body
Meeting of the company.
(b) Resolution must state

(i) The number of shares;
(ii) Current market price of such shares;
(iii) Consideration for which these shares are being issued;
(iv) Directors or employees to whom, if any, such shares are being issued.
(c) Once issued, all such shares are treated at par with the other shares.
(d) Such shares are listed on a recognised Stock Exchange.
Q. 7. Explain—(a) Rights shares and (b) Bonus Shares.
Ans. (a) Rights Shares. A company, limited by shares, is allowed to increase its
subscribed share capital by issuing new shares. However, this increase has to be
within the limits of its authorised capital as per Capital Clause of its
Memorandum of Association. Such shares have to be first offered to the existing
shareholders in the proportion of their present holdings as far as possible.
Such right of the shareholders to be so offered these new shares before these
are offered to the general public or anybody else is called shareholders’ right of
pre-emption. The shares so offered to these existing shareholders are called
‘Rights Shares’ and the issue of shares so made is called the ‘Rights Issue’.
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Main provisions of Section 62(1)(a) in this regard are as follows:
a
— Offer should be made to the existing shareholders only;
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— Offer must be made to the existing shareholders on a pro-rata basis;
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— Proper notice should be given to the existing shareholders;
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— Shareholders have also to be given the option to renounce their right in
favour of any one they want, if they so desire;
— Notice must provide at least 15 days time to the existing shareholders
either to accept the offer or renounce it or reject it;
— If the existing shareholder(s) refuse to accept or do not accept the offer or
even do not renounce it, then the Directors are allowed to make
allotment of such shares in any manner they deem fit in the best interests
of the company.
When can Rights Shares be issued to outsiders? or Exceptions to Section
62(1)(a): Section 62(1)(b) & (c) constitute an exception to Section 62(1)(a).
1. Section 62(1)(b) provides a company may at any time, issue shares to its
employees under a scheme of employees stock option, subject to special
resolution passed by the company and subject to such conditions as may
be prescribed.
2. Section 62(1)(c) provides a company may, at time, issue shares to any
person, if it is authorised by a special resolution, whether or not those
persons include the persons referred to in Section 62(1) clause (a) or
clause (b), either for cash or for a consideration other than cash, if the
price of such shares is determined by the valuation report of a registered
valuer subject to such conditions as may be prescribed.
Provisions of Section 62 of the Companies Act, 2013, relating to further issue
of shares apply to public companies as well as private companies.
(b) Bonus Shares. Companies usually do not distribute their entire profits as
dividend amongst their shareholders. They, as such, transfer part of their profits
to reserves, some of which are Statutory Reserves, whereas others are just
General Reserves. Companies, if so permitted by their Articles of Association, can
convert part of such reserves into capital by issuing bonus shares to the existing
shareholders. In fact, issue of bonus shares means capitalisation of profits. They
are called bonus shares because shareholders do not make any payment for such
shares.
1. A company may issue fully paid-up bonus shares to its members, in any
manner whatsoever, out of—
(i) its free reserves;
(ii) the Securities Premium Account; or
(iii) the Capital Redemption Reserve Account:
A company cannot issue bonus shares by capitalising reserves created by the
revaluation of assets.
2. No company shall capitalise its profits or reserves for the purpose of issuing
fully paid-up bonus shares, unless
(i) it is authorised by its Articles;
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(ii) it has, on the recommendation of the Board, been authorised in the
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general meeting of the company;
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(iii) it has not defaulted in payment of interest or principal in respect of fixed
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deposits or debt securities issued by it;
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(iv) it has not defaulted in respect of the payment of statutory dues of the
employees such as, contribution to provident fund, gratuity and bonus;
(v) the partly paid-up shares, if any, outstanding on the date of allotment,
are made fully paid-up;
(vi) it complies with such conditions as may be prescribed.
3. The bonus shares shall not be issued in lieu of dividend.
Q. 8. Distinguish between Rights shares and Bonus shares.
Ans. Distinction between Rights Shares and Bonus Shares
Point of Distinction Rights Shares Bonus Shares
1. Meaning Offer of new shares to Conversion of undis-
the existing members of tributed profits and
the company. reserves into shares.
2. Payment for the It only provides privilege Bonus shares are issued
shares to the existing members to the existing members
to subscribe for the free of charge.
shares offered by way of
rights. However, the
members have to pay for
the shares accepted.
3. Fully paid/Partly Rights shares may be Bonus shares are always
paid partly paid. fully paid.
4. Minimum Minimum subscription There is no condition of
subscription is to be raised. minimum subscription.
5. Money to be kept Money received on issue Since, no payment is

in a separate bank should be kept in a involved, hence, no such
account separate bank account. restriction.
6. Right to renounce Rights shares may be Bonus shares are like a
renounced by a member gift and can not be
in favour of any other renounced.
person. He may
renounce all or a part of
the shares offered to him.
7. Purpose Purpose of rights shares Purpose of bonus shares
is to raise funds for the is to capitalise the un-
company. distributed profits and
reserves.
8. Applicability Right shares are There is no such
mandatory. compulsion.
Q. 9. What is a Share Certificate? What are the legal effects of the issue of a
share certificate?
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Ans. Share Certificate. A ‘Share Certificate’ is a document which specifies the
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number of shares held by any member of the company. It is issued under the
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common seal, if any, of the company or signed by two directors or by a director
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and the Company Secretary, wherever the company has appointed a Company
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Secretary. Every person whose name is entered as a member in the register of
members, is entitled to get a share certificate from the company. It is not a
negotiable instrument. The share certificate may be in any form. A valid share
certificate must satisfy the following requirements:
(i) It must have the common seal of the company affixed on it.
(ii) It must specify the number and class of shares, the nominal value of
shares, distinctive number of shares, certificate number and the amounts
actually paid should also be stated in it.
(iii) It must also state the name of the shareholder.
(iv) Particulars of all the share certificates issued shall be recorded in the
Register of Members.
(v) It must state the name and the address of the registered office of the
company and the date of the issue.
Issue of Share Certificate. The power to issue share certificate is to be
exercised by the directors in Board meetings only. The share certificate must be
ready for delivery within two months after the date of allotment and one month
after the date of application for the registration of transfer/transmission.
Since the introduction of the ‘Demat System’, Share Certificates are no more
issued, as direct entries are made with the Depositories in the Demat Accounts of
the Applicants. A notice to this effect is sent to the Applicants by the Company
(Issue Managers).
Legal effects of share certificate. The legal effects of the issue of a share
certificate are as follows:
1. Estoppel as to the title to the shares. A share certificate is a prima facie
evidence of title, i.e., on the issue of a share certificate, the company is estopped
(i.e., prevented) from denying the title of the person to the shares whose name is
mentioned in the certificate. A share certificate is a declaration by the company
that the person in whose name the certificate is issued and to whom it is given, is
a shareholder in the company. But if an officer of the company who has no
authority to issue the share certificate issues a forged certificate, the rule of estoppel
will not be operative against the company.
2. Estoppel as to payment. In case, the share certificate states that on each of
the shares full amount has been paid, then the company is prevented from
alleging that the shares are not fully paid. Thus, once the share certificate states
that the shares are fully paid, then the company cannot ask for more payment on
the ground that the shares were not fully paid.
Q. 10. What are the circumstances under which a duplicate share certificate
can be issued?
Ans. Issue of duplicate share certificate. The directors are empowered to issue
a new duplicate share certificate in place of original certificate, if such certificate:
• is proved to have been lost or destroyed, or
• having been defaced or mutilated or torn is surrendered to the company.
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A company may issue a duplicate share certificate, if the original certificate has
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been defaced or mutilated or torn and the certificate is surrendered to the
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company. But, where the original share certificate is lost, stolen or destroyed, a
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duplicate share certificate can be issued only as per the provisions of the Articles
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of Association. The Articles generally prescribe some terms and conditions as to
evidence and indemnity. The new certificate shall also be duly sealed and signed
and the word ‘DUPLICATE’ shall appear across the face of such certificate. To
issue duplicate certificate, the Board of Directors has to pass a resolution. A
nominal fee is usually charged, as per the Articles, for such certificate.
If a company, with an intent to defraud, issues a duplicate share certificate, the
company shall be punishable with fine which shall not be less than five times the
face value of the shares involved but which may extend to ten times the face
value of such shares or ` 10 crore, whichever is higher and every officer of the
company who is in default shall be liable for action for fraud under Section 447.
PRACTICAL PROBLEM
1. The capital of Akanksha Manufacturing Ltd., is ` 2 crores consisting of Equity
share capital of ` 1.5 crores and ` 50 lacs of Redeemable preference share capital.
The Preference share capital is to be redeemed before 31st March 2015. The
company is running into losses and its accumulated losses aggregate to ` 50 lacs.
The company wants to borrow ` 1 crore from financial institutions to improve its
working and also to redeem the Preference share capital. Advice.
Hint: As per Section 55, preference shares can be redeemed either out of
accumulated profits or out of a fresh issue made for the purpose of
redemption. Hence, the company can borrow for working capital but it can
not borrow for redemption of Preference share capital. For details: (Refer
to Q.4(a), (Chapter 8)). [Page 61
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9 FORFEITURE & SURRENDER OF SHARES
Q. 1. Discuss the rules regarding forfeiture of shares and reissue of such

shares.
Ans. Forfeiture of Shares. It means the termination of membership of a
shareholder and taking away his shares by way of a penalty for not paying any
call or instalment or premium on the shares. Whenever a company makes any
call on the shares, then the shareholders have to pay the call money within a
stipulated time. If any shareholder fails to pay any such call money even after
reminders and notices, the company has a right, usually under its Articles of
Association, to forfeit his shares. In such a case the company has got a right to
even forfeit the amount already paid by the shareholder.
Rules relating to a valid forfeiture. If the Articles permit for forfeiture of
shares, then relevant regulations of ‘Table F’ shall apply (unless provided
otherwise in the Articles of the company) which provide the following rules
relating to a valid forfeiture of shares.
(i) Shares can be forfeited only for non-payment of call due in respect of the
shares and not for other debts.
(ii) Proper notice must be given to the defaulting member requesting him to
pay the outstanding amount of call. This notice must give at least 14 days
time for payment of such amount and must inform the member that in
the event of non-payment, his shares will be forfeited.
(iii) If the member does not comply with the notice, the Board of Directors
will pass a formal resolution of forfeiture and a notice of the same will
be served on the defaulting shareholder. If this resolution is not passed,
the forfeiture is invalid.
(iv) The power to forfeit shares must be exercised by the directors in good
faith and for the benefit of the company.
If a company is wound up after 1 year from the date of forfeiture, the member
whose shares have been forfeited cannot be held liable as a contributory.
Effects of a Valid Forfeiture. The effects of a valid forfeiture of shares are as
follows:
1. The defaulting shareholder, whose shares are forfeited, ceases to be a
member of the company and his name is struck off the register of
members.
2. The liability of the person whose shares have been forfeited ceases only
when the company receives payment in full of all such moneys in respect
of the shares forfeited. Therefore, a member remains liable to the
company for all such moneys, which at the time of forfeiture, were
payable by him to the company in respect of shares forfeited.
3. The former shareholder shall remain liable as a past member to pay calls,
if liquidation takes place within 1 year of the forfeiture.
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4. On forfeiture, the forfeited shares become the property of the company

and they are either re-issued or disposed of.
Re-issue of Forfeited Shares. Forfeited shares become the property of the
company. They may be cancelled or re-issued for any price they will fetch, but
the amount of discount cannot exceed the actual amount forfeited on these
shares, otherwise it would amount to issue of shares at a discount which is
prohibited under Section 53. After the re-issue, the new holder becomes a
shareholder of the company and his name will be registered in the register of
members. For the re-issue of shares, the Board has to pass a resolution.
The title of the purchaser to the forfeited shares is not affected by any
irregularly or invalidity in the forfeiture or sale of the shares. The re-issue of
forfeited shares is treated as re-sale and not as allotment and therefore, no return
of allotment of re-issue of forfeited shares need be filed with the Registrar of
Companies.
Q. 2. What is meant by surrender of shares? Distinguish between forfeiture
of shares and surrender of shares.
Ans. Surrender of Shares. Surrender is a short cut to forfeiture. Surrender of
shares means ‘voluntary’ return of shares by a member to the company. It is a
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short cut to the long procedure of forfeiture of shares. Shares, which are liable to
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be forfeited on account of default in the payment of calls, may be surrendered by
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the holder if he so desires. Such voluntary surrender of shares can be accepted by
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the company provided it is authorised by the Articles of the company. The
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formalities with regard to forfeiture are then unnecessary and the shares are
deemed to have been forfeited and cancelled without the detailed procedure
otherwise required for the purpose. The Directors may accept a surrender of
shares only—
(i) under the circumstances which would justify forfeiture of shares, i.e.,
non-payment of sum due in respect of shares which are not fully paid or
(ii) when the share certificate gets torn or mutilated and exchanged for the
new one.
The surrender of shares should not be used as a device for relieving the
shareholder from his liability [Collector of Moradabad vs. Equity Insurance Co.]
Distinction between Forfeiture of Shares and Surrender of Shares
Point of Distinction Forfeiture of Shares Surrender of Shares
1. Nature of Act Forfeiture is not a Surrender is a voluntary
voluntary act. It is in the act on the part of the
nature of a penalty shareholder.
imposed by the company
on a defaulting
shareholder.
2. Provisions of the Forfeiture is authorised The power to accept
Companies Act by Table F. But the surrender of shares is
and Table F forfeiture is valid only if not given in the
the procedure laid down Companies Act, or
in the Articles is followed. conferred by Table F.
CHAPTER 9: FORFEITURE & SURRENDER OF SHARES 69
3. Validity Forfeiture is valid only Surrender is valid under

for non-payment of calls two circumstances:
money. (a) When the call money
has not been paid.
(b) When the share certi-
ficate gets torn or
mutilated.
PRACTICAL PROBLEMS
1. A company was heavily losing and its shares were party paid-up. Harish, a
member of the company, surrenders his ten shares and the Board of Directors of the
company accepts the surrender. Is the surrender valid?
Hint: No. Surrender is valid only when shares are liable to be forfeited i.e.,
where a call is made and there is a default.
For details: (Refer to Q.2, (Chapter 9)). [Page 70
2. A public company forfeited 100 shares, re-issued them and thereby earned a
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surplus of ` 2,500. The company did not file a Return of Allotment to the
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Registrar in respect of these shares. Has the company contravened any provisions
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of the Companies Act?
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Hint: No. The issue of forfeited shares is treated as a sale and not allotment
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and therefore, no return of allotment of re-issue of forfeited shares need be
filed with the Registrar of Companies.
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10 TRANSFER & TRANSMISSION OF SECURITIES
(SHARES & DEBENTURES)
Q. 1. What is ‘Transfer of Securities (shares)’? Explain in brief the procedure

for transfer of securities (shares).
Ans. Meaning of Transfer of Securities (shares). Transfer of securities (shares)
means the transfer of ownership of securities (shares) from one person to another.
Transfer of securities (shares) is effected by removing the name of the existing
security holder (shareholder) from the register of members and by inserting the
name of the transferee in place of the transferor in the register of members or
register of debentureholders, as the case may be.
Securities (shares) of a public company are freely transferable whereas there
are certain restrictions on the transfer of securities (shares) of a private company.
Procedure for Transfer of Securities (shares) through transfer deed:
Following is the procedure for transfer of securities (shares) where a security
(share) certificate has been issued by the company:
(i) The instrument of transfer should be duly filed and signed by both the
transferor and the transferee.
(ii) The instrument of transfer must be in the form prescribed by the
Government.
(iii) Every instrument of transfer must bear the stamps of the requisite value
as per the Indian Stamps Act.
(iv) The instrument of transfer must be delivered to the company for
registration within 60 days from the date of execution along with the
share certificate or the letter of allotment, as the case may be.
(v) If partly paid-up securities (shares) are to be transferred, then the
company must give notice to the transferee and if the transferee does not
make any objection within 2 weeks from the date of receipt of the notice
or he does not respond to the notice, the company can register the transfer.
(vi) After all the above steps have been duly complied with, ‘Board of
Directors’ approval for the registration of transfer is obtained. After the
approval of the Board, the company registers the transfer by striking off
the transferor’s name from the Register of Members or register of
debentureholders, as the case may be and entering the name of the trans-
feree in its place.
(vii) An endorsement is made on the back of the security (share) certificate.
This endorsement recognises the transferee as the new owner of the
securities (shares).
Procedure for transfer of securities (shares) through Depository System. In case
of transfer of securities (shares) in ‘Demat’ form under depository system, there
is no need to execute a transfer deed because the buyer and the seller both have
availed the services of the ‘Depository’.
For details: (Refer to Chapter 18, The Depositories Act, 1996). [Page 147
70
CHAPTER 10: TRANSFER & TRANSMISSION OF SECURITIES 71
Q. 2. When can a company refuse to register a transfer of its securities

(shares)? What is the remedy open to the transferee in such a case?
Ans. Refusal to register transfer of securities (shares) by a Private Company. A
private company, by its Articles, restricts the right of its members (security
holders) to transfer securities (shares).
Absolute restriction on the right of transfer, contained in the Articles, shall
violate the provisions of the Act.
The Articles of Association usually empower the Board of Directors to refuse
the registration of transfer. This power must be exercised by the Board in the best
interest of the company and in a reasonable and judicial manner.
The Articles of Association usually empower the Board to refuse the
registration of transfer of securities (shares) on the following grounds:
(i) When partly paid-up securities (shares) are to be transferred to a
transferee who is a minor.
(ii) When a call is unpaid against the securities (shares) which are to be
transferred.
(iii) When the transferor is a debtor of the Company and the Company has a
lien on the securities (shares) to be transferred for the said debt, the
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Board may refuse to register the transfer unless the transferor pays off
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the debt.
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(iv) The Board may refuse to register a transfer if the instrument of transfer is
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incomplete, irregular or defective or is not properly stamped.
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(v) The Board may also refuse registration of transfer where the transferee is
a man of unsound mind.
Appeal against refusal:
1. If a private company limited by shares, refuses to register the transfer or the
transmission of the right to any securities, it shall within a period of 30 days from
the date on which the instrument of transfer, or the intimation of such
transmission, was delivered to the company, send notice of the refusal to the
transferor and the transferee or to the person giving intimation of such
transmission, giving reasons for such refusal.
2. The transferee may appeal to the Tribunal against the refusal within a period
of 30 days from the date of receipt of the notice or in case no notice has been sent
by the company, within a period of 60 days from the date on which the
instrument of transfer or the intimation of transmission was delivered to the
company.
Refusal to register transfer of securities (shares) by a Public Company. The
securities (shares) of a public company are freely transferable. However, any
contract or arrangement between two or more persons in respect of transfer of
securities (shares) shall be enforceable as a contract.
The Board of Directors of the company or the concerned ‘Depository’ does not
have any discretion to refuse transfer or transmission of any securities (shares).
Appeal against refusal. If a public company without sufficient cause refuses to
register the transfer of securities (shares) within a period of 30 days from the date
on which the instrument of transfer or the intimation of transmission is delivered to
the company, the transferee may, within a period 60 days of such refusal or where
no intimation has been received from the company, within 90 days of the delivery
of the instrument of transfer or intimation of transmission, appeal to the Tribunal.
Action by the Tribunal on the appeal. The Tribunal may, after hearing the
parties, either dismiss the appeal, or by order—
(a) direct that the transfer or transmission shall be registered by the
company and the company shall comply with such order within a period
of 10 days of the receipt of the order; or
(b) direct rectification of the register and also direct the company to pay
damages, if any, sustained by the aggrieved party.
If a person contravenes the order of the Tribunal under this section, he shall be
punishable with imprisonment for a term which shall not be less than 1 year but
which may extend to 3 years and with fine which shall not be less than ` 1 lakh
but may extend to ` 5 lakh.
Q. 3. What is meant by transmission of securities (shares)? Distinguish
between transfer and transmission of securities (shares).
Ans. Transmission of securities (shares). Transmission of securities (shares)
means transfer of securities (shares) on account of operation of law. Transmission
of securities (shares) takes place in case of death, insanity or insolvency of the
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security holder or, where the security holder is a company, on its liquidation. The
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effect of transmission is that the legal representative, administrator or the official
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assignee or receiver, as the case may be, shall be entitled to the securities (shares).
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A person who receives securities (shares) through transmission has two options
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before him—(a) to get himself registered as a security holder (share holder), or (b)
to transfer the securities (shares). If he chooses to become a security holder (share
holder), he has to make an application to the company for transfer of securities
(shares) in his name. The application must accompany probate, succession
certificate, letter of administration, certificate of death etc.
If the legal representative decides to sell the securities (shares), he can do so as
if he had been the holder at the time of the execution of the instrument of
transfer. He is also entitled to dividends declared by the company in case he sells
the shares or interest in case he sells the debentures as the case may be but he
cannot vote at the meetings of the company. In case of sale of shares, however, if
the company’s Articles permit, the directors may withhold payment of dividend,
bonus etc. to compel a legal representative to exercise either of the two options
available to him.
Distinction between Transfer and Transmission of Securities (Shares)
Point of Distinction Transfer of securities Transmission of securities
1. Nature of Act Transfer takes place by a Transmission is an
voluntary and deliberate involuntary act and is the
act of the transferor. result of operation of law.
2. Instrument of Instrument of transfer Instrument of transfer is
Transfer has to be executed by not required, only a
both the transferor and proof of title to the
the transferee in case of securities (shares) of the
transfer. person is required.
CHAPTER 10: TRANSFER & TRANSMISSION OF SECURITIES 73
3. Consideration Securities (shares) are Securities (shares) are

normally transferred to passed to another person
another person for some without consideration.
consideration.
4. Stamp duty In case of transfer of No stamp duty is pay-
securities (shares) through able in case of trans-
an instrument of transfer, mission of securities
stamp duty is payable on (shares).
the market value of the
securities (shares).
PRACTICAL PROBLEM
1. Anil is a shareholder of a company holding 100 shares. Anil dies leaving Sunil as
his legal representative. Sunil is not a member of the company. Sunil transfers all
the 100 shares of the deceased member to Rajeev. Is the transfer valid?
Give reasons for your answer.
Hint: Legal representative of the deceased member can sell the shares
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without being registered. If he wants to become a member himself, he can
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do so by submitting a proof of succession to the company. Hence, transfer
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by Sunil is valid.
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For details: (Refer to Q. 3., Chapter 10). [Page 74
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11 MANAGEMENT
Q. 1. “Directors are not only agents but also in some sense trustees of the
company.” Explain.
Or
Define the term Director. Discuss the legal position of Directors.
Ans. Director. Company is an artificial legal person having independent
existence in the eyes of law. It, being an artificial person, has no mind, and cannot
act on its own. It can act only through some human agents. The company is
owned and managed by its members. The members being large in number and
scattered all over the country, cannot conveniently manage the business of the
company. Thus, to carry on the business, they elect some persons to look after the
general administration of the company. These persons are known as ‘Directors’,
and collectively as ‘Board of Directors’.
Section 2(34) of the Companies Act, 2013 defines a director as a director
appointed to the Board of a company.
This definition does not throw any light on the meaning of a director. A
director may be defined as one of those persons who direct and supervise the
affairs of a company. Section 149(1) provides that every company shall have a
Board of Directors consisting of individuals as directors.
Legal position of Directors. It is difficult to define the exact legal position of the
directors of a company. In various judgements, Directors of a company have been
described as agents, trustees or managing partners.
As Agents. A Company, being an artificial person, has to act through some
human agency and Directors act as that necessary agency. So the relationship
between the Company and its Directors is that of the principal and agent. In the
case, “Ferguson vs. Wilson”, this position of Directors was described as: “The
company is no person. It can act only through its Directors. It is an ordinary case of
principal and agent. Wherever an agent is liable, these Directors are liable and wherever
the principal is liable, the liability is of the Company.”
As agents, Directors must conduct business with reasonable care abiding by the
Company’s Memorandum of Association and Articles of Association. Whatever
they do, ultimately binds the company. They enter into contracts and wherever
they put their signatures, they do so only on behalf of the company. However,
the directors are not completely like agents. Agents are appointed by the
principal but the directors are elected by the shareholders. Again, agents get
commission for the work done but the directors are expected to work without
reward. Further, an agent may not disclose the name of his principal but a
director has to do so. Thus, the directors are not the agents in the true sense.
As Trustees. In some respect, the Directors are the trustees of the company.
They are the guardians or custodians of the money and properties of the
company. While dealing with these, they must act in the interest of the company
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CHAPTER 11: MANAGEMENT 75
and not in their own interest. They stand in a fiduciary capacity in relation to the
interests of the company. Moreover, almost all the powers of Directors are as
powers in trust. The power to make call, forfeit shares, issue further capital, the
general powers of management and the power to accept or refuse a transfer of
shares, are all powers in trust which have to be exercised in good faith for the
benefit of the company as a whole.
However, it may be noted that the Directors are trustees of the company and
not of the individual shareholders of the company. Directors also are not trustees
for third parties who have made contracts with the company. They are also not
trustees for the creditors of the company. The Directors are not trustees in the
true sense because the ownership of property held in trust does not vest in them
as in case of an ordinary trust. Further, unlike a trustee, they enter into contracts
in the name of the company.
As Managing Partners. The Directors, who manage the company, do so for
themselves as well as for the benefit of others. They are also elected
representatives. Thus, their position is similar to that of a managing partner
because they are appointed to their posts by an arrangement between them and
all the shareholders.
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Being important shareholders, they are partners with shareholders. But, their
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liability is restricted to the amount unpaid on their shares. A Director cannot bind
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another Director like partners in a firm, unless he has been expressly authorised
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to do so. There is no mutual agency amongst Directors as in the case of partners.
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To sum up, we can say that the directors are neither agents nor trustees or
managing partners in the strict sense of the term. They combine in themselves all
these positions. They stand in a fiduciary position towards the company in
respect of their powers and capital under their control.
Q. 2. Write notes on—(i) Casual Director or Ad-hoc Director; (ii) Alternate
Director; (iii) Small shareholders’ Director; (iv) Woman Director; (v)
Independent Director; and (vi) Additional Director.
Ans. (i) Casual Director or Ad-hoc Director [Section 161(4)]. 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 the meeting of the Board.
Where the Articles are silent, the casual vacancy may be filled by the
shareholders in a general meeting. Casual Director is appointed when a casual
vacancy is caused by death, resignation, disqualification, removal, insanity or
insolvency of a director.
A casual director holds the office not upto the AGM but upto the expiry of the
term of the director in whose place he has been appointed.
(ii) Alternate Director [Section 161(2)]. An alternate director can be appointed
by the Board by passing a resolution in the Board Meeting or by circulation or in
a General Meeting.
The appointment of the alternate director should be authorised by the Articles
or by a resolution passed by the company in general meeting.
An alternate director is a director who is appointed to act for ‘the original
director’ during his absence for a period of not less than three months from
India.
Such director shall not hold office for a period longer than that permissible to
the original director in whose place he has been appointed.
The rights, duties, obligations and liabilities of an alternate director are same
as those of other directors.
The term of the alternate director shall not exceed the term permissible to the
original director. Thus, if the original director ceases to be a director by reason of
disqualification, incapacity, insolvency, conviction, removal etc., the alternate
director shall immediately vacate his office. Such an alterate director shall vacate
the office on the return of the original director to India or the expiry of the
original director’s term whichever is earlier.
Note: If a director as well as his alternate both are present at a meeting of the Board of
Directors of the company, the alternate director can not participate in the meeting since
the term of the alternate director comes to an end when the original director has returned
to the state in which Board meetings are ordinarily held.
(iii) Small Shareholders’ Director. Section 151 provides that a listed company
may have one director elected by such small shareholders in such a manner and
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with such terms and conditions as may be prescribed.
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Small shareholder means a shareholder who holds shares (both equity and
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preference) of nominal value of ` 20,000 or less.
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Provisions relating to small shareholders’ Director as per Rule 7 of the
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Companies (Appointment and Qualification of Directors) Rules, 2014.
1. A listed company may upon a notice given by at least one thousand small
shareholders or one tenth of the total number of such shareholders, whichever is
lower, appoint a small shareholders’ director elected by the small shareholders.
Small Shareholders Director may be elected by the company suo moto or on the
requisition of the small shareholders.
2. The small shareholders intending to propose the candidature of a person for
the post of small shareholders’ director should give at least 14 days notice before
the shareholders’ meeting. The notice should be signed by these small
shareholders and specify the name, address, shares held and folio number of the
person whose name is being proposed for the post of Small Shareholders’
Director and of the small shareholders making such proposal.
3. Such director shall be considered as an independent director.
4. Such director shall not retire by rotation.
5. Small Shareholders’ Director shall be appointed for a maximum period of
three consecutive years.
6. On the expiry of the term, such director shall not be eligible for
reappointment.
7. Small Shareholders’ Director cannot be appointed in more than two companies.
8. Small Shareholders’ Director shall be elected by the postal ballot method.
9. Small Shareholders’ Director cannot be appointed as a Whole-time Director
or a Managing Director.
10. Only a Small Shareholder can be appointed as a Small Shareholders’
Director.
11. Small Shareholders’ Director shall vacate his office if he ceases to be a small
shareholder. Other grounds for vacation of office are same as applicable to any
other director.
(iv) Woman Director. Section 149(1) provides that such class of companies, as
may be prescribed, shall have at least one woman director.
As per Section 149(2), every company existing on or before the date of
commencement of this Act shall, within 1 year from such commencement,
appoint at least one woman director.
The following class of companies is required to appoint at least one woman
director:
(a) Every company listed on a recognized stock exchange.
(b) Every other public company whose—(i) paid-up share capital is ` 100
crore or more or (ii) turnover is ` 300 crore or more.
Every company incorporated under the Companies Act, 2013 has to appoint at
least one woman director within a period of 6 months from the date of its
registration.
(v) Independent Director. As per Section 149(6) of the Companies Act, 2013,
An independent director in relation to a company, means a director other than a
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managing director or a whole-time director or a nominee director—
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(a) who, in the opinion of the Board, is a person of integrity and possesses
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relevant expertise and experience;
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(b) (i) who is or was not a promoter of the company or its holding,
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subsidiary or associate company;
(ii) who is not related to the promoters or directors in the company, in
its holding, subsidiary or associate company;
(c) who has or had no pecuniary relationship, other than remuneration as
such director or having transaction not exceeding ten per cent of his
total income or such amount as may be prescribed, with the company,
its holding, subsidiary or associate company, or their promoters, or
directors, during the two immediately preceding financial years or
during the current financial year;
(d) none of whose relatives—
(i) is holding any security of or interest in the company, its holding,
subsidiary or associate company during the two immediately
preceding financial years or during the current financial year:
Provided that the relative may hold security or interest in the
company of face value not exceeding fifty lakh rupees or two per
cent. of the paid-up capital of the company, its holding, subsidiary
or associate company or such higher sum as may be prescribed;
(ii) is indebted to the company, its holding, subsidiary or associate
company or their promoters, or directors, in excess of such amount
as may be prescribed during the two immediately preceding
financial years or during the current financial year;
(iii) has given a guarantee or provided any security in connection with
the indebtedness of any third person to the company, its holding,
subsidiary or associate company or their promoters, or directors of
such holding company, for such amount as may be prescribed

during the two immediately preceding financial years or during
the current financial year; or
(iv) has any other pecuniary transaction or relationship with the
company, or its subsidiary, or its holding or associate company
amounting to two per cent or more of its gross turnover or total
income singly or in combination with the transactions referred to in
sub-clause (i), (ii) or (iii).
(e) who, neither himself nor any of his relatives—
(i) holds or has held the position of a key managerial personnel or is
or has been employee of the company or its holding, subsidiary or
associate company in any of the three financial years immediately
preceding the financial year in which he is proposed to be
appointed;
Provided that in case of a relative who is an employee, the
restriction under this clause shall not apply for his employment
during preceding three financial years.
(ii) is or has been an employee or proprietor or a partner, in any of the
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three financial years immediately preceding the financial year in
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which he is proposed to be appointed, of—
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(A) a firm of auditors or company secretaries in practice or cost
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auditors of the company or its holding, subsidiary or associate
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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
nonprofit 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.
Various main provisions of the Act relating to ‘Independent Directors’ are as
follows:
(i) Minimum number of Independent Directors in case of listed public
companies. Every public company which is listed on the stock exchange
shall have at least 1/3rd of the total number of directors as Independent
Directors.
(ii) Minimum number of Independent Directors in case of other
companies. The minimum number of Independent Directors in case of
other public companies may be prescribed by the Central Government.
(iii) Retirement by rotation. The provisions of retirement of directors by
rotation shall not be applicable to appointment of Independent Directors.
(iv) Remuneration. An Independent Director shall not be entitled to any

remuneration other than sitting fee, reimbursement of expenses for
participating in various meetings and profit related commission which
have been approved by the members.
(v) Declaration. Every Independent Director shall, at the first meeting of the
Board in which he participates as a director and thereafter at the first
meeting of the Board in every financial year or whenever there is any
change in the circumstances which affect his status as an Independent
Director, give a declaration that he meets criteria of independence as per
the provisions of the Act.
(vi) Tenure. The tenure of the Independent Director shall not exceed in the
aggregate, a period of five consecutive years on the Board of the
company. The Independent Director shall be eligible for re-appointment
on passing of a special resolution by the company and such appointment
has to be disclosed in the Board’s report.
No Independent Director shall hold office for more than two consecutive
terms but such Independent Director shall be eligible for appointment
after the expiration of 3 years of ceasing to become an Independent
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Director provided that an Independent Director shall not, during the said
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period of 3 years be appointed in or be associated with the company in
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any other capacity, either directly or indirectly.
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(vi) Additional Director. The Board, if authorised by the Articles, has powers to
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appoint additional directors. The powers of the additional director are same as
those of other directors. Such a director can be appointed either in the Board
meeting or through circulation and holds office till the next Annual General
Meeting.
Q. 3. State the qualifications and disqualifications for appointment as a
director.
Ans. Qualifications for appointment as a director. As per the Companies Act,
no academic or even shareholding qualifications are prescribed for a Director. To
be so appointed, a person has to be:
• an individual, and
• competent to contract as per requirements of the Indian Contract Act.
Unless the Articles provide otherwise, a director need not be a shareholder of
the company.
Disqualifications for appointment as a director:
Section 164 of the Companies Act states that a person shall not be eligible for
appointment as a director of a company if,
1. he is a person found by a competent court to be of unsound mind and
such finding remaining in force;
2. he is an undischarged insolvent;
3. he has applied to be adjudged an insolvent;
4. he has been convicted by a Court of an offence involving moral turpitude
and sentenced in respect thereof to imprisonment for not less than 6
months, and a period of 5 years has not elapsed from the date of the
expiry of the sentence;
5. he has been convicted of an offence and sentenced in respect thereof to

imprisonment for a period of 7 years or more;
6. he is a person who has not paid any call in respect of shares of the
company held by him and 6 months have elapsed from the last date fixed
for the payment of the call; and,
7. he is a person who has been disqualified by the Court or Tribunal for
fraudulent activities in company’s promotion or management.
8. he has not complied with provisions relating to Director Identification
Number (DIN).
9. he is a person who is already a director of a public company which,
(i) has not filed the financial statement or annual returns for any of the
continuous 3 financial years.
(ii) has failed to repay its deposits or interest therein on due date or
redeem its debentures on due date or pay dividend and such failure
continues for 1 year or more. Such person shall not be eligible to be
appointed as a director of any other public company for a period of 5
years from the date of default committed by the public company.
Section 164 authorises a private company to add any other additional
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disqualifications in its Articles for appointment as a director. A public company
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cannot prescribe additional disqualifications in its Articles, for appointment as a
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director.
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Q. 4. Write notes on (a) Number of Directors, (b) Number of Directorships,
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(c) Director Identification Number (DIN).
Ans. (a) Number of Directors. According to Section 149(1), every public
company must have minimum three directors, every private company minimum
two directors and one person company minimum one director.
The maximum number of directors has been fixed at fifteen. A company may
appoint more than fifteen directors after passing a special resolution.
(b) Number of Directorships:
1. No person, after the commencement of this Act, shall hold office as a
director, including any alternate directorship, in more than 20 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. For reckoning the limit 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.
2. Subject to the provisions of Section 165(1), the members of a company
may, by special resolution, specify any lesser number of companies in
which a director of the company may act as director.
3. Any person holding office as director in more than the specified number
of companies as specified in Section 165 (1) immediately before the
commencement of the Companies Act, 2013 shall, within a period of
1 year from such commencement, choose not more than the specified
limit of companies and resign his office as director in other companies
and intimate his choice to each of the companies in which he was holding
the office of director before such commencement and the concerned

Registrar of Companies.
4. If a person accepts an appointment as a director in contravention of
Section 165(1), he shall be punishable with a fine of ` 5,000 for each day
after the first during which the contravention continues.
(c) Director Identification Number (DIN). Director Identification Number
(DIN) is the number allotted by the Central Government to any individual,
intending to be appointed as director or to any existing director of a company for
the purpose of his identification as a director of a company.
Provisions in respect of DIN are as follows:
(i) Application for allotment of Director Identification Number [Section
153]. Every individual intending to be appointed as director of a
company shall make an application for allotment of Director
Identification Number to the Central Government in such form and
manner and along with such fees as may be prescribed. Provided that the
Central Governent may prescribe any Identification Number which shall
be treated as Director Identification Number (DIN) for the purposes of
this Act and in case any individual holds or acquires such Identification
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Number, the requirement of this section shall not apply or apply in such
a
manner as may be prescribed.
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(ii) Allotment of Director Identification Number [Section 154]. The Central
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Government shall, within one month from the receipt of the application
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under Section 153, allot a Director Identification Number to an applicant
in such manner as may be prescribed.
(iii) Prohibition to obtain more than one Director Identification Number
[Section 155]. No individual, who has already been allotted a Director
Identification Number under Section 154, shall apply for, obtain or
possess another Director Identification Number.
(iv) Director to intimate Director Identification Number [Section 156].
Every existing director shall, within one month of the receipt of Director
Identification Number from the Central Government, intimate his
Director Identification Number to the company or all the companies
wherein he is a Director.
(v) Company to inform Director Identification Number to Registrar
[Section 157]. Every company shall, within 15 days of the receipt of
intimations under Section 156, furnish the Director Identification
Numbers of all its directors to the Registrar or any other officer or
authority as may be specified by the Central Government with such fees
as may be prescribed with such additional fees as may be prescribed and
every such intimation shall be furnished in such form and manner as
may be prescribed.
(vi) Obligation to indicate Director Identification Number [Section 158].
Every person or company, while furnishing any return, information or
particulars as are required to be furnished under this Act, shall mention
the Director Identification Number in such return, information or
particulars in case such return, information or particulars relate to the
director or contain any reference of any director.
(vii) Punishment for contravention. If any individual or director of a

company makes any default in complying with any of the provisions of
Section 152, Section 155 and Section 156, such individual or director of the
company shall be liable to a penalty which may extend to fifty thousand
rupees and where the default is a continuing one, with a further penalty
which may extend to five hundred rupees for each day after the first
during which such default continues.
Q. 5. State and explain various modes of appointment of a director.
Ans. Only an individual competent to contract and not disqualified under
Section 164 who has been allotted Director Identification Number can be
appointed as director of a company. No firm or association or company can be
appointed as director.
Various modes of appointment of directors:
1. Appointment of the first director. The first directors of the company are
usually named in the Articles. In case the Articles do not name them, the
subscribers to the Memorandum may appoint them according to the procedure
laid down in the Articles. But in case they are neither named in the Articles nor
appointed by the subscribers, the subscribers to the Memorandum shall be
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deemed to be the first directors of the company. Such directors shall hold office
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only till the first annual general meeting of the company. In case of One Person
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Company, if the first director has not been appointed by the Articles, the
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Individual member shall be deemed to be its first director until a director or
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directors are duly appointed by the member.
Every person proposed to be appointed as a director by the company in general
meeting or otherwise, shall furnish his Director Identification Number and a
declaration that he is not disqualified to become a director under this Act.
2. Subsequent Appointment by the Members in the General Meeting. Unless
the Articles provide otherwise, all subsequent appointments of directors shall
take place in the general meeting of the company.
Rotational Retirement of Directors. In the case of a Public Company or a
Private Company which is subsidiary of a Public Company, only one-third of the
total number of Directors can be permanent. At least two-thirds of the total
number of Directors shall be rotational directors. However, the Articles of
Association of the Company can provide that all the Directors shall retire at every
annual general meeting. But in case of a Private Company, all the Directors can
be permanent.
At every subsequent annual general meeting, out of the two-thirds rotational
directors, one-third or the number nearest to one-third must retire.
3. Appointment of Directors by the Board. The Board of Directors may
appoint directors in the following circumstances:
(i) Additional Directors [Section 161(1)]. If the Articles of Association of a
company permit, Board of Directors may 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.
(ii) Alternate Director [Section 161(2)]. An Alternate Director may be

appointed by the Board provided it is authorised by:
• Articles of Association; or
• a Resolution passed by the company in General Meeting.
Such a Director shall act for a Director called ‘the original Director’
during his absence for a period of at least 3 months from the State in
which Board Meetings are normally held.
Only that person can be appointed as an alternate director who does not
hold any alternate directorship for any other director in the company.
No person shall be appointed as an alternate director for an independent
director unless he is qualified to be appointed as an independent director
under the provisions of this Act. Such an alternate director shall vacate
the office on the return of the original director to India or the expiry of
the original director’s term whichever is earlier.
(iii) Nominee director [Section 161(3)]. 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
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Government by virtue of its shareholding in a Government company.
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(iv) Casual Vacancy [Section 161(4)]. ‘Casual vacancy’ means any vacancy
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which takes place due to death, resignation etc. of a director.
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If the office of such a Director is vacated before his term of office expires
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in the normal course, the resulting casual vacancy may be filled by the
Board of Directors at a Meeting of the Board which shall be subsequently
approved by members in immediate next General Meeting.
Any person so appointed shall hold office upto the date upto which the
Director, in whose place he is appointed, would have held the office.
4. Appointment of Directors by the Tribunal. Where a member of a company
makes an application to the Tribunal under Section 241 for relief in cases of
oppression and mismanagement of a company’s affairs, the Tribunal may make
such order as it thinks fit for the appointment of such number of persons as
directors, who may be required to report to the Tribunal on such matters as the
Tribunal may direct.
Right to apply under Section 241. The following members of a company shall
have the right to apply under Section 241, namely—
(a) in the case of a company having a share capital, not less than 100
members of the company or not less than one-tenth of the total number
of its members, whichever is less, or any member or members holding
not less than one-tenth of the issued share capital of the company.
(b) in the case of a company not having a share capital, not less than one-
fifth of the total number of its members.
5. Appointment of Directors by the Central Government [Section 167(3)].
Where all the directors of a company vacate their offices under any of the
specified disqualifications, the promoter or, in his absence, the Central
Government shall appoint the required number of directors who shall hold office
till the new directors are appointed by the company in the general meeting.
6. Appointment of Directors by Third Parties. If the Articles so authorise, one-

third of the total number of directors of a public company and all the directors of
a private company may be appointed by third parties on a non-rotational basis.
Such right may be given by the Articles to the debentureholders or other
specified creditors.
Q. 6. Explain the circumstances in which a director is deemed to have
vacated his office.
Ans. Vacation of office of Director (Section 167). The office of a director shall
fall automatically vacant in case—
(a) he incurs any of the disqualifications specified in Section 164;
Provided that where he incurs disqualification under sub-section (2) of
Section 164, the office of the director shall become vacant in all the
companies, other than the company which is in default under that sub-
section.
(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
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entering into contracts or arrangements in which he is directly or
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indirectly interested;
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(d) he fails to disclose his interest in any contract or arrangement in which
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he is directly or indirectly interested, in contravention of the provisions
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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 in case of
orders referred to in clauses (e) and (f):
(i) for thirty days from the date of conviction or order of
disqualification;
(ii) where an appeal or petition is preferred within thirty days as
aforesaid against the conviction resulting in sentence or order, until
expiry of seven days from the date on which such appeal or
petition is disposed of; or
(iii) where any further appeal or petition is preferred against order or
sentence within seven days, until such further appeal or petition is
disposed of.]
(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.
• 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 sub-section (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.
• Where all the directors of a company vacate their offices under any of the
disqualifications specified in sub-section (1), the promoter or, in his absence, the
Central Government shall appoint the required number of directors who shall
hold office till the directors are appointed by the company in the general
meeting.
• 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 sub-section (1).
Q.7. State the provisions of the Companies Act, 2013 with regard to removal
of directors.
Ans. Removal of Directors can be studied under the following two heads:
1. Removal by shareholders under Section 169. A company may, by passing
an ordinary resolution, remove a director before the expiry of his period of office
after giving him a reasonable opportunity of being heard. If some of the members
want to move the resolution for the removal of a director, they have to give a
special notice to the company at least 14 days before meeting. The notice should
specify the intention to move the resolution so that proper notice may be sent to
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the director concerned and other members.
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Where the notice is received well in advance, the company can send the notice
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of the resolution by including the same in the notice of general meeting.
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Otherwise, the company has to notify the same by way of two newspaper
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advertisements, one in English and another in vernacular language, at least
7 days before the meeting.
Where the director makes representations in writing to the company and
requests for circulation of the same to the members, the company is duty bound
to do so, unless it is received by it too late. If a copy of the representations is not
sent to the members, the director may require that the representations shall be
read out at the meeting. The company need not send a copy of the
representations to the members or the representations need not be read out at the
meeting, if on an application, either by the company or by the aggrieved party,
the Tribunal is satisfied that the rights so conferred are being abused to secure
needless publicity for defamatory matter.
The vacancy caused by such removal may be filled at the same meeting;
provided special notice of the proposed appointment has also been given. If the
vacancy is not filled at the meeting, it may be filled by the Board as a casual
vacancy. The director who has been removed cannot be reappointed but he may
claim compensation, if any, in respect of termination of his appointment.
The director so appointed shall hold office till the removed director could have
held office, had he not been removed.
The members, however, cannot remove the following types of directors:
(i) A director appointed according to the principle of proportional
representation under Section 163.
(ii) A director appointed by the Tribunal under Section 242.
2. Removal by the Tribunal [Section 242]. Where a member of a company
makes an application to the Tribunal under Section 241 for relief in case of
oppression or mismanagement, the Tribunal may make such order as it thinks fit
for the removal of any of the directors of the company.
The director so removed cannot hold a managerial office in the company for a
period of 5 years without the sanction of the Tribunal. Further, he cannot claim
compensation for such termination.
Q. 8. Discuss the powers of Directors of a company.
Ans. Powers of Directors. As per Section 179(1), the Board of Directors can
exercise all such powers and do all such acts and things, as the company is
authorised to exercise and do. The directors can exercise their powers subject to
the provisions contained in the Act, Memorandum, Articles and regulations
made by the company in general meetings.
The Board cannot exercise any power or do any act or thing which the Act, or
the Memorandum or the Articles of the company require to be exercised or done
by the company in general meetings.
Once the Articles set out the powers of the Board, they can be exercised only by
the Board. The shareholders of the company cannot interfere with the decisions
of the Board, provided the Board acts within the scope of the authority conferred
upon it and the powers are exercised bonafide in the interest of the company.
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Exceptions. In the following cases, the majority of shareholders in a general
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meeting may intervene and exercise a power which is otherwise vested in the
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Board.
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(a) Malafide actions. Where the actions of the directors are malafide and
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against the interests of the company. In such cases, the directors act for
their own personal interests and ignore the interests of the company.
(b) Board becoming incompetent to act. Where the Board becomes
incompetent to act. For example, all the directors showing interest in a
particular dealing.
(c) Deadlock. When the directors are not willing to act or they are unable to
act due to equal division of votes.
Statutory powers of the Board of Directors:
1. Powers to be exercised by means of resolutions passed at meetings of the
Board [Section 179(3)]. The following powers shall be exercised by the Board of
Directors by means of resolutions passed at meetings of the Board.
(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.
Besides the above mentioned powers, the following powers shall also be
exercised only by means of resolutions passed at meetings of the Board:
(i) to make political contributions;

(ii) to appoint or remove Key Managerial Personnel;
(iii) to take note of appointment(s) or removal(s) of one level below the Key
Management Personnel;
(iv) to appoint internal auditors and secretarial auditor;
(v) to take note of the disclosure of directors’ interest and share-holding;
(vi) to buy, sell investments held by the company (other than trade
investments), constituting 5% or more of the paid-up share capital and
free reserves of the investee company;
(vii) to invite or accept or renew public deposits and related matters;
(viii) to review or change the terms and conditions of public deposits;
(ix) to approve quarterly, half yearly and annual financial statements or
financial results as the case may be.
The Board of Directors may, by a resolution passed at a meeting, delegate the
following powers to any committee of directors, the Managing Director, the
Manager or any other Principal Officer of the company or in the case of a branch
office of the company, the Principal Officer of branch office:
(a) the power to borrow monies;
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(b) the power to invest the funds of the company;
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(c) the power to grant loans or give guarantee or provide security in respect
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of loans.
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2. Other Powers Exercisable only at Board Meeting. Besides the powers
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specified in Section 179(3), there are certain other powers which can be exercised
only at the meetings of the Board. Following are some of such powers:
(i) The power to fill up casual vacancies among directors.
(ii) The power to appoint the first auditors of the company, and to fill any
casual vacancy in the office of auditors, unless such vacancy is caused by
resignation of the auditor.
(iii) The power to recommend rate of dividend to be declared at the AGM
(subject to approval by the shareholders).
(iv) The power to make a declaration of solvency in case of proposal for buy-
back of shares, and voluntary winding up of the company.
(v) The power to fill the vacancy in the office of any whole-time Key
Managerial Personnel.
(vi) The power to approve the Corporate Social Responsibility policy for the
company.
Q. 9. Explain the provisions of Section 180 of Companies Act, 2013 relating
to restrictions imposed on the powers of the Board of Directors.
Ans. Restrictions on the powers of the directors [Section 180]. The Board of
Directors of a company shall exercise the following powers only with the consent
of the company by a special resolution, namely:
(a) to sell, lease or otherwise dispose of the whole or substantially the whole
of 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 apart from
temporary loans obtained from the company’s bankers in the ordinary
course of business.
The acceptance by banking company, in the ordinary course of its
business, of deposits of money from the public, repayable on demand or
otherwise and withdrawable by cheque, draft, order or otherwise, shall
not be deemed to be a borrowing of monies by the banking company
within the meaning of this clause.
(d) to remit, or give time for the repayment of, any debt due from a director.
Q. 10. Explain the provisions of the Companies Act, 2013, regarding powers
of the Board of Directors:
(a) To make contribution to Bonafide and Charitable Fund
(b) Regarding Political contributions and
(c) To make contribution to National Defence Fund.
Ans.(a) Powers of the Board of Directors to make contribution to a Bonafide
and Charitable Fund (Section 181).
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(i) Contribution of funds directly related to the business of the
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company. In such a case, the power of the Board is unrestricted.
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(ii) Contribution to funds not directly related to the business of the
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company. In such a case, the Board can contribute upto 5% of
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average net profits of the past 3 financial years without the approval
of the members through an ordinary resolution.
For contribution in excess of 5%, the approval of the members
through an ordinary resolution is required.
(b) Powers (Prohibitions and Restrictions) of the Board of Directors
regarding Political contributions (Section 182).
1. 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:
Provided that no such contribution shall be made by a company unless a
resolution authorising the making of such contribution is passed at a meeting of
the Board of Directors and such resolution shall, subject to the other provisions
of this section, be deemed to be justification in law for the making of the
contribution authorised by it.
2. Without prejudice to the generality of the provisions of sub-section (1),—
(a) a donation or subscription or payment caused to be given by a company
on its behalf or on its account to a person who, to its knowledge, is
carrying on any activity which, at the time at which such donation or
subscription or payment was given or made, can reasonably be regarded
as likely to affect public support for a political party shall also be
deemed to be contribution of the amount of such donation, subscription
or payment to such person for a political purpose;
(b) the amount of expenditure incurred, directly or indirectly, by a
company on an advertisement in any publication, being a publication in
the nature of a souvenir, brochure, tract, pamphlet or the like, shall also
be deemed—
(i) where such publication is by or on behalf of a political party, to be a
contribution of such amount to such political party, and
(ii) where such publication is not by or on behalf of, but for the advantage
of a political party, to be a contribution for a political purpose.
3. Every company shall disclose in its profit and loss account the total amount
contributed by it under this section during the financial year to which the
account relates.
3A. Notwithstanding anything contained in sub-section (1), the contribution
under this section shall not be made except by an account payee cheque drawn
on a bank or an account payee bank draft or use of electronic clearing system
through a bank account:
Provided that a company may make contribution through any instrument,
issued pursuant to any scheme notified under any law for the time being in
force, for contribution to the political parties.
4. 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
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times the amount so contributed and every officer of the company who is in
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default shall be punishable with imprisonment for a term which may extend to
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six months and with fine which may extend to five times the amount so
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contributed.
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(c) Powers to Make Contribution to National Defence Fund (Section 183).
Section 183 provides that the Board of Directors or any person or authority
exercising the powers of the Board of Directors, can contribute any amount to
National Defence Fund or any other Fund approved by the Central Government.
(For example, Prime Minister’s National Relief Fund) for the purposes of national
defence without the approval of the company in a general meeting. The company
shall disclose in its Statement of Profit & Loss the total amounts contributed by it
to the Fund, during the financial year to which the amount relates.
Q. 11. Discuss the provisions of the Companies Act, 2013 regarding meetings
of the Board of Directors.
Ans. Meetings of the Board of Directors. Following are the provisions of the
Companies Act, 2013 regarding conduct of Board’s meetings:
1. Frequency of Board Meetings [Section 173(1)]. Every company shall hold
the first meeting of the Board within 30 days of the date of its incorporation and
thereafter hold a minimum 4 meetings of its Board every year in such a manner
that the interval between two consecutive meetings of the Board does not exceed
120 days. The Central Government may, by notification, direct that the provisions
of this sub-section shall not apply in relation to any class or description of
companies or shall apply subject to such exceptions, modifications or conditions
as may be specified in the notification.
2. Notice of Board Meetings [Section 173(3)]. A meeting of the Board shall be
called by giving at least 7 days notice in writing to every director at his address
registered with the company and such notice shall be sent by hand delivery or by
post or by electronic means.
A meeting of the Board may be called at a shorter notice to transact urgent

business subject to the condition that at least one independent director, if any,
shall be present at the meeting. In case of absence of independent directors from
such a meeting of the Board, decisions taken at such a meeting shall be circulated
to all the directors and shall be final only on ratification thereof by at least one
independent director, if any.
According to Section 173(5), a One Person Company, a Small Company and a
Dormant Company shall be deemed to have complied with the provisions of this
Section if at least one meeting of the Board of Directors has been conducted in
each half of a calendar year and the gap between the 2 meetings is not less than
90 days. This requirement is not applicable to One Person Company in which
there is only one director on its Board of Directors.
3. Quorum for Board Meetings. The quorum means the minimum number of
directors which must be present for transacting legally binding business at the
meeting.
The quorum for a meeting of the Board of Directors of a company shall be
1/3rd of its total strength or 2 directors, whichever is higher, and the participation
of the directors by video conferencing or by other audio-visual means shall also
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be counted for the purposes of quorum under this sub-section.
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Where at any time, the number of interested directors exceeds or is equal to
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2/3rd of the total strength of the Board of Directors, the number of directors who
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are not interested directors and present at the meeting, being not less than two,
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shall be the quorum during such time.
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.
4. Passing of Resolution by Circulation [Section 175]. A resolution by
circulation shall be deemed as passed by the Board or by a committee thereof by
circulation, if the resolution has been circulated in draft, together with the
necessary papers, if any, to all the directors, or members of the committee, as the
case may be, at their addresses registered with the company in India and has
been approved by a majority of the directors or members, entitled to vote on the
resolution.
Where not less than 1/3rd of the total number of directors of the company
require that any resolution under circulation must be decided at a meeting, the
chairperson shall put the resolution to be decided at the meeting of the Board.
A resolution passed by circulation shall be noted at a subsequent meeting of
the Board or the committee thereof, as the case may be, and made part of the
minutes of such meeting.
5. Manner of Conducting Business at a Board Meeting. Unless otherwise
provided in the Articles, all resolutions at a Board meeting are passed by a
simple majority. But there are certain matters in which unanimous consent of all
the directors is required. For example:
(i) for appointing a person as Managing Director who is already a
Managing Director or Manager of another company.
(ii) for making inter-corporate loans and investments.

6. Voting. Each director has one vote for each resolution put to vote at the
meeting. In case of an equality of votes, the chairman shall have a casting vote.
However, the Act requires unanimous consent of all the directors in certain
matters under Section 203(3) and 186(5).
7. Minutes of Meetings. Every company shall prepare, sign and keep minutes
of proceedings of every meeting of the Board of Directors or committee of the
Board within 30 days of the conclusion of every such meeting concerned. The
minutes of each meeting shall contain a fair and correct summary of the
proceedings thereat.
In the case of a meeting of the Board of Directors or of a committee of the
Board, the minutes shall also contain:
(a) the names of the directors present at the meeting; and
(b) in the case of each resolution passed at the meeting, the names of the
directors, if any, dissenting from, or not concurring with the resolution.
Q. 12. Write a note on meetings of the Board of Directors through video
conferencing.
Ans. Meeting of the Board of Directors through video conferencing. Following
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is the procedure, for convening and conducting the Board meetings through
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video conferencing:
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(i) Every company shall make necessary arrangements to avoid failure of
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video connection.
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(ii) The Chairperson of the meeting and the company secretary, if any, shall
take due and reasonable care:
(a) to safeguard the integrity of the meeting by ensuring sufficient
security and identification procedures;
(b) to ensure availability of proper video conferencing;
(c) to record proceedings and prepare the minutes of the meeting;
(d) to store for safekeeping and marking the tape recording(s) or other
electronic recording mechanism as part of the records of the
company at least before the time of completion of audit of that
particular year.
(e) to ensure that only the concerned directors have access to the
proceedings of the meeting through video conferencing;
(iii) (a) The notice of the meeting shall be sent to all the directors in
accordance with the provisions of Section 173(3).
(b) A director intending to participate through video conferencing or
audio visual means shall communicate his intention to the
Chairperson or the company secretary of the company.
(c) In the absence of any intimation, it shall be assumed that the director
shall attend the meeting in person.
(iv) At the commencement of the meeting, a roll-call shall be taken by the
Chairperson when every director participating through video
conferencing shall state, for the record, the following namely:
(a) name;
(b) the location from where he is participating;
(c) that he has received the agenda and all the relevant material for the
meeting; and
(d) that no one other than the concerned director is attending or having
access to the proceedings of the meeting at the location mentioned in
clause (b);
(v) (a) After the role call, the Chairperson or the Company Secretary shall
confirm that the required quorum is complete.
(b) The Chairperson shall ensure that the required quorum is present
throughout the meeting.
(vi) With respect to every meeting conducted through video conferencing,
the scheduled venue of the meeting as mentioned in the notice of the
meeting, which shall be in India, shall be deemed to be the place of the
said meeting and all recordings of the proceedings at the meeting shall
be deemed to be made at such place.
(vii) The statutory registers which are required to be placed in the Board
meeting as per the provisions of the Act shall be placed at the scheduled
venue of the meeting.
(viii) Every participant shall identify himself for the record before speaking on
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any item of business of the agenda.
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(ix) At the end of the discussion on each agenda item, the Chairperson of the
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meeting shall announce the summary of the decision taken on such item
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along with the names of the dissenting directors.
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(x) (a) The draft minutes of the meeting shall be circulated among all the
directors within 15 days of the meeting either in writing or in
electronic mode as may be decided by the Board.
(b) After completion of the meeting, the minutes shall be entered in the
minutes book as specified under Section 118 of the Act and signed
by the Chairperson.
Matters not to be Dealt in a Meeting through Video Conferencing:
(i) the approval of the annual financial statement;
(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.
Q. 13. Write a note on the duties of directors.
Ans. Duties of Directors [Section 166]. A director of a company shall—
(i) act in accordance with the company’s Articles;
(ii) exercise his duties with due and reasonable care, skill and diligence
and shall exercise independent judgement.
(iii) 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 interest of the company,
its employees, shareholders, community and for the protection of
environment.
(iv) not involve in a situation in which he may have a direct/indirect interest
that conflicts with the interest of the company;
(v) not achieve/attempt to achieve any undue advantage either to himself/

his relatives/partners/associates. If he is found guilty of any such undue
gain, he shall be liable to pay an amount equal to that gain to the company.
(vi) not assign his office, and any assignment so made shall be void.
As per Section 166(7), if a director of a company contravenes these provisions
such director shall be punishable with a fine ranging from ` 1 lakh to ` 5 lakhs.
Q. 14. Discuss the provisions of the Companies Act regarding Audit
committee.
Ans. Audit Committee. Various provisions related to Audit Committee are as
follows:
1. Applicability. The Board of Directors of every listed company and such
other class or classes of companies, as may be prescribed, shall constitute an
Audit Committee. As per Rule 6 of the Companies (Meeting of Board and its
powers) Rules, 2014, the following classes of companies shall constitute an
‘Audit Committee’ of the Board:
(i) All public companies with the paid up capital of ` 10 crores or more.
(ii) All public companies having turnover of ` 100 crore or more.
(iii) All public companies having in aggregate, outstanding loans or
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borrowings or debentures or deposits exceeding ` 50 crores or more.
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2. Constitution. The Audit Committee shall consist of a minimum of three
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directors with independent directors forming a majority.
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The majority of members of Audit Committee including its Chairperson shall
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be persons with ability to read and understand the financial statement.
3. Reconstitution of Audit Committee of an existing company. Every Audit
Committee of a company existing immediately before the commencement of this
Act shall, within 1 year of such commencement, be reconstituted in accordance
with sub-section (2).
4. Functions of Audit Committee. Every Audit Committee shall act in
accordance with the terms of reference specified in writing by the Board which
shall inter alia, include—
(i) the recommendation for appointment, remuneration and terms of
appointment of auditors of the company;
(ii) review and monitor the auditor’s independence and performance, and
effectiveness of audit process;
(iii) examination of the financial statements and the auditor’s report thereon;
(iv) approval or any subsequent modification of transactions of the company
with related parties;
(v) scrutiny of inter-corporate loans and investments;
(vi) valuation of undertakings or assets of the company, wherever it is
necessary;
(vii) evaluation of internal financial controls and risk management systems;
(viii) monitoring the end use of funds raised through public offers and related
matters.
5. Call for the comments of the Auditors. The Audit Committee may call for
the comments of the auditors about internal control systems, the scope of audit,
including the observations of the auditors and review of financial statements
before their submission to the Board and may also discuss any related issues with
the internal and statutory auditors and the management of the company.
6. Authority to investigate. The Audit Committee shall have the authority to
investigate into any matter in relation to the items specified in sub-section (4) or
referred to it by the Board and for this purpose shall have the power to obtain
professional advice from external sources and have full access to information
contained in the records of the company.
7. Right to be heard. The auditors of a company and the key managerial
personnel shall have a right to be heard in the meetings of the Audit Committee
when it considers the auditor’s report but shall not have the right to vote.
8. Disclosure of the composition of the Audit Committee. The Board’s report
under sub-section(3) of Section 134 shall disclose the composition of an Audit
Committee and where the Board had not accepted any recommendation of the
Audit Committee, the same shall be disclosed in such report along with the
reasons therefor.
9. Establishment of vigil mechanism. Every listed company or such class or
classes of companies, as may be prescribed, shall establish a vigil mechanism for
directors and employees to report genuine concerns in such manner as may be
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prescribed.
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10. Provision of adequate safeguards. The vigil mechanism under sub-section
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(9) shall provide for adequate safeguards against victimization of persons who
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use such mechanism and make provision for direct access to the chairperson of
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the Audit Committee in appropriate or exceptional cases.
The details of establishment of such mechanism shall be disclosed by the
company on its website, if any, and in the Board’s report.
Q. 15. Distinguish between a Managing Director and a Manager.
Ans. Managing Director. A managing director may be defined as a director
who is entrusted with substantial powers of management which otherwise
cannot be exercised by him. These powers may be conferred upon him by virtue
of an agreement between the Managing Director and the company or a resolution
passed by the company in general meeting of the shareholders or by its Board of
Directors or by virtue of Articles of Association of the company.
The power to do administrative acts of a routine nature shall not be deemed to
be included within substantial powers of management. The Managing Director
has to exercise his powers subject to superintendence, control and direction of the
Board of Directors. He is a whole-time director of the company and also its chief
executive.
Manager. As per Section 2(53) of the Companies Act, 2013, Manager means an
individual who has the management of the whole or substantially the whole of
the affairs of a company. The Manager has to exercise his powers subject to the
superintendence, control and directions of the Board of Directors. Manager
includes a director or any other person occupying the position of a Manager by
whatever name called, and whether under a contract of service or not. A
Manager is usually appointed under a contract of service or by way of resolution
passed by shareholders in a general meeting.
Distinction between a Managing Director and a Manager

Point of Distinction Managing Director Manager
1. Powers of the Entrusted with sub- Has the management of
management stantial powers of the the whole or sub-
entrusted management. stantially the whole of the
affairs of the company.
2. Number of posts A company may have A company cannot have
more than one managing more than one manager.
directors.
3. Requirement as to A managing director A manager may or may
be a director must be a director. not be a director.
4. Method of May be appointed by (i) May be appointed
appointment virtue of an agreement under a contract of
with the company or (ii) service or by way of a
resolution passed by the resolution passed by the
company in the general company in the general
meeting, or (iii) Board of meeting.
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Directors, or (iv) virtue of
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Articles of Association of
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the company.
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5. Maximum remu- Where there are more
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5% of the net profits.
neration payable than one managing
directors, 10% of the net
profits.
Q. 16. Distinguish between Managing Director and a Whole-time Director.
Is there any significant difference in their powers?
Ans. Managing Director. Q. 15, Chapter 11. [Page 95
Whole-time Director. Section 2(94) of the Companies Act, 2013, provides that
a ‘whole-time director’ includes a director in the whole-time employment of the
company. Whole-time Director devotes all his time and attention in carrying on
those affairs of the company as may be assigned to him by the Board of Directors.
He may be appointed as finance manager, works manager, chief engineer etc.
Distinction between a Managing Director and a Whole-time Director
Point of Distinction Managing Director Whole-time Director
1. Control of He has substantial He may be given some
Management control of management. specific responsibilities
only.
2. Number of May be appointed in two Can be appointed as
Companies companies. wholetime director in
one company only.
3. Co-existence with A managing director and A whole-time director
other posts a manager can not co- can be appointed along
exist in a company. with a managing director
or a manager.
Thus, it is clear that the two offices, namely that of managing director and
whole-time director denote altogether different positions in a company with
marked difference in the magnitude and extent of powers and responsibilities. A
managing director is entrusted with substantial powers of management but a
whole-time director is not entrusted with substantial powers of management.
Q. 17. Write a note on Key Managerial Personnel.
Ans. Key Managerial Personnel (KMP). As per the definition given in Section
2(51), “Key Managerial Personnel” (KMP) in relation to a company means:
(i) the Chief Executive Officer, or the managing director or the manager;
(ii) the company secretary;
(iii) the whole-time director;
(iv) the Chief Financial Officer and
(v) such other officer as may be prescribed.
Appointment of Key Managerial Personnel:
1. As per Rule 8 of the Companies (Appointment and Remuneration of
Managerial Personnel) Rules, 2014, every listed company and every
other public company having a paid up share capital of ` 10 crore or
more must have Whole-time Key Managerial Personnel.
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2. Unless the Articles of such a company provide otherwise, an individual
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cannot be appointed or re-appointed as the chairperson as well as
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Managing Director or CEO of the company at the same time.
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3. Every Whole-time Key Managerial Personnel is to be appointed by a
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resolution of the Board of Directors containing the terms and conditions
of the appointment including the remuneration.
4. A Whole-time Key Managerial Personnel shall not hold office in more
than one companies except in its subsidiary company at the same time.
But he can take up non-executive directorship of any company with the
permission of the Board.
5. A company may appoint a person as its Managing Director, if he is the
Managing Director or Manager of one and of not more than one other
companies, with the consent of all the directors present at the Board’s
meeting and of which meeting and of the resolution to be moved thereat,
specific notice has been given to all the directors then in India.
6. Vacancy in the office of Key Managerial Personnel shall be filled by the
Board at a Board Meeting within a period of 6 months from the date of
such vacancy.
Section 203(5) of the Act provides that If any company makes any default in
complying with the provisions of this section, such company shall be liable to a
penalty of five lakh rupees and every director and key managerial personnel of
the company who is in default shall be liable to a penalty of fifty thousand
rupees and where the default is a continuing one, with a further penalty of one
thousand rupees for each day after the first during which such default continues
but not exceeding five lakh rupees.
Q. 18. Write a note on ‘Secretarial Audit’.
Ans. As per Section 204 of the Companies Act, 2013 every listed company
and companies belonging to the prescribed class or classes of companies shall
annex a secretarial audit report given by a Company Secretary in Practice with

its Board’s report. The form of such report shall be prescribed by the Central
Government. The Board in its report shall explain any qualifications or other
remarks made by the Company Secretary in practice.
According to Section 204 of the Companies Act, 2013, the provisions relating
to Secretarial Audit are as follows:
• Every listed company and a company belonging to other class of
companies as may be prescribed shall annex with its Board’s report a
Secretarial Audit Report, given by a Company Secretary in Practice, in
such form as may be prescribed.
• Rule 9 of the Companies (Appointment and Remuneration of
Managerial Personnel) Rules, 2014 prescribes the other class of
companies, for the purposes of Section 204, as follows:
(a) every public company having a paid-up share capital of ` 50 crore
or more; and
(b) every public company having a turnover of ` 250 crore or more.
• The company will be obliged to give all assistance and facilities to the
Company Secretary in Practice for auditing the secretarial and related
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records of the company.
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• The Board of Directors, in their report shall explain in full, any
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qualification or observation or other remarks made by the Company
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Secretary in Practice in his report.
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Penalty. Where any default is made in complying with the provisions of
secretarial audit:
• The company and every officer who is in default shall be punishable
with fine which shall not be less than ` 1 lakh but which may extend to
` 5 lakhs;
• The Company Secretary in Practice (undertaking the secretarial audit)
who is in default shall be punishable with fine which shall not be less
than ` 1 lakh but which may extend to ` 5 lakhs.
PRACTICAL PROBLEMS
1. Mr. Naveen is director in 8 public limited companies as on 30th July 2014.
He has the following offers with him. Advise:
(i) Directorship of ABC Ltd.
(ii) Directorship of PQRS (Pvt.) Ltd.
(iii) Directorship of XYZ Ltd.
Ans. Mr. Naveen cannot be a director of more than 10 public companies.
To compute the limit of public companies, directorship of private company
which is holding/subsidiary of public company, is also included.
Assuming PQRS Pvt. Ltd. is not one such company. Mr. Naveen can
become director of all the three companies, as an individual can be a
director of maximum 20 companies.
2. “A Director as well as his alternate both are present at a Meeting of the Board of
Directors of the Company.” Comment.
Hint: If a director as well as his alternate, both are present at a meeting of

the Board of Directors of the company, the alternate director can not
participate in the meeting since the term of the alternate director comes to
an end when the original director has returned to the state in which Board
meetings are ordinarily held.
For details: (Refer to Q. 2(ii), Chapter 11). [Page 77
3. ABC Co. Ltd. has 15 directors, 5 of whom are not subject to retirement by rotation.
Is it a Validly Constituted Board?
Hint: As per Section 152 not less than 2/3rd of the total number of directors
of a public or private company, which is a subsidiary of a public company,
must retire by rotation. Here 1/3rd of the directors are non-rotational
directors. Hence, the Board is validly constituted.
For details: (Refer to Q. 5(Point 2), Chapter 11). [Page 84
4. Who may be appointed as a Director out of the following and why?
(i) a minor
(ii) a partnership firm
(iii) a trust
Ans.
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(i) A minor cannot be appointed as a director of a company because he
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is not competent to contract under the Indian Contract Act.
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(ii) A partnership firm. Only an individual (natural person) can be
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appointed as director of a company. Therefore, a partnership firm
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cannot be appointed as director of any company.
[No body corporate, association of persons, Trust and firm shall be
appointed director of a company]
(iii) Trust. It can also not be appointed as a director of a company because
it is not an individual.
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12 CONVENING & CONDUCT OF SHAREHOLDERS’
MEETINGS
Q. 1. What are the different kinds of Meetings of shareholders? Explain.

Ans. Meetings of shareholders of a company are of two types:
(i) General Meetings
(ii) Class Meetings.
(i) General Meetings are those in which shareholders of a company
participate. General Meetings of shareholders are of two types:
– Annual General Meeting, and
– Extraordinary General Meeting.
(ii) Class Meetings. In such Meetings, it is only a particular class of
shareholders who participate. Such Meetings of different classes of shareholders
are convened and held only if matters affecting these shareholders are to be
discussed and decided. As such, a Class Meeting is intended to be attended by
members or shareholders of the class for which it is called. In such a Meeting,
matters affecting or concerning that particular class only are discussed. Such
Class Meetings are at times necessary, otherwise all types of shareholders
attending such a Meeting may confuse or even complicate matters to be
discussed.
Q. 2. Explain the provisions of the Companies Act with regard to holding of
an Annual General Meeting by a company.
Ans. Annual General Meeting (AGM). It is the most important meeting of the
members (shareholders) of a company. This meeting is held every year to review
the progress of the company.
Importance of Annual General Meeting. The Annual General Meeting is an
important protection to the members for it is one occasion when they can be sure
of having an opportunity of meeting the Directors and questioning them on the
accounts, and on their report on the company’s position and prospectus.
“It is at this Meeting that some of the Directors will retire and come up for re-election
and the shareholders will be able to exercise real control by “refusing to re-elect a Director
whose action and policy they disapprove”—Green LJ in Shaw and Sons (Salford)
Ltd. vs. Shaw.
Provisions regarding Annual General Meeting:
1. Which companies are required to hold AGM. Section 96(1) provides that
every company other than a One Person Company shall, in each year, hold, in
addition to any other meetings, a general meeting as its annual general meeting.
This Section further provides that the company shall specify the meeting as such
in the notice calling it.
2. First AGM. The first AGM shall be held within a period of 9 months from
the date of closing of the first financial year of the company.
If the company holds its first AGM as aforesaid, it shall not be necessary for the
company to hold any AGM in the year of its incorporation.
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3. Subsequent AGM. There must be one AGM in each calendar year. The
maximum time period between any two such AGMs should not be more than 15
months. This time may be extended for a maximum of 3 months by the Registrar
if there are some special reasons.
The AGM must be held within a period of 6 months from the date of closing of
the financial year or within 9 months where time has been extended by 3 months
by the Registrar. If AGM of a company is adjourned to a subsequent date, the
adjourned meeting is deemed to be the continuation of the earlier meeting. The
adjourned meeting must also be held within 15 months of the previous meeting.
4. Power to convene an AGM. The Board of Directors is the proper authority to
convene an AGM.
5. Place of AGM. An AGM must be held either at the registered office of the
company or at some other place within the city, town or village in which the
registered office of the company is situated.
6. Time and day of the AGM. AGM must be held during business hours i.e.,
between 9 am to 6 p.m. and also on a working day. It cannot be held on a
National holiday. Provided that AGM of an unlisted company may be held at
any place in India, if consent is given in writing or electronic mode, by all the
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members in advance.
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7. Notice of the meeting. An Annual General Meeting can be called by giving
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at least 21 days clear notice either in writing or through electronic mode in such
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manner as may be prescribed.
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The notice of the Annual General Meeting must be accompanied by a copy of
the audited Financial Statement for the previous financial year, the Annual
Report of the Directors and the Auditor’s Report.
Every notice of a meeting shall specify the date, place, day and the hour of the
meeting and shall contain a statement of the business to be transacted at such
meeting.
The notice of every meeting of the company shall be given to—
(a) every member of the company, legal representative of any deceased
member or the assignee of an insolvent member;
(b) the auditor or auditors of the company; and
(c) every director of the company.
Any accidental omission to give notice to, or the non-receipt of such notice by
any member or other person who is entitled to such notice for any meeting shall
not invalidate the proceedings of the meeting.
8. Business transacted at the meeting. The business to be transacted at an
AGM may comprise:
I. Ordinary Business. It relates to the following matters:
(a) consideration of financial statements and the reports of the Board of
Directors and auditors;
(b) the declaration of dividend;
(c) the appointment of directors in place of those retiring; and
(d) the appointment of auditors and fixation of their remuneration.
II. Special Business. Any other business, other than ordinary business,
scheduled to be transacted at the meeting is known as special business.
Examples of special business to be conducted at an Annual General
CHAPTER 12: CONVENING & CONDUCT OF SHAREHOLDERS’ MEETINGS 101
Meeting are: Change in the Memorandum of Association and Articles of

Association, Buy-back of shares etc.
9. Power of Tribunal to call AGM. If default is made in holding an Annual
General Meeting in accordance with Section 96, the Tribunal may, on the
application of any member of the company, call or direct the calling of the
Annual General Meeting of the company and give such directions as the Tribunal
thinks expedient in relation to the calling, holding and conducting of the meeting.
A general meeting so held shall be deemed to be the Annual General Meeting
of the company.
10. Penalty for default in holding AGM. If default is made in holding a meeting
of the company in accordance with Section 96, or in complying with any directions
of the Tribunal, company and every officer of the company who is in default, shall
be punishable with fine which may extend to ` 1 lakh and in the case of a
continuing default, with a further fine which may extend to ` 5000 for every day
after the first during which such default continues.
Q. 3. Write a note on Extraordinary General Meeting.
Ans. Meaning of Extraordinary General Meeting (EGM). All general meetings
other than the annual general meeting are called extraordinary general meetings.
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These meetings are convened to transact the business which cannot be postponed
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till the next AGM, e.g., alteration in the Memorandum, Alteration in the Articles
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etc. All business transacted at such meeting is called special business.
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Who may call an Extraordinary General Meeting. Extraordinary general
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meeting may be called:
(a) By the Board of Directors. The Board of Directors, may, whenever it
thinks fit, convene an extraordinary general meeting by passing a
resolution to that effect in the Board’s meeting.
(b) By the Board of Directors on Requisition of the Members. The Board of
Directors must call an extraordinary general meeting on the written
requisition of the members holding at least 1/10th of the total voting
power and who have a right to vote in respect of the matter. The
requisition must state the matters to be considered in the meeting to be
called. It must be signed by the requisitionists and deposited at the
registered office of the company. Within 21 days of the requisition, the
directors must proceed to call the meeting which must actually be held
within 45 days from the date of requisition.
(c) By the Requisitionists. If the Board of Directors fails to call the meeting
within above mentioned time limit, the requisitionists themselves may
call the meeting within 3 months of the date of requisition. The
reasonable expenses incurred by the requisitionists for holding such a
meeting can be recovered by them from the company which, in turn,
shall recover the same from the remuneration of the directors at fault.
(d) By the Tribunal. The Tribunal can also order an extraordinary general
meeting to be called, held or conducted, if for any reason it is not
practicable to call or hold such a Meeting. The Tribunal may pass order
for calling such a Meeting on its own initiative or on the application of
any Director or any members entitled to vote at the Meeting.
An EGM can be convened on a National holiday and at a place other than the
registered office of the company or the city in which the registered office is
situated.
Q. 4. Explain ‘ordinary business’ and ‘special business’ which may be
transacted in a general meeting of a company. State also the meetings in which
such business may be transacted.
Ans. Ordinary Business. It relates to the following matters:
(a) consideration of financial statements and the reports of the Board of
Special Business. Any other business, other than ordinary business, scheduled
to be transacted at the meeting is known as special business. Examples of special
business to be conducted at an Annual General Meeting are: Change in the
Memorandum of Association and Articles of Association, Buy-back of shares etc.
Generally, ordinary business requires the passing of an ordinary resolution and
special business a special resolution. There are certain items of business which
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require an ordinary resolution e.g., alteration of Share capital, Issue of Bonus
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shares etc.
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Ordinary business may be transacted only in the Annual General Meeting
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whereas special business may be transacted in Annual General Meeting as well
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as Extraordinary General Meeting.
Q. 5. What are the requisites of a valid Meeting? Explain.
Ans. Any Meeting to be called a valid meeting has to fulfil the following
requirements:
1. It must be duly convened by the proper authority.
2. Proper notice must be given to all those who are entitled to receive it.
3. Quorum must be present.
4. The chairman must preside.
5. Proper minutes of the proceedings should be kept.
1. Proper Authority. For General Meetings of the company’s shareholders, the
Board of Directors is the proper authority to convene such Meetings. For this, the
Board of Directors has to pass a Resolution at its meeting. Such a meeting of the
shareholders can be Annual General Meeting, Extraordinary General Meeting or
even any Class Meeting of shareholders of the company. In certain cases, even
such meetings may be called by or requisitioned by the shareholders themselves
or by the National Company Law Tribunal.
2. Notice. The notice of every meeting of the company shall be given to—
(a) every member of the company, legal representative of any deceased
member or the assignee of an insolvent member;
(b) the auditor or auditors of the company; and
(c) every director of the company.
For General Meeting of the members, notice has to be given at least 21 days in
advance. While calculating 21 days, the date of the issue and the date of the
meeting are not included. In case the notice is sent by post, 2 days for postal
transit are excluded. Therefore, the notice of a general meeting should be sent 25
days before the date of the meeting if the notice is sent by post. The notice should
contain the agenda of the meeting which means a list of all the items to be
discussed in the meeting. The notice must specify the place, time and purpose of
the meeting.
The meeting may be held even with a shorter notice if it is so agreed by at
least 95% of the members entitled to vote in such meeting.
Deliberate omission to give notice to any member can render the meeting
invalid. An accidental omission to give notice to or non-receipt of it by any
individual member will not affect the meeting’s validity. The notice must contain
a statement about the business to be transacted at the meeting, clearly dividing
the business into Ordinary Business and Special Business. The notice may be sent
to a member by post or by courier or by such electronic or other mode as may be
prescribed.
3. Quorum. It means the minimum number of members required to be present
at the meeting. If this minimum number of members is not present, then the
meeting is held to be invalid and no business can be transacted at it. Generally, it
is the Articles of Association of the company wherein the requirement of the
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Quorum is specified regarding various meetings whether it is a Board Meeting
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or General Meeting of the members.
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Quorum is required to be present at the beginning of the meeting. It need not
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be present throughout or at the time of taking votes on any resolution. A quorum
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must be present throughout in the case of Board’s Meetings.
Section 103 of the Companies Act contains provisions relating to the number of
members which would constitute quorum for a meeting of the company.
As per Section 103, unless, the Articles of the company provide for a larger
number—
(a) in case of a public company—
(i) five members personally present if the number of members as on the
date of meeting is not more than one thousand;
(ii) fifteen members personally present if the number of members as on
the date of meeting is more than one thousand but less than or equal
to five thousand;
(iii) thirty members personally present if the number of members as on
the date of meeting is more than five thousand;
(b) in the case of a private company, two members personally present shall
form the quorum for a meeting of the company.
• If the quorum is not present within half-an-hour from the time
appointed for holding the meeting of the company—
(i) the meeting shall stand adjourned to the same day in the next
week at the same time and place, or to such other date and such
other time and place as the Board may determine; or
(ii) the meeting, if called by the requisitionists shall stand cancelled.
In case of an adjourned meeting or of a change of day, time or place of
meeting, the company shall give not less than 3 days notice to the
members either individually or by publishing an advertisement in the
newspapers (one in English and one in vernacular language) which is in

circulation at the place where the registered office of the company is
situated.
• If at the adjourned meeting also, a quorum is not present within
half-an-hour from the time appointed for holding the meeting, the
members present shall be the quorum.
Can one person constitute a quorum?
Ordinarily one person present in the meeting can not form a quorum.
Under the following circumstances, even one person present may form the
quorum for a general meeting.
(i) When the Tribunal calls or directs the calling of an Annual General
Meeting, it may give direction to the company that one member present
in person or by proxy shall be deemed to constitute a meeting.
(ii) In case of class meetings, if all the shares of a particular class are held by
one person, he shall constitute the quorum.
(iii) If there is only one creditor or debentureholder, he shall constitute
quorum for the creditors’/debentureholders’ meeting.
4. Chairman of the Meeting [Section 104]. The successful conduct of any
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meeting is largely dependent upon the personality of the Chairman. He acts as
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the Presiding Officer of the company’s meeting. It is the Chairman who is
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responsible for maintaining order and also conducting the meeting. He puts
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motions before the meeting, counts the votes, announces the results and also
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certifies the records (minutes) of the meeting by putting his signatures.
Unless the Articles of the company provide otherwise, the members personally
present at the meeting shall elect one of themselves to be the Chairman thereof on
the show of hands.
If a poll is demanded on the election of the Chairman, it shall be taken in
accordance with the provisions of this Act and the Chairman elected on a show of
hands shall continue to be the Chairman of the meeting until some other person
is elected as Chairman as a result of the poll, and such other person shall be the
Chairman for the rest of the meeting.
Section 104 leaves the appointment of the Chairman to be regulated by the
Articles of the company. The provisions of this Section would be applicable only
if the Articles do not otherwise provide. The Articles generally contain provisions
on the lines of Regulations 45 to 47 contained in Table F of Schedule I. These
Regulations are as follows:
Regulation 45. The Chairman, if any, of the Board shall preside as Chairman at
every general meeting of the company.
Regulation 46. If there is no such Chairman, or if he is not present within
fifteen minutes after the time appointed for holding the meeting, or is unwilling
to act as the Chairman of the meeting, the directors present shall elect one of the
directors present to be the Chairman of the meeting.
Regulation 47. If at any meeting, no director is willing to act as Chairman or if
no director is present within fifteen minutes after the time appointed for holding
the meeting, the members present shall choose one of the members present to be
the Chairman of the meeting.
5. Minutes (Section 118). Minutes mean a written record of all the proceedings
of the meeting. Some important points pertaining to minutes are as follows:
(i) Every company shall take steps to get the minutes of the proceedings of
general meetings, meetings of the Board of Directors and its committees
and every resolution passed by postal ballot prepared within 30 days of
conclusion of such meeting or passing of resolution by postal ballot.
(ii) Separate minutes books have to be maintained for each type of Meeting.
(iii) Every minutes book shall be in a bound form and not in a loose-leaf
form.
(iv) Every page of the minutes book must be serially numbered.
(v) Minutes must present a fair and proper summary of all the proceedings
conducted at the Meeting.
(vi) All appointments made at any of the meetings aforesaid shall be
included in the minutes of the meeting.
(vii) In the case of a meeting of Board of Directors or of a committee of the
Board, the minutes shall also contain—
(a) the names of the directors present at the meeting; and
(b) in the case of each resolution passed at the meeting, the names of the
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directors, if any, dissenting from, or not concurring with the
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resolution.
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(viii) There shall not be included in the minutes, any matter which, in the
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opinion of the Chairman of the meeting—
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(a) is or could reasonably be regarded as defamatory of any person;
(b) is irrelevant or immaterial to the proceedings; or
(c) is detrimental to the interests of the company.
The Chairman shall exercise absolute discretion in regard to the inclusion
or non-inclusion of any matter in the minutes on the grounds stated
above.
The minutes kept in accordance with the provisions of the Act shall be
the evidence of the proceedings recorded therein.
(ix) Each page of every such book shall be initialed or signed and the last
page of the record of proceedings of each meeting or each report in such
books shall be dated and signed within a period of 30 days:
(a) In the case of minutes of proceedings of a meeting of the Board or of
a committee thereof, by the Chairman of the said meeting or the
Chairman of the next succeeding meeting;
(b) In the case of minutes of proceedings of a general meeting, by the
Chairman of the same meeting;
(c) In case of every resolution passed by postal ballot, by the Chairman
of the Board.
(x) The minutes book of general meetings shall be kept at the registered
office of the company.
(xi) Minutes constitute a prima-facie proof of meetings being in order.
(xii) The minutes book shall be open for inspection to members during
business hours without any charge.
Q. 6. Write a note on Proxy.
Ans. Proxy. In any meeting, a member is entitled to attend and vote either in
person or by proxy. So a proxy means an authority to represent and vote for
another member in a meeting. It is through this instrument of proxy that a person
is appointed to represent another member. The person so appointed to represent
another is called a proxy. ‘Proxy’ need not be a member of the company. The
proxy does not get a right to speak in the meeting.
Thus, Proxy means
(i) A person appointed to represent a member of the company, and
(ii) An instrument by which a person is appointed to vote for a member at
the meeting of the company.
Provisions of the Companies Act relating to Proxy:
(i) Section 105(1) provides that every member of a company shall be
entitled to appoint another person as his proxy to attend and vote instead
of himself.
(ii) A proxy need not be a member of the company.
(iii) A proxy shall not have the right to speak at such meeting and shall not be
entitled to vote except on a poll.
(iv) A person appointed as proxy shall act on behalf of such member or
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number of members not exceeding 50 and such number of shares as may
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be prescribed.
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(v) Section 105(2) provides that every notice sent by a company for calling a
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meeting must prominently mention the right of a member to appoint a
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proxy along with the fact that the proxy need not be a member of the
company.
(vi) The instrument appointing a proxy shall—
(a) be in writing; and
(b) be signed by the member or his attorney duly authorised in writing
or, if the member is a body corporate, be under its seal or be signed by an
officer or an attorney duly authorised by it.
(vii) ‘Proxy’ instrument has to be deposited with the company 48 hours before
the time of the meeting.
(viii) For each meeting a separate proxy is required.
(ix) No invitation to appoint any person as proxy shall be issued at the
company’s expense.
(x) Every member entitled to vote at the meeting of the company shall be
entitled to inspect the proxy during the period beginning 24 hours before
the time fixed for the meeting and ending with the conclusion of the
meeting.
(xi) A proxy is revocable and subject to the provisions of the Articles, it can
be revoked any time, before it is acted upon. Death or insanity of the
member appointing the proxy also revokes the authority of the proxy
provided the company receives intimation in writing of such death or
insanity at its office before the commencement of the meeting.
(xii) A member can prevent the proxy from exercising the right to vote by
himself attending the meeting and voting at the meeting.
Q. 7. Write a note on voting at general meeting.
Ans. Voting at General Meeting. Any motion proposed in a meeting of the

company is decided by votes of the members present either in person or by
proxies. A vote means member’s right which he/she may exercise as deemed fit
in his/her interest. But such a vote must be exercised keeping in mind the best
interest of the company.
Method of Voting. The voting in a company may take place either:
(i) by show of hands,
(ii) by poll, or
(iii) through electronic means.
(i) Voting by show of hands. It is the simplest method of voting, results of
which can be given by the Chairman immediately. However, this method
violates the confidentiality of the members’ wishes. Again, voting is not
proportional to the shareholdings held by the members.
(ii) Voting by poll. As against the voting by show of hands, poll means
counting of votes in favour and against a motion. It is done whenever it
is so demanded. In a poll, voting rights of different members are in
proportion to their shareholdings.
Who can demand a poll. On a motion, decision to take voting by poll may be
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taken by the Chairman on his own accord or a demand for a poll may be made by
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the members present. Poll will be a necessary mode of voting in the following
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cases:
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(a) In case of a company having share capital. When poll is demanded by
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any member present in person or by proxy, such a member or proxy
must be holding shares (i) with power to vote not less than 1/10th of the
total voting power; or (ii) with an aggregate sum of not less than
` 5 lakhs paid up value or such higher amount as may be prescribed.
(b) In case of any other company, when demanded by any member(s)
present in person or by proxy and having not less than 1/10th of the total
voting power.
When a poll is taken, a member is free to split his votes in favour of as well as
against the same Resolution. He has the right to distribute his votes in any
manner he chooses.
The manner of taking a poll is to be decided by the Chairman. He appoints two
scrutineers (one of whom must be a member, if available and willing) to
scrutinise the votes given on the poll. A declaration of the Chairman that a
Resolution has or has not been carried is prima-facie evidence of the Resolution.
A poll on a Resolution for the adjournment of the Meeting or for the
appointment of Chairman must be immediately taken. Chairman, in all other
cases, must take poll at any suitable time but not later than 48 hours of the
demand for poll. If a poll is not completed on the same day, it will be continued
on the next day and the Chairman will not be entitled to close the poll.
If the Articles so provide, members holding shares on which calls are in arrear,
or in regard to which Company has exercised right of lien, may not be allowed to
vote on poll.
(iii) Voting through electronic means. The Central Government may prescribe
the class or classes of companies and the manner in which a member may
exercise his right to vote by electronic means (Section 108).
Rule 20 of the Companies (Management and Administration) Rules 2014,

provides the following rules relating to voting through electronic means:
1. Every listed company or a company having 1,000 or more shareholders,
shall provide to its members facility to exercise their right to vote at the
general meetings by electronic means.
2. A member may exercise his right to vote at any general meeting by
electronic means and the company may pass any resolution by electronic
voting system.
3. The company shall follow the following procedure, namely:
(i) the notices of the meeting shall be sent to all the members, auditors
of the company, or directors;
(ii) the notice shall also be placed on the website of the company, if any;
(iii) the notice of the meeting shall clearly mention that the business may
be transacted through electronic voting system and the company is
providing facility for voting by electronic means;
(iv) the notice shall clearly indicate the process and manner for voting by
electronic means and the time schedule including the time period
during which the votes may be cast and shall also provide the login
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ID and create a facility for generating password and for keeping
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security and casting of vote in a secure manner;
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(v) the company shall cause an advertisement to be published, not less
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than 5 days before the date of beginning of the voting period, at least
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once in a vernacular newspaper and at least once in an English
newspaper including the following matter, namely:
(a) statement that the business may be transacted by electronic voting;
(b) the date of completion of sending of notices;
(c) the date and time of commencement of voting through electronic
means;
(d) the date and time of the end of voting through electronic means;
(e) the statement that voting shall not be allowed beyond the said
date and time;
(f) website address of the company and agency, if any, and
(g) contact details of the person responsible to address the
grievances connected with the electronic voting;
(vi) the e-voting shall remain open for not less than 1 day and not more
than 3 days:
In all such cases, such voting period should be completed 3 days
prior to the date of the general meeting:
(vii) during the e-voting period, shareholders of the company, may cast
their vote electronically;
(viii) at the end of the voting period, the portal where votes are cast shall
forthwith be blocked;
(ix) the Board of Directors shall appoint one scrutiniser;
(x) the scrutiniser shall, within a period of not exceeding 3 working
days from the date of conclusion of e-voting period, unblock the
votes in the presence of at least 3 witnesses not in the employment of
the company and make a scrutiniser’s report of the votes cast in

favour or against, if any, forthwith to the Chairman;
(xi) subject to the receipt of sufficient votes, the resolution shall be
deemed to be passed on the date of the relevant general meeting of
the members.
Q. 8. What are the different types of Resolutions which may be passed in a
Meeting of shareholders? Explain.
Ans. Resolution. In any Meeting, the matters which are put for consideration
are in the form of proposals and are called ‘motions’. In a Meeting any such
“motion” may be brought for consideration either by the Chairman or by the
Secretary or by any other member also. Any such motion, after due discussion, is
put to vote or for decision and its decision is recorded in the form of
“Resolution”. So a Resolution means formal recording of the wishes of the
members present as expressed by voting. Generally, Resolutions are of three
types:
1. Ordinary Resolution
2. Special Resolution
3. Resolution requiring special notice.
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1. Ordinary Resolution [Section 114(1)]. It is a resolution of which notice
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required under the Companies Act has been duly given and which is passed with
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a simple majority of the members present either in person or through proxies.
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Simple majority means that the votes cast in favour of the resolution exceed the
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votes against the resolution. It may be passed either by a show of hands or
electronically or on a poll.
An ordinary resolution is passed for the ordinary business transacted at the
Annual General Meeting for example.,
(a) consideration of financial statement and the reports of the Board of
There are certain items of special business which require an ordinary resolution
for example:
(a) Alteration of the name clause of the company at the direction of the
Central Government Section 16(1).
(b) Alteration of the share capital Section 65(1).
(c) Issue of bonus shares Section 63(2).
(d) Removal of a director other than the director appointed by the Tribunal
under Section 169(1).
2. Special Resolution [Section 114(2)]. A Special Resolution is one which is
required in transacting special business and it is required to be passed by a three-
fourth majority. Section 114(2) of the Companies Act provides that a resolution
shall be special resolution when:
(a) The intention to propose it as a Special Resolution has been duly
specified in the notice calling the General Meeting;
(b) The votes cast in favour of the Resolution (whether by a show of hands,
or electronically, or by a poll) by the members present, in person, or by
proxy, or by postal ballot are not less than 3 times the votes cast against
the Resolution by the members.
Special Resolution is needed for the purposes such as:
(i) Change in Objects Clause of Memorandum of Association.
(ii) Change in Memorandum of Association as regards “Registered Office”
of the company from one State to another.
(iii) Alteration of the Articles of Association.
(iv) Reduction of share capital.
(v) Making variation in terms of contracts mentioned in the prospectus.
(vi) Changing shareholders’ rights.
(vii) Increasing maximum number of directors beyond 15.
(viii) Removal of an auditor.
(ix) Buy-back of shares.
3. Resolution requiring special notice [Section 115]. It is not an independent
class of Resolution. Rather, it is a kind of Ordinary Resolution with the difference
that the mover has to give a 14 days’ prior notice of the intention to move such a
Resolution. The company, on receipt of such a notice, will give a notice of the
Resolution to the members at least 7 days before the meeting in the same manner
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in which notice for meeting is given.
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Special notice of the intention to move such resolution shall be given to the
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company by members holdings minimum 1% of the total voting power or
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holding shares on which an aggregate of not less ` 5 lakhs has been paid up on
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the date of the notice.
Special notice is required by the Act in the following cases:
1. For appointing an auditor other than the retiring auditor or for a
resolution providing that an auditor retiring shall not be reappointed
except where the retiring auditor has completed a consecutive tenure of 5
years.
2. For removal of a Director before the expiry of his term or for
appointment of a Director in place of the Director so removed.
Q. 9. Distinguish between on ordinary resolution and a special resolution.
Ans. Ordinary resolution. See Q. 8, on the Opposite Page 110.
Special resolution. See Q. 8, on the Opposite Page 110.
Distinction between an Ordinary resolution and a Special resolution
Point of Distinction Ordinary Resolution Special Resolution
1. Nature of Business Usually, items of ordinary Usually, items of special
business require passing business require passing
of an ordinary resolution. of a special resolution.
2. Majority It is passed by simple It is passed by 3/4th
majority. majority. In case of a
special resolution, votes
cast in favour of a
resolution should be 3
times the votes cast
against it.
3. Filing of the Copy Not required to be filed Required to be filed

of the Resolution with the ROC. with the ROC within 30
with ROC days of passing it.
4. Explanatory Sta- Not required to be sent Required to be sent
tement alongwith alongwith the notice of alongwith the notice of
the Notice the meeting. the meeting. The
statement should give all
material facts about the
items of special business.
5. Casting Vote of The Chairman can give The Chairman does not
the Chairman his casting vote in case of have a casting vote.
a tie.
Q. 10. Write a note on passing of resolution by Postal Ballot.
Ans. Passing of Resolution by Postal Ballot. Section 2(65) of the Companies
Act, 2013 defines ‘postal ballot’ as voting by post or through any electronic
mode.
Section 110 contains provisions regarding passing of resolution by postal
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ballot. These provisions are as follows:
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1. A Company:
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(a) shall, in respect of such items of business as the Central Government
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may, by notification, declare to be transacted only by means of postal
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ballot; and
(b) may, in respect of any item of business, other than ordinary business
and any business in respect of which directors or auditors have the
right to be heard at any meeting, transact by means of postal ballot,
in such manner as may be prescribed, instead of transacting such
business at a general meeting.
2. If a resolution is assented to by the requisite majority of the shareholders
by means of a postal ballot, it shall be deemed to have been duly passed
at a general meeting convened on that behalf.
One Person Company and other companies having members upto 200 are not
required to transact any business through postal ballot.
List of items of business in which the resolution has to be passed through
Postal Ballot: The items of business in which the resolution shall be passed
through Postal Ballot are as follows:
(a) Alteration of the objects clause of the Memorandum;
(b) Alteration of Articles of Association in relation to insertion or removal of
the provisions which are required to be included in the Articles of a
company in order to constitute it a private company;
(c) Change in the place of registered office outside the local limits of any
city, town or village as specified in Section 12(5);
(d) Change in objects for which a company has raised money from public
through prospectus and still has any unutilised amount out of the money
so raised under Section 13(8);
(e) Issue of shares with differential rights as to voting or dividend or
otherwise under Section 43;
(f) Variation in the rights attached to a class of shares or debentures or other

securities as specified under Section 48;
(g) Buy-back of shares by a company under Section 68(1);
(h) Election of a director under Section 151;
(i) Sale of the whole or substantially the whole of an undertaking of a
company as specified under Section 180;
(j) Giving loans or extending guarantee or providing security in excess of
the limit specified under Section 186.
PRACTICAL PROBLEMS
1. Prosperity Ltd. issued a notice of its Annual General Meeting to be held on
7 November, 2014. The notice was posted to the members on 16 October, 2014.
Few members of the company alleged that the company had not complied with the
provisions of the Companies Act with regard to the period of notice and as such,
the Meeting was not validly called. Decide, giving reasons:
(i) Whether the Meeting has been validly called?
(ii) Is the notice shorter than the mandatory requirement?
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(iii) Can the shortfall be condoned?
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Ans. For General Meeting of the members, notice has to be given at least 21
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days in advance. While calculating 21 days, the date of the issue and the
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date of the meeting are not included. In case the notice is sent by post, 2
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days for postal transit are excluded. Therefore, the notice of a general
meeting should be sent 25 days before the date of the meeting if the notice
is sent by post.
Hence, in this case the meeting is not validly called as the notice is
shorter than the mandatory requirement. But this shorter notice can be
condoned if it is so agreed by at least 95% of the members entitled to vote.
2. Reliance industries Ltd. has its registered office at Mumbai. The company desires
to hold an Extraordinary General Meeting in New Delhi. Examine the validity
of the company’s desire with reference to the relevant provisions of the Companies
Act, 2013.
Ans. Unlike AGM, there is no specific provision in the Companies Act which
prohibits the holding of an Extraordinary General Meeting at a place other
than the registered office or a place outside the town, city or village in
which the registered office is situated. Thus, unless the Articles of
Association of the company provide otherwise, it is legally possible to call
an Extraordinary General Meeting (EGM) of the company in New Delhi.
3. A Proxy was appointed by a member on an instrument duly executed. Will the
vote cast by the Proxy by valid in the following cases:
(i) When the member himself attends and casts his vote at the Meeting without
revoking the authority of the Proxy; and
(ii) When the member died in the meantime.
Ans. (i) ‘Proxy’ is always revocable as a proxy is only an agent of the person
appointing the proxy i.e., the principal. Such a principal can always
revoke the authority given to his agent at any time before the
authority is exercised by such an agent. In case of a proxy, revocation

is allowed till the time or before the proxy has voted. So in this case,
the shareholder, who has appointed the proxy, can personally attend
and also vote at the meeting. If he does so, then the proxy is revoked
automatically and vote cast by him will not be valid.
(ii) Further the death or even any other incapability of the shareholder
(e.g., lunacy or insolvency) after he has appointed proxy, generally
does not revoke the proxy until the company has received notice of
his death or such incapacity or incapability. If the company has
received the notice of the death of the member, the vote cast by the
proxy would be invalid.
4. A company has 100 members. It sends notice of the General Meeting to all of
them. 20 members do not attend the meeting. Out of 80 members who are
present, 20 abstain from voting. How many members should vote in favour of a
resolution if it is to be passed as a Special Resolution?
Hint: In case of a Special Resolution, votes cast in favour of the resolution
must be at least 3 times the votes cast against the resolution. In this case
as
only 60 members are to vote. Hence, minimum 45 members should give
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their votes in favour of the resolution as against a maximum of 15 against
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it.
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5. Ganeev, the Chairman, at an Annual General Meeting, declares a motion carried
after a show of hands, the voting being “20 in favour, 50 against it and 60 in
favour voted by proxy.” The company’s Articles provide that a proxy is entitled
to vote on a poll. Is he right in his judgement?
Ans. Ganeev, the Chairman is not right in his judgement. Since the Articles
provide that a proxy is not entitled to vote by show of hands, therefore
60 votes in favour voted (by show of hands) by proxy are not to be
counted.
6. The Articles of Association of X Ltd. require the personal presence of 7 members
to constitute Quorum of General meetings. The following persons were present
in the Extraordinary General Meeting to consider the appointment of Managing
Director.
(i) A, the representative of Governor of Madhya Pradesh.
(ii) B and C, shareholders of preference shares.
(iii) D, representing Y Ltd. and Z Ltd.
(iv) E, F, G and H as proxies of shareholders.
Can it be said that the quorum was present in the meeting?
Ans. For the purposes of quorum, only members present in and not by proxies
are to be counted. However, A, representing the Governor of Madhya
Pradesh and D representing Y Ltd. and Z Ltd. will be considered as
present in person. (It is assumed that Governor of Madhya Pradesh, Y
Ltd. and Z Ltd. are the members of the company). The quorum requires
the personal presence of 7 members but there is a shortfall of 4 members.
Preference shareholders are not to be counted for the purpose of quorum
except where the proposed business includes any item directly affecting
them. Hence it is not a proper Quorum.
7. The accounts books of a company were confiscated by income tax authorities for
a particular year. As a result the accounts of the company were not ready.
Should the Company hold any meeting in the absence of accounts.
Hint: Problem. In the case of annual general meeting, all business to be
transacted shall be deemed as special business, other than—
(i) The consideration of financial statements and the reports of the board
of Directors and Auditors;
(ii) The declaration of dividend;
(iii) The appointment of directors in place of those retiring;
(iv) The appointment of auditors.
It is mandatory on the part of the Board of Directors of the company to
lay the accounts at every annual general meeting, within statutory
period. If the accounts are not ready for being laid at the meeting, the
usual practice is to hold the meeting, transact all the business except the
adoption of accounts and then adjourn the meeting to a subsequent date
for adoption of accounts. But the later date also has to be within the
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statutory time limit.
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In the present case, if the Income Tax Department has confiscated books
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of accounts of the company, then offence is not punishable.
Shi _____________
13 DIVIDEND PROVISIONS
Q. 1. What is dividend? State the legal provisions relating to the payment of

dividend.
Ans. Meaning of Dividend. Dividend refers to that portion of the profits of a
company which is allocated to the members of the company by a formal
declaration in the Annual General Meeting of the company.
According to Section 2(35), dividend includes interim dividend also. Dividend
implies final dividend declared at the general meeting of the company.
Legal Provisions regarding Dividend:
1. Source of Dividend. The dividend should be declared or paid out of:
(a) Current year’s profits of the company or profits of the previous
financial years after providing for depreciation as per Schedule II of
the Companies Act, 2013, or
(b) Out of both; or
(c) Money provided by the Central or State Governments for the
payment of dividends in pursuance of the guarantee given by that
Government.
Dividend is not allowed to be paid out of capital.
2. Transfer to reserves. A company may, before the declaration of any
dividend in any financial year, transfer such percentage of its profits for
that financial year as it may consider appropriate to the reserves of the
company.
3. Declaration of dividend out of reserves. No dividend shall be declared
or paid by a company from its reserves other than free reserves.
In the event of inadequacy or absence of profits in any year, a company
may declare dividend out of free reserves subject to the fulfillment of
certain conditions.
No Company shall declare dividend unless Carried over previous losses
and depreciation not provided in previous year or years are set-off
against profit of the company for the current year.
4. Recommendation of the Board. The directors have the sole discretion to
recommend or not to recommend the dividend.
The members in the Annual General Meeting cannot increase the rate of
dividend recommended by the Board of Directors. They can either
approve the same rate or lower it.
5. Declaration of final dividend at the annual general meeting. The
dividend is usually declared at the Annual General Meeting.
A company which could not declare dividend at an Annual General
Meeting may declare the same at a subsequent general meeting.
Final dividend cannot be paid twice in the same year.
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6. Depositing the amount of dividend declared into a separate bank

account. The dividend declared must be deposited in a separate bank
account within five days of its declaration and the same shall be used for
the payment of dividend.
7. Dividend to be paid in cash. Dividend shall be paid only in cash, either
by cheque or warrant or through any electronic mode except when
adjusted towards paying up unpaid amount on shares held by the
members of the company.
8. Dividend to be paid only to the registered shareholders and
beneficial owners. Dividend is to be paid only to the registered holder
of shares or to his order or to his banker. Dividend shall be paid in
proportion to the amounts paid up on each share.
9. Time framework for the payment of dividend. Where a dividend
which has been declared at the General Meeting of the shareholders,
becomes a debt against he company and, it should be paid within 30
days from the date of its declaration.
Penalty for failure to pay dividend within 30 days. In case a dividend has
been declared by a company but not paid or the warrant in respect thereof has
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not been posted, within 30 days from the date of the declaration, to any
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shareholder entitled to the payment of the dividend, every director of the
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company who is knowingly a party to the default, shall be punishable with
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imprisonment for a term which may extend to 2 years and with a minimum fine
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of ` 1,000 for every day during which such default continues.
The company shall also be liable to pay simple interest at the rate of 18% per
annum during the period for which such default continues.
In the following cases, there would not be any punishment for default:
(i) where the dividend could not be paid by reason of the operation of any
law;
(ii) where a shareholder has given directions to the company regarding the
payment of the dividend and it is not possible to comply with those
directions;
(iii) where there is a dispute regarding the right to receive the dividend;
(iv) where the dividend has been lawfully adjusted by the company against
any sum due to it from any shareholder; or
(v) where, for any other reason, the failure to pay the dividend or post the
warrant within the period aforesaid was not due to any default on the
part of the company. [Section 127]
10. Transfer of unpaid or unclaimed dividend. According to Section 124(1),
where, after the declaration of the dividend, it has not been paid or
claimed within 30 days from the date of the declaration to any
shareholder entitled to the payment of the dividend, the company shall,
within 7 days from the date of expiry of the said period of 30 days,
transfer the total amount of dividend which remains unpaid or
unclaimed to a special account called the Unpaid Dividend Account. For
this purpose, the company has to open Unpaid Dividend Account in
scheduled bank.
CHAPTER 13: DIVIDEND PROVISIONS 117
In case of delay, the company would have to pay interest @12% p.a.
11. Transfer of unpaid/unclaimed dividend to Investor Education and
Protection Fund. Any money transferred to the Unpaid Dividend
Account of a company which remains unpaid or unclaimed for a period
of 7 years from the date of such transfer shall be transferred by the
company along with the interest accrued, if any, thereon to the Investor
Education and Protection Fund.
Q. 2. “Dividend once declared cannot be revoked”. Explain.
Ans. Ordinarily, a dividend once declared cannot be revoked, except with the
consent of the shareholders; because a dividend which has been once declared in
a General Meeting creates a debt to the shareholders.
But where a dividend has been illegally declared, or where due to extra
ordinary events intervening after the declaration, the Board of Directors will be
justified in revoking the declaration of dividend, preferably with the approval of
shareholders.
The extra ordinary events may be:
• a fire destroying the company’s property; or
• the outbreak of a war; or
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• the imposition of a new heavy tax burden; or
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• other cause significantly diminishing the assets of the company.
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Q. 3. Write a short note on Interim Dividend.
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Ans. Interim Dividend. A dividend declared in between two Annual General
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Meetings of the company by the Board of Directors is known as ‘Interim
Dividend’. Section 2(35) provides that dividend includes any ‘Interim Dividend’.
In this way, interim dividend has been legally recognized as a part of final
dividend. The provisions regarding interim dividend contained in Section 123(3)
are as follows:
(i) The Board of Directors of a company may declare interim dividend
during any financial year out of the surplus in the Statement of Profit &
Loss and out of, profits of the financial year in which such interim
dividend is sought to be declared.
In case of loss during the current financial year up to the end of the
quarter immediately preceding the date of declaration of interim
dividend, such interim dividend shall not be declared at a rate higher
than the average dividends declared by the company during the
immediately preceding 3 financial years.
(ii) The amount of interim dividend shall also be deposited in a separate
bank account within 5 days from the date of declaration.
(iii) The amount of interim dividend so deposited shall be used only for
paying the interim dividend.
(iv) The provisions which apply to the payment of final dividend, also apply
to any interim dividend.
(v) The payment of interim dividend does not require the approval of the
General Meeting since members have no say in the matter of such
dividends.
Interim dividend, like final dividend, shall constitute a debt, once it is declared
and shall not be revocable.
Therefore, before declaring an interim dividend, the directors must satisfy
themselves that the financial position of the company allows the payment of such
dividend out of its distributable profits.
Interim dividend should be declared only when the company has made
substantial profits during a portion of the year and there exists good future
prospects in the remaining part of the year.
Q. 4. State the provisions of the Companies Act, 2013 regarding Investor
Ans. Investor Education and Protection Fund. Section 125 of the Companies
Act, 2013 provides for the establishment of Investor Education and Protection
Fund (called Fund in short).
The following amounts shall be credited to the Fund:
(i) the amount given by the Central Government by way of grants after due
appropriation made by Parliament by law in this behalf for being utilised
for the purposes of the Fund;
(ii) donations given to the Fund by the Central Government, State
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Governments, companies or any other institution for the purposes of the
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Fund;
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(iii) the amount in the Unpaid Dividend Account of companies transferred to
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the Fund under Section 124(5);
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(iv) the amount in the general revenue account of the Central Government
which had been transferred to that account under Section 205(A) of the
Companies Act, 1956, as it stood immediately before the commencement
of the Companies (Amendment) Act, 1999, and remaining unpaid or
unclaimed on the commencement of this Act, i.e., Companies Act, 2013.
(v) the amount lying in the Investor Education and Protection Fund under
Section 205C of the Companies Act, 1956.
(vi) the interest or other income received out of investments made from the
fund;
(vii) the amount received under Section 38(4);
(viii) the application money received by companies for allotment for any
securities and due for refund;
(ix) matured deposits with companies other than banking companies;
(x) matured debentures with companies;
(xi) interest accrued on the amounts referred to in clauses (h) to (j).
(xii) sale proceeds of fractional shares arising out of issuance of bonus shares,
merger and amalgamation for seven or more years;
(xiii) redemption amount of preference shares remaining unpaid or unclaimed
for seven or more years; and
(xiv) such other amount as may be prescribed.
Utilisation of Fund: The Fund shall be utilised, in accordance with such rules
as may be prescribed for:
(a) the refund in respect of unclaimed dividends, matured deposits, matured
debentures, the application money due for refund and interest thereon;
CHAPTER 13: DIVIDEND PROVISIONS 119
(b) promotion of investor’s education, awareness and protection;

(c) distribution of any disgorged amount among eligible and identifiable
applicants for shares or debentures, shareholders, debentureholders or
depositors who have suffered losses due to wrong actions by any person,
in accordance with the orders made by the Court which had ordered
disgorgement;
(d) reimbursement of legal expenses incurred in pursuing class action suits
under Section 37 and 245 by members, debentureholders or depositors
as may be sanctioned by the Tribunal; and
(e) any other purpose incidental thereto.
The person whose amounts referred to in clauses (a) to (d) have been
transferred to Investor Education and Protection Fund, after the expiry of the
period of seven years as per provisions of the Companies Act, 1956, shall be
entitled to get refund out of the Fund in respect of such claims in accordance with
the rules made under this Section.
PRACTICAL PROBLEMS
1. The shareholders at an Annual General Meeting of a public limited company
as
unanimously resolved for payment of dividend though the Board of Directors did
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not recommend payment of any dividend. State the legal position.
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Ans. The directors have the sole discretion to recommend or not to recommend
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the rate of dividend. The shareholders can approve the same rate as
recommended by the Board of Directors or lower it. The shareholders
themselves cannot recommend payment of any dividend.
2. The shareholders of a company unanimously passed a resolution at the Annual
General Meeting for payment of dividend at the rate higher than that
recommended by the Board of Directors. Discuss the validity of the resolution.
Ans. The rate of dividend is recommended and declared by the Board of
Directors in the Annual General Meeting. The shareholders cannot insist
on either declaration of dividend or on increasing the rate recommended
by the Directors. They may, however, lower the rate of dividend
recommended by the Directors. In the light of this the resolution passed at
the Annual General Meeting is not a valid resolution.
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14 BOOKS OF ACCOUNTS
Q. 1. Write a note on Books of Accounts to be maintained by a company.

Ans. Books of Accounts. As per Section 2(13) of the Companies Act, 2013,
“Books of accounts” include records maintained in respect of:
(a) all sums of money received and expended by the company and the
matters in respect of which the receipt and expenditure take place;
(b) all sales and purchases of goods and services by the company;
(c) the assets and liabilities of the company; and
(d) in the case of such class of companies engaged in production of such
goods or providing such services as may be specified under Section
148, such particulars relating to utilization of material or labour or
other items of cost as may be prescribed.
Place of keeping Books of Accounts. Section 128 requires that every company
shall keep at its registered office proper books of accounts. However, these books
may be kept at such other place in India as the Board of Directors thinks fit. In
that case, within 7 days of the decision, a notice in writing indicating full address
has to be given to the Registrar of Companies.
System of Accounting. The books of accounts should be kept on accrual basis
and according to the double entry system of accounting.
Inspection of Books of Accounts. Section 128 provides that any director can
inspect the Books of Accounts and other books and papers of the company
during business hours.
Period of preservation. The books of accounts together with the vouchers
relevant to entry in such books, relating to period of at least 8 financial years
immediately preceding the current year shall be preserved in good order.
In case an investigation has been ordered, the Central Government shall have
power to ask the company to keep the books of accounts for a period longer than
eight financial years.
Persons responsible for keeping the Books of Accounts: The persons
responsible for the maintenance of books of accounts etc. shall be
(i) Managing Director
(ii) Whole-Time Director in charge of finance
(iii) Chief Financial Officer;
(iv) Any other person of the company charged by the Board with duty of
complying with provisions of Section 128.
In case the aforementioned persons of the company fail to take reasonable steps
to secure compliance of this section they shall, in respect of each offence, be
punishable with imprisonment for a term which may extend to 1 year or with
fine which shall not be less than ` 5,000 but which may extend to ` 5 lakhs or
both.
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CHAPTER 14: BOOKS OF ACCOUNTS 121
Maintenance of Books of Accounts in Electronic Form. The Companies Act,

2013 permits the companies to maintain books of accounts and other books and
papers in electronic mode.
Q. 2. Discuss the provisions of the Companies Act, 2013 relating to financial
statements.
Ans. According to Section 2(40), of the Companies Act, 2013, the term
financial statement in relation to a company includes.
(i) a balance sheet as at the end of the financial year;
(ii) a profit and loss account, or in the case of a company carrying on any
activity not for profit, an income and expenditure account for the
financial year;
(iii) cash flow statement for the financial year;
(iv) a statement of changes in equity, if applicable; and
(v) any explanatory note annexed to, or forming part of, any document
referred to in sub-clause (i) to sub-clause (iv) above.
The financial statement, with respect to One Person Company, Small company
and Dormant company, may not include the cash flow statement.
The provisions relating to financial statement are as follows [Section 129]:
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1. The financial statement shall give a true and fair view of the state of affairs
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of the company or companies, comply with the accounting standards notified
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under Section 133 and shall be in the form or forms as may be provided for
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different class or classes of companies in Schedule III. This provision does not
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apply to any insurance or banking company or any company engaged in the
generation or supply of electricity, or to any other class of company for which a
form of financial statement has been specified in or under the Act governing such
class of company.
2. At every annual general meeting of a company, the Board of Directors of the
company shall lay before such meeting its financial statement for the financial year.
3. Where a company has one or more subsidiaries, it shall, in addition, prepare
a consolidated financial statement of the company and of all the subsidiaries in
the same form and manner as that of its own which shall also be laid before the
annual general meeting of the company along with the laying of its financial
statement. The company shall also attach along with its financial statement, a
separate statement containing the salient features of the financial statement of
its subsidiary or subsidiaries in such form as may be prescribed.
4. Where the financial statement of a company does not comply with the
accounting standards, the company shall disclose in its financial statements, the
deviation from the accounting standards, the reasons for such deviation and the
financial effects, if any, arising out of such deviation.
Penalty for Contravention of the Provisions of Section 129. In case of non-
compliance of any provision of Section 129 the managing director, the whole-
time director in charge of finance, the Chief Financial Officer or any other person
charged by the Board with the duty of complying with the requirements of this
section and in the absence of any of the officers mentioned above, all the directors
shall be punishable with imprisonment for a term which may extend to 1 year or
with fine which shall not be less than ` 50,000 but which may extend to ` 5 lakhs
or with both.
Authentication of Financial Statements. The financial statements, including

consolidated financial statement, if any, shall be approved by the Board of
Directors before they are signed on behalf of the Board by the chairperson of the
company where he is authorised by the Board or by two directors out of which
one shall be the managing director, if any, and the Chief Executive Officer, the
Chief Financial Officer and the company secretary of the company, wherever
they are appointed, or in the case of One Person Company, only by one director,
for submission to the auditor for his report thereon.
The Auditors’ report shall be attached to every financial statement.
Filing of Financial Statements etc. with the Registrar. As per Section 137 a
copy of the financial statements including consolidated financial statements, if
any, along with all the documents which are required to be attached to such
financial statements, duly adopted at the Annual General Meeting of the
company, shall be filed with the Registrar within 30 days of Annual General
Meeting.
Q. 3. Discuss the provisions relating to ‘National Financial Reporting
Authority’ as laid down in Companies Act, 2013.
Ans. Constitution of National Financial Reporting Authority:
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Section 132: The Central Government may, by notification, constitute a
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National Financial Reporting Authority to provide for matters relating to
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accounting and auditing standards under this Act.
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The National Financial Reporting Authority shall perform its functions
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through such divisions as may be prescribed.]
Functions of National Financial Reporting Authority:
(a) Make recommendations to the Central Government on the formulation
and laying down of accounting and auditing policies and standards for
adoption by companies or class of companies or their auditors, as the
case may be;
(b) Monitor and enforce the compliance with accounting standards and
auditing standards in such manner as may be prescribed;
(c) Oversee the quality of service of the professions associated with
ensuring compliance with such standards, and suggest measures
required for improvement in quality of service and such other related
matters as may be prescribed; and
(d) Perform such other functions relating to clauses (a), (b) and (c) as may be
prescribed.
The National Financial Reporting Authority shall consist of a chairperson,
who shall be a person of eminence and having expertise in accountancy,
auditing, finance or law to be appointed by the Central Government and such
other members not exceeding fifteen consisting of part-time and full-time
members as may be prescribed:
Each division of the National Financial Reporting Authority shall be presided
over by the Chairperson or a full-time Member authorised by the Chairperson.
There shall be an executive body of the National Financial Reporting
Authority consisting of the Chairperson and full-time Members of such
Authority for efficient discharge of its functions under sub-section (2) [other than
clause (a)] and sub-section (4).]

Provided that the terms and conditions and the manner of appointment of the
chairperson and members shall be such as may be prescribed:
Provided further that the chairperson and members shall make a declaration
to the Central Government in the prescribed form regarding no conflict of
interest or lack of independence in respect of his or their appointment:
Provided also that the chairperson and members, who are in full-time
employment with National Financial Reporting Authority shall not be
associated with any audit firm (including related consultancy firms) during the
course of their appointment and two years after ceasing to hold such
appointment.
Powers of the National Financial Reporting Authority:
National Financial Reporting Authority shall
(a) have the power to investigate, either suo moto or on a reference made to
it by the Central Government, for such class of bodies corporate or
persons, in such manner as may be prescribed into the matters of
professional or other misconduct committed by any member or firm of
chartered accountants, registered under the Chartered Accountants Act,
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1949:
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Provided that no other institute or body shall initiate or continue any
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proceedings in such matters of misconduct where the National Financial
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Reporting Authority has initiated an investigation under this section;
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(b) have the same powers as are vested in a civil court under the Code of
Civil Procedure, 1908, while trying a suit, in respect of the following
matters, namely—
(i) discovery and production of books of account and other
documents, at such place and at such time as may be specified by
the National Financial Reporting Authority;
(ii) summoning and enforcing the attendance of persons and
examining them on oath;
(iii) inspection of any books, registers and other documents of any
person referred to in clause (b) at any place;
(iv) issuing commissions for examination of witnesses or documents;
(c) where professional or other misconduct is proved, have the power to
make order for—
(A) imposing penalty of—
I. not less than one lakh rupees, but which may extend to five times of
the fees received, in case of individuals; and
II. not less than five lakh rupees, but which may extend to ten times of
the fees received, in case of firms;
(B) debarring the member or the firm from—
I. being appointed as an auditor or internal auditor or undertaking
any audit in respect of financial statements or internal audit of the
functions and activities of any company or body corporate; or
II. performing any valuation as provided under Section 247,
for a minimum period of six months or such higher period not
exceeding ten years as may be determined by the National Financial

Reporting Authority.
The National Financial Reporting Authority shall prepare in such form and at
such time for each financial year as may be prescribed its annual report giving a
full account of its activities during the financial year and forward a copy thereof
to the Central Government and the Central Government shall cause the annual
report and the audit report given by the Comptroller and Auditor-General of
India to be laid before each House of Parliament.
Q. 4. Discuss the provisions of the Companies Act, 2013 regarding the
Directors’ Report (Board’s Report).
Ans. Board’s Report or Directors’ Report:
Section 134(3) of the Act:
(1) The financial statement, including consolidated financial statement, if any,
shall be approved by the Board of Directors before they are signed on behalf of
the Board by the chairperson of the company where he is authorised by the
Board or by two directors out of which one shall be managing director, if any,
and the Chief Executive Officer, the Chief Financial Officer and the company
secretary of the company, wherever they are appointed, or in the case of One
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Person Company, only by one director, for submission to the auditor for his
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report thereon.
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(2) The auditors’ report shall be attached to every financial statement.
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(3) There shall be attached to statements laid before a company in general
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meeting, a report by its Board of Directors, which shall include—
(a) the web address, if any, where annual return referred to in sub-section (3)
of Section 92 has been placed
(b) number of meetings of the Board;
(c) Directors’ Responsibility Statement;
(ca) details in respect of frauds reported by auditors under sub-section (12) of
Section 143 other than those which are reportable to the Central
Government;
(d) a statement on declaration given by independent directors under sub-
section (6) of Section 149;
(e) in case of a company covered under sub-section (1) of Section 178,
company’s policy on directors’ appointment and remuneration
including criteria for determining qualifications, positive attributes,
independence of a director and other matters provided under sub-section
(3) of Section 178;
(f) explanations or comments by the Board on every qualification,
reservation or adverse remark or disclaimer made—
(i) by the auditor in his report; and
(ii) by the company secretary in practice in his secretarial audit report;
(g) particulars of loans, guarantees or investments under Section 186;
(h) particulars of contracts or arrangements with related parties referred to
in sub-section (1) of Section 188 in the prescribed form;
(i) the state of the company’s affairs;
(j) the amounts, if any, which it proposes to carry to any reserves;
(k) the amount, if any, which it recommends should be paid by way of

dividend;
(l) material changes and commitments, if any, affecting the financial
position of the company which have occurred between the end of the
financial year of the company to which the financial statements relate
and the date of the report;
(m) the conservation of energy, technology absorption, foreign exchange
earnings and outgo, in such manner as may be prescribed;
(n) a statement indicating development and implementation of a risk
management policy for the company including identification therein of
elements of risk, if any, which in the opinion of the Board may threaten
the existence of the company;
(o) the details about the policy developed and implemented by the
company on corporate social responsibility initiatives taken during the
year;
(p) in case of a listed company and every other public company having such
paid-up share capital as may be prescribed, a statement indicating the
manner in which formal annual evaluation of the performance of the
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Board, its Committees and of individual directors has been made;
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(q) such other matters as may be prescribed.
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Provided that where disclosures referred to in this sub-section have been
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included in the financial statements, such disclosures shall be referred to instead
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of being repeated in the Board’s report.
Provided further that where the policy referred to in clause (e) or clause (o) is
made available on company’s website, if any, it shall be sufficient compliance of
the requirements under such clauses if the salient features of the policy and any
change therein are specified in brief in the Board’s report and the web-address is
indicated therein at which the complete policy is available
(3A) The Central Government may prescribe an abridged Board’s report, for
the purpose of compliance with this section by One Person Company or small
company
(4) The report of the Board of Directors to be attached to the financial
statement under this section shall, in case of a One Person Company, mean a
report containing explanations or comments by the Board on every qualification,
reservation or adverse remark or disclaimer made by the auditor in his report.
(5) The Directors’ Responsibility Statement referred to in clause (c) of sub-
section (3) shall state that—
(a) in the preparation of the annual accounts, the applicable accounting
standards had been followed along with proper explanation relating to
material departures;
(b) the directors had selected such accounting policies and applied them
consistently and made judgments and estimates that are reasonable and
prudent so as to give a true and fair view of the state of affairs of the
company at the end of the financial year and of the profit and loss of the
company for that period;
(c) the directors had taken proper and sufficient care for the maintenance of
adequate accounting records in accordance with the provisions of this

Act for safeguarding the assets of the company and for preventing and
detecting fraud and other irregularities;
(d) the directors had prepared the annual accounts on a going concern
basis; and
(e) the directors, in the case of a listed company, had laid down internal
financial controls to be followed by the company and that such internal
financial controls are adequate and were operating effectively.
Q. 5. Write a note on Directors’ Responsibility statement.
Ans. Directors’ Responsibility Statement. The Board’s Report is required to
include a “Directors’ Responsibility Statement”, which as per Section 134(5),
shall state that:
(i) in the preparation of the annual accounts, the applicable accounting
standards had been followed along with proper explanation relating to
material departures;
(ii) the directors had selected such accounting policies and applied them
consistently and made judgements and estimates that are reasonable and
prudent so as to give a true and fair view of the state of affairs of the
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company at the end of the financial year and of the profit and loss of the
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company for that period;
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(iii) the directors had taken proper and sufficient care for the maintenance of
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adequate accounting records in accordance with the provisions of this
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Act for safeguarding the assets of the company and for preventing and
detecting fraud and other irregularities;
(iv) the directors had prepared the annual accounts on a going concern basis;
and
(v) in the case of a listed company, the directors had laid down internal
financial controls to be followed by the company and that such internal
financial controls are adequate and were operating effectively. The term
“internal financial controls” refers to the policies and procedures
adopted by the company for ensuring the orderly and efficient conduct
of its business, including adherence to company’s policies, the
safeguarding of its assets the prevention and detection of frauds and
errors, the accuracy and completeness of the accounting records and the
timely preparing of reliable financial information.
(vi) the directors had devised proper system to ensure compliance with the
provisions of all applicable laws and that such systems were adequate
and operating effectively.
Q. 6. State the provisions of the Companies Act, 2013 regarding ‘Annual
Return’.
Ans. Annual Return. As per Section 92 every company is required to prepare
an ‘Annual Return’ in the prescribed form containing the particulars as they
stood on the close of the financial year regarding the following:
(i) its registered office, principal business activities, particulars of its
holding, subsidiary and associate companies;
(ii) its shares, debentures and other securities and shareholding pattern;
(iii) its indebtedness;

(iv) its members and debenture-holders along with changes therein since the
close of the previous financial year;
(v) its promoters, directors, key managerial personnel along with changes
therein since the close of the previous financial year;
(vi) meetings of members or a class thereof, Board and its various committees
along with attendance details;
(vii) remuneration of directors and key managerial personnel;
(viii) penalties or punishments imposed on the company, its directors or
officers and details of compounding of offences and appeals made
against such penalty or punishment;
(ix) matters relating to certification of compliances, disclosures as may be
prescribed;
(x) details, as may be prescribed, in respect of shares held by or on behalf of
Foreign Institutional Investors indicating their names, addresses,
countries of incorporation, registration and percentage of shareholding
held by them; and
(xi) such other matters as may be prescribed.
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Signing of annual return. The annual return must be signed by a Director and
a
the Company Secretary, or where there is no Company Secretary, by a Company
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Secretary in Practice.
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Annual return of One Person Company and Small company must be signed by
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the Company Secretary, or where there is no Company Secretary, by the Director
of the company.
Certification of annual return. The annual return, filed by a listed company or,
by an unlisted company having such paid-up capital and turnover as may be
prescribed, must also be certified by a Company Secretary in practice in the
prescribed form, stating
(i) that the annual return discloses the facts correctly and adequately, and
(ii) that the company has complied with all the provisions of this Act.
If a Company Secretary in Practice certifies the annual return otherwise than in
conformity with the requirements of this Section or the rules made thereunder, he
shall be punishable with fine ranging from ` 50,000 to ` 5 lakhs.
Filing of annual return with ROC. Every company shall file with the Register
of Companies a copy of the annual return, within 60 days from the date on which
the Annual General Meeting is held or where no Annual General Meeting is held
in any year within 60 days from the date on which the Annual Meeting should
have been held together with statement specifying the reasons for not holding the
Annual General Meeting.
An extract of the annual return in such form as may be prescribed shall form
part of the Board’s report.
Q. 7. Write a note on Statutory Books and Registers.
Ans. Statutory books and registers. Every company has to maintain the
following books and registers at its registered office:
(i) Register of Investments made by the company but not held in its own
name (For example, where a company holds shares in a wholly owned
subsidiary company in the name of its nominees) under Section 187(3).
(ii) Register of Charges, under Section 85.

(iii) Register of Members, under Section 88.
(iv) Register of Debentureholders, under Section 88.
(v) Register of any other security-holders, under Section 88.
(vi) ‘Foreign Register’, of Members and Debentureholders and other
security-holders residing outside India under Section 88.
(vii) Minutes Book, under Section 118.
(viii) Books of Accounts, under Section 128.
(ix) Register of Contracts with companies and firms in which the directors of
the company are interested, under Section 189.
(x) Register of Directors and Key Managerial Personnel and their
shareholding under Section 170.
(xi) Register of loans and investments etc. made by the company in other
companies, under Section 186(9).
(xii) Books of Accounts to be kept by Company Liquidator in winding up by
Tribunal under Section 293.
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15 AUDIT AND AUDITORS
Q. 1. Discuss the provisions of the Companies Act, 2013 relating to

appointment of auditors.
Ans. Appointment of auditors (Section 139):
(i) Appointment of first auditor or auditors. As per Section 139(6) the
Board of Directors shall appoint the first auditor or auditors of a
company, other than a Government company, within 30 days from the
date of registration of the company. In case of failure of the Board to
appoint first auditor, the members of the company will then appoint the
first auditor or auditors within 90 days at an Extra Ordinary General
Meeting of the company. The first auditor shall hold office till the
conclusion of the first Annual General Meeting.
(ii) Subsequent appointment of Auditor or Auditors [Section 139(1)]: It is
necessary for every company, before making an appointment at an AGM
of an auditor, to obtain from the auditor to be appointed, his written
consent and a certificate to the following effect:
(a) The individual/firm is eligible for appointment and is not
disqualified for appointment under the Act, the Chartered
Accountants Act, 1949 and the rules or regulations made thereunder;
(b) The proposed appointment is as per the terms provided under the
Act;
(c) The proposed appointment is within the limits laid down by or
under the authority of the Act;
(d) The list of proceedings against the auditor or audit firm or any
partner of the audit firm pending with respect to professional
matters of conduct, as disclosed in the certificate, is true and correct.
Section 139(1) of the Companies Act, 2013 read with Rule 3 of Companies
(Audit and Auditors) Rules, 2014 provides that every company, other than a
Government Company, shall at the first Annual General Meeting, appoint an
individual or a firm as an auditor who shall hold office from the conclusion of
that meeting till the conclusion of its sixth Annual General Meeting (AGM) and
thereafter till the conclusion of every sixth meeting.
The company shall inform the auditor concerned of his or its appointment and
also file a notice of such appointment with the Registrar within 15 days of the
meeting in which the auditor is appointed.
Term of Auditor. Following companies shall not appoint or reappoint an
individual as auditor for more than 1 term of 5 Consecutive years; and an audit
firm as auditor for more than 2 terms of 5 Consecutive years:
(a) A Listed Company;
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(b) An unlisted Public Company having a paid-up share capital of `10 crores
or more;
(c) A Private Limited Company having a paid-up share capital of ` 50 crores
or more;
(d) All Companies having paid up share capital below threshold limit
mentioned in (b) and (c) above and having public borrowings from
Banks, Financial Institutions or public deposits or ` 50 crores or more.
Further, no audit firm shall be appointed as auditor of the company for a
period of 5 years, if same firm presently having common partners to the previous
audit firm, whose tenure has expired in a company immediately preceding the
financial year.
(iii) Appointment of Auditors in a Government Company [Section 139(5)]. The
appointment of auditor in a Government company or government controlled
(directly/indirectly) company shall be held in accordance with the following
provisions:
The First auditor shall be appointed by the Comptroller and Auditor General
(CAG) within 60 days from the date of incorporation. In case of failure to do so,
the Board shall appoint auditor within next 30 days and on failure to do so by the
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Board, it shall inform the members, who shall appoint the auditor within 60 days
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at an Extraordinary General Meeting. Such auditor shall hold office till the
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conclusion of first Annual General Meeting.
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In case of subsequent auditor for existing government companies, the
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Comptroller and Auditor General shall appoint the auditor within a period of
180 days from the commencement of the financial year and the auditor so
appointed shall hold office till the conclusion of the Annual General Meeting.
The CAG shall have a right to conduct a supplementary audit of financial
statements of the company and comment upon or supplement such audit report
within 60 days from the date of receipt of the audit report.
Reappointment of Auditors [Section 139(9)]: A retiring auditor shall be
reappointed unless
(i) He is not qualified for reappointment; or
(ii) He has given to the company, notice in writing of his unwillingness to be
reappointed; or
(iii) A special resolution has been passed at that meeting, appointing
somebody instead of him, or expressly providing that he shall not be
appointed.
Section 139(10) lays that where at any annual general meeting, no auditor is
appointed or reappointed, the existing auditor shall continue to be an auditor of
the company.
Appointment of Auditor by filling casual vacancy [Section 139(8)]. The
casual vacancy in the office of auditor may be filled by the Board. But where the
vacancy is caused by resignation of auditor, such vacancy shall only be filled by
the company in general meeting within 3 months of the recommendation of the
Board. The auditor so appointed shall hold the office until the conclusion of the
next AGM.
The casual vacancy in office of an auditor of a Government company or
CHAPTER 15: AUDIT AND AUDITORS 131
government controlled (directly/indirectly) company shall be filled by the

Comptroller and Auditor General within 30 days from the date of vacancy and if
he fails to do so, the Board shall fill up the same within next 30 days.
In case the company had appointed more than one auditors, the remaining
auditor or auditors can continue to act notwithstanding the vacancy caused by
the resignation of other auditor.
Appointment of Auditor other than Retiring Auditor. The procedure for
appointing an auditor, who is not the retiring auditor, is as follows—
(i) A special notice of minimum 14 clear days is required for appointing as
auditor, a person other than the retiring auditor or providing expressly
that a retiring auditor shall not be reappointed. No special notice is
required if the retiring auditor has completed the term of 5 or 10 years, as
the case may be.
(ii) On receipt of notice of such a resolution, the company should
immediately send a copy of the same to the retiring auditor.
(iii) Where the notice is received well in advance, the company can
conveniently send the notice of the resolution to the members including
the same in the AGM. Where it is received just 14 days before the
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meeting and it is not feasible for the company to send notice of the same
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to members, the company has to notify the same in English and
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Vernacular Language newspapers at least 7 days before the meeting.
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(iv) The retiring auditor can make a representation and request for the
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notification to members. The company should do so unless the
representation is received too late. If it is received too late then
representations shall be read out at the meeting. It may be noted that if a
copy of the representation is not sent as aforesaid, a copy there of shall be
filed with the Registrar of Companies
(v) If on the application of the company or any other person who claims to
be aggrieved, the National Company Law Tribunal, on being satisfied
that the rights are being abused to secure needless publicity for
defamatory matter, the company need not send a copy of or read out the
representations.
(vi) At AGM, the appointment will be considered and the necessary
resolution be passed.
(vii) After the appointment, the Company shall inform the auditor concerned
of his or its appointment and also file a notice of such appointment with the
Registrar within 15 days of the meeting in which the auditor is appointed.
Q. 2. Discuss the provisions of the Companies Act, 2013 regarding rotation of
auditors.
Ans. Rotation of auditors. As per Companies Act, 2013 there shall be
compulsory rotation of individual auditors every 5 years, and of audit firm every
10 years, for listed companies and such class or classes of companies as may be
prescribed.
As per Rule 5, Rotation of auditors applies to the following classes of
companies, excluding One Person Companies and Small Companies:
(a) An unlisted public company having paid-up share capital of ` 10 crores
or more;
(b) A private limited company having paid-up share capital of ` 50 crores or

more;
(c) All companies having paid up share capital below threshold limit
mentioned in (a) and (b) above, but having public borrowings from
financial institutions, banks or public deposits of ` 50 crores or more;
As per Section 139(2) of the Companies Act, 2013, listed companies and above
companies, shall not appoint or reappoint:
(i) An individual as auditor for more than 1 term of 5 Consecutive years;
and
(ii) An audit firm as auditor for more than 2 terms of 5 Consecutive years;
An individual auditor or an audit firm shall not be eligible for reappointment
as auditor in the same company for 5 years from the completion of the term as
above.
In other words, there shall be a cooling off period of 5 years for rotated
auditor/firm of 5 years from the completion of their term.
Further, no audit firm shall be appointed as auditor of the company, for a
period of 5 years, if the same firm presently having common partner(s) to the
previous audit firm, whose tenure has expired in a company immediately
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preceding the financial year.
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A transition period of 3 years from the commencement of the Act has been
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prescribed for existing companies to comply with the provisions of the rotation of
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auditors.
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The term “firm” includes a Limited Liability Partnership, incorporated under
the LLP Act, 2008.
As per Section 139(3) the members of a company may resolve that
(a) the audit firm appointed by the auditing partner and his team shall be
rotated at such intervals as may be resolved by the members, or
(b) The audit shall be conducted by more than one auditors.
The Central Government has the powers to prescribe the manner in which
the companies can rotate their auditors.
Q. 3. What are the provisions of the Companies Act, 2013 relating to
qualifications and disqualifications of auditors? Discuss.
Ans. Qualification of Auditors. Sections 141(1) and 141(2) state that only a
Chartered Accountant (individual) or a firm, where majority of partners
practicing in India are Chartered Accountants, can be appointed as auditor of
any company, whether public or private.
Where a firm including a Limited Liability Partnership (LLP) is appointed as
an auditor of a company, only the partners who are Chartered Accountants shall
be authorized to act and sign on behalf of the firm.
Disqualifications of auditors (Section 141(3). The following persons shall not
be eligible for appointment as an auditor of a company, namely—
(a) a body corporate other than a limited liability partnership registered
under the Limited Liability Partnership Act, 2008;
(b) an officer or employee of the company;
(c) a person who is a partner, or who is in the employment, of an officer or
employee of the company;
(d) a person who, or his relative or partner—

(i) is holding any security of or interest in the company or its subsidiary, or of
its holding or associate company or a subsidiary of such holding
company:
Provided that the relative may hold security or interest in the company of face
value not exceeding one thousand rupees or such sum as may be
prescribed;
(ii) is indebted to the company, or its subsidiary, or its holding or associate
company or a subsidiary of such holding company, in excess of such
amount as may be prescribed; or
(iii) has given a guarantee or provided any security in connection with the
indebtedness of any third person to the company, or its subsidiary, or its
holding or associate company or a subsidiary of such holding company,
for such amount as may be prescribed;
(e) a person or a firm who, whether directly or indirectly, has business
relationship with the company, or its subsidiary, or its holding or
associate company or subsidiary of such holding company or associate
company of such nature as may be prescribed;
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(f) a person whose relative is a director or is in the employment of the
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company as a director or key managerial personnel;
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(g) a person who is in full time employment elsewhere or a person or a partner
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of a firm holding appointment as its auditor, if such persons or partner
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is at the date of such appointment or reappointment holding
appointment as auditor of more than twenty companies.
(h) a person who has been convicted by a court of an offence involving fraud
and a period of ten years has not elapsed from the date of such
conviction;
(i) a person who, directly or indirectly, renders any service referred to in
Section 144 to the company or its holding company or its subsidiary
company.
Q. 4. Discuss the provisions of Companies Act, 2013 related to removal of
auditors.
Ans. Removal of Auditors:
1. By the shareholders. The auditor appointed under Section 139 may be
removed from his office before the expiry of the term only by—
(i) Obtaining the prior approval of the Central Government within 30 days
of resolution passed by the Board.
(ii) The company shall hold the general meeting within 60 days of receipt of
approval of the Central Government for passing the special resolution.
(iii) The auditor concerned shall be given a reasonable opportunity of being
heard.
2. By the National Company Law Tribunal. National Company Tribunal
(NCLT) can either—
(i) Suo moto; or
(ii) On an application from Central Government, or
(iii) On an application from person concerned,
can direct the company to change the auditor if it is satisfied that the auditor of
a company has, whether directly or indirectly, acted in a fraudulent manner or
abetted or collided in any fraud by, or in relation to the company or its directors
or officers.
In the case of application being made by the Central Government and the
NCLT being satisfied that change of auditor is required, it shall, within 15 days
of the receipt of such application, make an order that the auditor shall not
function as an auditor of the company and the Central Government may appoint
another auditor in his place.
Where the auditor whether individual or firm, against whom the final order as
aforementioned is passed by the NCLT under this section he shall not be eligible
to be appointed as an auditor of any company for a period of 5 years from the
date of passing of such order. Further the auditor shall also be liable for action
under Section 447 which provides for punishment for frauds.
In case a firm is appointed by the company, the liability shall be of the firm and
every partner or partners who acted in fraudulent manner or abetted or collided
in any fraud by, or in relation to, the company or its directors or officers shall be
liable and not be eligible to be appointed as auditor of any company for a period
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of 5 years.
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Q. 5. Discuss the rights, powers and duties of auditors under the Companies
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Act, 2013.
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Ans. Rights and powers of auditors:
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1. The auditor has a right of access at all times to the Books of accounts and
vouchers of the company, whether kept at the registered office of the company or
at any other place.
2. He is entitled to enquire from the officers of the company about such
information and explanation as may be necessary for the performance of his duty
as an auditor.
3. Right to attend General Meeting. As per Section 146 the auditor has the
right to receive all notices and other communications relating to any General
Meeting. He has the right to attend the general meeting, to be heard in such
meetings, on any part of business which concerns him as an auditor.
4. The auditor of a holding company has also the right of access to the records
of all its subsidiaries in so far it relates to consolidation of its financial statement
with that of its subsidiaries.
5. He has the right to receive Remuneration on the completion of his work
covered under Section 142 fixed in its General Meeting or in such manner as may
be determined.
The remuneration shall, in addition to the fee payable, include the expenses, if
any, incurred by the auditor in connection with the audit of the company.
Duties of a company auditor:
1. Duty to inquire about certain special matters. Section 143 provides that an
auditor has the duty to inquire, amongst other matters, into the following
matters:
(i) Whether loans and advances made by the company on the basis of
security have been properly secured and whether the terms on which
they have been made are prejudicial to the interests of the company or its
members;
(ii) Whether transactions of the company which are represented merely by
book entries are prejudicial to the interests of the company;
(iii) Where the company not being an investment company or a banking
company, whether so much of the assets of the company as consist of
shares, debentures and other securities have been sold at a price less
than at which they were purchased by the company;
(iv) Whether loans and advances made by the company have been shown as
deposits;
(v) Whether personal expenses have been charged to revenue account;
(vi) Where it is stated in the books and documents of the company that any
shares have been allotted for cash, whether cash has actually been
received in respect of such allotment and if no cash has actually been so
received, whether the position as stated in the account books and the
balance sheet is correct, regular and not misleading.
2. Duty to act as a whistle Blower: The auditors are required to immediately
report to the Central Government, if any offence involving fraud has been
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committed against the company by its officers or employees. The auditor shall
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report the fraud to the Central Government within 60 days of his knowledge
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and after following the prescribed procedure in this regard.
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3. Duty to make an Audit Report: Section 143(2) provides that an auditor is
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required to make an audit report to the members of the company on the accounts
examined by him and on every financial statement which is required by the Act
to be laid before the company in a General Meeting.
4. Duty to comply with Auditing Standards: It is the duty of an auditor to also
comply with the Auditing Standards.
Q. 6. Write a note on Auditor’s report.
Ans. Auditor’s report: The auditor is required to make a report and this report
is called Auditor’s report.
The auditor in his Audit Report shall state:
(i) Whether in his opinion and to the best of his information and knowledge
the said accounts give a true and fair view of the company’s state of
affairs.
(ii) Whether he has obtained all information and explanations, which to the
best of knowledge and belief were necessary for the purpose of his audit,
and if not the details thereof and the effect of such information on the
financial statements.
(iii) Whether proper Books of accounts, as required by law have been
maintained by the company.
(iv) Whether the Balance Sheet and Statement of Profit and Loss of the
company comply with the Accounting Standards prescribed by the
Central Government.
(v) Whether any Director is disqualified from being appointed as Director
under Section 164(2).
(vi) Any qualification, reservation or adverse remarks relating to the

maintenance of accounts and other matters.
(vii) Whether the company has adequate internal financial control system in
place and the effectiveness of such control.
Rule 11 of Companies (Audit and Auditors) Rules, 2014 provides that the
Auditor’s Report should also include views and comments of the auditor on
the following matters:
(i) Whether the company has disclosed in its financial statements the
impact, if any, of pending litigations on its financial position;
(ii) Whether the company has made provision for foreseeable losses, if any,
on long-term contracts;
(iii) Whether there has been delay in depositing money into the Investor
Education and Protection Fund by the company.
If the Audit Report so prepared contains any adverse remarks it is called a
Qualified Audit Report and if it does not contain negative observation or
comments, it is called a Clean or Unqualified report.
Signing of Audit Report: According to Section 145 only the Auditors of the
company or where a firm is appointed, only the Partners of the firm may sign
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the Auditor’s Report or sign or authenticate any document of the company,
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required by law, to be signed and authenticated by the auditor.
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Q. 7. Give the provisions of the Companies Act, 2013 with respect to services
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which cannot be rendered by an Auditor.
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Ans. Services which cannot be rendered by an Auditor [Section 144]: An
auditor of a company can render such services as are approved by the Board of
Directors or the Audit Committee of the company.
Section 144 provides that an auditor of a company shall not, directly or
indirectly, render the following services to the company or its holding
company or subsidiary company:
(i) Accounting and book-keeping services;
(ii) Internal audit;
(iii) Design and implementation of any financial information system;
(iv) Actuarial services;
(v) Investment advisory services;
(vi) Investment banking services;
(vii) Rendering of outsourced financial services;
(viii) Management services and;
(ix) Any other kind of services as may be prescribed.
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16 CONCEPT & MODES OF WINDING UP
Q. 1. What is meant by ‘Winding up’ of a Company? How is it different from

dissolution of a company? Explain.
Ans. Meaning of Winding up. Winding up or liquidation is the process by
which the management of a company’s affairs is taken out of its directors’ hands,
its assets are realised by a liquidator, and its debts are paid out of the proceeds of
realisation. If any balance remains in the hands of the liquidator, it is divided
among the members of the company in accordance with their rights under the
Articles.
Since a company is an artificial legal person, its life shall be brought to an end
by a process of law.
According to Professor Gower, “Winding up of a company is the process whereby
its life is ended and its property administered for the benefit of its creditors and members.
An administrator, called a liquidator, is appointed and he takes control of the company,
collects its assets, pays its debts and finally distributes any surplus among the members
in accordance with their rights.”
Meaning of Dissolution. Dissolution means putting an end to the existence of
the company. On dissolution, the company ceases to exist. Its name is struck off
by the Registrar from the Register of Companies. This fact is published in the
Official Gazette.
Distinction between Winding up and Dissolution:
— Winding up of a company precedes its dissolution.
— Winding up is the first step and Dissolution is the last or final step in the
entire process which drops the curtain over a company’s life, i.e., brings
its life to an end.
— Winding up involves realisation of the various assets of the company and
distribution of the proceedings amongst creditors and if there is a
surplus, then even also amongst members. Dissolution is the last step
which actually announces that all these formalities are over.
— After winding up, the legal entity of the company remains but after
dissolution, it comes to an end.
— Creditors of the company can prove their debts during the winding up
proceedings but not after dissolution.
Q. 2. What is winding up? State the circumstances under which a company
may be compulsorily wound up by the Tribunal.
Ans. Meaning of Winding up. Please refer to the answer given in Q. 1(above).
Compulsory winding up under order of the Tribunal. Grounds for winding up
by the Tribunal. As per Section 271(1), a company may, on a petition under
Section 272, be wound up by the Tribunal—
(a) if the company has, by special resolution, resolved that the company be
wound up by the Tribunal;
137
(b) if the company has acted against the interests of the sovereignty and
integrity of India, the security of the State, friendly relations with
foreign States, public order, decency or morality;
(c) if on an application made by the Registrar or any other person
authorized by the Central Government by notification under this Act,
the Tribunal is of the opinion that the affairs of the company have been
conducted in a fraudulent manner or the company was formed for
fraudulent and unlawful purpose or the persons concerned in the
formation or management of its affairs have been guilty of fraud,
misfeasance or misconduct in connection therewith and that it is proper
that the company be wound up;
(d) if the company has made a default in filing with the Registrar its
financial statements or annual returns for immediately preceding five
consecutive financial years; or
(e) if the Tribunal is of the opinion that it is just and equitable that the
company should be wound up.
The Tribunal has very wide discretionary powers under this clause. What is
just and equitable depends on the fact of each case. Some of the instances of just
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and equitable grounds are as follows:
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(i) Deadlock in management. Where there is a complete deadlock in the
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management of the company, the company may be ordered to be wound
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up on just and equitable grounds [Re. Akola Electric Supply Co. Ltd.].
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For instance, when directors are not on speaking terms or are bitterly
hostile to each other.
A company cannot be ordered to be wound up if there is difference in
view of the majority directors and minority directors.
(ii) Loss of substratum. If the company has failed to materialise its objects
for which it was formed or objects become impossible to be carried out,
its substratum is gone and the company may be ordered to be wound up
on just and equitable grounds.
(iii) Losses. Where the business of the company cannot be carried on except
at a loss, the Tribunal may order for the winding up of the company. But
a mere apprehension on the part of some shareholders that the
company’s business cannot be carried on except at a loss, would not be
any ground for an order by the Tribunal.
(iv) Oppression of minority. Where the majority of shareholders is
exercising oppression on the minority, the company may be wound up
by the Tribunal on just and equitable grounds.
(v) Illegality of objects and fraud. Where the company was formed to carry
out fraudulent or illegal business or when the business of the company
becomes illegal because of a change in law, the Tribunal may order the
company to be wound up on just and equitable grounds. For example, if
the object of the company is to conduct lottery business in Delhi it would
be an illegal business.
(vi) Bubble company. Where the company does not carry on any business
nor does it own any property, i.e., it is a mere ‘bubble’ company, it may
CHAPTER 16: CONCEPTS & MODES OF WINDING UP 139
be wound up by the ‘Tribunal’s order. Such companies are also called

fly-by-night companies.
Q. 3. What are the effects or consequences of a winding up order against a
Company?
Ans. Consequences of the Winding up Order:
(i) The Tribunal shall, within a period of 7 days from the date of passing of
the order, send the intimation thereof to the Company Liquidator and the
Registrar. [Section 277(1)].
(ii) The Registrar shall, then, notify in the Official Gazatte that such an order
has been made.
In case of a listed company, the Registrar shall intimate about such order
to the stock exchange or exchanges where the securities of the company
are listed. [Section 277(2)].
(iii) The winding up order shall be deemed to be the notice of discharge to
the officers, employees and workmen of the company except when
company’s business is continued for the purpose of beneficial realisation
of the assets of the company. [Section 277(3)].
(iv) The powers of the Board of Directors get terminated and now vest in the
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Company Liquidator.
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(v) Within 3 weeks from the date of passing of winding up order, the
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Company Liquidator shall make an application to the Tribunal for
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constitution of a winding up committee to assist the Company Liquidator
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and monitor the progress of liquidation proceedings. [Section 277(4)].
(vi) The Company Liquidator shall place before the Tribunal a report along
with minutes of the meetings of the committee every month. The report
shall be signed by the members present in the meeting for consideration
till the final report for dissolution of the company is submitted before the
Tribunal. [Section 277(6)].
(vii) The Company Liquidator shall prepare the draft final report and present
it before the winding up committee for consideration and approval.
[Section 277(7)].
Q. 4. Who are entitled to file a petition to the Tribunal for the winding up of
a company.
Ans. Petition for winding up. Petition means an application to the Tribunal for
winding up. As per Section 272, petition for winding up of the company by the
Tribunal can be presented by any of the following:
1. Petition by the company. A company can file petition with the Tribunal for
winding up when members of the company pass a special resolution and resolve
that the company be wound up by the Tribunal.
A petition to the Tribunal can also be made by the company when directors
find the company to be insolvent due to circumstances which ought to be
investigated by the Tribunal.
A petition presented by the company for winding up before the Tribunal shall
be admitted only if accompanied by a statement of affairs in such form and in
such manner as may be prescribed.
2. Petition by any creditor or creditors. Any creditor or creditors of the
company may make a petition to the Tribunal for winding up of the company on
the ground that the company is not able to pay its debts.
The term creditor includes:
(i) a secured creditor
(ii) a debentureholder and
(iii) trustee for the holders of debentures.
A contingent or prospective creditor can also file a petition for the winding up
of the company if prior consent of the Tribunal has been obtained. The Tribunal
would give the consent when
(i) it is of the opinion that there is a prima-facie case for winding up of the
company; and
(ii) a security for costs as the Tribunal thinks reasonable has been given by
the petitioner i.e., creditor.
3. Petition by contributory or contributories. A contributory is a person who is
liable to contribute towards the assets of a company in case of its winding up.
The holder of fully paid-up shares is also a contributory because he has the right
to share in the surplus, if any, in a winding up.
A contributory can make petition to the Tribunal on any ground for company’s
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winding up except No. 1 (inability to pay debts) and No. 2 (passing of a special
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resolution by the company).
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A contributory can present a winding up petition if:
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(i) he is an original allottee of the shares; or
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(ii) he has held his shares for any 6 out of the previous 18 months; or
(iii) the shares have devolved upon him through the death of a former
holder.
4. Petition by all or any of the prior parties (i.e., parties mentioned under
points 1, 2 and 3 together). A petition for the winding up may be presented by
the company, creditor/creditors or the contributory/contributories jointly.
5. Petition by the Registrar. The Registrar can present a petition for winding
up only with the previous sanction of the Central Government. The Central
Government shall not accord its sanction unless the company has been given a
reasonable opportunity of making representations. The Registrar can make
petition to the Tribunal only on the following grounds.
(i) When the company is unable to pay its debts.
(ii) When the company has acted against the national interest.
(iii) When the affairs of the company are being conducted in a fraudulent
manner.
(iv) When the company has made a default in filing financial statements or
annual returns for immediately preceding 5 consecutive years.
6. Petition by any person authorised by the Central Government. The Central
Government may also authorise a person to present a petition on its behalf. For
example, if from the reports of the inspectors appointed by the Central
Government to investigate the affairs of a company, it appears that the business
of the company has been conducted for fraudulent or unlawful purpose, it may
allow a person, usually the Registrar, to file a petition for the winding up of the
company.
CHAPTER 16: CONCEPTS & MODES OF WINDING UP 141
7. Petition by Central or State Government. If the company has acted against

the sovereignty, integrity or security of India or the State, or against public order,
decency or morality, the Central Government or the State Government can file a
petition for the company’s winding up.
PRACTICAL PROBLEM
1. There are only two members of a company, they are also the directors of the
company. Both of them are not on speaking terms. Can the company be wound up
on this ground? Give reasons.
2. There are only two members of a company and both of them are not on speaking
terms. Can the company be wound up on this ground?
Hint: Yes, the company can be wound up by the court on the grounds of
just and equitable.
For details: (Refer to See Q. 2(Point 7(i), Chapter 16). [Page 138
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MISCELLANEOUS PROVISIONS
17 E-FILING,
NATIONAL COMPANY LAW TRIBUNAL &
SPECIAL COURTS
Q. 1. ‘E-filing is a key feature of the MCA-21 project’. Comment.

Or, Write a note on online filing of documents.
Ans. E-filing is a key feature of the MCA-21 project of Ministry of Corporate
affairs. The major benefits of e-filing are the ease of interaction with all citizens
and almost a paperless environment. The notified new e-forms may be filed
through electronic media or through any other computer readable media under
the Companies Act,
Highlights of the System:
(i) The filing of forms (e-forms) with ROC can be done from one’s home or
office through the internet. There is no need to visit the ROC’s office for
filing various documents.
(ii) The payment of filing fees can also be made over the internet through
credit card/internet banking without queuing up at the banks.
(iii) The filing will be valid only when filing fee is paid.
(iv) Pre-scrutiny of filled-up forms is done in the portals before final
submission.
(v) Many of these e-forms require certification by CA/CWA/CS (in whole
time practice). Certification must be done by signing digitally.
(vi) DIN (Directors Identification Number) is compulsory for all directors.
(vii) Every signatory of e-form must obtain DSC (Digital Signature
Certificate).
The process of e-filing:
(i) Download a blank e-form from the MCA-21 portal.
(ii) Fill up the e-form offline using software that is free and widely
available.
(iii) Optionally carry out electronic pre-security in which the system will
verify whether the form has been completed in all respects.
(iv) The form has to be digitally signed by one or more signatories.
(v) Submit the e-form for processing to the MCA-21 portal.
(vi) Make necessary payments to complete the transaction either at an
authorised bank branch or through internet banking.
Advantages of e-filing:
1. Advantages to Corporates and Professionals.
(i) Documents can be filed without visiting the ROC office.
(ii) There is no need to stand in long queues for filing documents or paying
filing fees.
(iii) Filing will be open on a 24×7 basis. This affords one the flexibility to do
this work at one’s convenience.
(iv) Pre-scrutiny of forms filed will be done in the portal itself at the point of
142
CHAPTER 17: MISCELLANEOUS PROVISIONS 143
filing. So, once the form is filed, a need to interact with ROC personnel
to rectify deficiencies in the filings will be minimised to a great extent.
(v) Filing fees can be paid from the comforts of one’s office/home using
credit card/internet banking.
2. Advantages to the public. To the public, the portal offers inspection of
documents filed by companies on a 24×7 basis from the comforts of one’s home/
office.
3. Advantages to the Government.
(i) Better utilisation of existing staff and limited space resources.
(ii) The DIN (which is compulsory for all existing and prospective directors
to obtain) will help enforce accountability of directors.
(iii) Time and energy spent in accepting documents, filing them,
corresponding with companies will be drastically reduced and
channelised towards taking action against errant corporates.
4. Advantages to financial institutions. They have the facility of easy
registration and verification of charges from anywhere in the country.
Services available under the MCA-21 Project:
(i) Registration and incorporation of new companies.
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(ii) Filing of various returns and statutory documents under the Companies
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Act.
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(iii) Securing copies of public documents like Memorandum of Association,
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Articles of Association etc.
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(iv) Registration and verification of charges.
(v) Inspection of public documents.
(vi) Building up a centralized database repository of Corporates operating in
India.
(vii) Total transparency through e-governance.
(viii) Timely redressal of investor grievances.
Q. 2. Write a note on National Company Law Tribunal.
Ans. National Company Law Tribunal:
1. Composition of the Tribunal. The Tribunal shall consist of a President and
such number of judicial and technical members as the Central Government may
deem necessary, to be appointed by it. The President of the NCLT shall be a
person who is or has been a judge of a High Court for 5 years.
2. Benches of the Tribunal. The powers of the Tribunal will be exercised by
the Benches, constituted by the President of the Tribunal. Every order of the
Bench would be deemed to be the order or act of the Tribunal. There would be a
Principal Bench at New Delhi presided over by the President of the Tribunal.
Ordinarily, every Bench of the Tribunal would consist of two members, out of
whom one shall be a judicial Member and another shall be a Technical Member.
3. Order of the Tribunal. The Tribunal may, after giving the parties to any
proceedings before it, a reasonable opportunity of being heard, pass such orders
therein as it thinks fit. Efforts shall be made by the Tribunal for the disposal of
the proceedings within 3 months from the date of commencement of the
proceedings.
The Tribunal shall have power to review its own orders.
4. Appeal Against the Orders of the Tribunal. An aggrieved person may file
an appeal against any decision or order of the Tribunal before the “National
Company Law Appellate Tribunal”. The appeal should be filed within 45 days
from the date on which a copy of the Tribunal’s order is received by the
appellant.
5. Appeal to Supreme court. Any person who is aggrieved by any decision or
order of the National Company Law Appellate Tribunal may file an appeal to the
Supreme Court within a period of 60 days from the date of communication
thereof, on any question of law.
Procedure before Tribunal and Appellate Tribunal:
1. The Tribunal and the Appellate Tribunal shall have, for the purposes of
discharging its functions under this Act, the same powers as are vested in a civil
court under the Code of Civil Procedure, 1908 while trying a suit in respect of the
following matters:
(a) summoning and enforcing the attendance of any person and examining
him on oath;
(b) requiring the discovery and production of documents;
(c) receiving evidence on affidavits;
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(d) subject to the provisions of the Sections 123 and 124 of the Indian
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Evidence Act, 1872, requisitioning any public record or document or
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copy of such record or document from any office;
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(e) issuing commissions for the examination for default or deciding it ex-
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parte;
(f) dismissing a representation for default or deciding it ex-parte;
(g) setting aside any order or dismissal of any representation for default or
any order passed by it ex-parte; and
(h) any other matter as may be prescribed.
2. Any order made by the Tribunal or the Appellate Tribunal may be enforced
by that Tribunal in the same manner as if it were a decree made by a court in a
suit pending therein.
3. All proceedings before the Tribunal or the Appellate Tribunal shall be
deemed to be judicial proceedings within the meaning of Sections 193 and 228,
and for the purposes of Section 196 of the Indian Penal Code.
Civil court not to have jurisdiction. No civil court shall have jurisdiction to
entertain any suit or proceeding in respect of any matter which the Tribunal or the
Appellate Tribunal is empowered to determine by or under this Act or any other
law for the time being in force and no injunction shall be granted by any court or
other authority in respect of any action taken or to be taken in pursuance of any
power conferred by or under this Act or any other law for the time being in force.
Q. 3. Explain the relevant provisions of the Companies Act, 2013 regarding
Special courts.
Ans. Establishment of Special Courts [Section 435]. The Central Government
may, for the purpose of providing speedy trial of offences punishable under this
Act with imprisonment of two years or more by notification, establish or
designate as many Special Courts as may be necessary.
CHAPTER 17: MISCELLANEOUS PROVISIONS 145
A Special Court shall consist of—

(a) a single judge holding office as Session Judge or Additional Session
Judge, in case of offences punishable under this Act with imprisonment
of two years or more; and
(b) a Metropolitan Magistrate or a Judicial Magistrate of the First Class, in
the case of other offences,
who shall be appointed by the Central Government with the concurrence of
the Chief Justice of the High Court within whose jurisdiction the judge to be
appointed is working.
Offences triable by Special courts (Section 436):
1. All offences specified under Section 435(1) of the Companies Act, 2013 shall
be triable by the Special court for the area in which registered office of the
company in relation to which the offence is committed, or where there are more
than one Special Courts for that area, by such one of them as may be specified by
the High Court [Section 436(1)(a)].
2. When a person accused of, or suspected of commission of an offence under
this Act is forwarded, a Judicial Magistrate may authorise the detention of that
person for 15 days or an Executive Magistrate for 7 days. When the Magistrate
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considers that the detention of the person upon or before the expiry of the period
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of detention is unnecessary, he shall order such person to be forwarded to the
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Special Court having jurisdiction [Section 436(1)(b)].
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3. The Special Court may exercise the same power which a Magistrate having
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jurisdiction to try a case may exercise under Section 167 of the Code of Criminal
Procedure, 1973 in relation to an accused person who has been forwarded to him
[Section 436(1)(c)].
4. A Special Court may, upon perusal of the police report of the facts
constituting an offence under this Act or upon a complaint, take cognizance of
the offence without the accused being committed to it for trial [Section 436(1)(d)].
5. When trying an offence under this Act, a Special Court may also try an
offence under the Code of Criminal Procedure, 1973 in a same trial [Section
436(2)].
6. The Special Court may try in a summary way any offence under this Act
which is punishable with imprisonment for a term not exceeding 3 years. In case
of summary trial, a sentence of imprisonment for a term exceeding 1 year shall
not be passed. Where the Special Court thinks it undesirable to try the case
summarily, the Special Court shall record an order to that effect and thereafter
recall any witness or witnesses who have been examined and proceed to hear or
rehear in regular trial [Section 436(3)].
Appeal and Revision. High Court will have the power of appeal or revision, as
if Special Court were Court of Session, trying cases within the local limits of the
Jurisdiction of the High Court [Section 437].
Application of code to proceedings before special court. The provisions of the
Code of Criminal Procedure, 1973 shall apply to the proceedings before a Special
Court. The Special Court shall be deemed to be a Court of Session and the person
conducting a prosecution before a Special Court be deemed to be a Public
Prosecutor [Section 438].
Offences to be non-cognizable. All the offences pertaining to Companies Act,

2013 are non-cognizable, except offences referred to Serious Fraud Investigation
Office (SFIO) [Section 439].
However, until a Special Court is established, any offence which is triable by a
Special Court under this Act, shall be tried by a Sessions Court exercising
jurisdiction over that area.
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Das
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18 THE DEPOSITORIES ACT
Q. 1. What is Depository System? What are its constituents?

Ans. Depository System. The Depositories Act, 1996 introduced the concept of
Depository and Dematerialisation of shares and securities.
Shares were traditionally held in physical or paper form. This method had its
own inherent weaknesses like loss/theft of certificates, forged/fake certificates,
cumbersome and time-consuming process for transfer of shares etc. Therefore, to
eliminate these weaknesses, a new system called the Depository System was
introduced in 1996.
The Depository System is a system whereby the transfer of securities takes
place not through transfer deeds and physical delivery of scrips, but by means of
book entry in the ledger of the depository without the physical movement of
scrips. This system is also referred to as Scripless Trading System.
At present there are two depositories in India:
(i) National Securities Depository Limited (NSDL) and
(ii) Central Depository Services (India) Limited (CDSL).
Key Constituents of Depository:
(i) Issuer. Issuer means the company which is listed with the depository
and whose shares are available for trading under demat mode.
(ii) Issuer’s Registrar. The Registrar provides electronic connectivity
between the depository and the issuer company. The dematerialisation of
shares is done by Registrar on behalf of the company and it keeps the
electronic data of beneficiary owners.
(iii) Depository Participant (DP). Depository Participant acts as service
provider to the investors and acts as a custodian of the electronic
accounts of the clients. DP takes care of trading and settlement and acts
as an intermediary between investor and depository.
(iv) Clearing Members. Clearing members are the persons admitted as
members by a Clearing Corporation which has been admitted as a user
by the depository. These members are required to open a clearing
member account with the DP.
(v) Stock Brokers. These are the registered members of the stock exchange,
who have been authorised to trade on behalf of the investors.
(vi) Clearing Corporation. It coordinates between the stock exchanges for
executed trades, clearing members and custodians for bringing in the
necessary funds and securities for settlement.
(vii) Investors. Investors are the main beneficiaries for the services provided
by the depository. They are called as beneficial owners.
(viii) Bank. Account number of beneficiary’s bank is recorded for direct credit
of the monetary benefits into the account.
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All these are directly or indirectly linked to the main depository NSDL through
whom, all the operations are carried out electronically.
Q. 2. Distinguish between dematerialisation and rematerialisation of shares.
Ans. ‘Dematerialisation’ is the process by which physical certificates of
securities of an investor are converted into an equivalent number of securities in
electronic form and credited into the investor’s account with his/her DP. In order
to dematerialise physical securities:
(i) The Depository Participant provides Dematerialisation Request Form
(DRF) to the investor. The shareholder fills up separate DRFs for each
company and submits the same with the DP along with the share
certificates to be dematerialised.
(ii) The DP intimates depository of the request through the system. The DP
then surrenders the share certificates and DRF to the Company
concerned.
(iii) The company cancels the share certificates and substitutes in its Register
of Members the name of the depository as the registered owner of those
shares and informs the depository accordingly.
(iv) On receipt of such information from the company the depository enters
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the name of the investor concerned in its records as the Beneficial Owner
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and the number of shares held by him.
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(v) The Beneficial Owner continues to enjoy all the rights and benefits and is
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subject to all the liabilities in respect of his securities held by the
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depository.
(vi) Thereafter, the depository will intimate the DP electronically and thereby
confirm Dematerialisation to the DP. On receipt of the confirmation, the
DP credits the client’s demat account with the equivalent number of
shares which he will then hold in electronic form.
(vii) The DP then issues a statement of transaction to the client.
(viii) For the securities dematerialised, the depository is the registered owner
in the books of the Issuing Company and the investor as the Beneficial
Owner in the books of the depository. The process is known as
Dematerialisation.
(ix) The investors holding shares in electronic form can convert their holding
of shares in part or in full into physical form of share certificates through
the process of Rematerialisation (Remat). The investor will have to
request his DP for Remat, who in turn intimates the depository of the
request.
(x) The depository will forward the same to the company and the company
issues the share certificates to the investor. This process of getting back
the share certificates in paper form is called Rematerialisation.
Distinction between Dematerialisation and Rematerialisation of shares:
Point of Distinction Dematerialisation Rematerialisation
1. Meaning Conversion of physical Conversion of securities
certificates of securities in electronic form into
into electronic form. physical certificates.
CHAPTER 18: THE DEPOSITORIES ACT 149
2. Certificates in They are cancelled. They are printed again.

Physical form
3. Function of the Primary function. Secondary function.
Depository
4. Forms used DRF Form. RPF Form.
Q. 3. What is a Depository? What are the benefits of Depository System?
Or, What is a Depository? Describe the working of a Depository.
Ans. According to Section 2(1)(e) of the Depositories Act, 1996, a “Depository”
means a company formed and registered under the Companies Act and which
has been granted a certificate of registration under Section 12 (1A) of the
Securities and Exchange Board of India Act, 1992.
In other words, a depository is an organisation which holds securities (like
shares, debentures, bonds, government securities, mutual fund units etc.) of
investors in electronic form, at the request of the investors through a registered
depository participant. It also provides services related to transactions in securities.
The Depositories Act, 1996 provides a legal framework for setting up of
depositories so that transfer of securities could be effected through book entry
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only on the ledgers of the depository without the physical movement of scrips.
a
This system is also called Scripless Trading System.
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Benefits of using Depository System for holding securities in a Company:
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(i) Securities transfer transactions can be effected immediately. The need to
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follow-up with the stock broker or Registrar or company for transfer is
eliminated.
(ii) No stamp duty is payable on transfer of securities. As a result,
transaction costs are usually lower than those on physical delivery.
(iii) Need to post or carry securities to different locations for settlement
purposes or for registration is eliminated.
(iv) The concept of an “odd lot” in respect of dematerialised securities is
abolished.
(v) The bonus and right issues are credited by the company directly to the
shareholders’ Depository Accounts. For doing so, the concerned
company obtains the details of beneficiary holders and their holdings as
on the date of the Book Closure or Record Date from depositories.
(vi) The process of transmission is more convenient as the transmission
formalities for all securities held in a demat account can be completed by
submitting documents to the Depository Participant (DP) alone, whereas
in case of physical certificate of securities, the legal heirs or nominees
have to correspond with each company in which securities are held.
(vii) Statement of account of transactions and holdings is received from the
Depository Participant (DP) periodically which eliminates the need to
keep manual accounts of the securities held and of transactions therein.
(viii) The requirement of maintaining bank vaults for safe custody of
securities, certificates and frequent stock taking is eliminated.
(ix) Change of address recorded with the DP automatically gets registered
with all the companies in which investors hold securities electronically
eliminating the need to correspond with each of them separately.
Working of a Depository:
The Depositories Act envisages that each depository will have its agent to be
known as ‘Depository Participants’ (DPs), who shall act as a crucial link between
the investors and the depository. A depository interfaces with the investors
through a set of ‘Depository Participants’.
An investor who wants to avail himself of the services of a depository is
required to enter into an agreement with the depository through a ‘Depository
Participant’, and for this he has to open a ‘Demat’ account with a DP of the
depository. Once the investor opens an account with the depository participant
(DP), he can purchase/sell securities in electronic form through a broker after
providing the details of his account with the DP. The investor can sell and buy
securities only through a stock broker and not through DP.
Selling of securities held in electronic form is very similar to selling of a paper
form of securities. Instead of signing the transfer deed as seller and delivering it
with securities certificates to a broker, he has to instruct his DP to debit his
account with the number of securities sold by him and credit his broker’s clearing
account. The delivery instruction has to be given to his DP through ‘Delivery
Instruction Slip’ (DIS) daily signed by him, containing the details of securities
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sold by him.
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For purchasing demat securities from the secondary market, the client has to
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give to his DP a ‘Receipt Instruction Slip’, duly signed, containing the details of
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securities purchased. The investor should ensure that his broker transfers the
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securities from his clearing account to his depository account before the book
closure.
The depository participant will inform the depository electronically about the
sale or purchase transactions by the client and also make appropriate entries in
its records to effect the sale or purchase of securities.
Q. 4. Which securities are eligible to be held in dematerialised form in a
depository?
Ans. The following securities are eligible for being held in dematerialised
form in a depository:
(i) Shares, scrips, stocks, bonds, debentures, debenture stocks or other
marketable securities of like nature in or of any incorporated company
or other body corporate; or
(ii) Units of mutual funds, rights under collective investment schemes and
venture capital funds, commercial paper, certificates of deposit,
securities debt, money market instruments, etc.
Q.5. What are the services provided by a Depository?
Ans. Following services are provided by a depository to the beneficial owners
but of course, through a Depository Participant (DP):
(i) Opening a demat account;
(ii) Dematerialisation, i.e. converting physical securities into electronic form;
(iii) Rematerialisation, i.e. converting electronic securities balances held in
beneficial owner’s account into physical form;
(iv) Maintaining record of securities held by the beneficial owners in the
electronic form;
(v) Settlement of trade by delivery or receipt of securities from/in beneficial

owner’s accounts;
(vi) Settlement of off-market transactions between beneficial owners;
(vii) Receiving electronic credit in respect of securities allotted by issuers
under IPO or otherwise on behalf of demat account holders;
(viii) Receiving non-cash corporate benefits such as allotment of bonus and
rights shares or any other non-cash corporate benefits given by the
issuers in electronic form on behalf of its demat account holders;
(ix) Pledging of dematerialised securities and facilitating loans against
shares; and
(x) Freezing of the demat account for debits, credits, or both.
Q. 6. What are the rights and obligations of ‘depository’ and ‘participants’
under the Depositories Act.
Ans. A depository is an organisation where the securities of an investor are
held in electronic form at the request of the investor and which carries out the
securities transactions by book entry through the medium of a Depository
Participant.
A ‘participant’ means a person registered under Section 12(1A) of the
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Securities and Exchange Board of India Act, 1992 [Section 2(1)(g)]. The
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Depositories Act, 1996 states certain rights and obligations of ‘depository’ and
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‘participant’:
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(i) A depository shall enter into an agreement with one or more participants
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as its agent in such form as may be specified by the bye-laws.
(ii) Any person through a participant may enter into an agreement, in such
form as may be specified by the bye-laws, with any depository for
availing its services.
(iii) Subject to the provisions of this Act, the rights and obligations of the
depositories, participants and the issuer whose securities are dealt with
by a depository shall be specified by the regulations.
(iv) Notwithstanding anything contained in any other law, a depository shall
be deemed to be the registered owner for the purposes of effecting
transfer of ownership of securities on behalf of a beneficial owner.
(v) The depository as a registered owner shall not have any voting rights or
any other rights in respect of securities held by it.
(vi) The beneficial owner shall be entitled to all the rights and benefits and be
subjected to all the liabilities in respect of his securities held by a
depository.
(vii) A beneficial owner may, with the previous approval of the depository,
create a pledge or hypothecation in respect of a security owned by him
through a depository.
(viii) Where shares of a company, whose shares are maintained by a
depository are transferred, the transaction may be directly handled by
the participant and the depository. The depository shall furnish to the
issuer company information about the transfer of securities in the name
of beneficial owners at such intervals as may be specified by the bye-
laws.
(ix) If a beneficial owner seeks to opt out of a depository in respect of any

security, he shall inform the depository accordingly.
On receipt of such intimation, the depository will make necessary
changes in its records and shall inform the issuer company.
(x) If SEBI (Securities and Exchange Board of India) considers it necessary in
the public interest or in the interest of the investor it may call up on any
issuer company, depository, participant etc. to furnish in writing the
information relating to securities held in a depository. SEBI may also
authorise any person to make an enquiry or inspection in relation to the
affairs of the issuer company, depository or participant. SEBI may also
issue directions to any depository or participant or issuer company as it
may deem fit in the interest of investors or the securities market.
Q. 7. Define the terms:
(a) Depository
(b) Participants (Depository participant) and
(c) Beneficial owner of securities.
Ans. (a) Depository. According to Section 2(1)(e) of the Depositories Act, 1996,
a “Depository” means a company formed and registered under the Companies
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Act and which has been granted a certificate of registration under Section 12
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(1A) of the Securities and Exchange Board of India Act, 1992.
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In other words, a depository is an organisation which holds securities (like
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shares, debentures, bonds, government securities, mutual fund units etc.) of
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investors in electronic form, at the request of the investors through a registered
depository participant. It also provides services related to transactions in
securities.
In order to receive the certificate of registration, an application has to be made
to SEBI by the sponsors, along with the prescribed fee and draft bylaws of the
Depository that is proposed to be set up.
As per Regulation 6 of SEBI (Depositories and Participants) Regulations, 1996,
the sponsor, to be eligible to act as a Depository, must belong to one of the
institutions namely: (i) a public financial institution, (ii) a scheduled bank,
(iii) foreign bank operating in India, (iv) recognised stock exchange, (v) a body
corporate engaged in providing financial services where at least 75% of equity
capital is held by any of the aforestated institutions, jointly or severally etc.
To act as a Depository it should obtain a Certificate of Commencement of
Business from SEBI.
(b) Participant. A participant is a person through whom the investor of the
securities avails the services of the depository. As per Section 2(1)(g) of the Act, a
‘participant’ means a person registered under Section 12(1A) of the Securities
and Exchange Board of India Act, 1992. A participant is an agent of the
depository and acts as a link between the investor and the depository.
The applicant willing to get registered as participant with SEBI should belong
to one of the following categories:
(i) a public financial institution,
(ii) a bank,
(iii) a foreign bank operating in India,
(iv) a state financial corporation,

(v) an institution engaged in providing financial services, promoted by any
of the aforestated institutions, jointly or severally,
(vi) a custodian of securities registered with the SEBI,
(vii) a clearing house or stock exchange,
(viii) a stock broker, provided he has a minimum net worth of ` 50 lakhs and the
aggregate value of the portfolio of securities of the beneficial owners held in
dematerialised form in a depository through him shall not exceed 100 times
of its net worth, or a stock broker with a minimum worth of ` 10 crores,
(ix) a non-banking finance company having a minimum net worth of ` 50 lakhs,
(x) a registrar to an issue or share transfer agent who has a minimum net
worth of ` 10 crores and who has been granted a certificate of
registration by SEBI.
(c) Beneficial owner of securities. In the Depository system, the ownership of
securities is bifurcated between the registered owner and the beneficial owner.
For the securities dematerialised, the Depository is the registered owner in the
books of the issuing company and the investor is the beneficial owner in the
books of the Depository.
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Q. 8. Discuss the provision for punishment for offences, penalties and
a
appeals in the Depositories Act, 1996.
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Ans. Section 19 of the Depositories Act, deals with imposition of penalty for
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failure to furnish information, returns etc. or to enter into an agreement or to
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redress investors’ grievances or to reconcile records or to comply with the
directions of SEBI, or for delay in dematerialisation or issue of certificate of
securities etc. The guilty party shall be liable to a penalty of ` 1 lakh for each day
during which the failure continues or ` 1 crore, whichever is less, for every failure.
Further, whoever fails to comply with any provisions of this Act, the rules or
the regulations or bylaws made or directions issued by SEBI thereunder, for
which no separate penalty has been provided, shall be liable to a penalty which
may extend to ` 1 crore.
Power to adjudicate. For the purpose of adjudging, SEBI will appoint an officer
not below the rank of a Division Chief of SEBI to be an adjudicating officer for
holding an enquiry, for the purpose of imposing any penalty.
Punishment for offences. Irrespective of any penalty imposed by the
Adjudicating Officer under this Act, if any person contravenes or abets the
contravention of the provisions of this Act or any rules or regulations, he shall be
punishable with imprisonment for a term which may extend to 10 years, or with
fine, which may extend to ` 25 crores, or with both.
Further, if any person fails to pay the penalty imposed by the Adjudicating Officer
or fails to comply with any of his directions or orders, he shall be punishable with
imprisonment for a term which shall not be less than one month but which may
extend to 10 years, or with fine which may extend to ` 25 crores, or with both.
Where an offence under this Act has been committed by a company, the company
itself as well as every person who at the time the offence was committed was
incharge or, and was responsible to the company for the conduct of its business like
the Managing Director or Executive Director, shall be deemed to be guilty of offence
and shall be liable to be proceeded against and punished accordingly.
Q. 9. Explain the salient features of Depositories Act, 1996.

Ans. The Depositories Act, 1996 provides a legal basis for establishment of
depositories in securities with the objective of ensuring free transferability of
securities with speed, accuracy and security by (a) making the securities of public
limited companies freely transferable; (b) dematerialising the securities in the
depository mode; and (c) providing maintenance of ownership records in a book
entry form.
Salient features of the Depositories Act, 1996:
(i) The Depositories Act, 1996 provides a legal framework for setting up
depositories so that transfer of securities could be effected through book
entry only in the ledgers of the depository without the physical
movement of scrips.
(ii) Each depository is required to be registered under the Companies Act,
and also with SEBI (Securities and Exchange Board of India) and receive
a “Certificate of Commencement of Business” from it.
(iii) In the depository system, the investors have option to hold securities in
physical or dematerialised form.
(iv) Each depository will have its agents to be known as ‘Depository
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Participants’, who shall be a crucial link between the investors and the
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depository. A depository will interface with the investors through a set of
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‘Depository Participants’.
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(v) An investor who wants to avail himself of the services of a depository, is
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required to enter into an agreement with the depository through a
Depository Participant (DP), and for this he has to open a ‘Demat’
account with a DP of the depository.
(vi) The securities held in the depository are fungible. They cease to have any
distinctive folio or certificate number. All the shares of the same class are
identical and can be exchanged for one another.
(vii) In the depository system, the ownership of securities is bifurcated
between Registered Owner and Beneficial Owner. For the securities
dematerialised, the depository is the registered owner in the books of the
issuing company and the investor is the beneficial owner in the books of
the depository. The beneficial owner continues to enjoy all the rights and
benefits and he is subject to all the liabilities in respect of his securities
held by the Depository.
(viii) The Depositories Act has done away with the stamp duty on transfer of
securities within the depository mode. All transfers of securities outside
the depository mode shall attract the stamp duty.
(ix) A beneficial owner may with the previous approval of the Depository,
create a pledge in respect of securities owned by him through a
repository.
(x) In the depository system, the transaction of transfer of shares is directly
handled by the participant and the depository. Thus, the depository is
required to furnish to the issuer company information about the transfer
of shares in the name of beneficial owners at regular intervals.
____________
Voluntary Winding up and Insolvency come under
the perview of Indian Bankruptcy Code, 2016
Q. 1. What is Voluntary Winding up under Insolvency and Bankruptcy Code, 2016?
What is the procedure of voluntary winding up and what are its consequences?
Ans. Voluntary Winding up (Section 59 of the Insolvency and Bankruptcy Code,
2016). A Company that intends to liquidate itself voluntarily and has not committed
any default on any debt to any person may initiate voluntary liquidation
proceedings. A Company may choose to be wound up voluntarily under several
circumstances including winding up as a result of expiry of period of operation
fixed in its Articles of Association or occurrence of an event provided in its Articles
of Association for its dissolution.
Conditions for Voluntary Winding up:
(a) A declaration from majority of the directors of the company verified by an
affidavit stating that:
(i) They have made a full inquiry into the affairs of the company and they have
formed an opinion that either the company has no debt or that it will be
able to pay its debts in full from the proceeds of assets to be sold in the
voluntary liquidation; and
(ii) The company is not being liquidated to defraud any person.
(b) The declaration under sub-clause (a) shall be accompanied with the following
documents:
(i) Audited financial statements and record of business operations of the
company for the previous two years or for the period since its
incorporation, whichever is later;
(ii) A report of the valuation of the assets of the company, if any, prepared by a
Registered Valuer.
Procedure of Voluntary Winding up under IBC 2016:
Step-I: Submission of declaration(s) to ROC, stating that the company will be able
to pay its dues and is not being liquidated to defraud any person.
Step-II: Passing of special resolution for approving the proposal of voluntary
liquidation and appointment of liquidator (Approval), within 4 (four) weeks of the
aforesaid declaration(s). If a corporate person owes debts, approval of two-third
majority Creditors would also be required.
Step-III: Public announcement inviting claims of all stakeholders, within 5 (five)
days of such Approval, in newspaper as well as on website of the corporate person.
Step-IV: Intimation to the ROC and the Board (Insolvency and Bankruptcy Board
of India) about the Approval, within 7 (seven) days of such Approval.
Step-V: Preparation of preliminary report by the liquidator about the capital structure,
estimates of assets and liabilities, proposed plan of action etc., and submission of the
same to the corporate person within 45 (forty-five) days of such Approval.
Step-VI: Verification of claims, within 30 (thirty) days form the last date for
receipt of claims and preparation of list of stakeholders, within 45 (forty-five) days
from the last date for receipt of claims.
Step-VII: Opening of a bank account in the name of the corporate person followed
by the words ‘in voluntary liquidation’, in a scheduled bank, for the receipt of all
moneys due to the corporate person.
Step-VIII: Sale of assets, recovery of monies due to corporate person, realization
of uncalled capital or unpaid capital contribution.
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Step-IX: Distribution of the proceeds from realization within 6 (six) months from
the receipt of the amount to the stakeholders.
Step-X: Submission of final report by the liquidator to the corporate person, ROC
and the Board and application to the National Company Law Tribunal (NCLT) for
the dissolution.
Step-XI: Submission of NCLT order regarding the dissolution, to the concerned
ROC within 14 (fourteen) days of the receipt of order.
Consequences of Winding up process:
1. Cease to carry on Business. The corporate shall cease to carry on its business on
the appointment of a liquidator except for its beneficial winding up.
2. Limit on Directors’ Liability. The most important difference between voluntary
winding up and other means of closure is that the liabilities of a Director shall not
continue post the dissolution of the company, except in the cases of fraud,
misrepresentation, etc.
3. Board Continues to Exist. The powers of the Board of Directors shall not cease
and shall continue without hampering the independence of the liquidator.
4. Winding up a private process. It is a private process run by the third party (the
liquidator), wherein the liquidation has to make sure that each stakeholder is paid
and is satisfied with their settlement.
5. Verification of Claims and list of Stakeholders. The liquidator shall collect,
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collate and verify all claims and prepare a list of stakeholders.
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6. Realisation and Distribution of Assets. The liquidator shall create a liquidation
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estate; then realise and distribute all the assets of the corporate.
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7. Application of Dissolution to National Company Law Tribunal. The
liquidator shall make an application for the dissolution to the adjudicating
authority, i.e., National Company Law Tribunal (NCLT), along with the final report.
8. Date of Dissolution. The corporate shall be wound up from the date of the
dissolution order passed by the National Company Law Tribunal (NCLT).
Q. 2. What is meant by ‘Declaration of solvency’ in relation to voluntary
winding up of a company?
Ans. The Declaration of Solvency is an important document in the members’
voluntary winding up. The declaration must be made in the meeting of the Board of
Directors.
(a) It should be made by a majority of the directors and certified by an affidavit.
Majority of Directors shall state in Declaration of Solvency that they have made a
full inquiry into the affairs of the company and they have formed an opinion that
either the company has no debt or that it will be able to pay its debts in full from the
proceeds of assets to be sold in the voluntary liquidation; and the company is not
being liquidated to defraud any person.
(b) Affidavit to be accompanied by:
(i) Audited Financial Statements of past two years
(ii) Records of Business Operations of past two years
(iii) Report by the Registered Valuer about the valuation of the assets of the
Company, if any.
(iv) Latest Financial Position of the Company, if any.
(c) Within four weeks of making a Declaration of Solvency, there shall be a special
resolution of the members of the company in a general meeting requiring the
company to be liquidated voluntarily and appointing an insolvency professional to
act as the liquidator.
____________
2012 (MAY) (Modified)
Name of the Paper : Corporate Laws
Name of the Course : B.Com. (Hons.)
Time: 3 hours Maximum marks: 75
1. Attempt All Question exercising the available internal choice.
2. Answer may be written in Hindi or English but the same medium should be
followed throughout the paper.
Q. 1. (a) Under what circumstances Court may disregard the separate legal
entity of a company? 5
(b) Explain the law relating to alteration of objects clause of Memorandum
of Association. 5
(c) The Memorandum and Articles of Association of a company were
delivered to the Registrar of Companies on 6th January for registration. On 8th
January, the Registrar issued the Certificate of Incorporation, but by mistake
dated it as 6th January. Incidentally, on that very day (6th January), the
company made allotment of its shares. The said allotment was challenged on
the ground that it was made before the actual issue of the Certificate of
Incorporation. How would you decide and why? 5
Ans. (a) Circumstances when the Court may disregard the separate legal entity
of a company. See Q. 4, Chapter 1. [Page 4
(b) Alteration of the Objects Clause: See Q. 5, Chapter 4. [Page 28
(c) The given case relates to the decision in “Jubilee Cotton Mills Ltd., vs.
Lewis”. For details: See Q. 5, Chapter 3. [Page 20
Or
(a) “A prospectus must state truth and nothing but truth”. Do you agree?
Explain. 5
(b) Define a ‘Government Company’. What are its special features? 5
(c) The Articles of a company empowered the directors to determine who
should have the authority to draw bills on behalf of the company. ‘C’, the
manager of a branch of the company, drew bills on behalf of the company in
favour of ‘K’, who took them in good faith believing that ‘C’ was authorized to
draw them. In fact, ‘C’ had no such authority. Is the company liable on the said
bill? Will it make any difference if ‘C’ had been a director of the company? 5
Ans. (a) Prospectus. See Q. 1, Chapter 6. [Page 41
“A Prospectus must state truth and nothing but truth.” See Q. 3, Chapter 6.
[Page 45
(b) Government Company. See Q. 8(b), Chapter 2. [Page 14
(c) Problem. See (Practical Problem 3), Chapter 5. [Page 39
Q. 2. (a) Distinguish between a public company and a private company. 5
(b) What are the remedies open to an allottee of shares against the company
in case of misleading prospectus? 5
(c) Explain ‘ordinary business’ and ‘special business’ which may be
transacted in a general meeting of a company. State also the meetings in which
such business may be transacted. 5
157
Ans. (a) Public company and Private company. See Q. 2, Chapter 2. [Page 9
(b) Mis-statements in a Prospectus. See Q. 3, Chapter 6. [Page 45
(c) Ordinary business and Special Business. See Q. 4, Chapter 12. [Page 102
Or
(a) “The validity of a Certificate of Incorporation cannot be disputed on any
ground whatsoever,” Comment. 5
(b) What is meant by the term “allotment”? What are the various rules
relating to allotment? What is the effect of irregular allotment of shares? 5
(c) Who can call extraordinary general meeting of a company? 5
Ans. (a) The validity of a Certificate of Incorporation cannot be disputed on
any ground whatsoever: See Q. 5, Chapter 3. [Page 20
(b) Allotment of shares. See Q. 1, Chapter 7. [Page 52
(c) EGM. See Q. 3, Chapter 12. [Page 101
Q. 3. (a) “A company cannot buy-back its own shares”, Explain. Are there
any exceptions to this Rule? 5
(b) Explain the circumstances in which a director is deemed to have vacated
his office. 5
(c) Write a note on ‘Minutes’ of general meeting of a company. 5
s
Ans. (a) Buy-back of shares. See Q. 5, Chapter 8. [Page 60
a
(b) Circumstances in which a director is deemed to have vacated his office.
v D
See Q. 6, Chapter 11. [Page 84
hi
(c) Minutes of a general meeting. See Q. 5(Point 5), Chapter 12. [Page 104
S
Or
(a) Distinguish between ‘forfeiture’ and ‘surrender’ of shares. 5
(b) Write a note on ‘quorum’ of general meeting of a company. Can one
member constitute quorum? 5
(c) Distinguish between a Managing Director and Whole-Time Director. Is
there any significant difference in their powers? 5
Ans. (a) Distinction between ‘forfeiture’ and ‘surrender’ of shares. See Q. 2,
Chapter 9. [Page 68
(b) Quorum. See Q. 5 (Point 3), Chapter 12. [Page 103
(c) Distinction between Managing Director and Whole-time Director.
Q. 4. (a) Write a note on Demat System. How is the transfer of shares
effected in the dematerialized form? 5
(b) What are the rights and obligations of ‘depository’ and ‘participants’
under the Depositories Act, 1996? 5
(c) Explain the provisions of the Companies Act, 2013, relating to the
establishment of Investor Education and Protection Fund. 5
Ans. (a) Demat (Dematerialisation). See Q. 2, Chapter 18. [Page 148
(b) Rights and obligations of ‘Depository’ and ‘Participant’. See Q. 6, Chapter
18. [Page 151
(c) See Q. 4, Chapter 13. [Page 118
Or
(a) Discuss the provisions of Companies Act, 2013 related to removal of
auditors. 5
CORPORATE LAWS—2012 (MAY) 159
(b) Write a short note on ‘declaration of solvency’ with reference to voluntary
winding up of a company. 5
(c) What are the advantages of the Depository System over the old system of
physical movement and trading of share certificates. 5
Ans. (a) Removal of Auditors. See Q. 4, Chapter 15. [Page 133
(b) Declaration of solvency. See Q. 2. [Page 156
(c) Benefits of Depository System over the old system. See Q. 3, Chapter 18.
[Page 149
Q. 5. Write short notes on:
(a) Secretarial Audit
(b) Online registration of a new company
(c) Postal ballot 15
Ans. (a) Secretarial Audit. See Q. 18, Chapter 11. [Page 96
(b) Online registration of a new company. See Q. 6, Chapter 3. [Page 21
(c) Postal ballot. See Q. 10, Chapter 12. [Page 111
Or
Write short notes on:
(a) Formation of a producer company
s
(b) Explain the relevant provisions of the Companies Act, 2013 regarding
a
Special courts.
v D
(c) Write a note on Auditor’s report. 15
hi
Ans. (a) Formation of a producer company. See Q. 7, Chapter 2. [Page 12
S
(b) Special Courts. See Q. 3, Chapter 17. [Page 144
(c) Audit Report. See Q. 6, Chapter 15. [Page 135
_____________
B.Com. (Hons.)
CORPORATE LAWS—2012 (Modified)
(NC—Admissions of 2004 and onwards)
Attempt All Questions.
All questions carry equal marks.
Q. 1. (a) When does court lift up the corporate veil? 5
(b) Explain Turquand’s rule. State its exceptions. 5
(c) Explain the process of conversion of a public company into a private
company. 5
Ans. (a) Lifting of corporate veil. See Q. 4, Chapter 1. [Page 4
(b) Turquand’s rule is also called doctrine of ‘Indoor Management’. This rule
was laid in the famous case of Royal British Bank vs. Turquand, hence it is also
famous as Turquand’s rule.
For further explanation and exceptions. See Q. 4(b), Chapter 5. [Page 37
(c) Conversion of a public company into a private company. See Q. 4,
Chapter 2. [Page 9
Or
(a) “The term body corporate connotes a wider meaning than the term
company.” Comment. 5
(b) What is an illegal association? State its consequences. 5
(c) A company issued a prospectus advertising that the company has
‘potential turnover’ of a million bags of cement in a year. It was discovered
later that while the company has the installed capacity of one million bags, it
never produced more than 6 lakh bags of cement in a year. Buyers of shares
seek remedy against misleading statement. Will they succeed? Does a
shareholder who buys the shares from open market have right to remedies for
misstatement in prospectus? 5
Ans. (a) Body Corporate and Company. See Q. 2, Chapter 1. [Page 3
(b) Illegal association. See Q. 8(e), Chapter 2. [Page 16
Q. 2. (a) Write a note on government company. 5
(b) Differentiate between Pre-incorporation and Provisional Contracts. 5
(c) Articles of a limited company state that A shall be the law officer of the
company and shall not be removed except on the ground of proved
misconduct. The company removed him even though he was not guilty of
misconduct. State whether company’s action is valid or not. 5
Ans. (a) Government company. See Q. 8(b), Chapter 2. [Page 14
(b) Pre-incorporation and Provisional Contracts. See Q. 3, Chapter 3.
[Page 19
(c) Problem. See Q. 3(Point 4), Chapter 5. [Page 37
Or
(a) State the provisions of the Companies Act, 2013 regarding ‘Annual
Return’. 5
160
CORPORATE LAWS—2012 161
(b) A company was formed on the basis of the certificate of incorporation
obtained by threatening the Registrar of Companies. Is the company legally
formed? 5
(c) The articles of a company provided that the shares of a member who
becomes bankrupt would be offered for sale to other shareholders at a certain
price. Is the provision binding on the shareholders? 5
Ans. (a) Annual Return: See Q. 6, Chapter 14. [Page 126
(b) Problem. See (Practical Problem 2(i)), Chapter 3. [Page 23
(c) Problem. Yes, the provisions of the Articles are binding on the shareholders.
According to Section 10 of the Companies Act, 2013, “Subject to the provisions of
the Act, the Memorandum and Articles shall when registered, bind the company and the
members thereof to the same extent as if they respectively had been signed by the
company and each member and contained covenants on its and his part to observe all the
provisions of Memorandum and of the Articles”.
Thus, it follows from the provisions that the Memorandum and Articles bind
the company to its members, and the members to the company.
The facts of the given case relate to the facts of Borland Trustees vs. Steel Bros
& Co. Ltd. The Articles of the company provided that the shares of any member
s
who became bankrupt should be sold to certain other persons at a certain price to
Da
be fixed by the directors. Borland became bankrupt. His trustees in bankruptcy
v
claimed that Borland was not bound by the Articles and he could dispose of the
hi
shares at their true value. It was held that he was bound by the provisions of the
S
Articles.
Q. 3. (a) Distinguish between: Ordinary resolution and special resolution. 5
(b) Write a note on Investor Education and Protection Fund. 5
(c) Discuss the statutory provisions regarding reduction of share capital. 5
Ans. (a) Ordinary resolution and special resolution. See Q. 9, Chapter 12.
[Page 110
(b) Investor Education and Protection Fund. See Q. 4, Chapter 13. [Page 118
(c) Reduction of share capital. See Q. 7, Chapter 4. [Page 29
Or
(a) Write a note on shelf prospectus. 5
(b) State provisions and prohibitions on buy-back of shares. 5
(c) Ultra-vires acts cannot be ratified even by unanimous consent.
Comment. 5
Ans. (a) Shelf prospectus. See Q. 2(d), Chapter 6. [Page 44
(b) Buy-back of shares. See Q. 5, Chapter 8. [Page 60
(c) Yes, it is true that ultra-vires acts cannot be ratified even by unanimous
consent.
For details: See Q. 9, Chapter 4. [Page 30
Q. 4. (a) Explain the provisions relating to holding of annual general meeting.
5
th
(b) JKL Limited issued a notice for holding its AGM on 7 November, 2014.
The notice was posted on 16th October, 2014.
(i) Is it a proper notice with respect to period of notice?
(ii) If not, can shortfall be condoned? How and when? 5
(c) Write a note on the concept of ‘Book Building’. 5
Ans. (a) Holding of Annual General Meeting. See. Q. 2, Chapter 12. [Page 99
(b) Problem. See (Practical Problem 1), Chapter 12. [Page 112
(c) Book Building. See Q. 4(a), Chapter 6. [Page 48
Or
(a) Who may call Extraordinary General Meeting? 5
(b) State provisions regarding quorum at General Meeting explaining how
the following be counted for the purpose of quorum:
(i) A representative of the Governor of Gujarat.
(ii) B representing Y Ltd. and Z Ltd.
(iii) C, D, E as proxies of shareholders. 5
(c) What is a depository? Describe the working of a depository. 5
Ans. (a) Extraordinary General Meeting. See Q. 3, Chapter 12. [Page 101
(b) Provisions Regarding Quorum: See Q. 5(Point 3: Quorum), Chapter 12.
[Page 103
Problem. See (Practical Problem 6), Chapter 12. [Page 113
(c) Depository. See Q. 3, Chapter 18. [Page 149
Q. 5. (a) State the circumstances under which a company may be
s
compulsorily wound up by the court. 5
Da
th
(b) Mr. Anil is a director in 8 public limited companies as on 30 July, 2014.
iv
He has the following offers with him. Advise:
h
(i) Directorship of ABC Ltd.
S
(ii) Directorship of KLM (Pvt.) Ltd.
(iii) Directorship of XYZ Ltd. 5
(c) Write a note on Interim Dividend. Can it be revoked? 5
Ans. (a) Circumstances under which a company may be compulsorily wound
up by the court. See Q. 2, Chapter 16. [Page 137
(c) Interim dividend. See Q. 3, Chapter 13. [Page 117
Or
(a) Define Independent Director. 5
(b) Who can be a director? Can the director of a company be appointed by
the Board of Directors? Explain. 5
(c) Write a note on Qualifications and Disqualifications of auditors. 5
Ans. (a) Independent Director. See Q. 2(v), Chapter 11. [Page 77
(b) Qualifications of a Director. See Q. 3, Chapter 11. [Page 79
Appointment of a director by the Board of Directors: See Q. 5(Point 3),
Chapter 11. [Page 82
(c) Qualifications and Disqualification of Auditors. See Q. 3, Chapter 15.
[Page 132
_____________
SECTION A
Q. 1. (a) What is a corporate veil? When is it pierced by the order of the
court? 5
(b) “A Company can be registered with limited liability without the word
‘limited’ with its name.” State with reasons whether the statement is correct
or incorrect. 5
(c) Discuss in brief the restrictions on alteration of Articles of Association.
5
Ans. (a) Corporate Veil. See Q. 4, Chapter 1. [Page 4
(b) A Company can be registered with limited liability without the word
‘limited’. See Q. 8(c), Chapter 2. [Page 15
s
(c) Restrictions on alteration of Articles of Association. See Q. 2, Chapter 5.
Da
[Page 35
iv
Or
h
(a) “A Company is a legal person distinct from its members taken
S
individually or collectively.” Comment on the statement. 5
(b) “Discuss the legal effects of pre-incorporation contracts.” Comment. 5
(c) Under the articles, the Directors of a Company had power to borrow up
to `1,00,000 without the consent of the general meeting. The Directors
themselves lent ` 3,50,000 to the Company without such consent and took
debentures. Is the Company liable for ` 3,50,000? 5
Ans. (a) ‘A Company is a legal person distinct from its members taken
individually or collectively’. See Q. 1(Point 3), Chapter 1. [Page 1
(b) Legal effects of pre-incorporation contracts. See Q. 2(a), Chapter 3.
[Page 18
Q. 2. (a) Write a note on the concept of book building. 5
(b) Explain the law relating to alteration of objects clause of Memorandum
of Association. 5
(c) State the conditions to be satisfied before a Company may forfeit the
shares. What is the effect of such forfeiture? 5
Ans. (a) Book Building. See Q. 4(a), Chapter 6. [Page 48
(b) Alteration of objects clause of Memorandum of Association. See Q. 5,
Chapter 4. [Page 28
(c) Forfeiture of shares: Conditions to be satisfied and Effect of forfeiture.
Or
163
(a) “A company cannot buy back its own shares.” Explain. Are there any
exceptions to it? 5
(b) State and explain the various modes of appointment of directors in a
company. 5
(c) Explain the statutory provisions regarding holding of an Annual General
Meeting. 5
Ans. (a) Buy-back of shares by a company. See Q. 5, Chapter 8. [Page 60
(b) Various modes of Appointment of Directors. See Q. 5, Chapter 11.
[Page 82
(c) Provisions regarding holding of an Annual General Meeting. See Q. 2,
SECTION B
Q. 3. (a) Explain the provisions of the Companies Act, 2013 with regard to
proxy at General Meeting. 5
(b) Discuss the rights, powers and duties of auditors under the Companies
Act, 2013. 5
(c) Distinguish between Managing Director and Whole-time Director. 5
Ans. (a) Provisions with regard to proxy at a General meeting. See Q. 6,
s
Da
(b) Rights, powers and duties of Auditors. See Q. 5, Chapter 15. [Page 134
iv
(c) Managing Director and Whole-time Director. See Q. 16, Chapter 11.
h
[Page 95
S
Or
(a) Write a note on Books of Account to be maintained by a company. 5
(b) State the legal position of the Director of a company. 5
(c) Answer the following problem:
Reliance industries Ltd. has its registered office at Mumbai. The company
desires to hold an extraordinary general meeting in New Delhi. Examine the
validity of the company’s desire with reference to the relevant provisions of
the Companies Act, 2013. 5
Ans. (a) Books of Accounts. See Q. 1, Chapter 14. [Page 120
(b) Legal position of the Director of a company. See Q. 1, Chapter 11.
[Page 74
Q. 4. (a) “A company cannot pay dividend out of its capital.” Comment. 5
(b) Under what circumstance will the National Company Law Tribunal
order a compulsory winding up of a company? 5
(c) What are the benefits of using depository system for holding securities
in a company? 5
Ans. (a) Payment of dividend out of Capital. See Q. 1, Chapter 13.
[Page 115
(b) Compulsory winding of a company by the order of National Company Law
Tribunal. See Q. 2, Chapter 16. [Page 137
(c) Benefits of using Depository System for holding securities in a company.
Or
(a) State the provisions of the Companies Act, 2013 regarding ‘Annual
Return’. 5
(b) What are the provisions of the Companies Act, 2013 relating to
qualifications and disqualifications of auditors? Discuss. 5
(c) Write a note on “Investor Education and Protection Fund”. 5
Ans. (a) Annual Return. See Q. 6, Chapter 14. [Page 126
(b) Qualifications and Disqualifications of Auditors. See Q. 3, Chapter 15.
[Page 132
(c) Investor Education and Protection Fund. See Q. 4, Chapter 13. [Page 118
SECTION C
Q. 5. (a) State the provisions of the Companies Act relating to passing of
resolution by postal ballot. 5
(b) Write a note on National Company Law Tribunal. 5
(c) Write a note on Alternate Director. 5
Ans. (a) Passing a resolution by postal ballot. See Q. 10, Chapter 12.
[Page 111
(b) National Company Law Tribunal. See Q. 2, Chapter 17. [Page 143
(c) Alternate Director. See Q. 2(ii), Chapter 11. [Page 75
s
Or
Da
Write notes on:
iv
(a) One Person Company 5
h
(b) Small Company 5
S
(c) Corporate Identity Number (CIN). 5
Ans. (a) One Person Company. See Q. 5, Chapter 2. [Page 10
(b) Small Company. See Q. 6, Chapter 2. [Page 11
(c) Corporate Identity Number (CIN). See Q. 7, Chapter 3. [Page 22
_____________
B.Com. (Hons.)
(Admissions of 2004 and onwards)
All Questions carry equal marks.
Q. 1. (a) A Company has a nationality and residence but no citizenship.
Discuss. 5
(b) The Shares of a Pvt. Ltd. Company are not transferable at all. Critically
examine the statement. 5
(c) Under what circumstances the Court may disregard the separate legal
entity of a Company. 5
Ans. (a) Company is a legal person but not a citizen. See Q. 3, Chapter 1.
[Page 4
(b) The shares of a Private Limited Company are not freely transferable.
However, absolute restriction on the right of transfer is ultra-vires the Act. The
right of transfer is restricted by the Articles in case of a Private Company.
Usually, the Articles empower the Directors to reject transfer of shares on the
following grounds:
s
(i) Where partly paid-up shares are to be transferred to a minor.
Da
(ii) Where the transferee is a person of unsound mind.
iv
(iii) Where a call is unpaid against the shares to be transferred.
h
(iv) Where the company has a lien on the shares because the transferor is
S
indebted to it.
(v) Where the instrument of transfer contains some apparent irregularity,
e.g., not signed or stamped properly.
(c) Lifting of Corporate Veil. See Q. 4, Chapter 1. [Page 4
Or
(a) State the procedure for converting a private company into a public
company. 5
(b) A shareholder cannot have any insurable interest in the property of the
Company. Discuss. 5
(c) Explain Government Company. What are the special provisions
applicable to a Government Company? 5
Ans. (a) Conversion of a private company into a Public company. See Q. 3,
Chapter 2. [Page 10
(b) A Company is a legal person having a juristic personality, entirely distinct
from and independent of the individual persons who are for the time being its
members. It has the right to own and transfer the title to property in any way it
likes. No member can either individually or jointly claim any ownership rights in
the assets of the Company during its existence or in its winding up.
Thus, a shareholder cannot have any insurable interest in the property of a
Company.
• The facts of Macura vs. Northern Assurance Company Ltd. (1925) case
provide an illustration to this point.
For details: See Q. 1(Point 8), Chapter 1. [Page 3
166
CORPORATE LAWS—2013 (SOL) 167
(c) Government Company. See Q. 8(b), Chapter 2. [Page 14
Q. 2. (a) The validity of incorporation certificate cannot be disputed on any
grounds whatsoever. Discuss. 5
(b) Discuss the provisions of the Companies Act, 2013 regarding the
Directors’ Report (Board’s Report). 5
(c) Articles do not bind a company to outsiders. Discuss. 5
Ans. (a) “The validity of a certificate of incorporation cannot be disputed on
any grounds whatsoever”. See Q. 5, Chapter 3. [Page 20
(b) Directors’ Report. See Q. 4, Chapter 14. [Page 124
(c) Articles and Outsiders. See Q. 3(Point 4), Chapter 5. [Page 39
Or
(a) Explain the limits on alteration of Articles of a Company. 5
(b) A company may be registered with limited liability yet without the word
limited with its name. Discuss. 5
(c) Distinguish between preliminary contracts and provisional contracts. 5
Ans. (a) Alterations of Articles of Association. See Q. 2, Chapter 5. [Page 35
(b) Company with limited liability yet without the word Limited [Association
not for Profit]. See Q. 8(c), Chapter 2. [Page 15
(c) Preliminary contracts and Provisional contracts. See Q. 3, Chapter 3.
as
[Page 20
D
Q. 3. (a) Explain the rule in Turquand’s case. What are its exceptions? 5
iv
(b) Explain the fixed price method and the book building method of Public
Sh
issues. 5
(c) A purchased 1000 shares of a Company from B on the basis of a pros-
pectus issued by the Company. The prospectus issued by the Company contained
false statements. What are the remedies available to A against the Company? 5
Ans. (a) Doctrine of Indoor management (Turquand’s Case). See Q. 4(b),
Chapter 5. [Page 37
(b) Fixed Price Method and Book building. See Q. 4(a), Chapter 6. [Page 48
Or
(a) Distinguish between:
(i) Shelf prospectus (ii) Deemed prospectus 5
(b) Explain the statutory provisions which must be complied with before a
valid allotment of shares. 5
(c) A company cannot buy back its own shares. Discuss. What are the
exceptions? 5
Ans. (a) (i) Shelf prospectus. See Q. 2(d), Chapter 6. [Page 44
(ii) Deemed prospectus. See Q. 2(b), Chapter 6. [Page 43
(b) Valid allotment of shares. See Q. 1, Chapter 7. [Page 52
(c) Buy-back of shares. See Q. 5, Chapter 8. [Page 60
Q. 4. (a) A Company purchases a property without its power given in the
Memorandum of Association. What is the legal position of the Company with
regard to the property? 5
(b) Explain the following terms:
(i) a depository (ii) depository participant
(iii) beneficial owner of shares 5
(c) Explain the provisions of the Companies Act 2013 with regard to
(i) opening and closing of the subscription list
(ii) minimum subscription 5
Ans. (a) If a company’s money has been spent in purchasing some property
without any power given in the Memorandum of Association, the company’s
right over that property must be held secure. For that asset, though wrongly
acquired, represents the corporate capital. Property acquired legally and by
formal transfer or conveyance transferred to a company is within law duly vested
in such company; even though the company was not empowered to acquire such
property. Thus, the position of the company in case of ultra-vires acquired
property is similar to the case of a minor.
(b)(i) Depository. See Q. 7(a), Chapter 18. [Page 152
(ii) Depository Participant. See Q. 7(b), Chapter 18. [Page 152
(iii) Beneficial owner of shares. See Q. 7(c), Chapter 18. [Page 153
(c) (i) Opening and Closing of the subscription list. See Q. 2, Chapter 7. [Page 55
(ii) Minimum subscription. See Q. 1[Point II(iii)], Chapter 7. [Page 53
Or
(a) Discuss the provisions of the Companies Act, 2013 regarding rotation of
auditors. 5
as
(b) Who can call extraordinary General Meeting of a company. 5
D
(c) Distinguish between ordinary business and special business. 5
iv
Ans. (a) Rotation of auditors. See Q. 2, Chapter 15. [Page 131
Sh
(b) Extraordinary General Meeting. See Q. 3, Chapter 12. [Page 101
(c) Ordinary business and Special Business. See Q. 4, Chapter 12. [Page 102
Q. 5. (a) Explain the legal provisions of holding the Annual General Meeting
of a Company. 5
(b) Write short notes on:
(i) additional directors (ii) casual directors
(c) Write a short note on interim dividend. 5
Ans. (a) Annual General Meeting. See Q. 2, Chapter 12. [Page 99
(b) Additional Director. See Q. 2(vi), Chapter 11. [Page 79
Casual Director. See Q. 2(i), Chapter 11. [Page 75
(c) Interim dividend. See Q. 3, Chapter 13. [Page 117
Or
(a) Explain the legal provisions regarding declaration of dividend by the
Companies. 5
(b) Explain winding up of a company by the Court on the grounds “Just and
equitable”. 5
(c) Explain: 5
(i) Passing a resolution by postal ballot
(ii) DIN
Ans. (a) Declaration of Dividend. See Q. 1, Chapter 13. [Page 115
(b) Winding up by the Court on ‘Just and equitable’ grounds. See Q. 2[Point (e)],
(c) (i) Passing a Resolution by postal ballot. See Q. 10, Chapter 12. [Page 111
(ii) DIN. See Q. 4(c), Chapter 11. [Page 80
_____________
SECTION A
Q. 1. (a) “A company is, in law, a different person altogether from the
members”. Comment. 5
(b) Define a private company. State the provisions for conversion of a
public company into a private company. 5
(c) Discuss the provisions relating to alteration of name clause of a
company. 5
Ans. (a) “A company is, in law, a different person altogether from the
members”. See Q 1(Point 3), Chapter 1. [Page 1
(b) Private company. See Q. 1, Chapter 2. [Page 8
Conversion of a public company into a private company. See Q. 4, Chapter 2.
s
[Page 10
Da
(c) Alteration of Name Clause of a company. See Q. 3, Chapter 4. [Page 26
iv
Or
h
(a) Explain the remedies available to an allottee who has subscribed for
S
shares on the faith of a false and misleading prospectus. 5
(b) Explain the doctrine of indoor management. State the cases in which the
doctrine of indoor management is not applicable. 5
(c) Out of the seven signatures to the memorandum of association of a
company, four are forged. The memorandum is duly presented, registered and
a certificate of incorporation is issued. Can the existence of the company be
subsequently questioned on the ground that the registration is void? 5
Ans. (a) Remedies available to an allottee who has subscribed for shares on
the faith of a false and misleading prospectus. See Q. 3, Chapter 6. [Page 45
(b) Doctrine of indoor management. See Q. 4(b), Chapter 5. [Page 37
(c) Problem. See Practical Problem 2(iii), Chapter 3. [Page 23
Q. 2. (a) Discuss the provisions of the Companies Act, 2013 relating to
financial statements. 5
(b) Distinguish between managing director and manager. 5
(c) What are the consequences of default in holding an Annual General
Meeting? 5
Ans. (a) Financial statements. See Q. 2, Chapter 14. [Page 121
(b) Managing Director and Manager. See Q. 15, Chapter 11. [Page 95
(c) Default in holding an annual general meeting. See Q. 2(Point 10), Chapter
12. [Page 101
Or
(a) State the legal position of the directors of the company. 5
169
(b) When and by whom an extraordinary general meeting of a company may
be convened? 5
(c) Discuss the statutory provisions regarding reduction of share capital. 5
Ans. (a) Legal position of directors. See Q. 1, Chapter 11. [Page 74
(b) Extraordinary general meeting. See Q. 3, Chapter 12. [Page 101
(c) Provisions regarding reduction of share capital. See Q. 7, Chapter 4.
[Page 29
SECTION B
Q. 3. (a) Distinguish between ordinary resolution and special resolution. 5
(b) Explain the provisions of the Companies Act relating to the appointment
of directors by the Board of Directors. 5
(c) What are the conditions to be fulfilled by a company proposing to issue
sweat equity shares under the Companies Act. 5
Ans. (a) Ordinary Resolution and Special Resolution. See Q. 9, Chapter 12.
[Page 110
(b) Appointment of Directors by the Board of Directors. See Q. 5(Point 3),
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(c) Sweat Equity Shares. See Q. 6, Chapter 8. [Page 62
a
Or
v D
(a) “Buy-back of shares is an instrument to improve shareholders’ net
hi
worth”. Explain.
S
State the conditions of governing the buy-back of shares by a company. 5
(b) Directors are vested with wide powers under Section 179 of the
Companies Act, 2013. Explain. 5
(c) Ganeev, the Chairman, at an annual general meeting, declares a motion
carried after a show of hands, the voting being “20 in favour, 50 against it and
60 in favour voted by proxy.” The company’s articles provide that a proxy is
entitled to vote on a poll. Is he right in his judgment? 5
Ans. (a) Buy-back of shares is an instrument to improve shareholders’ net
worth. When shares are bought back, they are physically destroyed. This
reduces the number of shares and the Earning per share of the company
increases. From the viewpoint of the investors, the buy-back price offered by the
company is usually higher than the market price. The investors get benefitted
and buy-back is advocated as an instrument to improve shareholders’ net worth.
Conditions governing the buy-back of shares. See Q. 5, Chapter 8. [Page 60
(b) Powers of Board of Directors. See Q. 8, Chapter 11. [Page 86
Q. 4 (a) “Dividend once declared cannot be revoked.” Comment. 5
(b) What is meant by declaration of solvency in relation to voluntary
winding up of a company? Explain. 5
(c) Examine the salient features of the Depositories Act, 1996. 5
Ans. (a) Dividend once declared cannot be revoked. See Q. 2, Chapter 13.
[Page 117
(b) Declaration of solvency in relation to voluntary winding up. See Q. 2.
[Page 156
(c) Salient features of the Depositories Act, 1996. See Q. 9, Chapter 18.
[Page 154
Or
(a) Explain the relevant provisions of the Companies Act, 2013 regarding
Special courts. 5
(b) Write a note on Auditor’s report. 5
(c) What is a depository ? Describe the working of a depository. 5
Ans. (a) Special courts. See Q. 3, Chapter 17. [Page 144
(b) Auditor’s Report. See Q. 6, Chapter 15. [Page 135
(c) Depository and working of Depository. See Q. 3, Chapter 18. [Page 149
Section C
Q. 5. (a) Discuss the procedure of online registration of company. 5
(b) Write a note on Secretarial Audit. 5
(c) State the provisions of the Companies Act, with regard to Director
Identification Number (DIN). 5
Ans. (a) Online Registration of Company. See Q. 6, Chapter 3. [Page 21
(b) Secretarial Audit. See Q. 18, Chapter 11. [Page 96
(c) Director Identification Number. See Q. 4(c), Chapter 11. [Page 80
as
Or
D
(a) Discuss the provisions of the Companies Act, 2013 relating to
iv
appointment of auditors. 5
h
(b) State the objects for which a producer company may be formed. 5
S
(c) What is E-Filing? List at least five advantages of e-filing under MCA-21.
5
Ans. (a) Appointment of Auditors. See Q. 1, Chapter 15. [Page 129
(b) Objects for formation of a Producer Company. See Q. 7, Chapter 2.
[Page 12
(c) E-Filing. See Q. 1, Chapter 17. [Page 142
_____________
B.Com. (Hons.)
Q. 1. (a) Define a Private Limited Company. Why are the shares of a Pvt.
Ltd. Company not freely transferable? 5
(b) X an employee of a Company had not been paid salary for several
months. He sued the Managing Director of the Company for recovery of the
salary due to him. Would he succeed? 5
(c) Write a short note on Section 8 of Companies Act. 5
Ans. (a) Private Limited Company. See Q. 1, Chapter 2. [Page 8
The shares of a Private Limited Company are not freely transferable because a
Private Company through its Articles ‘restricts the right to transfer its shares’
[Section 2(68)(i)].
(b) Problem. See Practical Problem 4, Chapter 1. [Page 7
(c) Formation of a company with charitable object [Section 8]. See Q. 8(c),
Chapter 2. [Page 15
Or
(a) What is an illegal association? What are the consequences of an illegal
association? 5
(b) Incorporation certificate is a conclusive evidence that the company has
been duly incorporated. Discuss. 5
(c) Distinguish between Preliminary Contracts and Provisional Contracts. 5
Ans. (a) Illegal association and its consequences. See Q. 8(e), Chapter 2.
[Page 16
(b) Incorporation certificate, a conclusive evidence. See Q. 5, Chapter 3.
[Page 20
(c) Preliminary Contracts and Provisional Contracts. See Q. 3, Chapter 3.
[Page 19
Q. 2. (a) Is it essential for every company to prepare its own Articles? What
are the options available? 5
(b) The “Doctrine of Indoor Management” is an exception to the rule of
“Constructive Notice”. Discuss. 5
(c) Explain the procedure of alteration of the objects clause in the
Memorandum of a Company. 5
Ans. (a) Essentiality of Articles of Association. See Q. 1, Chapter 5. [Page 33
(b) Indoor Management Doctrine of constructive notice. See Q. 4, Chapter 5.
[Page 37
(c) Alteration of Objects Clause. See Q. 5, Chapter 4. [Page 28
Or
(a) The Directors of a company had power to borrow up to ` 25,000 without
the consent of members in the general meeting. The directors themselves lent
172
` 50,000 to the company and took debentures of the said amount without
passing a resolution in the meeting. Is the company liable to pay? 5
(b) Discuss the provisions relating to ‘National Financial Reporting
Authority’ as laid down in Companies Act, 2013. 5
(c) What are the benefits of depository system to:
(i) the investors
(ii) the company 5
Ans. (a) The doctrine of indoor management cannot be in favour of a person
who has actual or constructive knowledge that the rules of internal management
have not been complied with. In other words the directors themselves lent
` 50,000 to the company and took debentures of the said amount without
passing a resolution in the general meeting. Therefore, the company in this case
is liable to pay only ` 25,000. The facts of the given problem relate to the case
Howard vs. Patent Ivory Manufacturing company.
For details: See Q. 4(b)(Point (i)), Chapter 5. [Page 38
(b) National Financial Reporting Authority. See Q. 3, Chapter 14. [Page 122
(c) Benefits of Depository system. See Q. 3, Chapter 18. [Page 149
Q. 3. (a) A company cannot buy its own shares. Discuss. Are there any
s
exceptions to the rule. 5
a
(b) What do you understand by the term “prospectus by implication”?
v D
Explain the rules, related to deemed prospectus. 5
hi
(c) Explain various statutory provisions provided by Companies Act, 2013
S
related to allotment of shares. 5
Ans. (a) Buy-back of own shares and its exceptions. See Q. 5, Chapter 8.
[Page 60
(b) Prospectus by implication or Deemed prospectus. See Q. 2(b), Chapter 6.
[Page 43
(c) Statutory provisions related to allotment of shares. See Q. 1, Chapter 7.
[Page 52
Or
(a) Explain the provisions of the Companies Act, 2013 with regard to:
(i) Opening and closing of the Subscription list
(ii) Minimum subscription 5
(b) How is the transfer of shares effected in dematerialised form. 5
(c) Distinguish between ordinary business and special business to be
transacted in Annual General meeting. 5
Ans. (a) (i) Opening and closing of Subscription list. See Q. 2, Chapter 7.
[Page 55
(ii) Minimum subscription. See Q. 1(Point II(iii)), Chapter 7. [Page 53
(b) Transfer of shares effected in dematerialised form:
Procedure for selling and buying dematerialised shares. An investor who
wants to avail himself of the services of a depository is required to enter into an
agreement with the depository through a ‘Depository Participant’, and for this
he has to open a ‘Demat’ account with a DP of the depository. Once the investor
opens an account with the depository participant (DP), he can purchase/sell
securities in electronic form through a broker after providing the details of his
account with the DP. The investor can sell and buy securities only through a
stock broker and not through DP.
Selling of securities held in electronic form is very similar to selling of a
paper form of securities. Instead of signing the transfer deed as seller and
delivering it with securities certificates to a broker, he has to instruct his DP to
debit his account with the number of securities sold by him and credit his
broker’s clearing account. The delivery instruction has to be given to his DP
through ‘Delivery Instruction Slip’ (DIS) daily signed by him, containing the
details of securities sold by him.
For purchasing demat securities from the secondary market, the client has to
give to his DP a ‘Receipt Instruction Slip’, duly signed, containing the details of
securities purchased. The investor should ensure that his broker transfers the
securities from his clearing account to his depository account before the book
closure.
(c) Ordinary business and Special business. See Q. 4, Chapter 12. [Page 102
Q. 4.(a) Write a note on National Company Law Tribunal. 5
(b) Explain the rules with regard to sending notice of the general meetings.
Can we call a meeting by sending a notice shorter than the normal notice? 5
s
(c) Explain the provisions of Companies Act, 2013 with regard to:
a
(i) Proxy (ii) Quorum 5
v D
Ans. (a) National Company Law Tribunal. See Q. 2, Chapter 17. [Page 143
hi
(b) Rules with regard to sending notice of the General Meeting.
S
See Q. 5(Point 2), Chapter 12. [Page 102
(c) (i) Proxy. See Q. 6, Chapter 12. [Page 105
(ii) Quorum. See Q. 5(Point 3), Chapter 12. [Pages 103
Or
(a) Explain appointment of first and subsequent directors in a Company. 5
(b) Can the directors of a Company be appointed by the board of directors?
Explain the different types of directors appointed by the Board. 5
(c) Who may be appointed as a Director out of the following and why?
(i) a minor
(ii) a partnership firm
(iii) a trust 5
Ans. (a) Appointment of first directors. See Q. 5(Point 1), Chapter 11.
[Page 82
(b) Appointment of subsequent directors. See Q. 5(Point 2), Chapter 11.
[Page 82
Q. 5. (a) Write a note on:
(i) interim dividend
(ii) investor education and protection fund 5
(b) Explain various grounds for compulsory winding up of a company. 5
(c) Write a short note on:
(i) Contributory
(ii) Declaration of solvency 5
Ans. (a) (i) Interim dividend. See Q. 3, Chapter 13. [Page 117
(ii) Investor Education Fund. See Q. 4, Chapter 13. [Page 118
(b) Grounds of compulsory winding up of a company. See Q. 2, Chapter 16.
[Page 137
(c) (i) Contributory. See Q. 4(Point 3), Chapter 16. [Page 140
(ii) Declaration of solvency. See Q. 2. [Page 156
Or
(a) Distinguish between ordinary resolution and special resolution giving
four reasons for which a special resolution may be passed. 5
(b) Explain the fiduciary relationship of promoters with the Company they
promote. 5
(c) The accounts books of a company were confiscated by income tax
authorities for a particular year. As a result the accounts of the company were
not ready. Should the Company hold any meeting in the absence of accounts.
5
Ans. (a) Ordinary resolution and Special resolution. See Q. 9, Chapter 12.
[Page 110
(b) Fiduciary relationship of promoters. See Q. 1, Chapter 3. [Page 18
(c) Problem. See Practical Problem 7, Chapter 12. [Page 114
s
_____________
iv Da
Sh
2015 (MAY)
Attempt All Question. All questions carry equal marks.
Q. 1. (a) “A company is an artificial person created by law with a perpetual
succession and common seal.” Explain with reference to case law. 5
(b) What is a private company? State the provisions for conversion of a
public company into a private company. 5
(c) “Preliminary contracts are a nullity.” Comment on the statement
bringing out clearly the position of the promoter with regard to preliminary
contracts. 5
Ans. (a) “A company is an artificial person created by law with a perpetual
succession and common seal”. See Q. 1(Point 2, 4 & 7), Chapter 1. [Page 1
Case Law: Solomon vs. Solomon & Co. See Q. 1, Chapter 1. [Page 2
(b) Private Company. See Q. 1, Chapter 2. [Page 8
Provisions for conversion of a public company into a private company. See
Q. 4, Chapter 2. [Page 10
s
(c) Preliminary Contracts. See Q. 2(a), Chapter 3. [Page 18
Da
Or
iv
(a) Distinguish between Holding and Subsidiary company. 5
h
(b) State the objects for which a producer company can be formed. 5
S
(c) “The power of altering articles is wide yet it is subject to a large number
of restrictions.” Explain. 5
Ans. (a) Difference between Holding Company and Subsidiary Company.
See Q. 8(a), Chapter 2. [Page 14
(b) Objects of a Producer Company. See Q. 7, Chapter 2. [Page 12
(c) Alteration of Articles. See Q. 2, Chapter 5. [Page 35
Q. 2. (a) Explain the doctrine of Indoor Management. State the cases in
which the doctrine of Indoor Management is not applicable. 5
(b) Write a note on deemed prospectus. 5
(c) What are the provisions of law as to issue of Sweat Equity Shares? 5
Ans. (a) Doctrine of Indoor Management. See Q. 4(b), Chapter 5. [Page 37
(b) Deemed Prospectus. See Q. 2(b), Chapter 6. [Page 43
(c) Sweat Equity Shares. See Q. 6, Chapter 8. [Page 62
Or
(a) In the event of conflict between the Memorandum and the Articles, it is
the memorandum that will prevail. Comment. 5
(b) What is meant by Shelf Prospectus? State the provisions of the
Companies Act, 2013. Point out the circumstances under which such
prospectus is required to be filed with registrar of companies. 5
(c) “Buy back of shares is an instrument to improve shareholders’ net
worth.” Explain and state the conditions governing the buy back of shares by
a company. 5
176
Ans. (a) Relationship between Memorandum and Articles: The relationship
between Memorandum and Articles has been aptly summed up by Justice
Cairns in Ashbury Railway Carriage and Iron Co. Ltd. vs. Riche as follows:
“The Articles play a part subsidiary to the Memorandum of association. They
accept the Memorandum of association as a charter of incorporation of the
company, and so accepting it the Articles proceed to define the duties, rights
and powers of governing body as between themselves and the company at large,
and the mode and form in which changes in internal regulations of the company
may from time to time be made.”
The Articles of a company are subordinate to, and controlled by the
Memorandum of Association, which is the dominant instrument and contains
the general constitution of the company. The Articles cannot contain any
provision, which is against the Companies Act, the Memorandum, the law of the
land or public policy. Memorandum and Articles are to be read together and in
case of any conflict between the two documents, the provisions of the
Memorandum will be upheld. The Memorandum defines and confines the
company’s objects and various powers it possesses, the Articles determine how
those powers are exercised.
s
(b) Shelf Prospectus. See Q. 2(d), Chapter 6. [Page 44
a
Provisions of the Companies Act, 2013. See Q. 2(d), Chapter 6. [Page 44
v D
Circumstances under which such prospectus is required to be filed with
hi
registrar of companies. See Q. 2(d) (Point IV), Chapter 6. [Page 44
S
(c) Buy-back of shares is an instrument to improve shareholders’ net worth.
When shares are bought back, they are physically destroyed. This reduces the
number of shares and the Earning per share of the company increases. From the
viewpoint of the investors, the buy-back price offered by the company is usually
higher than the market price. The investors get benefitted and buy-back is
advocated as an instrument to improve shareholders’ net worth.
Conditions governing the buy back of shares by a company. See Q. 5, Chapter 8.
[Page 60
Q. 3. (a) What are the provisions related to an audit committee? Which
companies must have an audit committee? 5
(b) When would it be just and equitable for a tribunal to wind up a
company? Discuss. 5
(c) Who can convene an Extra-ordinary General Meeting? 5
Ans. (a) Provisions related to an audit committee. See Q. 14, Chapter 11.
[Page 93
Companies must have an audit committee. See Q. 14 (Point 1), Chapter 11.
[Page 93
(b) Just and equitable for a tribunal to wind up a company. See Q. 2 [Point (e)],
(c) Who can convene an Extraordinary General Meeting. See Q. 3, Chapter 12.
[Page 101
Or
(a) Explain the qualifications of an auditor.
(b) State the provisions as to Proxy. 5
(c) State the provisions of the Companies Act, 2013 with regard to vacation
of office of the director. 5
Ans. (a) Qualifications of an Auditor. See Q. 3, Chapter 15. [Page 132
(b) Provisions of the Companies Act relating to Proxy. See Q. 6, Chapter 12.
[Page 105
(c) Vacation of office of the Director (Section 167). See Q. 6, Chapter 11.
[Page 84
Q. 4 (a) Explain the legal position of a director. 5
(b) The shareholders of XYZ Ltd. at an Annual General Meeting
unanimously passed a resolution for payment of dividend at a higher rate than
that recommended by the directors. Discuss the validity of the resolution. 5
(c) Discuss the provisions of the Companies Act, 2013 regarding annual
return. 5
Ans. (a) Legal position of a Director. See Q. 1, Chapter 11. [Page 74
(b) Problem. The rate of dividend is recommended and declared by the Board
of Directors in the Annual General Meeting. The shareholders cannot insist on
either declaration of dividend or on increasing the rate recommended by the
Directors. They may, however, lower the rate of dividend recommended by the
s
Directors. In the light of this, the resolution passed at the Annual General
a
Meeting is not a valid resolution.
v D
(c) Provisions of the Companies Act, 2013 regarding Annual Return. See Q. 6,
hi
S
Or
(a) Write a note on e-voting. 5
(b) What are the provisions regarding preparing and maintaining the books
of accounts. 5
(c) The Articles of Associations of ABC Ltd. stated that Mr. Sanjeev will be
the legal advisor of the company. The company in its general meeting of the
shareholders resolved unanimously to appoint Mr. Sharan in place of Mr.
Sanjeev as the legal advisor of the company by altering the Articles of
Association. Can the company do so? State the reasons. 5
Ans. (a) E-Voting through electronic means. See Q. 7 (Point (iii)), Chapter 12.
[Page 107
(b) Provisions regarding preparing and maintaining the books of accounts. See
Q. 1,Chapter 14. [Page 120
(c) Yes, the company can do so as neither the company nor the members are
bound to the outsiders.
Neither the company nor the members are bound to outsiders. The Memo-
randum and Articles do not create a contract between the company and the
outsiders, i.e., vendors, solicitors, secretary, etc. Neither the company nor the
In the case of Eley vs. Positive Government Security Life Assurance Co. Ltd.,
the Articles provided that Eley would be the company’s solicitor for life. He
would not be removed except for misconduct. He became a member in the
company also. He acted as solicitor of the company but the company removed
him after some time. He filed a suit against the company for breach of the
Articles. It was held that he had no cause of action, because the Articles did not
constitute any contract between the company and himself.
Q. 5. (a) Write a note on “Association not for profit.” 5
(b) All statements in a prospectus issued by ABC Ltd. were literally true, but
it failed to disclose that the dividends stated in it as paid were not paid out of
realised current profits. Is it a prospectus carrying mis-statement? If so, what
are the remedies available to aggrieved parties? 5
(c) Write a note on rotation of an Auditor. 5
Ans. (a) Association not for Profit. See Q. 8(c), Chapter 2. [Page 15
(b) Problem. See Practical Problem 3, Chapter 6. [Page 51
(c) Rotation of auditors. See Q. 2, Chapter 15. [Page 131
Or
(a) What is an illegal association? What are its consequences? 5
(b) What are the grounds for voluntary winding up of a company? 5
(c) Write a short note on Dematerialisation of shares. 5
Ans. (a) Illegal Association & Consequences of an Illegal Association.
See Q. 8(e), Chapter 2. [Page 16
s
(b) Grounds for voluntary winding up. See Q. 1. [Page 155
a
(c) Dematerialisation of shares. See Q. 2 [Point (i) to (viii)], Chapter 18.
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[Page 148
hi
_____________
S
B.Com. (Hons.)
CORPORATE LAWS—2015
Q. 1. (a) Define a Private Company. What privileges does a private company
enjoy under the Companies Act? 4
(b) “A prospectus must state truth and nothing but truth.” Do you agree?
Explain. 4
(c) Write a note on Licensed Company. 3
Ans. (a) Private Company. See Q. 1, Chapter 2. [Page 8
Privileges enjoyed by a Private Company. See Q. 1, Chapter 2. [Page 8
(b) Yes, a prospectus must state truth and nothing but truth.
Misleading Prospectus. A prospectus constitutes the basis of the contract
between the company and the shareholders and therefore, it must disclose all
material facts which are likely to influence the decision of a prospective investor
very accurately. It must not state as fact any matter or thing which is not so. Not
s
only this, it must also not omit any material facts. A person who has subscribed
Da
to the shares of a company or one who has been allotted shares on the basis of a
iv
mis-statement in its prospectus has got certain remedies against the company as
h
well as against the person or persons responsible for the issue of such prospectus.
S
In order to call a prospectus a ‘misleading prospectus’, there must be
misrepresentation of material facts and not of law or opinion. For example, if a
prospectus states that the company’s shares will be issued at a discount of 10 per
cent, it is misrepresentation of law because as per Section 53, shares cannot be
issued at a discount, and a person deceived by it will have no remedy.
Further, opinion given by the directors does not constitute mis-statement. For
example, if the directors state that in their opinion, the company would be able to
pay dividend in the very first year of its operations, it would not constitute mis-
statement.
(c) Licensed Company. See Q. 8(c), Chapter 2. [Page 15
Or
(a) Explain Turquand’s rule. State its exceptions. 4
(b) Who may call Extra-ordinary General Meeting? 4
(c) Write a note on Shelf Prospectus. 3
Ans. (a) Turquand’s rule. See Q. 4(b), Chapter 5. [Page 37
Exceptions to Turquand’s rule. See Q. 4(b), Chapter 5. [Page 37
(b) Who may call an Extra-ordinary General Meeting. See Q. 3, Chapter 12.
[Page 101
(c) Shelf Prospectus. See Q. 2(d), Chapter 6. [Page 44
Q. 2. (a) Explain the provisions of the Companies Act, with respect to
proxies. 4
(b) Write a note on Pre-incorporation contracts. 4
180
(c) Distinguish between Memorandum of Association and Articles of
Association. 3
Ans. (a) Provisions of the Companies Act, with respect to proxies. See Q. 6,
(b) Pre-incorporation Contracts. See Q. 2(a), Chapter 3. [Page 18
(c) Distinction between Memorandum of Association and Articles of
Association. See Q. 1, Chapter 5. [Page 34
Or
(a) “The validity of a certificate of incorporation can’t be disputed on any
ground whatsoever.” Comment. 4
(b) Write a note on Independent Director. 4
(c) State provisions in regard to buy back of shares. 3
Ans. (a) The validity of a certificate of incorporation can’t be disputed on any
ground whatsoever. See Q. 5, Chapter 3. [Page 20
(b) Independent Director. See Q. 2(v), Chapter 11. [Page 77
(c) Provision with regard to buy back of shares. See Q. 5, Chapter 8. [Page 60
Q. 3. (a) Write a note on Minimum subscription. 4
(b) “A promoter stands in a fiduciary position towards the company.”
s
Explain. 4
a
(c) Explain the provisions of Companies Act, relating to restrictions imposed
v D
on the power of Board of Directors. 3
hi
Ans. (a) Minimum subscription. See Q. 1-II[Point (iii)], Chapter 7. [Page 53
S
(b) Promoter. See Q. 1, Chapter 3. [Page 18
(c) Provisions of Companies Act, relating to restrictions imposed on the power
of Board of Directors. See Q. 9, Chapter 11. [Page 87
Or
(a) “The term body corporate connotes a wider meaning than the term
company.” Comment. 4
(b) Write a note on functions of audit committee. 4
(c) “No dividend can be paid by a company except out of profits.” Explain.
3
Ans. (a) Company and Body Corporate. See Q. 2, Chapter 1. [Page 3
(b) Functions of Audit Committee. See Q. 14, Chapter 11. [Page 93
(c) Payment of Dividend. See Q. 1 (Point 1), Chapter 13. [Page 115
Q. 4.(a) Define a ‘Government Company’. What are its special features? 4
(b) Few friends purchased a property. Later on they promoted a company
and sold the property to the company at huge profits without adequate
disclosure. Can the company receive the profit from the promoters? 4
(c) Write provisions of holding annual general meeting. 3
Ans. (a) Government Company. See Q. 8(b), Chapter 2. [Page 14
(c) Provisions of holding Annual General Meeting. See Q. 2, Chapter 12.
[Page 99
Or
(a) Write a note on Demat System. How is the transfer of shares effected in
dematerialised form? 4
(b) How are the following counted for the purpose of quorum in AGM? 4
(i) A preference shareholder
(ii) A representative of Co. ABC Ltd.
(iii) A proxy
(iv) A representative of Governor of Maharashtra
(c) Write a note on the special resolution. 3
Ans. (a) Demat system. See Q. 2, Chapter 18. [Page 148
Transfer of shares effected in dematerialised form. See Q. 3, Chapter 18.
[Page 149
(b)(i) Preference shareholders are not to be counted for the purpose of quorum
except where the proposed business includes any item directly affecting
them.
(ii) A representative of Company ABC Ltd. will be considered as present in
person and counted for the purpose of quorum in AGM. It is assumed
that ABC Ltd. is member of the company in question.
(iii) A Proxy. For the purposes of quorum, only members present in and not
by proxies are to be counted.
(iv) A representative of Governor of Maharashtra will be considered as
s
present in person and counted for the purpose of quorum in AGM. It is
a
assumed that Governor of Maharashtra is a member of the company in
v D
question.
hi
(c) Special Resolution [Section 114(2)]. See Q. 8 (Point 2), Chapter 12.
S
[Page 109
Q. 5. (a) Write a note on the concept of ‘Producer company’. 4
(b) X purchased from Y 10,000 shares of ABC Ltd. on the basis of prospectus
containing wrong statement. What remedies are available to X against the
company? 4
(c) Write a note on Books of Accounts to be maintained by a company. 3
Ans. (a) Producer Company. See Q. 7, Chapter 2. [Page 12
(b) Problem. Since X did not buy the shares on the basis of the prospectus, he
has no remedy against the company.
Remedies against the company. The following two remedies are available to an
injured party against the company for misrepresentation in the prospectus under
general law:
1. Rescission of the contract to take or accept shares. For this, the shareholder
of opinion.
misstatements.
2. Damages for fraudulent misstatement or concealment. Any person induced
by such statement or omission is also entitled to sue the company for damages.
For this, he has to first rescind his contract and give up or surrender his shares to
the company, as an allottee of the shares cannot claim damages and also, side by
side, retain his shares. But to avail this remedy, the subscriber has to prove
(i) that the misstatements were made fraudulently and (ii) that he has actually
been deceived, in addition to proving other facts necessary to succeed in a suit of
s
rescission.
a
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(c) Books of Accounts. See Q. 1, Chapter 14. [Page 120
Or
(a) A member of a company can’t surrender his shares. Explain. 4
(b) Discuss the statutory provisions regarding reduction of share capital. 4
(c) What is meant by ‘declaration of solvency’ in relation to voluntary
winding up of a company? 3
Ans. (a) Surrender of shares. See Q. 2, Chapter 9. [Page 68
(b) Statutory provisions regarding reduction of share capital. See Q. 7,
Chapter 4. [Page 29
(c) Declaration of solvency. See Q. 2. [Page 156
_____________
2016 (MAY)
Name of the Course : B.Com. (Hons.) CBCS
Duration: 3 hours Maximum marks: 75
Attempt All Questions. All questions carry equal marks.
Q. 1. (a) What is lifting of corporate veil? Explain the statutory provisions
under which the corporate veil of the Company may be lifted. 5
(b) Explain the procedure of online registration of the company. 5
(c) A was employed as an office manager in a company. He had arrears of his
three month’s salary and he filed a suit against the managing director of the
company for the recovery of arrears of his salary. Will he succeed in getting his
arrears? Give reasons. 5
Ans. (a) Corporate veil & Lifting of Corporate veil. See Q. 4, Chapter 1.
[Page 4
(b) Procedure of online registration. See Q. 6, Chapter 3. [Page 21
(c) In this case ‘A’ would not succeed since he is an employee of the company
and company is a separate entity from its members, directors, managing director,
manager and employees. The suit to recover salary due from a company lies
against the company and not against the managing director. The facts of this case
as
relate to the case Abdul Haque vs. Das Mal. (Practical Problem No. 4, Page 7)
D
Or
iv
(a) “A promoter is neither a trustee nor an agent of the company he promotes
Sh
but he stands in a fiduciary position towards the company and the original
allottees of shares.” Comment on the statement. 5
(b) What are preliminary contracts? Discuss the legal effects of preliminary
contracts. 5
(c) X holds all the shares except one in a textile company and is also its
substantial creditor. He gets the company’s goods insured in his own name.
Unfortunately the goods are destroyed by fire and X claims the compensation
of loss from the insurance company. Is the Insurance company liable to
compensate the loss and pay to X. State reasons for your answer. 5
Ans. (a) “A promoter is neither a trustee nor an agent of the company he
promotes but he stands in a fiduciary position towards the company and the
original allottees of shares.” See Q. 1, Chapter 3. [Page 18
Besides the company, the promoter also stands in a fiduciary position towards
the original allottees of shares. Prospective investors invest in the shares of the
company on the basis of information given in the prospectus.
A prospectus constitutes the basis of the contract between the company and the
shareholders and therefore, it must disclose all material facts which are likely to
influence the decision of a prospective investor very accurately. It must not state
as fact any matter or thing which is not so. Not only this, it must also not omit
any material facts. A person who has subscribed to the shares of a company or
one who has been allotted shares on the basis of a misstatement in its prospectus
has got certain remedies against the company as well as against the person or
persons responsible for the issue of such prospectus.
184
Thus, it is the duty of the promoter to see that the prospectus is not mis-
leading, otherwise he could be sued by original allottees of shares for damages.
(b) Preliminary contracts and their legal effects. See Q. 2(a), Chapter 3.
[Page 19
(c) No, the Insurance company is not liable to compensate the loss and pay to
X. A company is separate and distinct from its members. Thus, company’s
property is not the property of its members. The property of the company is in its
own name and managed and controlled by it. As such, property of the company
is its own property and its members have no insurable interest in it. Members,
thus, cannot get insurance-claim of the company’s property. This was so decided
in the case of Macaura vs. Northern Assurance Co. Ltd. (Chapter 1, Page 3)
Q. 2. (a) Define a private company and distinguish it from a producer
company.
(b) “The power to alter the Articles conferred by the Companies Act is very
wide, yet it is subject to a large number of limitations.” Explain.
(c) Write a short note on One Person Company. 5,5,5
Ans. (a) Private company. Section 2(68) of the Companies Act, 2013 defines a
private company as a company having a minimum paid-up share capital as may
be prescribed and which, by its Articles of Association:
as
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its members; and
However, if two or more persons hold shares in joint names, then they are
regarded only as one single member.
Difference between a Private company and a Producer Company
Point of Distinction Private Company Producer Company
1. Regulated by Companies Act, 2013 Companies Act, 1956
2. Minimum number of members 2 (Two) (One in case of 10 (Ten)
OPC)
3. Maximum number of members 200 (Two hundred) No Limit
excluding past and
present employee
members (One in case
of OPC).
4. End words of the name Private Ltd. unless it is a Not necessary to use
licensed company under Private Ltd. but name
Section 8 (Association must end with words
not for profits e.g., club, Producer Company Ltd.
trust etc.)
5. Objective May or may not be to Not to earn profit. It aims
earn profit. at welfare of the members.
6. Minimum number of directors 2 (Two) 5 (Five)
7. Capital May consist of equity Consists of only equity
shares as well as shares.
preference shares.
(b) “The power to alter the Articles conferred by the Companies Act is very
wide, yet it is subject to a large no. of limitations.” See Q. 2, Chapter 5. [Page 35
(c) One Person Company. See Q. 5, Chapter 2. [Page 10
Or
(a) Explain the provisions of the Companies Act, 2013 regarding alteration of
name clause. 5
(b) Explain the doctrine of Indoor Management. State the exceptions, if any,
to the doctrine of Indoor Management. 5
(c) Write a short note on Independent Director. 5
Ans. (a) Provisions of the Companies Act, 2013 regarding alteration of name
clause. See Q. 3, Chapter 4. [Page 26
(b) Doctrine of Indoor management and Exceptions to the Doctrine of Indoor
management. See Q. 4(b), Chapter 5. [Page 37
(c) Independent director. See Q. 2(v), Chapter 11. [Page 77
Q. 3. (a) What do you mean by a misleading prospectus? What are the
remedies available to the shareholders against the company for misstatement
in the prospectus?
(b) What is forfeiture of shares? Distinguish between forfeiture and
s
surrender of shares.
a
(c) Write a note on Employees’ Stock Option Scheme. 5, 5, 5
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Ans. (a) Misleading prospectus and remedies available to the shareholders.
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(b) Forfeiture of shares. See Q. 1, Chapter 9. [Page 67
Forfeiture and surrender of shares. See Q. 2, Chapter 9. [Page 68
(c) Employees’ Stock Option Scheme (ESOS). Employees’ Stock Option Scheme
is an instrument which the companies use to attract, retain and motivate its
employees. It involves the issuing of shares at a discount, as compared to the
market price to its employees as part of employees’ compensation.
The major advantage of stock options is that it develops a sense of belonging to
the company and thus contributes effectively to the growth of the company.
As per Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014
the term Employee means: (a) A permanent employee of the company who has
been working in India or outside India; or (b) A director of the company, whether
a whole time director or not; (c) An employee as defined above in sub-clauses (a)
or (b), of a subsidiary company in India or outside India, or of a holding company
of the company or an associate company.
The term Employee does not include. (a) An employee who is a promoter or a
person belonging to the promoters’ group, or (b) A director who either himself or
through his relative or through any body corporate, directly or indirectly, holds
more than 10% of the outstanding equity shares of the company.
A company cannot offer any ESOS to its employees unless the shareholders
approve of it by passing a special resolution at a general meeting. The notice for
the meeting must be accompanied by an Explanatory statement giving all
particulars of ESOS such as
• the total number of options to be granted.
• the class of employees to whom it is to be granted.
• period within which ESOS to be exercised.
• the maximum number of options to be issued per employee.
• lock-in period if any.
If in any one year, the ESOS offered to the employees equals or exceeds one per
cent of the issued capital, it must be approved by a separate resolution of the
shareholders in a meeting. Again if employees of a subsidiary or holding
company are to be given ESOS, it should be approved by a separate resolution of
the shareholders in a general meeting.
The exercise price of the shares under ESOS is determined after conforming to
accounting policies. There is a minimum one-year lock-in period between the
grant of options and vesting of options. And till the shares are issued on exercise
of options, the shareholder does not have the right to receive dividend or vote.
The Company shall maintain a register of employees’ stock option in Form No.
SH 6 and shall forthwith enter all the particulars of the options granted under the
scheme.
Or
(a) Describe the statutory provisions regarding quorum at the general
meeting of a company. Can one member constitute quorum? 5
s
(b) Describe the provisions of the Companies Act, 2013 regarding private
a
placement of securities. 5
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(c) Write a note on issue of Sweat equity shares. 5
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Ans. (a) See Q. 5 (Point 3), Chapter 12. [Page 103
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(b) See Q. 4(b), Chapter 6. [Page 49
(c) Sweat equity shares. See Q. 6, Chapter 8. [Page 62
Q. 4. (a) Who can be a director? Explain the provisions of the Companies Act
relating to the appointment of directors by the Board of Directors. 5
(b) What is an extraordinary general meeting? By whom can an extraordinary
general meeting be called? 5
(c) What is the procedure to be followed to conduct a Board of Directors
meeting through video conferencing or other audio visual means? 5
Ans. (a) Who can be a director. See Q. 3, Chapter 11. [Page 79
Provisions of the Companies Act relating to the appointment of directors by
the Board of Directors. See Q. 5 (Point 3), Chapter 11. [Page 82
Besides possessing the above qualifications, the person to be appointed as
director should not possess any of the disqualifications for appointment as a
director under Section 164 of the Companies Act.
(b) Extraordinary general meeting. See Q. 3, Chapter 12. [Page 101
Or
(a) Describe the general powers vested in the Board. Under what exceptional
situations, the shareholders in general meeting are competent to act even on
the matters delegated to the Board? 5
(b) Explain the provisions regarding ‘Proxy’ under the Companies Act, 2013.
5
(c) Discuss the provisions of the Companies Act regarding removal of
directors. 5
Ans. (a) General powers & Exceptional situations. See Q. 8, Chapter 11.
[Page 86
(b) Provisions regarding ‘Proxy’. See Q. 6, Chapter 12. [Page 105
(c) Provisions regarding removal of directors. See Q. 7, Chapter 11. [Page 85
Q. 5. (a) Explain the advantages of Depository System over the old system of
physical movement and trading of share certificates. 5
(b) Write a note on compulsory winding up of a company. 5
(c) What is unpaid and unclaimed dividend? Explain the statutory
provisions regarding unpaid and unclaimed dividend. 5
Ans. (a) Advantages of Depository System over the old system of physical
movement and trading of share certificates. See Q. 3, Chapter 18. [Page 149
(b) Compulsory winding up of a company. See Q. 2, Chapter 16. [Page 137
(c) Unpaid Dividend. It is the dividend the warrant in respect of which has not
been encashed, or any dividend which otherwise has not been paid (e.g.,
dividend declared but warrant not posted) or claimed.
Unclaimed Dividend. It is the dividend which has not been claimed by the
shareholder who is entitled to the payment of dividend. It is also a part of unpaid
dividend. Though the dividend is directly credited into the Bank Accounts of
s
shareholders these days.
a
Statutory Provisions regarding unpaid and unclaimed dividend:
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1. Transfer of unpaid or unclaimed dividend. According to Sec. 124(1), where,
hi
after the declaration of the dividend, it has not been paid or claimed within 30
S
days from the date of the declaration to any shareholder entitled to the payment
of the dividend, the company shall, within 7 days from the date of expiry of the
said period of 30 days, transfer the total amount of dividend which remains
unpaid or unclaimed to a special account called the Unpaid Dividend Account.
For this purpose, the company has to open Unpaid Dividend A/c in a scheduled
bank. In case of delay, the company would have to pay interest @ 12% p.a.
2. Preparation of Statement with respect to unpaid dividend as per Sec.
124(2). Within 90 days from the date of transfer of unpaid dividend to unpaid
dividend account, the company should prepare a statement which should contain
the names, the last known addresses and the unpaid amount of dividend to be
paid to each person, and placing on the website of the company, if any, and also
on any other website approved by the Central Government, in the prescribed
manner.
3. Default in Transferring unpaid dividend to Unpaid Dividend Account.
Section 124(3) provides that if the company makes a default in transferring the
total amount of unpaid or unclaimed dividend to the Unpaid Dividend Account,
it shall pay interest from the date of default @ 12% p.a. to the members in
proportion to the amounts remaining unpaid to them.
4. Application for payment of the money claimed. Sec. 124(4) provides that
any person claiming to be entitled to any money transferred to unpaid dividend
account may apply to the company for the payment of the money claimed.
Protection Fund. Any money transferred to the Unpaid Dividend Account of a
company which remains unpaid or unclaimed for a period of 7 years from the
date of such transfer shall be transferred by the company along with the interest
accrued, if any, thereon to the Investor Education and Protection Fund.
6. Transfer of Shares to Investor Education and Protection Fund. Sec. 124(6)
states a company shall transfer all shares in respect of which dividend has not
been paid or claimed for 7 consecutive years or more to the Investor Education
and Protection Fund, alongwith a statement containing such details as may be
prescribed.
7. Penalty. As per Section 124(7) if a company fails to comply with any of the
requirements of this section, the company, shall be punishable with fine which
shall not be less than ` 5 lakhs but which may extend to ` 25 lakhs, and every
officer of the company who is in default shall be fined which shall not be less
than ` 1 lakh but which may extend to ` 5 lakhs.
Or
(a) Describe the term ‘Depository’ and ‘Participants’ as given under the
Depositories Act, 1996. 5, 5, 5
(b) What is meant by Rotation of Auditors. What are the provisions of the
Companies Act, 2013 with respect to it?
(c) Discuss the grounds and consequences of voluntary winding up of a
s
company.
a
Ans. (a) Despository and Participants. See Q. 7(a) & (b), Chapter 18.[Page 152
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(b) Rotation of Auditors. See Q. 2, Chapter 15. [Page 131
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(c) Grounds and consequences of voluntary winding up of a company. See Q. 1.
S
[Page 155
_____________
B.Com. (Hons.)
(Admissions of 2004 and onwards) (SOL)
Q. 1. (a) “A company is a legal entity distinct from its members.” Comment
and state the essential characteristics of a company. 6
(b) What is a Government Company? Summarise the special provisions of
the Companies Act relating to Government companies. 5
Ans. (a) “A company is a legal entity distinct from its members” and Essential
characteristics of a company. See Q. 1, Chapter 1. [Pages 1-3
(b) Government company and special provisions relating to Government
companies. See Q. 8(b), Chapter 2. [Page 14
Or
(a) Explain the Law relating to alteration of registered office clause of
Memorandum of Association. 6
(b) Discuss the legal effects of pre-incorporation contracts. 5
Ans. (a) Law relating to alteration of registered office clause of Memorandum
as
of Association. See Q. 4, Chapter 4. [Page 26
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[Page 18
Sh
Q. 2. (a) State the conditions to be satisfied before a company may forfeit the
shares. What is the effect of such forfeiture? 6
(b) Explain the legal position of the Directors of a Company. 5
Ans. (a) Conditions to be satisfied before a company may forfeit the shares.
Effects of a valid forfeiture. See Q. 1, Chapter 9. [Page 67
(b) Legal position of the Directors of a Company. See Q. 1, Chapter 11.
[Page 74
Or
(a) Who can be appointed as a director? Under what circumstances the
directors may be removed? 6
(b) Write a short note on ‘Book Building’. 5
Ans. (a) Qualifications for appointment as director. Besides possessing the
above qualifications, the person, to be appointed as a director should not possess
any of the disqualifications for appointment as a director under Section 164 of the
Companies Act.
As per the Companies Act, no academic or even shareholding qualifications are
prescribed for a Director. To be so appointed, a person has to be:
• an individual, and
• competent to contract as per requirements of the Indian Contract Act.
Unless the Articles provide otherwise, a director need not be a shareholder of
the company.
190
Circumstances under which the directors may be removed: See Q. 7, Chapter 11.
[Page 85
(b) Book Building. See Q. 4(a), Chapter 6. [Page 48
Q. 3. (a) Explain the statutory provisions with regard to holding of Extra
ordinary General meeting. 6
(b) What amounts are required to be transferred to Investor Education and
Protection Fund? 5
Ans. (a) Statutory provisions with regard to holding of Extraordinary General
meeting. See Q. 3, Chapter 12. [Page 101
(b) Amounts that are required to be transferred to Investor Education and
Protection Fund. See Q. 4, Chapter 13. [Page 118
Or
(a) When would it be ‘Just and Equitable’ for a Tribunal to wind up the
business of a company? 6
(b) Discuss the salient features of Depositories Act 1996. 5
Ans. (a) When would it be ‘Just and Equitable’ for a Tribunal to wind up the
business of a company. See Q. 2[Point (e)], Chapter 16. [Page 138
(b) Salient features of Depositories Act 1996. See Q. 9, Chapter 18. [Page 154
s
Q. 4. (a) What are the objects for which a producer company may be formed?
a
6
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(b) X purchased 10,000 shares of a company on the basis of prospectus
hi
containing untrue statements. What remedies are available to X against the
S
company? 5
Ans. (a) Objects for which a producer company may be formed. See Q. 7,
Chapter 2. [Page 12
(b) Remedies against the company. See Q. 3, Chapter 6. [Page 45
Or
(a) Distinguish between Memorandum of Association and Articles of
Association. 6
(b) Write a note on quorum of general meeting of a company. 5
Ans. (a) Difference between Memorandum of Association and Articles of
(b) Quorum of general meeting of a company. See Q. 5(Point 3), Chapter 12.
[Page 103
Q. 5. (a) Distinguish between ordinary resolution and special resolution. 6
(b) What are bonus shares? When are these issued? State the legal provisions
in relation to the issue of bonus shares. 5
Ans. (a) Difference between ordinary resolution and special resolution.
(b) Bonus shares. See Q. 7(b), Chapter 8. [Page 63
Or
(a) Discuss in brief the rights of the members of a company. 6
(Out of syllabus)
(b) Discuss the provisions of the Companies Act regarding meetings of
board of Directors. 5
Ans. (a) Rights of members. The Articles of Association of a company provides
rights and duties between the members inter-se and the members and the
company. Some of the rights of a member are:
(i) The right to vote at meetings;
(ii) The right to requisition an extraordinary general meeting of the company
or to be a joint requisitionist;
(iii) The right to receive notice of a general meeting;
(iv) The right to appoint proxy and inspect proxy registers;
(v) The right to require the company to circulate his resolution;
(vi) The right to elect directors and thus to participate in the management
through them;
(vii) The right to vote on resolution at meetings of the company;
(viii) The right to enjoy the profits of the company in the shape of dividends;
(ix) The right to apply to the Court for relief in the case of oppression;
(x) The right to apply to the Court for relief in the case of mismanagement;
(xi) The right to apply to the Court for winding up of the company.
(xii) The right to share in the surplus on winding up.
(b) Provisions of the Companies Act regarding meetings of board of Directors.
s
a
_____________
hiv D
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2016 (NOVEMBER)
Duration: 3 hours Maximum marks: 75
Attempt All Questions. All questions carry equal marks.
Q. 1. (a) “The fundamental attribute of corporate personality is that company
is a legal entity distinct from its members.” Explain the statement with
relevant case laws. 5
(b) A company can be registered with ‘Limited Liability’ without the word
‘Limited’ with its name. Comment. 5
(c) Explain the doctrine of ‘Indoor Management’. State the cases in which
this doctrine is not applicable. 5
Ans. (a) Independent Legal Entity. See Q. 1(Point 3), Chapter 1. [Page 1
(b) Association not for Profit [Section 8]. See Q. 8(c), Chapter 2. [Page 15
(c) Doctrine of Indoor Management & its exceptions. See Q. 4(b), Chapter 5.
[Page 37
Or
(a) What is an illegal association? What are its consequences? 5
s
(b) What is a Private Limited Company? How can a Private Limited
a
Company be converted into a Public Limited Company? 5
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(c) What is the importance of registered office of a company? State the
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procedure for shifting of the registered
S
office of a company from one state to another. 5
Ans. (a) Illegal Association and its consequences. See Q. 8(e), Chapter 2.
[Page 16
(b) Private Company. Section 2(68) of the Companies Act, 2013 defines a
private company as a company having a minimum paid-up share capital as may
be prescribed and which, by its Articles of Association:
its members; and
Conversion of Private Limited Company into a Public Limited Company. For
converting a private company into a public company, Articles have to be altered
in such a manner that the restrictions with respect to transfer of shares, number
of members, etc. are removed from it. From the date of alteration, the company
ceases to be a private company. A copy of the altered Articles, along with the
fees, should be filed with the Registrar, who shall register the same.
Steps for converting a private company into a public company:
(i) Special Resolution. A special resolution has to be passed to alter the
Articles of the company to delete the restrictions of Section 2(68).
(ii) Copy of Resolution and altered Articles. Within 15 days of passing the
resolution, copy of the same along with a printed copy of altered
Articles, along with fees must be filed with the Registrar of Companies.
193
(iii) Increasing the number of members. If the number of members is less
than seven, it must be raised to minimum seven.
(iv) Increasing the number of Directors. If the number of directors is less
than three, it must be raised to minimum three.
(v) Deleting the word Private from the name of the Company. The word
‘private’ shall be deleted from its name by passing a special resolution.
(c) Meaning of Registered Office. The name of the State in which the regis-
tered office of the company is to be situated must be given in the Memorandum.
But the exact address of the registered office is not required to be stated therein.
As per Section 12, a company, on and from the 15th day of its incorporation,
shall have a registered office. The company shall furnish to the Registrar veri-
fication of its registered office within a period of 30 days of its incorporation. The
importance of the registered office is that it is the address of the company where
all communications and notices are to be sent and where register of members,
register of debentureholders, charges, minutes book of meetings etc. are kept.
Procedure of changing registered office from one state to another [Section 13]. If
a company wants to shift its registered office from one State to another State:
(i) A special resolution in general meeting is required to be passed, which
must be confirmed by the Central Government. This change involves
as
alteration of Memorandum of Association.
D
(ii) The Central Government shall dispose off the application within a period
iv
of 60 days.
Sh
(iii) The Central Government, before passing its order, may satisfy itself that
the application has the consent of the creditors, debentureholders and
other persons concerned with the company or that the sufficient
provision has been made by the company either for the due discharge of
all its debts and obligations or that adequate security has been provided
for such discharge.
(iv) In case of shifting the Registered Office from one State to another State, a
certified copy of the order of the Central Government approving the
alteration has to be filed by the company with the Registrar of both the
States within such time and in such a manner as may be prescribed.
(v) Both the Registrars would register the same and the Registrar of the State
where the Registered office has been shifted would issue a fresh
Certificate of Incorporation. The Certificate would indicate the alteration.
(vi) A copy of special resolution shall be filed with the Registrar of
Companies within 30 days of passing the special resolution.
(vii) Also within 15 days of the change of the registered office, a notice to the
Registrar should be given of the new location of the office.
Q. 2. (a) “A promoter stands in a fiduciary relation towards the company he
promotes”. Explain. 5
(b) Arvind purchased from Vikas 1000 shares of ABC Ltd. On the basis of
prospectus containing wrong statement in it. What are the remedies available
to Arvind against the company? 5
(c) State the conditions to be satisfied before a company may forfeit the
shares. What is the effect of such a forfeiture? 5
Ans. (a) See Q. 1, Chapter 3. [Page 18
CORPORATE LAWS—2016 (NOVEMBER) 195
(b) Arvind does not have any remedies against the company on the ground of
Prospectus containing wrong statement, because where a person purchases
shares from an existing shareholder, he obtains them on terms settled between
the two, and only the buyer and seller are bound by those terms. The company
and prospectus are not a part of their contract. Arvind is not an original allottee
and the wrong statement in the prospectus was not directed towards him. Thus,
as Arvind purchases 1,000 shares from Vikas, who is an existing shareholder, no
remedies are available to Arvind against the company.
(c) Rules relating to valid forfeiture and effects of a valid forfeiture. See Q. 1,
Chapter 9. [Page 67
Or
(a) Write a note on “Book Building”. 5
(b) The shareholders at an annual general meeting of a public limited company
unanimously resolved for payment of dividend though the Board of Directors
did not recommend payment of any dividend. State the legal position. 5
(c) “Right Shares and Bonus Shares are the same because both are offered to
the existing shareholders.” Comment. 5
Ans. (a) Book Building. See Q. 4(a), Chapter 6. [Page 48
(b) The directors have the sole discretion to recommend or not to recommend
as
the rate of dividend. The shareholders can approve the same rate as
D
recommended by the Board of Directors or lower it. The shareholders themselves
iv
cannot recommend payment of any dividend.
Sh
(c) No doubt, Right Shares as well as Bonus Shares are offered to the existing
shareholders but the two are absolutely different categories of shares.
Distinction between Rights Shares and Bonus Shares. See Q. 8, Chapter 8.
[Page 64
Q. 3. (a) “Directors are described sometimes as agents, sometimes as trustees
and sometimes as managing partners.” Explain the position of directors in the
light of this statement. 5
(b) Who can convene an Extraordinary General Meeting of the shareholders? 5
(c) What is E-filing of documents? What are the advantages of E-filing under
MCA-21? 5
Ans. (a) Legal position of directors. See Q. 1, Chapter 11. [Page 74
(b) Convening of an EGM. See Q. 3, Chapter 12. [Page 101
(c) E-filing of documents and its advantages under MCA-21. See Q. 1,
Or
(a) What are those powers which the Board of Directors cannot exercise
without a unanimous consent? 5
(b) Discuss the procedure of Online Registration of a company. 5
(c) ‘X’ appoints ‘Y’ as proxy just before the meeting. ‘X’ comes to attend the
meeting. Explain the position of proxy appointed by ‘X’. 5
Ans. (a) Following are the powers which can only be exercised by the Board
with unanimous consent, i.e., consent of all the Directors present at the meeting:
(i) Power to appoint or employ a person as its Managing Director under
Section 203 of the Act, if he is the Managing Director or Manager of one
and not more than one other company.
(ii) Power to invest or to give loans or guarantee or security under Section
186(5) of the Act.
(b) Online Registration. See Q. 6, Chapter 3. [Page 21
(c) Proxy. According to the provisions of the Companies Act, any member of
the company entitled to attend and vote at a meeting shall be entitled to appoint
another person as a proxy to attend and vote at the meeting on his behalf. But the
proxy should be appointed 48 hours before the time fixed for the commencement
of the meeting. Also, a member can prevent the proxy from exercising the right to
vote by himself attending the meeting and voting at the meeting. In the given
case, ‘X’ appoints ‘Y’ as proxy just before the meeting, and he himself comes to
attend to the meeting. Therefore, if ‘X’ has not appointed the proxy ‘Y’ 48 hours
before the time of meeting, it is not a valid appointment. Also, ‘X’ comes to attend
the meeting himself, which also prevents the proxy (had it been a valid proxy)
from exercising voting right.
Q. 4. (a) What are the rights and obligations of ‘Depository’ and
‘Participants’ under the Depository Act, 1996? 5
(b) State the grounds and consequences of voluntary winding up of company. 5
(c) “One person cannot form the quorum for a General Meeting of company”.
Comment. 5
as
Ans. (a) Rights and obligations of ‘Depository’ and ‘Participants’. See Q. 6,
D
iv
(b) Grounds & consequences of voluntary winding up of company. See Q. 1.
Sh
[Page 155
(c) Quorum. See Q. 5(Point 3), Chapter 12. [Page 103
Can one person constitute a quorum? Ordinarily one person present in the
meeting can not form a quorum.
Under the following circumstances, even one person present may form the
quorum for a general meeting.
(i) When the Tribunal calls or directs the calling of an Annual General
Meeting, it may give direction to the company that one member present
in person or by proxy shall be deemed to constitute a meeting.
(ii) In case of class meetings, if all the shares of a particular class are held by
one person, he shall constitute the quorum.
(iii) If there is only one creditor or debentureholder, he shall constitute
quorum for the creditors’/debentureholders’ meeting.
Or
(a) What is dematerialisation of securities? How is it different from
rematerialisation? 5
(b) There are only two members of a company, they are also directors of the
company. Both of them are not on speaking terms. Can the company be wound
up on this ground? Give reasons. 5
(c) Discuss provisions relating to Transmission of shares. 5
Ans. (a) Dematerialisation and its distinction with Rematerialisation. See
Q. 2, Chapter 18. [Page 148
(b) Yes, the company can be wound up on this ground because under the given
circumstances it is only just and equitable that the company be wound up. There
is a complete deadlock in the management of the company as there are only two
CORPORATE LAWS—2016 (NOVEMBER) 197
members, who are also directors of the company, and both of them are not on
speaking terms. In Re Yenidje Tobacco Co. Ltd. (1916), L and M the only
shareholders and directors of a private limited company became so bitterly
hostile to each other that neither of them would speak to the other except through
the secretary. It was held that, there was a complete deadlock and consequently
the company be wound up.
(c) Main provisions related to Transmission of Shares:
(i) Person eligible to apply for transmission. In case of joint holding, the
survivor(s) shall only be entitled for registration and the legal heir of the
deceased member shall have no right or claims.
(ii) Share transfer deed not required for transmission. Execution of transfer
deed is not required in case of transmission of shares. Intimation/
application of Transmission accompanied with relevant documents
would be enough for valid transmission request.
(iii) Documents required for transmission of shares. In case of transmission
of shares by operation of law, it is not necessary to execute and submit
transfer deed. A simple application to the company by a legal
representative along with the following necessary evidences is
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sufficient—(a) Certified copy of death certificate; (b) Succession
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certificate; (c) Probate; (d) Specimen signature of the successor.
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(iv) Liability on shares shall continue. In case of a transmission of shares,
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shares continue to be subject to the original liabilities, and if there was
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any lien on the shares for any sums due, the lien would subsist, not with-
standing the devolution of the shares.
(v) Payment of consideration or stamp duty not required.
(vi) Time limit for issue of share certificate on transmission [Section-56(4)].
Every company, unless prohibited by any provision of law or of any
order of any Court, Tribunal or other authority, shall, within one month
deliver, the certificates of all shares transmitted after the application for
the registration of the transmission of any such shares received.
(vii) The limit for Refusal of registration of transmission. Power of refusal
to register transmission of shares is to be exercised by the company
within 30 days from the date on which the intimation of transmission is
delivered to the company.
(viii) Penalty for Non-compliance. Where any default is made in complying
with the provisions related to transmission of shares, the company shall
be punishable with fine which shall not be less than `25,000 but which
may extend to `5,00,000 and every officer of the company who is in
default shall be punishable with fine which shall not be less than `10,000
but which may extend to `1,00,000.
Q. 5. Write short notes on: 5,5,5
(a) Producer Company (b) Insider trading
(c) Director Identification Number (DIN)
Ans. (a) Producer Company. See Q. 7, Chapter 2. [Page 12
(b) Insider trading. When a company is likely to announce significant improve-
ment in its financial information, this unpublished price-sensitive information is
first available to the persons working in the accounts department of the company
or the Directors or the auditors of the company. These persons may purchase
shares of the company at low prices before the financial results are publicly
announced in the media. On the release of such information, the ordinary
investors in the market react and start buying the shares of the company. This
leads to rise in the price of the shares. The persons who had purchased shares at
a low price (before the release of information publicly) start selling the shares at a
higher price and make profits on such transactions. The innocent investors who
had purchased shares subsequent to the release of the price sensitive information
suffer losses. This kind of trading is known as Insider Trading and the persons
involved in such trading are known as Insiders.
To overcome this problem, SEBI issued some regulations prohibiting insider
trading in 1992 and again issued (Prohibition of Insider Trading) Regulations, 2015.
According to SEBI Act, ”Insider” means any person who is:
— a connected person; or
— in possession of or having access to unpublished price sensitive information.
Accordingly, no insider shall either on his own behalf or on behalf of any other
person, deal in securities of a company listed on any Stock Exchange when in
possession of any unpublished price-sensitive information or communicate or
hold or procure, directly or indirectly, any unpublished price sensitive
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information to any person who while in possession of such unpublished price-
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sensitive information shall not deal in securities.
iv
(c) Director Identification Number (DIN). See Q. 4(c), Chapter 11. [Page 81
h
Or
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Q. 5. Write short notes on: 5,5,5
(a) National Company Law Tribunal 5
(b) Small Company (c) Rating Agencies
Ans. (a) National Company Law Tribunal. See Q. 2, Chapter 17. [Page 143
(c) Rating agencies. A credit rating agency provides information and guidance
to institutional and individual investors and creditors. It helps in increasing the
ability of borrowers to raise funds from money market and the capital market. It
also helps the regulators in promoting transparency in the financial markets. It
provides an opinion regarding the ability of borrowers to pay off their debt
obligations on time.
Role in making an investment decision. Following services are provided by a
good Credit Rating Agency:
(i) The credit rating of all types of debt instruments—both short-term and
long-term is undertaken.
(ii) It provides Information Service under which it makes available
information on any company, local body, industry or sector required by a
business enterprise. It enables the users of the service to make informed
decisions regarding investments.
(iii) It prepares credit reports on companies which are used by the banks and
financial institutions while granting loans to companies.
(iv) It undertakes the study of equities by conducting an extensive study of the
shares listed on the major stock exchanges. It attempts to identify the equity
having good prospects in future on the basis of various fundamentals.
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2017 (MAY)
Q. 1. (a) ‘The fundamental attribute of corporate personality is that company
is a legal entity distinct from its members.’ Explain the statement citing
relevant case laws. 5
(b) Discuss the statutory provisions ‘regarding reduction of share capital’. 5
(c) With a view to issue shares to the general public, a shelf prospectus
containing some false information was issued by the company. Mr. X a high
net worth investor received a copy of the prospectus but did not apply for any
shares. The allotment of shares was completed by the company. A few months
later Mr. X bought 1000 shares of this company from the open market at a
higher price. Subsequently, the price of the shares fell and Mr. X sold these
shares at a heavy loss. Mr. X filed a case against the company claiming
damages for the loss suffered on the ground that the prospectus issued by the
company contained a false statement. Referring to the provisions of the
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Companies Act, examine whether Mr. X’s claim is justified. 5
Da
Ans. (a) Company is a legal entity distinct from its members.
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See Q. 1(Points 2 & 3), Chapter 1. [Page 1
h
(b) Reduction of share capital. See Q. 7, Chapter 4. [Page 29
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(c) Mr. X’s claim is not justified as he is not an original allottee of the shares.
He has purchased the shares from the open market. He has nothing to do with
the leading prospectus as he has not purchased the shares on the basis of
prospectus. But, there are certain remedies available to allottees who subscribed
for the shares on the basis of misleading prospectus.
For Remedies. See Q. 3, Chapter 6. [Page 45
Or
(a) What do you mean by lifting of the corporate veil? Explain the
circumstances when the corporate veil of a company may be lifted under the
order of the court. 5
(b) Describe the essential steps to be taken for the incorporation of a
company. 5
(c) The Articles of a company stated that Mr. A will be the financial advisor
of the company. The company in its general meeting passed a resolution to
appoint Mr. B in place of Mr. A as the financial advisor of the company by
altering the Articles of Association of the company. Explain with reasons
whether the company can do so. 5
Ans. (a) Lifting of the corporate veil and circumstances when the corporate
veil of a company may be lifted under the order of the court. See Q. 4, Chapter 1.
[Page 4
(b) Steps to be taken by the Promoter for incorporation of a company:
1. Select a suitable name and check availability. The name of the company
should not be identical with or resemble the name of an existing company or
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LLP. Also, the name should not be undesirable in the opinion of the central
government. Promoters may propose up to six names for the proposed company
and secure the name availability by making an Application in Form No. INC-1
along with the requisite fees to the Registrar of Companies (ROC). If the
proposed name is not found to be undesirable, it shall be made available to the
applicant and shall be reserved for 60 days from the date of approval. If the name
is found to be undesirable, the ROC shall inform the applicant and ask for any
further information in that matter or for resubmission of the application with
new name, within 60 days. Two opportunities shall be allowed to the applicant
for resubmission of the name against the fee paid originally. The promoter
should not furnish any wrong or incorrect information for the reservation of the
name. If, before incorporation it is found that the name was applied by
furnishing wrong or incorrect information, the name so reserved shall be
cancelled and the applicant could be fined up to `1 lakh.
2. Preparation of Memorandum and Articles of Association. Memorandum of
Association is the document which lays down the objectives of the company. The
Articles of Association contain rules regarding internal management of the
company. The promoter should prepare these documents carefully and get them
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printed after vetting of the same by the ROC/Regional director.
a
The Memorandum and Articles of Association must be signed by each
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subscriber along with his name, address, description, occupation, if any, in the
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presence of at least one witness who shall attest his signature. The witness shall
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also sign and add his name, address, description and occupation, if any. The
subscribers should also mention the number and nature of shares subscribed by
them.
3. Particulars of First Directors of the company and their consent to act as
such. Particulars of each person mentioned in the Articles of Association as first
director of the company, including his Director Identification Number (DIN) and
his interest in other body corporate or firms along with his consent to act as the
director of the company should be filed in Form No. DIR-12 along with the
requisite fee with the ROC. It is necessary for all directors (existing or first time)
to have DIN. If the said person does not have DIN, he must apply for it
electronically.
4. Filing of documents and forms for Registration. All documents related to
incorporation shall be filed before the Registrar such as Memorandum and
Article of the company, address for correspondence till the Registered office is
established, particulars of subscribers, proof of residential address, proof of
identity of promoters, etc.
5. Registration fee and filing fee. Promoters must make sure that along with
the forms and documents, the prescribed registration fee and fee for filing of
forms has been paid.
(c) Yes, the company can do so as neither the company nor the members are
bound to the outsiders.
Neither the company nor the members are bound to outsiders. The
Memorandum and Articles do not create a contract between the company and
the outsiders, i.e., vendors, solicitors, secretary, etc. Neither the company nor the
In the case of Eley vs. Positive Government Security Life Assurance Co. Ltd.,
the Articles provided that Eley would be the company’s solicitor for life. He
would not be removed except for misconduct. He became a member in the
company also. He acted as solicitor of the company but the company removed
him after some time. He filed a suit against the company for breach of the
Articles. It was held that he had no cause of action, because the Articles did not
constitute any contract between the company and himself.
Q. 2. (a) Define a private company and state the provisions under the
Companies Act, 2013 for the conversion of a private company into a public
company. 5
(b) Define a Government Company. State special provisions of the
Companies Act relating to Government Companies. 5
(c) Write a note on ‘Shelf Prospectus’. 5
Ans. (a) Private Company. See Q. 1, Chapter 2. [Page 8
Conversion of a Private company into a Public company. See Q. 3, Chapter 2.
[Page 9
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(b) Government Company and Provisions of the Companies Act relating to
a
Government companies. See Q. 8(b), Chapter 2. [Page 14
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(c) Shelf Prospectus. See Q. 2(d), Chapter 6. [Page 44
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Or
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(a) Define Producer Company and explain the objects for which Producer
Company is formed. 5
(b) ‘A promoter remains liable for pre-incorporation contracts’. Critically
examine the statement. 5
(c) Explain different kinds of resolutions passed at the general meeting of
the shareholders, citing appropriate examples for each. 5
Ans. (a) Producer company and Objects for which it is formed. See Q. 7,
Chapter 2. [Page 12
(b) Preliminary or Pre-incorporation Contracts. During promotion of the
company, the promoters of the company enter into various contracts with third
parties, e.g., purchasing some property or hiring the services of professionals like
lawyers, technicians etc. Legally, such contracts are not binding on the company
after it is incorporated.
All such contracts which are entered into by the promoters before the
incorporation of the company are called ‘Preliminary Contracts.’ The Company
can neither sue nor it can be sued on the basis of such contracts because the
company was not a party to such contracts. A company cannot even ratify or
adopt such contracts to get the benefit of such contracts. Promoters themselves,
remain personally liable on all such contracts.
Section 15(h) of the Specific Relief Act, 1963 provides that where the promoter
of a public company has entered into a pre-incorporation contract for the
purposes of the company and is warranted by the terms of incorporation it can be
enforced by the company. Further, Section 19(e) of the Specific Relief Act, 1963
provides that the third party can also enforce the contract if the company has
adopted it after its incorporation and the contract is within the terms of its
incorporation, provided such acceptance was communicated to the third party.
The contract should be essential for the working or incorporation of the company,
e.g., contract to print Memorandum and Articles of Association.
(c) Resolutions passed at the general meeting of the shareholders. See Q. 8,
Q. 3. (a) A company has its registered office at Mumbai in the state of
Maharashtra. For better administrative convenience, the company wants to
shift its office at Pune in the state of Maharashtra. What formalities the
company has to comply with for shifting its registered office? 5
(b) Differentiate between the right shares and bonus shares. 5
(c) Can a retiring director be reappointed? Explain the provisions of the
Companies Act in this regard. 5
Ans. (a) Formalities to be complied with by the company for shifting of the
registered office from Mumbai to Pune. See Q. 4(Point 3), Chapter 4. [Page 27
(b) Distinction between Right shares and Bonus shares. See Q. 8, Chapter 8.
[Page 64
(c) Reappointment of retiring director. In the case of a Public Company or a
Private Company which is subsidiary of a Public Company, only one-third of the
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total number of Directors can be permanent. At least two-thirds of the total
a
number of Directors shall be rotational directors. However, the Articles of
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Association of the Company can provide that all the Directors shall retire at every
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annual general meeting. But in case of a Private Company, all the Directors can
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be permanent.
At every subsequent annual general meeting, out of the two-third rotational
directors, one-third or the number nearest to one-third must retire.
The retiring director is subject to re-election. According to Section 152(e), at the
Annual General Meeting at which the director retires, the company may fill up
the vacancy by appointing the retiring director or any other person. If the
vacancy is not filled up at the Annual General Meeting and the meeting has not
expressly resolved not to fill the vacancy, it shall be filled at the adjourned
meeting which shall be held 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.
If at the adjourned meeting also, the vacancy of the retiring director is not filled
up and in that meeting also, it has not been expressly resolved not to fill the
vacancy, the retiring director shall be deemed to have been re-appointed at the
adjourned meeting unless:
— at that meeting or the previous meeting, a resolution for his re-
appointment was put to the meeting but was lost,
— the retiring director has, by a notice in writing to the company or its
Board of Directors, expressed his unwillingness to be re-appointed as
director,
— he is not qualified or is disqualified for appointment, or
— an ordinary special resolution is necessary for his appointment or re-
appointment by virtue of any provisions of the Companies Act, 2013, or
— Section 162 is applicable to the case i.e., filling two or more vacancies by
a single resolution.
Or
(a) What do you mean by ‘buy back of securities’? Explain the provisions of
the Companies Act, 2013 regarding ‘buy back of securities’. 5
(b) What do you mean by transmission of shares and distinguish between
the transfer and transmission of shares. 5
(c) Write a note on Corporate Social Responsibility Committee. 5
Ans. (a) Buy-back of securities. See Q. 5, Chapter 8. [Page 60
(b) Transmission of shares and Distinction between Transfer of shares and
Transmission of shares. See Q. 3, Chapter 10. [Page 72
(c) Corporate Social Responsibility Committee. (Out of Course)
Corporate Social Responsibility of corporates is governed by the provisions of
Section 135, Companies (Corporate Social Responsibility Policy, Rules, 2014 and
by Schedule VII of the Companies Act, 2013.
Section 135(1) provides that every company having a
— net worth of `500 crores or more, or
— turnover of over `1,000 crore or more, or
— net profit of `5 crores or more
in any financial year shall constitute, Corporate Social Responsibility
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Committee of the Board of Directors consisting of 3 or more directors, out of
a
which at least one director should be an independent director.
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Rule 5 of the Companies (Corporate Social Responsibility Policy) Amendment
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Rules, 2014 provides that an unlisted public company or a private company
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which meets the criteria prescribed by Section 135(1) can have its CSR Committee
without an independent director, if not required to appoint the same. Again, a
private company having only two directors in its Board, shall constitute its CSR
Committee with both such directors. Section 135(2) provides that the Board’s
Report shall disclose the composition of the CSR committee.
Section 135(3) provides that the Corporate Social responsibility Committee
shall:
(i) Formulate and recommend to the Board, a Corporate Social
Responsibility Policy which shall indicate the activities to be undertaken
by the company as specified in Schedule VII.
(ii) Recommend the amount of expenditure to be incurred on the activities
referred to above, and
(iii) Monitor the Corporate Social Responsibility Policy of the company
from time to time.
Q. 4. (a) State the provisions of the Companies Act, 2013 with respect to
qualifications and disqualifications of Directors. 5
(b) State the legal provisions regarding calling and holding of an Annual
General Meeting. What are the consequences of default in holding of such a
meeting. 5
(c) Write a note a Audit Committee. 5
Ans. (a) Qualifications & Disqualifications of Directors. See Q. 3, Chapter 11.
[Page 79
(b) Calling and holding of an Annual General Meeting. See Q. 2, Chapter 12.
[Page 99
Consequences of default in holding of such a meeting. See Q. 2(Point 10),
(c) Audit Committee. See Q. 14, Chapter 11. [Page 93
Or
(a) Distinguish between a whole time director and a managing director. 5
(b) What do you mean by insider trading? State the legal provisions
regarding insider trading under the Companies Act, 2013. 5
(c) Write a note on postal ballot. 5
Ans. (a) Distinction between a Whole-time Director and a Managing Director.
(b) Insider Trading. (Out of Course)
See Q. 5(b), 2016 (November). [Page 201
Regulation of Insider Trading. Insider Trading in India is regulated by Sec. 195
of the Companies Act, 2013 by SEBI (Prohibition of Insider Trading) Regulations,
2015
Insider Trading As Per the Companies Act, 2013. Section 195(1) provides that
no person including any director or key managerial personnel of a company shall
enter into insider trading. Insider Trading is referred to:
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• an act of subscribing, buying, selling, dealing, or agreeing to subscribe,
a
buy, sell or deal in any securities, by any director or key managerial
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personnel or any other officer of the company, either as principal or
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agent, if such director, key managerial personnel or any other officer of
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the company is reasonably expected to have access to any non-public
price sensitive information in respect of securities of the company, or
• an act of counselling about procuring or communicating, directly or
indirectly, any non-public price sensitive information to any person.
It is to be noted that communication required in the ordinary course of business
or profession or employment or under any law does not fall under the purview of
Section 195(1).
As per Section 195(1)(b), “Price-sensitive Information” means any information
which relates, directly or indirectly, to a company and which if published is likely
to materially affect the price of securities of the company.
Penalty for Insider Trading Under the Companies Act, 2013. [Section 195(2)]
If any person is found guilty of insider trading, he shall be punishable with
imprison-ment up to 5 years or with fine ranging from `5 lakhs to `25 crores or 3
times the amount of profits made out of insider trading whichever is higher, or
with both.
(c) Postal Ballot. See Q. 10, Chapter 12. [Page 111
Q. 5. (a) What is meant by inability to pay debts? Can a company be wound
up on this ground? 5
(b) What is the process of dematerialization of physical shares under the
Depository System? Can these be rematerialized? 5
(c) Define the term books of account and discuss the provisions for the
maintenance of books of account under the Companies Act, 2013. 5
Ans. (a) Inability to pay debts comes under the perview of Indian Bankruptcy
Code, 2016.
(b) Process of Dematerialization of physical shares under the depository
system:
(i) The Depository Participant (DP) provides Dematerialisation Request
Form (DRF) to the investor. The shareholder fills up separate DRFs for
each company and submits the same with the DP along with the share
certificates to be dematerialized after writing “Surrendered for
Dematerialization” on the face of each certificate.
(ii) The DP will send DRF along with the certificates to the company for
confirmation of its genuineness through Depository (NSDL/CDSL).
(iii) After checking the genuineness of the certificates and the DRFs, the
company shall destroy the certificates and send confirmation to
Depository which in turn confirms the DP of the investor.
(iv) The DP on receipt of such confirmation shall inform the investor accordingly.
(v) For the securities dematerialized, the Depository is the Registered Owner
in the books of the issuing Company and the investor is the Beneficial
Owner in the books of the depository.
Can the Dematerialized shares be Rematerialized?
(i) The investors holding shares in electronic form can convert their holding of
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shares in part or in full into physical form of share certificates through the
a
process of Rematerialisation (Remat). The investor will have to request his
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DP for Remat, who in turn intimates the depository of the request.
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(ii) The depository will forward the same to the company.
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(iii) The company updates accounts and prints and issues certificates and
confirms the Depository. This process of getting back the share
certificates in paper form is called Rematerialisation.
(iv) Depository updates accounts and downloads the details the DP.
(v) The DP sends the intimation about Remat to the client.
(c) Books of Account and Provisions related to its maintenance. See Q. 1,
Or
(a) There are only two members of a company. They are also the directors of
the company. Both of them are not on speaking terms. Can the company be
wound up on this ground? Give reasons. 5
(b) Examine the salient features of the Depository Act, 1996. 5
(c) Write a note on ‘Investor Education and Protection Fund’. 5
Ans. (a) Where there is a complete deadlock in the management of the
company, the company may be ordered to be wound up on just and equitable
grounds [Re. Akola Electric Supply Co. Ltd.]. For instance, when directors are
not on speaking terms or are bitterly hostile to each other.
A company cannot be ordered to be wound up if there is difference in view of
the majority directors and minority directors.
Therefore, in the given case where 2 members who are also the directors of the
company are not on speaking terms, there is a deadlock and the company may be
ordered to be wound up.
(b) Salient features of the Depository Act, 1996. See Q. 9, Chapter 18. [Page 154
(c) Investor Education and Protection Fund. See Q. 4, Chapter 13. [Page 118
_____________
B.Com. (Hons.)
Q. 1. (a) Define Corporate Veil. When does the court lift up the corporate
veil? 7
(b) Define Private Company. 4
Lifting up of the corporate veil. At times it may happen that the corporate
personality of the company is used to commit frauds and improper or illegal acts.
Since an artificial person is not capable of doing anything illegal or fraudulent,
the façade of corporate personality might have to be removed to identify the
persons who are really guilty. This is known as ‘lifting of corporate veil’.
When this veil is used as a means to commit fraud or wrong conducts, then it
becomes necessary for even courts to lift or pierce this veil and to look at the
members who are behind the company and to hold them liable for the wrongful
acts of the company.
Lifting of corporate veil or exceptions to the separate legal entity concept can
be studied under the following heads:
1. Under statutory provisions; 2. Under judicial interpretations
(b) Private Company. See Q. 1, Chapter 2. [Page 8
Or
(a) Explain the meaning of pre-incorporation contracts. What is the legal
status of pre-incorporation contracts? 7
(b) Write a note on illegal association. 4
Ans. (a) Pre-incorporation contracts. See Q. 2(a), Chapter 3. [Page 18
Legal status of pre-incorporation contracts. All such contracts which are
entered into by the promoters before the incorporation of the company are called
‘Preliminary Contracts.’ The legal position is that since presence of two
consenting parties is necessary for a contract, and the company before
incorporation is a non-entity, the promoters cannot act as agents for the company
which has yet to come into existence. As such, the company is not liable for the
acts of the promoters done before its incorporation. The Company can neither sue
nor it can be sued on the basis of such contracts because the company was not a
party to such contracts. A company cannot even ratify or adopt such contracts to
get the benefit of such contracts.
(b) Illegal association. See Q. 8(e), Chapter 2. [Page 16
Q. 2. (a) ‘Power to alter Articles of Association is wide yet subject to a
number of conditions’. Do you agree? If so, elaborate the conditions. 7
(b) Differentiate between transfer and transmission of shares. 4
Ans. (a) Alteration of Articles. Articles can be altered simply by passing a special
resolution. Approval of the Tribunal is required where a public company is to be
converted into a private company.
206
Thus, the power to alter Articles of Association is wide. It can be altered simply
by passing a special resolution. But alteration in the Articles is subject to a
number of conditions.
For these conditions or restrictions. See Q. 2, Chapter 5. [Page 35
(b) Difference between transfer and transmission of shares. See Q. 3, Chapter 10.
[Page 72
Or
(a) What do you mean by doctrine of indoor management? Are there any
exceptions to this doctrine? Elaborate. 7
(b) State the process of forfeiture of shares. 4
Ans. (a) Doctrine of indoor management. See Q. 4(b), Chapter 5. [Page 37
Exceptions to the Doctrine of Indoor Management. See Q. 4(b), Chapter 5.
[Page 38
(b) Process of forfeiture of shares. See Q. 1, Chapter 9. [Page 67
Q. 3. (a) Explain the requisites of a valid meeting. 7
(b) Write a note on shelf prospectus. 4
Ans. (a) Requisites of a valid meeting. See Q. 5, Chapter 12. [Page 102
(b) Shelf prospectus. See Q. 2(d), Chapter 6. [Page 44
s
Or
Da
(a) Explain various provisions under listing agreement with regard to
iv
corporate governance. 7
Sh
(b) A husband and wife who were the only two members of a private
company died in an accident. Does the company also come to an end? 4
Ans. (a) Out of Course.
(b) See Q. 1(Point 4), Chapter 1. [Page 2
Q. 4. (a) What is the buy-back of securities? State provisions regarding buy-
back of securities. 7
(b) Write a note on Board meeting. 4
Ans. (a) Buy-back of securities. See Q. 5, Chapter 8. [Page 60
Provisions regarding buy-back of securities. See Q. 5, Chapter 8. [Page 61
(b) Board meeting. See Q. 11, Chapter 11. [Page 89
Or
(a) What are the various ways by which directors are appointed? Is it
mandatory to have small shareholders’ representative on the board? 7
(b) Write a note on investors Education and Protection Fund. 4
Ans. (a) Various ways by which directors are appointed. See Q. 5, Chapter 11.
[Page 82
Is it mandatory to have small shareholders representative on the board?
Section 151(1), defines ‘small shareholder’ as a shareholder holding shares of
nominal value of not more than twenty thousand.
Sub-Section (1) provides that a listed company ‘may’ have one director elected
by such small shareholders in such a manner and with such terms and conditions
as may be prescribed. Thus, the term ‘may’ makes it clear that it is not mandatory
to have small shareholders’ representative on the board.
(b) Investors Education and Protection Fund. See Q. 4, Chapter 13. [Page 118
Q. 5. (a) What is D-mat of shares? How does Depository Act facilitate D-mat
of shares? 7
(b) Distinguish between Right Issue and Bonus Issue. 4
Ans. (a) D-mat of shares. D-mat of shares is the process by which physical
certificates of securities of an investor are converted into an equivalent number
of securities in electronic form and credited into investor’s account with his/her
Depository Participant (DP).
How does Depository Act facilitate D-mat of shares? The Depositories Act,
1996 provides a legal framework for setting up depositories so that transfer of
securities could be effected through book entry only in the ledgers of the
depository without the physical movement of scrips. Each depository is required
to be registered under the Companies Act, and also with SEBI (Securities and
Exchange Board of India) and receive a “Certificate of Commencement of
Business” from it. Each depository will have its agents to be known as
‘Depository Participants’, who shall be a crucial link between the investors and
the depository. A depository will interface with the investors through a set of
‘Depository Participants’. An investor who wants to avail himself of the services
of a depository, is required to enter into an agreement with the depository
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through a Depository Participant (DP), and for this he has to open a ‘Demat’
a
account with a DP of the depository.
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Thus, by providing a legal framework for setting up depositories, the
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Depositories Act, 1996 has facilitated D-mat of shares.
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(b) Difference between Right Issue and Bonus Issue. See Q. 8, Chapter 8.
[Page 64
Or
(a) What is the difference between winding-up and dissolution of
company? Explain provisions regarding voluntary winding-up. 7
(b) A purchased from B 1000 shares of a company on the basis of a
prospectus containing wrong statements. Is he entitled to the remedies
available for mis-statement in prospectus? Comment. 4
Ans. (a) Difference between winding-up and dissolution of company. See Q. 1,
Provisions regarding voluntary winding-up. See Q. 1. [Page 155
(b) See Practical Problem 1, Chapter 6. [Page 51
_____________
B.Com. (Hons.)
Q. 1. (a) Explain the principle of separate legal entity of a company with
suitable case studies. Explain the consequences which emanate from separate
legal entity. 9
(b) Write a note on licensed company. 6
Ans. (a) Principle of separate legal entity. See Q. 1(Point 3), Chapter 1.
[Page 1
Consequences which emanate from separate legal entity:
1. A company can sue and be sued in its own name.
2. A company can own, enjoy and transfer property in its own name.
3. The creditors of the company are the creditors of the company alone.
They can not file a suit against the members and vice-versa.
4. Members do not have any rights in the assets owned by the company
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during its existence or on its winding up.
a
(b) Licensed company. See Q. 8(c), Chapter 2. [Page 15
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Or
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(a) ‘Promoter is neither an agent nor a trustee, rather he stands in a fiduciary
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relationship with company he promotes’. Explain. 9
(b) State provisions of the Indian Companies Act with regard to Government
Company. 6
Ans. (a) ‘Promoter is neither an agent nor a trustee’. See Q. 1, Chapter 3.
[Page 18
Q. 2. (a) Memorandum of Association is a document of importance for
outsiders while Articles of Association are for internal regulations. Explain the
difference between these two in the light of above statement. 9
(b) Define Pre-incorporation Contracts. Are these contracts binding on the
company? 6
Ans. (a) Memorandum of Association. See Q. 1, Chapter 4. [Page 24
Articles of Association. See Q. 1, Chapter 5. [Page 33
Distinction between Memorandum of Association and Articles of Association.
(b) Pre-incorporation Contracts. See Q. 2(a), Chapter 3. [Page 18
Or
(a) State the meaning of mis-statement in prospectus. Can a shareholder who
is not an original allottee avail of remedies available for mis-statement in the
prospectus? When does the aggrieved shareholder lose the right of rescission
of shares? 9
(b) Explain the meaning of issue of shares through book-building process. 6
Ans. (a) Meaning of mis-statement in prospectus. See Q. 3, Chapter 6. [Page 45
209
A shareholder who is not an original allottee can not avail of remedies
available for mis-statement in the prospectus.
Aggrieved shareholder loses the right of rescission of shares under the
following circumstances:
misstatements.
(b) Issue of shares through book-building. See Q. 4(a), Chapter 6. [Page 48
Q. 3. (a) State provisions regarding calling and holding of Annual General
Meeting. What business is conducted in this meeting? Is it rightly said any
business may be discussed in the meeting but no resolution can be passed
regarding a matter a prior notice of which has not been given? 9
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(b) Write a note on proxy. 6
a
Ans. (a) Provisions regarding calling and holding of Annual General Meeting.
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Business conducted in AGM. See Q. 2 (Point 8), Chapter 12. [Page 100
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Resolution. In any meeting, the matters which are put for consideration are in
the form of proposals and are called ‘motions’. In a meeting any such “motion”
may be brought for consideration either by the Chairman or by the Secretary or
by any other member also. Any such motion, after due discussion, is put to vote
or for decision and its decision is recorded in the form of “Resolution”. So a
resolution means formal recording of the wishes of the members present as
expressed by voting. Generally, resolutions are of three types:
1. Ordinary Resolution
2. Special Resolution
3. Resolution requiring special notice.
However, any business—ordinary or special, may be discussed in the meeting
but no resolution can be passed regarding a matter a prior notice of which has
not been given. All the three types of resolutions ordinary, special and resolution
requiring special notice require prior notice to be given.
(b) Proxy. See Q. 6, Chapter 12. [Page 105
Or
(a) Who may call Extra Ordinary General Meeting? 9
(b) Distinguish between ordinary and special resolution. 6
Ans. (a) Extra Ordinary General Meeting. See Q. 3, Chapter 12. [Page 101
(b) Distinction between ordinary and special resolution. See Q. 9, Chapter 12.
[Page 110
Q. 4. (a) ‘Interim dividend is treated on the same footing as final dividend’.
Explain the validity of the above statement through provisions regarding
payment of dividend under the act. 9
(b) Define independent director under clause 49 of listing agreement. 6
Ans. (a) Interim dividend. A dividend declared in between two Annual
General Meetings of the company by the Board of Directors is known as Interim
Divined. As per the Companies Act, 2013, the term dividend includes interim
dividend also. Thus, all the provisions relating to dividend have now become
applicable to interim dividend.
Provisions regarding payment of dividend under the Companies Act, 2013. The
following provisions equally apply to the Interim Dividend and the Final
Dividend:
1. Depreciation. Depreciation has to be provided for the full year as per
Schedule II.
2. Transfer to reserves. A company may, before the declaration of any
dividend in any financial year, transfer such percentage of its profits for
that financial year as it may consider appropriate to the reserves of the
company.
3. Depositing the amount of dividend declared into a separate bank
account. The dividend declared must be deposited in a separate bank
account within five days of its declaration and the same shall be used for
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the payment of dividend.
a
4. Dividend to be paid in cash. Dividend shall be paid only in cash, either
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by cheque or warrant or through any electronic mode except when
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adjusted towards paying up unpaid amount on shares held by the
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members of the company.
5. Dividend to be paid only to the registered shareholders and beneficial
owners. Dividend is to be paid only to the registered holder of shares or
to his order or to his banker. Dividend shall be paid in proportion to the
amounts paid up on each share.
6. Time framework for the payment of dividend. A dividend which has
been declared at the General Meeting of the shareholders, becomes a
debt against the company and, it should be paid within 30 days from the
date of its declaration.
Penalty for failure to pay dividend within 30 days—In case a dividend has
been declared by a company but not paid or the warrant in respect
thereof has not been posted, within 30 days from the date of the
declaration, to any shareholder entitled to the payment of the dividend,
every director of the company who is knowingly a party to the default,
shall be punishable with imprisonment for a term which may extend to 2
years and with a minimum fine of ` 1,000 for every day during which
such default continues.
The company shall also be liable to pay simple interest at the rate of 18%
per annum during the period for which such default continues.
7. Transfer of unpaid or unclaimed dividend. According to Section 124(1),
where, after the declaration of the dividend, it has not been paid or
claimed within 30 days from the date of the declaration to any
shareholder entitled to the payment of the dividend, the company shall,
within 7 days from the date of expiry of the said period of 30 days,
transfer the total amount of dividend which remains unpaid or
unclaimed to a special account called the Unpaid Dividend Account. For
this purpose, the company has to open Unpaid Dividend Account in
scheduled bank. In case of delay, the company would have to pay
interest @12% p.a.
Protection Fund. Any money transferred to the Unpaid Dividend
Account of a company which remains unpaid or unclaimed for a period
of 7 years from the date of such transfer shall be transferred by the
company along with the interest accrued, if any, thereon to the Investor
Interim dividend, like final dividend, shall constitute a debt, once it is declared
and shall not be revocable.
(b) Independent Director. As per clause 49 of the listing agreement, an
independent director is a non-executive director of the company who:
(i) apart from receiving director’s remuneration does not have any material
pecuniary relationships or transactions with the company, its promoters,
its directors, its senior management or its holding company, its
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subsidiaries and associates which may affect independence of the director;
a
(ii) is not related to promoters or persons occupying management positions
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at the board level or at level below the board;
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(iii) has not been an executive of the company in the immediately preceding
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three financial years;
(iv) is not a partner or an executive or was not partner or an executive during
the preceding three years, of the statutory audit firm or the internal audit
firm that is associated with the company, and the legal firm(s) and
consulting firm(s) that have a material association with the company;
(v) is not a material supplier, service provider or customer of the company,
which may affect independence of the director; and
(vi) is not a substantial shareholder of the company, i.e., holding two percent
or more of the block of voting shares.
Or
(a) Who can be a Director? Can a director of company be appointed by the
board of directors? Explain 9
(b) Write a note on producer company. 6
Ans. (a) Who can be a Director. See Q. 3, Chapter 11. [Page 79
Yes, a director of a company can be appointed by the Board of directors in the
following circumstances. See Q. 5 (Point 3), Chapter 11. [Page 82
(b) Producer company. See Q. 7, Chapter 2. [Page 12
Q. 5. (a) State the circumstances under which company may compulsorily
be wound up. 9
(b) Write a note on Dematerialization of shares. 6
Ans. (a) Circumstances under which company may compulsorily be wound up.
(b) Dematerialization of shares. See Q. 2 [Points (i) to (viii)], Chapter 18.
[Page 148
Or
(a) Depository Participant acts as a link between depository and beneficial
owner. Explain the functioning of depository system. 9
(b) State legal position of director in a company. 6
Ans. (a) Depository Participant. In India, depository participant (DP) is
described as an agent of the depository. They are the intermediaries between the
depository and the investors. The relationship between the DPs and the
depository is governed by an agreement made between the two under the
Depositories Act. In a strictly legal sense, a DP is an entity who is registered
with SEBI under the Subsection 1A of Section 12 of the SEBI Act. As per the
provisions of this Act, a DP can offer depository related services only after
obtaining a certificate of registration from SEBI.
Functioning of depository system. See Q. 3 (Working of a Depository),
(b) Legal position of director in a company. See Q. 1, Chapter 11. [Page 74
_____________
Das
Shiv
2018 (MAY)
Q. 1. (a) “A company in law is a different person altogether from the
members.” Comment, citing the relevant case laws. 5
(b) Write a note on a ‘small company’. 5
(c) “The Companies Act is not against the profits made by a promoter, but its
non-disclosure.” Examine the statement with regard to duties and obligations
of promoter of a company. 5
Ans. (a) “A company in law is a different person altogether from the
members.” See Q. 1(Point 3), Chapter 1. [Page 1
Or
(a) “The property of a company is the property of its members.” Comment
on the statement with the help of suitable case laws. 5
as
(b) Explain the concept of ‘Producer Company’. State the objectives for
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which a producer company may be formed. 5
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(c) Describe the essential steps to be taken for on-line registration of a
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company. 5
Ans. (a) A company is a legal person and is different from its members. The
property of the company belongs to the company alone and the members can not
claim individually or jointly ownership right in the assets of the company during
its existence or in its winding up. This can be understood with the help of the
following case laws.
1. Separate Property. A company can hold property in its own name. The pro-
perty of the company is in its own name and managed and controlled by it. As
such, property of the company is its own property and its members have no
insurable interest in it. Members, thus, cannot get insurance-claim of the
company’s property. This was so decided in the case of Macaura vs. Northern
Assurance Co. Ltd.
In the case of Macaura vs. Northern Assurance Co. Ltd., Macaura (M), the
owner of a timber estate sold all the timber to a registered company in exchange
for the shares in the company. The timber continued to be insured in M’s name
personally. He held all the shares of the company except one. He had also
advanced loan to the company. Bulk of the timber was destroyed by fire. M
claimed the loss from the insurance company. Held, the insurance company was
not liable as M had no insurable interest in the company’s property. M, neither as
shareholder nor as creditor, could insure the company’s property.
2. Another case on separate property is that of Bacha F. Guzdar vs.
Commissioner Of Income Tax, Bombay.
Under the Income Tax Act, then in force, agricultural income was exempt from
214
tax. The income of a tea company was exempt upto 60 per cent being agricultural
income. 40 per cent was taxed as income from manufacture and sale of tea. The
plaintiff (Bacha F. Guzdar) was a member of a tea company and she received a
certain amount of dividend in respect of the shares which she held in the
company. She claimed that her dividend income should be treated as agricultural
income to the extent of 60 per cent since she and the company were one and the
same. It was decided that the income of the company was agricultural to the
extent of 60 per cent and the same could not be regarded as partly agricultural
income for the individual.
The Supreme Court said that a shareholder is not the part owner of the
company or its property. The law gives only certain rights to the shareholders e.g.
right to attend meetings of the company, right to vote, right to receive dividend
etc.
(b) Producer company and objectives for forming it. See Q. 7, Chapter 2.
[Page 12
(c) Steps for on-line registration. See Q. 6, Chapter 3. [Page 21
Q. 2. (a) “A company cannot justify a breach of contract by altering its
Articles of Association.” Explain. 5
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(b) ‘A’ applied for certain shares of a company on the basis of a prospectus
a
containing the names of six directors of the company. Two directors from these
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six retired before the shares were allotted. Can ‘A’ exercise the right of
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rescission against the company? Also explain the cases where he will lose this
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right. 5
(c) State the importance of ‘Memorandum of Association’ of the company.
Explain the procedure relating to the alteration of object clause of
Memorandum of Association. 5
Ans. (a) See Q. 2(Point 7), Chapter 5. [Page 36
(b) Yes, ‘A’ can exercise the right of rescission against the company. If a
statement becomes untrue before the allotment is made, the contract can be
rescinded. In this case, the prospectus contained the names of six directors and
before the allotment of shares, the number of directors got reduced to four due to
retirement of two directors. Therefore, the statement became untrue and the
contract can be rescinded.
Cases where right of rescission is lost. The right of rescinding the contract,
however, is lost under the following circumstances:
misstatements.
(c) Importance of ‘Memorandum of Association’. See Q. 1, Chapter 4.
[Page 24
Procedure relating to the alteration of object clause of Memorandum of
Or
(a) A company was in financial difficulties and the majority shareholders
representing 95% of the shares were willing to provide the required capital if
remaining shareholders amounting to 5% would sell their shares to the
majority shareholders. However, the minority shareholders refused to sell
their shares to majority shareholders, but the company altered its Articles so as
to authorize the majority shareholders to purchase the shares of minority
shareholders compulsorily upon certain terms. Are the minority shareholders
bound by this alteration? Explain. 5
(b) Write a note on ‘Deemed Prospectus’. 5
(c) A company wants to shift its registered office from Chennai to
Coimbatore both in the state of Tamil Nadu for administrative convenience.
What provisions the company has to comply with under the Companies Act,
2013 for shifting its registered office? 5
Ans. (a) The minority shareholders are not bound by the alteration. The given
case is based on the facts of the case Brown vs. British Abrasive Wheel Co.
s
For details of the case. See Q. 2, (Point 3), Chapter 5. [Page 35
a
(b) Deemed Prospectus. See Q. 2(b), Chapter 6. [Page 43
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(c) See Q. 4(Point 3), Chapter 4. [Page 27
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Q. 3. (a) What do you understand by the forfeiture of shares? Explain the
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requirements of a valid forfeiture of shares by a company. 5
(b) What are the conditions to be fulfilled by a company that proposes to
issue ‘sweat equity shares’ under the Companies Act, 2013? 5
(c) Why does the Companies Act allow a company to buy back it shares?
Which sources of funds can be used by the company for this purpose? 5
Ans. (a) Forfeiture of shares. See Q. 1, Chapter 9. [Page 67
(b) Sweat Equity Shares. See Q. 6, Chapter 8. [Page 62
(c) The Companies Act allows a company to buy back its shares for the
following reasons:
(i) To improve shareholders’ net worth. When shares are bought back, they
are physically destroyed and the number of shares gets reduced. It leads
to an increase in the earning per share of the company. Normally, the
buy back price offered by the company is higher than the prevailing
market price. Hence the investors are benefited by way of return of their
capital.
(ii) To promote capital formation. Buy back provides the investors, real
return on their investment. They can reinvest the same and it leads to
capital formation which is essential to increase the pace of economic
growth.
(iii) To provide an alternative route to restructure the companies. Buy back
helps the companies to lower their overall cost of capital by structuring
the debt equity composition. Reduction in overall cost of capital helps the
companies in improving their return on share capital ,thereby leading to
improvement in the market price of its shares.
(iv) To prevent hostile takeover bids. The buy back increases the percentage
stake of the promoters in the company. Therefore, the control of the
company remains in their hands and hostile takeover bids are prevented.
Promoters’ stake goes up without spending any money because the
shares are bought back by using company’s reserves and surpluses.
Sources of funds which can be used by the company for buy back of its shares.
A company may purchase its own shares or other securities (specified ones) from
out of:
(i) its free reserves; or
(ii) Securities Premium A/c; or
(iii) proceeds of issue of shares or securities made at the time of such buy-
back.
Or
(a) Who is member of a company? Explain various modes of acquiring
membership of a company. 5
(b) What are the bonus shares? State the conditions that must be complied
with before a company makes a bonus issue. 5
(c) What are the sources of money credited to the ‘Investor Education and
s
Protection Fund’? 5
a
Ans. (a) Out of the Syllabus
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(b) Bonus shares & conditions to be complied with before bonus issue.
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See Q. 7(b), Chapter 8. [Page 64
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(c) Sources of money credited to investor education and protection fund.
Q. 4. (a) Write a note on ‘voting by electronic means’. 5
(b) Discuss the provisions of the Companies Act, 2013 regarding the
Directors Identification number. 5
(c) Under what circumstances a director is deemed to have vacated the office
of directorship? 5
Ans. (a) Voting by electronic means. See Q. 7[Point (iii)], Chapter 12.
[Page 107
(b) Provisions of the Companies Act, 2013 regarding the Directors
Identification number. See Q. 4(c), Chapter 11. [Page 80
(c) Circumstances under which a director is deemed to have vacated the office
of directorship. See Q. 6, Chapter 11. [Page 84
Or
(a) Write a note on Woman Director. 5
(b) Who is a proxy? Is it essential for a proxy to be a member of the
company? If a proxy is appointed by a shareholder but in the meeting
shareholder also casts his vote, whose vote will be considered valid and why?
5
(c) State the provisions of the Companies Act, 2013 with respect to
qualification and disqualification of Directors. 5
Ans. (a) Women Director. See Q. 2(iv), Chapter 11. [Page 77
(b) Proxy. See Q. 6, Chapter 12. [Page 105
Is it essential for a proxy to be a member of the company? It is not essential for
a proxy to be a member of the company. Even a non-member can be appointed as
a proxy. If a proxy is appointed by a shareholder and in the meeting the
shareholder also casts his vote, vote of the shareholder would be considered
because when the shareholder personally attends and votes at the meeting the
proxy stands revoked. It is essential that the shareholder should cast his vote
before a vote being cast by the proxy.
(c) Provisions of the Companies Act, 2013 with respect to qualification and
disqualification of Directors. See Q. 3, Chapter 11. [Page 79
Q. 5. (a) What is the process of dematerialisation of physical shares under
the Depository system? Can these be rematerialised? 5
(b) What is ‘Audit Committee’ of Board of Directors? Explain the functions
of this committee. 5
(c) Explain ‘Advisory Committee’ which is constituted in case of Compulsory
Winding up. 5
Ans. (a) Process of dematerialisation of physical shares under the Depository
system. See Q. 2(Points (i) to (viii)), Chapter 18. [Page 148
Yes, dematerialised shares can be rematerialised. For rematerialisation, an
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investor has to request his depository participant. The depository will intimate
a
the registrar who will print and despatch the physical certificates to the investor.
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(b) ‘Audit Committee’ of Board of Directors. An audit committee is a
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committee of Board of Directors, generally consisting of non-executive directors
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of a company. The executive director/managing director attends the meetings of
the committee as a special invitee. The committee generally acts as a liason
between the auditors, both internal and external, and the Board of Directors.
1. Applicability. The Board of Directors of every listed company and such
other class or classes of companies, as may be prescribed, shall constitute an
Audit Committee. As per Rule 6 of the Companies (Meeting of Board and its
powers) Rules, 2014, the following classes of companies shall constitute an
‘Audit Committee’ of the Board:
(i) All public companies with the paid up capital of ` 10 crores or more.
(ii) All public companies having turnover of ` 100 crore or more.
(iii) All public companies having in aggregate, outstanding loans or
borrowings or debentures or deposits exceeding ` 50 crores or more.
2. Constitution. The Audit Committee shall consist of a minimum of three
directors with independent directors forming a majority.
The majority of members of Audit Committee including its Chairperson shall
be persons with ability to read and understand the financial statement.
Functions of Audit Committee. Every Audit Committee shall act in accordance
with the terms of reference specified in writing by the Board which shall inter alia,
include—
(i) the recommendation for appointment, remuneration and terms of
appointment of auditors of the company;
(ii) review and monitor the auditor’s independence and performance, and
effectiveness of audit process;
(iii) examination of the financial statements and the auditor’s report thereon;
(iv) approval or any subsequent modification of transactions of the company
with related parties;
(v) scrutiny of inter-corporate loans and investments;
(vi) valuation of undertakings or assets of the company, wherever it is
necessary;
(vii) evaluation of internal financial controls and risk management systems;
(viii) monitoring the end use of funds raised through public offers and related
matters.
(c) Advisory Committee (Section 287). The Tribunal, while passing an order of
winding up of a company, directs that an advisory committee be appointed to
advice the company liquidator and to report to the Tribunal on such matters as
the Tribunal may direct.
Membership. The Advisory Committee shall consist of maximum of 12
members being creditors and contributories or such other persons in such
proportion as the Tribunal may direct.
Meeting of Creditors and Contributories. Within 30 days from the date of order
of winding up, the company liquidator shall convene a meeting of creditors and
contributories, as ascertained from the books and documents of the company, for
enabling the Tribunal to determine the persons who may be members of the
as
Advisory Committee.
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Right to Inspect Accounts of liquidator. The Advisory Committee shall have
iv
the right to inspect the books of accounts and other documents, assets and
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properties of the company under liquidation at a reasonable time.
Convening of the meeting. The provisions relating to the convening of the
meetings, procedure to be followed at such meetings and other matters relating
to conduct of business by the Advisory Committee shall be such as may be
prescribed.
Chairman of the meeting. The meeting of Advisory Committee shall be chaired
by the company liquidator.
Or
(a) Is it mandatory for every company to rotate its Auditors? What are the
provisions of the Companies Act with regard to Rotation of Auditors? 5
(b) Explain winding up of a company on ‘just and equitable’ grounds. 5
(c) What do you understand by scriptless trading system as per the
Depository Act, 1996? Explain its benefits. 5
Ans. (a) Provisions of the Companies Act with regard to rotation of Auditors.
(b) Winding up of a company on ‘just and equitable’ grounds. The Tribunal
may order winding up if it considers such an order to be just and equitable. The
Tribunal has very wide discretionary powers under this clause. What is ‘just and
equitable’ depends on the facts of each case. Some of the instances of just and
equitable grounds are as follows:
(i) Deadlock in management. Where there is a complete deadlock in the
management of the company, the company may be ordered to be wound
up on just and equitable grounds [Re. Akola Electric Supply Co. Ltd.].
For instance, when directors are not on speaking terms or are bitterly
hostile to each other.
A company cannot be ordered to be wound up if there is difference in
view of the majority directors and minority directors.
(ii) Loss of substratum. If the company has failed to materialise its objects
(iii) Losses. Where the business of the company cannot be carried on except
(iv) Oppression of minority. Where the majority of shareholders is
(v) Illegality of objects and fraud. Where the company was formed to carry
s
a
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(vi) Bubble company. Where the company does not carry on any business
hi
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(c) Scriptless trading system See Q. 3, Chapter 18. [Page 149
_____________
B.Com. (Hons.)
Q. 1. (a) What is corporate veil? Discuss the case laws when corporate veil
may be lifted. 7½
(b) “A company can be registered with limited liability without the word
limited in its name.” Comment citing reasons. 7½
(b) These companies can be registered without using the word limited in its
name since licence is given by the Central Government to them subject to the
fulfillment of certain conditions.
See Q. 8(c), Chapter 2. [Page 15
Or
(a) “A company is a legal entity distinct from its members.” Comment citing
the relevant case laws. 7½
s
(b) Write a note on ‘Government Company’. 7½
a
Ans. (a) A company is a legal entity distinct from its members.
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hiv
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Q. 2. (a) Outline the rule in Royal British Bank vs. Turquand. What are the
exceptions to this rule? 7½
(b) “A public company may never issue shares to public all its life.”
Comment. 7½
Ans. (a) Rule in Royal British Bank vs. Turquand and exceptions to this rule.
See Q. 4(b), Chapter 5. [Page 37
(b) A public company has the freedom to raise its capital by issue its shares to
public. This made enables it to approach to large number of people and therefore can
raise enormous funds from public for its capital. However, a public company has
options to raise its funds from private resources and not make public issue at all.
Private Placement. See Q. 4(b), Chapter 6. [Page 49
Or
(a) “A company cannot undertake any business not stated in the object
clause.” Comment. 7½
(b) Discuss the legal effects of pre-incorporation contracts. 7½
Ans. (a) A company cannot undertake any business not stated is the object
clause. See Q. 2(Point 3), Chapter 4. [Page 25
[Page 18
Q. 3. (a) Discuss the provisions of the Companies Act, relating to buy back of
shares by a company. 7½
(b) What are remedies open to an allottee of shares against the company in
case of misleading prospectus? 7½
221
Ans. (a) Provisions of the Companies Act relating to buy back of shares by a
company. See Q. 5, Chapter 8. [Page 60
(b) Remedies against the company in case of misleading prospectus.
Or
(a) Write a note on Shelf prospectus. 7½
(b) What are the provisions of the Companies Act, 2013 which must be
complied with by a public company before making a valid allotment of
shares? 7½
Ans. (a) Shelf prospectus. See Q. 2(d), Chapter 6. [Page 44
(b) Provisions of governing allotment of shares. See Q. 1, Chapter 7.
[Page 52
Q. 4. (a) State the legal provisions regarding calling and holding of annual
general meeting of a company. 7½
(b) “Directors owe a duty of loyalty and care in performing their duties.” Do
you agree? Explain. 7½
Ans. (a) Legal provisions regarding calling and holding of annual general
meeting of a company. See Q. 2, Chapter 12. [Page 99
s
(b) See Q. 3(b), 2019 (May). [Page 226
a
Or
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(a) Who can be a director? Can directors be appointed by the Board of
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Directors? If yes, when? 7½
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(b) “One person cannot form a quorum for a general meeting of a company.”
Comment. 7½
Ans. (a) Who can be a director? See Q. 3, Chapter 11. [Page 79
Yes, directors can be appointed by the Board of Directors. See Q. 5(Point 3),
(b) The given statement is not correct. One person can form a quorum for a
general meeting of a company. See Q. 5(Point 3), Chapter 12. [Page 103
Q. 5. (a) Explain the salient features of Depository Act, 1996. 7½
(b) “No dividend can be paid by a company except out of profits.” Explain. 7½
Ans. (a) Salient features of Depository Act, 1996. See Q. 9, Chapter 18.
[Page 154
(b) Payment of dividend. See Q. 1(Point 1 & 3), Chapter 13. [Page 115
Or
(a) Define Producer Company and explain the provisions of the Companies
Act, 2013 relating to formation and registration of a Producer Company. 7½
(b) State the circumstances under which a company may be compulsorily
wound up. 7½
Ans. (a) Producer Company and provisions in respect of such companies.
(b) Circumstances under which a company may be compulsorily wound up.
_____________
2019 (MAY)
Duration: 3 hours Maximum Marks: 75
Q. 1. (a) “A fundamental attribute of corporate personality is that a company
is a legal entity distinct from its members.” Discuss the above statement citing
the relevant case laws. 5
(b) “Preliminary contracts are a nullity.” Comment on the statement bringing
out clearly the position of promoters with regard to these contracts. 5
(c) Write a short note on ‘Licensed Company’. 5
Ans. (a) A company is a legal entity distinct from its members.
(b) Preliminary contracts. See Q. 1 and Q. 2(a), Chapter 3 [Page 18
(c) Licenced company. See Q. 8(c), Chapter 2. [Page 15
Or
(a) What is a foreign company? Is it necessary for it to comply with the
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provisions of the Companies Act? If so, to what extent? 5
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(b) Explain the concept of corporate personality and discuss the
iv
circumstances where the Court lifts the corporate veil to see what really lies
h
behind. 5
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(c) Write a note on “Illegal association of persons”. 5
Ans. (a) Foreign company. As per Section 2(42), a foreign company means
any company or body corporate incorporated outside India, which—
(i) has a place of business in India whether by itself or through an agency,
physically or through electronic mode, and
(ii) conducts any business activity in India in any other manner.
The phrase electronic mode means carrying on business electronically and
includes business to business and business to consumer transactions, online
services such as tele-marketing, web-based marketing, data communication
services, cloud computing, offering to accept deposits or subscriptions in India or
from citizens of India etc.
Yes, it is necessary for a foreign Company to comply with some of the
provisions of the Companies Act. These provisions are as follows:
1. Documents (etc.) to be delivered to the Registrar. Section 380 provides that
the following documents must be delivered to the Registrar by foreign companies
within 30 days of establishing the place of business:
(a) A certified copy of the charter, statutes, or Memorandum and Articles of
the company or any other instrument which defines the constitution of
the company. If the instrument is not in english language, a certified
translation thereof.
(b) The full address of the registered or principal office of the company.
223
(c) A list of the directors and secretary of the company containing the
particulars regarding his name in full, usual residential address, his
nationality of origin, his business and particulars of other directorships
held by him.
(d) The names and addresses of persons resident in India, authorised to
accept on behalf of the company notices or other documents served on
the company.
(e) The full address of the office in India which is deemed to be its principal
place of business in India.
(f) Particulars of opening and closing of a place of business in India on
earlier occasion or occasions.
(g) Declaration that none of the directors of the company or the authorised
representative in India has ever been convicted or debarred from
formation of companies and management in India or abroad.
(h) Any other information as may be prescribed.
Section 380 states that if any alteration is made or occurs in any of the above
mentioned documents, the Registrar must be notified of the change, within the
prescribed time limits.
as
2. Accounts of foreign companies. Section 381 provides that every Foreign
D
Company shall, in every calendar year:
iv
(a) make out a balance sheet, and profit and loss account, in such form and
Sh
containing such particulars, as if it was a company incorporated under
the Companies Act of 1956; and
(b) deliver three copies of these documents to the Registrar.
It is to be noted that the Central Government, through a notification in the
Official Gazette, may direct that requirement of clause (a) of Section 381
shall not apply, or apply with modifications, to foreign companies.
Section 381(2) states that if any document is not in english language,
there shall be a certified translation annexed to it.
As per Section 381(3), every foreign company needs to send to the Registrar, a
copy of a list in the prescribed form of all places of business established by the
company in India.
Other Obligations: Sections 382 states that a foreign company is further
bound by the following obligations:
(a) The company shall in every prospectus state the country in which the
company is incorporated.
(b) Outside every office or place of business, its name and the country of its
incorporation, should be conspicuously exhibited in english and in one
local language.
(c) The company’s name and the country of its incorporation should be
stated legibly in english in all business letters, letter heads and letter
papers, notices and other official publications of the company.
(d) Every prospectus, advertisement, official publication, letterhead, and
business letter of the company, must state in legible english, whether the
liability of the members is limited. This fact should also be prominently

exhibited outside every office and place of business as well.
(b) Concept of corporate personality. See Q. 4, Chapter 1. [Page 4
(c) Illegal Association of Persons. See Q. 8(e), Chapter 2. [Page 16
Q. 2. (a) On the cover page of the prospectus of a company a statement was
printed in bold letters stating that the managing agent, promoters and
directors with their friends and relatives have promised to subscribe shares
worth Rupees ten lakhs. However, they collectively subscribed shares worth
Rupees six lakhs only. Can the prospectus of the company be considered as
misleading? 5
(b) What do you mean by “buyback of securities”? Explain the legal
provisions relating to buyback of securities by a company under the
Companies Act, 2013. 5
(c) Discuss the binding effect of Memorandum of Association and Articles of
Association of a company on the shareholders, outsiders and the company
itself. 5
Ans. (a) The prospectus of the company cannot be considered as misleading.
s
The present problem is based on the facts of the case of Shiromani Sugar Mills
a
Limited vs. Debi Prasad. In this case, a statement was printed in red ink on the
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cover page that managing agent with their friends, promoters and directors have
hi
already promised to subscribe to shares worth `6 lakhs, but they had taken much
S
less. Yet it was not taken to be misrepresention. The statement represented only
the existence of a promise which was not falsified by the breaking of it.
Also, See Q. 3, Chapter 6. [Page 45
(b) Buyback of Securities. See Q. 5, Chapter 8. [Page 60
(c) Binding effect of Memorandum of Association and Articles of Association
of a company on the shareholders, outsiders and the company itself. See Q. 3,
Chapter 5. [Page 36
Or
(a) Write a note on ‘Producer Company’. 5
(b) “An outsider is presumed to know the constitution and the statutory
public documents of a company, but not what may or may not have taken
place within the doors that are closed to him.” Explain with reference to the
doctrine of Indoor Management. 5
(c) Discuss the importance of a Red Herring prospectus in the light of issue
of securities by the company through book building process. 5
Ans. (a) Producer company. See Q. 7, Chapter 2. [Page 12
(b) Doctrine of Indoor Management. See Q. 4(b), Chapter 5. [Page 37
(c) The Companies Act, 2013 by providing for Red-herring prospectus,
facilitates the process of Book Building. In Book Building, initially a draft
red-herring prospectus is issued. Thereafter, Red-Herring prospectus is issued
three days prior to the opening of Offer.
Red Herring prospectus. See Q. 2(e), Chapter 6. [Page 45
Q. 3. (a) Differentiate between right issue and bonus issue. 5
(b) “Directors owe a duty of loyalty and care in performing their duties.” Do
you agree? Explain. 5
(c) What is the role of CSR Committee? Is it compulsory for a Company to
constitute a CSR Committee? 5
Ans. (a) Distinction between right issue and bonus issue. See Q. 8, Chapter 8.
[Page 64
(b) We agree with the given statement.
Duties of Directors. Under general law, directors stand in a fiduciary
relationship towards the company. They owe a duty of loyalty and care in
performing their responsibilities on behalf of the company. A breach of these
duties gives rise to liability to account for improper profits and to pay equitable
compensation for improper loss of company assets.
Section 166 of the Companies Act 2013 has codified the duties of directors as
follows:
1. Duty to act in accordance with the Articles of Association of the Company.
2. Duty to act in Good Faith. Directors must act honestly and diligently in the
interests of the company. They must exercise their powers bona fide to promote
as
the objects of the company for the benefit of its members and in the best interest
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of the company, its employees, shareholders, community and for protection of
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the environment.
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Good faith also requires that directors should not make any secret profit from
their dealings with the company nor they should make any profit by taking
advantage of the corporate opportunities.
3. Duty of reasonable care. A director is bound to observe reasonable care in
the performance of his duties. He is expected to act with that much of skill and
diligence which an ordinary man would take in his own case. If directors act
within their powers, if they act with such care as is reasonably expected of them
having regard to their knowledge and experience and if they act honestly for the
benefit of the company they represent, they discharge both their equitable as well
as legal duty to the company.
4. A director of a company shall not involve himself 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. If a director is interested in a contract with the
company he must disclose the nature of his interest at the Board’s meeting. A
director stands in a fiduciary relationship with the company and his personal
interest should not conflict with his duty. A director can enter into a contract with
the company in which he is interested. The only requirement is that such interest
must be disclosed, bona fide and fair.
5. A director of company shall not achieve/attempt to achieve any undue
advantage either to himself or to his relatives/partners/associates. If he is found
guilty of such undue gain, he shall be liable to pay an amount equal to that gain
to the company.
6. A director of a company shall not assign his office and any assignment so
made shall be void.
Thus, it is clear from the above discussion that directors owe a duty of loyalty
and care in performing their duties.
(c) Role and constitution of CSR committed. (out of course) See Q. 3(Or)(c),
2017 (May). [Page 203
Or
(a) Discuss the provisions of the Companies Act, 2013 regarding holding of
board’s meeting through audio-visual means. 5
(b) State difference between transfer and transmission of shares. 5
(c) Write a note on ‘Women Director’. 5
Ans. (a) Provisions of the Companies Act, 2013 regarding holding of board’s
meeting through audio-visual means. See Q. 12, Chapter 11. [Page 91
(b) Transfer & transmission of shares. See Q. 3, Chapter 10. [Page 72
(c) Women Director. See Q. 2(iv), Chapter 11. [Page 77
Q. 4. (a) ‘Dividend once declared cannot be revoked.’ Are there any
exceptions to it? Explain. 5
(b) What is an Audit Committee? Discuss its powers and functions. 5
(c) ‘A faulty notice of a meeting can be fatal to the validity of a meeting.’
Explain. 5
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Ans. (a) See Q. 2, Chapter 13. [Page 117
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(b) Audit committee. See Q. 14, Chapter 11. [Page 93
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Powers of Audit Committee. Under Clause 49(II)(C) of the Listing Agreement,
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an audit committee would have the following powers.
• To investigate any activity under the scope of its terms of reference.
• To search or seek information from any employee.
• To obtain any outside professional or legal advice.
• To secure the attendance of outsiders with any relevant expertise.
Also, See Q. 14, (Point 4). Chapter 11. [Page 93
(c) Notice of a Meeting.
One of the requisites of a valid meeting is proper notice and for The Notice to
be valid, it
(i) should be of proper length,
(ii) should be given to all persons entitled to receive it and
(iii) should contain the date, time, place and the nature of business to be
transacted at the meeting. If any of these requirements is not met, the notice
would be a faulty notice and the meeting would become invalid.
For detail, See Q. 5(Point 2), Chapter 12. [Page 102
Or
(a) Distinguish between ordinary resolution and special resolution by giving
suitable examples of each. 5
(b) ABC Limited has its registered office at Mumbai. The company desires to
hold its AGM at New Delhi. Examine the validity of the company’s desire
with reference to the relevant provisions of the Companies Act. 5
(c) Discuss the provisions of the Companies Act, 2013 regarding the removal
of a Director. 5
Ans. (a) Ordinary resolution and Special resolution. See Q. 8, Chapter 12.
[Page 109
(b) AGM stands for Annual General Meeting. It is an organised gathering of
shareholders and directors of a company (public or private) held once in a
calendar year. According to Section 96(2) of the Companies Act, 2013 an AGM
must be held either at the registered office of the company or at some other place
within the city, town or village in which the registered office of the company is
situated. It means, it is not necessary to hold the AGM at the registered office, but
it should be held at some place within the postal limits of the city in which
registered office is situated as deemed convenient by the management. Since
New Delhi is a different city, AGM can not be held at New Delhi.
(c) Removal of Director. See Q. 7, Chapter 11. [Page 85
Q. 5. (a) What are the provisions of the Companies Act, 2013 regarding the
appointment of an Auditor? 5
(b) State the circumstances under which a company may be wound up
compulsorily by the NCLT (National Company Law Tribunal). 5
(c) Write a note on ‘Dematerialisation of securities’. 5
Ans. (a) Appointment of an auditor. See Q. 1, Chapter 15. [Page 129
as
(b) Circumstances under which a company may be wound up compulsorily by
D
the NCLT. See Q. 2, Chapter 16 [Page 137
iv
(c) Dematerialisation of securities. See Q. 2, Chapter 18. [Page 148
Sh
Or
(a) Write a note on ‘National Company Law Tribunal’. 5
(b) Who can file a petition in the NCLT for winding up of a company? 5
(c) What is Depository? Explain the benefits of Depository System. 5
Ans. (a) National Company Law Tribunal [NCLT]. See Q. 2, Chapter 17.
[Page 143
(b) Filing of petition in NCLT for winding up of a company.
(c) Depository. See Q. 3, Chapter 18. [Page 149
_____________
2020 (MAY)
Duration: 2 hours Maximum Marks: 75
Attempt any four Questions. All Questions carry equal marks.
Q. 1. A transport company Lucky Golden wanted to obtain permit to
operate in Haryana but due to its past issues and track record, Govt. of
Haryana denied to grant it permission. So later on this company formed a
subsidiary Evergreen Transport and this time got permit to operate in Haryana
state. But on complaint by one competing company, the court cancelled the
permit of Evergreen Transport. Later on, holding company Lucky Golden
invested `5 lakh in Evergreen Transport by buying its shares. Dividend out of
these shares was shown in P&L account of Lucky Golden company as basis of
calculating bonus payable to its workers. But after some time Lucky Golden
transferred all `5 lakh shares of Evergreen Transport to a new subsidiary
company Mayur Transport. So P& L of Lucky Golden showed no dividend
income and Lucky Golden did not pay bonus this time to its workers by giving
excuse of no dividend income. The Workers filed a case in the court and the
court directed Lucky Golden to pay bonus to its workers as paid last year.
s
Explain by citing case laws under relevant judicial interpretations, How the
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court denied all three companies mentioned in the above case to be accepted
iv
as seperate legal entities?
h
Ans. A company, in the eyes of law, is a separate entity.
S
For details. See Q. 1(Point 3), Chapter 1. [Page 1
There are various statutory provisions and judicial interpretations under which
separate legal entity is ignored.
In the given case, we have to discuss exceptions under judicial interpretations
which are relevant to the given case.
1. Formation of subsidiaries to Act as Agents. Though, in the eyes of the law,
a parent (holding) company and its subsidiary are separate legal entities, yet the
subsidiary company may lose its individuality if it is formed with the objective to
circumvent law as happened in the case of Merchandise Transport Limited vs
British Transport Commission. In this case, a transport company wanted to
obtain licences for its vehicles, but could not do so if applied in its own name.
The transport company formed a subsidiary company and the application for
licence was made in the name of the subsidiary. The application was rejected on
the ground that the subsidiary was formed to circumvent the law. The court held
that the parent (holding) and the subsidiary companies were one commercial unit
and the application for licences was rejected.
In the given case, Lucky Golden formed the subsidiary Evergreen Transport to
circumvent the law. The company was formed to act as the agent of the Lucky
Golden. The permit of Evergreen Transport was cancelled because it was not
treated as a legal entity separate from the parent company Lucky Golden which
was denied permit because of its past issues and track record. The basic objective
of forming EvergreenTransport was to obtain licence and the company was to act
as the agent of Lucky Golden.
229
2. To avoid a welfare legislation. If a subsidiary is formed to avoid a welfare
legislation, it may lose its individuality in favour of its holding company as was
decided in the case of Workmen of Associated Rubber Industry Ltd. vs
Associated Rubber Industry Ltd. In this case, ‘ARI Ltd.’ purchased the shares of
‘I Ltd.’ by investing a sum of `4,50,000. The dividend received was shown in the
Profit & Loss Account of the company for many years. It was taken into account
for calculating bonus payable to the workmen of the company. Later. ‘ARI Ltd.’
transferred the shares of ‘I Ltd.’ to ‘AB Ltd.’ which was its wholly owned
subsidiary. There was no dividend income from ‘AB Ltd.’ and it did not find
place in the Profit & Loss Account of ‘ARI Ltd’. Thus, the surplus available for
the purpose of payment of bonus to the workmen got reduced and hence the
amount of bonus was reduced.
The Supreme court did not recognise the separate legal entity of the subsidiary
company. The new company (AB Ltd.) formed had no assets of its own except
those transferred by ‘ARI Ltd’. It had no business as income of its own except
receiving dividends on the shares transferred by ‘ARI Ltd’. Thus, the sole
objective of forming ‘AB Ltd’. was to reduce the amount of bonus payable to the
workmen. In the given case, Lucky Golden also formed Mayur Transport with
the objective of denying bonus to the workers. So, the separate legal entity of
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Mayur Transport was not recognised.
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Thus, the court denied all three companies to be accepted as separate legal entities.
iv
Q. 2. A promoter Mr. Ram appointed a solicitor for preparing MOA and
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AOA for the proposed company XYZ Ltd in 1962 which was not in existence at
that time. That solicitor incurred all expenses related to company registration
fees and other related expenses but later on after incorporation of company,
directors of XYZ Ltd denied him payment. Before XYZ Ltd came into existence,
Mr. Ram had done a deal with M/s Shyam & sons to take leasing rights of a
gold mine for 5 years on behalf of proposed XYZ Ltd but later on after Gold
struck in the mine, Shyam & sons denied to fulfill transferring of leasing
rights to Mr. Ram. When Mr. Ram approached the court, the court rejected Mr.
Ram’s claim on leasing rights. Meanwhile, Mr. Ram had done a contract with
Mr. Sudhir for supplying cranes to be used by the proposed company XYZ Ltd
and had done payment also from his account. But later on after incorporation
of XYZ Ltd in 1964, when Mr. Ram demanded his payment from the directors
of XYZ Ltd. and they denied it. When Ram approached the court, the court
asked the company to honour the payment to Mr. Ram. With reference to the
given case, mention reasons of non payment of expenses to solicitor by
Company XYZ Ltd. and denial of leasing rights by court to Mr. Ram and
acceptance of payment claimed by Mr. Ram for cranes by the court explaining
all the provisions related with contracts done by the promoters before
incorporation of the company.
Ans. Pre-incorporation contracts. See Q. 2(a), Chapter 3. [Page 18
Reason for non-payment of expenses to solicitor by company XYZ Ltd. The
company was not in existence at the time when expenses were incurred. A pre–
incorporation contract purported to be made by a company which does not exist
is a nullity, when the company comes into existence, it can neither sue, nor be
sued on that contract.
Note: In this case, preparing of MOA and AOA are for the purposes of the
company and these contracts must have been adopted by the company after its
incorporation and also the contract is within the terms of incorporation.
Therefore, the company XYZ Ltd. is liable to make payment to the solicitor. Had
the company been incorporated before the specific Relief Act, 1963 came into
force, the company XYZ Ltd. would not have been liable to pay to the solicitor.
Reason for denial of leasing rights to the promoter.
The contract with M/s Shyam & sons is also a case of pre–incorporation
contract. A company cannot ratify pre–incorporation contracts. The company is
not bound by such contracts. Also, the company cannot sue on the basis of such
contracts. Such contracts are a nullity. Therefore, the promoter can not claim any
leasing rights.
Reason for acceptance of payment claimed by the promoter. The Company
XYZ Ltd. came into existence in 1964. As per specific Relief Act, the other party
can enforce the contract, if the company has adopted it after its incorporation and
the contract is for the purposes of the company and it is warranted by specific
performance of pre–incorporation. This is so provided under the provisions of
Specific Relief Act, 1963. For this, the company has to adopt such contracts in
writing after its incorporation and communicate such acceptance to the other
as
party to the contract.
D
In this case, contract for the supply of cranes is for the purpose of the
iv
company, and it must have been adopted by the company after its incorporation
Sh
and also the contract is within the terms of incorporation. Therefore, the company
XYZ Ltd. is liable to make payment to the promoter.
Q. 3. Mr. Vikram who was a chartered accountant in the company. Globe
Finance Ltd. borrowed a sum of `5 lakh from the company. He got loan
agreement signed by chief accountant and managing director but signatures of
the MD had been forged. For any loan above `4.5 lakh the MD needed
approval of shareholders in AGM before sanctioning such loan as per AOA,
but the loan given to Mr. Vikram was sanctioned without calling AGM by the
MD. Moreover, as per AOA, all loan agreements needed the signatures of MD
as well as director finance. Later on when Mr. Vikram demanded the loan
money from Globe Finance Ltd. the MD of Globe Finance Ltd. denied to give
the loan money to Mr. Vikram. Mr. Vikram approached the court aganist the
company Globe Finance Ltd. but the court rejected the claim of Mr. Vikram.
Specify reasons behind the court’s rejection of Mr. Vikram’s claim explaining
two important doctrines under AOA.
Ans. Two important doctrines under AOA are:
(a) Constructive Notice of Memorandum and Articles of Association. This
doctrine says that every person dealing with the company is presumed to have
had notice of the contents of both the Memorandum of Association as well as the
Articles of Association. This is so because both these documents are already
registered or filed with the Registrar of Companies. As such, these are considered
to be public documents. Not only this, even the office of the Registrar of
Companies is also regarded as a public office. Both these documents are
accessible to all. All outsiders dealing with the company are presumed not only
to have read these documents but it is also presumed that they have understood
the contents there in. This doctrine actually is an extension of the rule of
‘estoppel’ which prevents any outsider from saying that he or she did not know
the contents of the Memorandum of Association or the Articles of Association.
In the given case, Mr. Vikram should have the knowledge of the contents of the
AOA. The loan agreement was for `5 lakhs but the AOA authorised the MD to
sanction loans upto `4.5 lakhs only.
(b) Doctrine of Indoor Management. As against the doctrine of ‘Constructive
Notice’, the doctrine of ‘Indoor Management’ states that an outsider is not
bound to look into the formalities of company’s internal functioning or the
company’s internal management. He is not affected by any irregularity in the
internal management of the company’s functioning. This is known as doctrine of
‘Indoor Management’. This doctrine was laid down in the famous case of Royal
British Bank vs. Turquand.
The doctrine of Indoor Management is also known as Turquand’s Rule. So,
whereas the doctrine of ‘Constructive Notice’ helps to protect the company, the
doctrine of ‘Indoor Management’ helps to protect the persons (outsiders) dealing
with the company. The latter is based on the principle of justice and public
convenience as internal formalities of the company are not open to the public or
outsiders.
as
In the given case, Mr. Vikram, being an employee of the company must have
D
had the knowledge of irregularity (approval of shareholders and signing of loan
iv
agreement by MD and director finance).
Sh
Where a person dealing with a company has actual or constructive (virtual)
knowledge of the irregularity as regards internal management, he cannot claim
the benefit of the doctrine of indoor management.
In the case of Howard vs. Patent Ivory Manufacturing Co., the directors of the
company could borrow on behalf of the company any amount upto £1,000 and
for any amount beyond £1,000 they were required to obtain the consent of the
shareholders in the General Meeting. The Directors themselves lent to the
company an amount in excess of £1,000 without the consent of the shareholders.
Held, the directors had incurring notice of the internal irregularity and hence the
company was liable to them only for £1,000.
Besides irregularities in the loan agreement, signatures of MD were forged. If a
person relies or acts on a forged document, then also the rule of indoor
management does not apply. This doctrine only applies to matters involving
irregularities and not to those involving illegalities.
In the given case the loan agreement was given forging the signatures of the
MD as required under the company’s Articles of Association. Held, Mr. Vikram’s
claim was turned down. (Ruben vs. Great Fingall Consolidated Co.)
Q. 4. ABC Ltd. issued prospectus for IPO and it mentioned few statements
in it. It showed dividend payment for last 5 years but did not disclose that
company was incurring losses for last 3 years and was paying dividend out of
its free reserves. It mentioned further that the company had acquired 5
godowns but in reality ABC Ltd. had not acquired any such property. It
mentioned that present value of its gross sale is `10 crore per annum without
mentioning actual produce or capability of production. It also stated that due
to intelligence of the management our company is expected to reach a certain
level. It also talked about issuing shares at a discount. Explain which
statements in the Prospectus of ABC Ltd. are half truth, misleading, false,
ambiguous, lawfully wrong and mere opinion? What are the conditions, to be
satisfied for cancellation of such a contract and under what circumstances right
to rescission is lost? Under what cricumstances a shareholder can claim for
damages also besides the cancellation of shares?
Ans. Half–Truth and Misleading statement. It showed dividend payment for last
5 years but did not disclose that the company was incurring losses for last 3 years and
was paying dividend out of its free reserves.
False Statement. It mentioned further that the company had acquired 5 godowns but
in reality ABC Ltd. had not acquired any such property.
Ambiguous Statement. It mentioned that present value of its gross sale is `10 crore
per annum without mentioning actual produce or capability of production.
Lawfully wrong statement. It also taked about issuing shares at a discount.
Mere opinion. It also stated that due to intelligence of management our
company is expected to reach a certain level.
Conditions to be satisfied for cancellation of contract. For this, the shareholder
as
D
iv
Sh
of opinion.
misstatements.
Damages for fraudulent misstatement or concealment. Any person induced by
such statement or omission is also entitled to sue the company for damages. For
this, he has to first rescind his contract and give up or surrender his shares to the
company, as an allottee of the shares cannot claim damages and also, side by side,
retain his shares. But to avail this remedy, the subscriber has to prove (i) that the
misstatements were made fraudulently and (ii) that he has actually been deceived,
in addition to proving other facts necessary to succeed in a suit of rescission.
Q. 5. The Ministry of Corporate Affarirs (MCA) on 5th May, 2020 allowed
companies to hold their annual general meetings (AGMs) by video
conferencing (VC) or other audio–visual means during 2020. This has been
done as the social distancing norms continue and there is restriction on the
movement of people looking at COVID-19 pandemic situation in India. Earlier
only specific companies were allowed to conduct E–Voting in India. What
procedure needs to be followed for E–voting in India and how passing
resolutions through E–voting in AGM is different from passing resolutions
through postal ballot in AGM in India?
Ans. E–voting. E–voting means casting of votes by shareholders in an
electronic form by using a secured electronic system which enables display,
recording and registering of votes cast in favour of or against the resolution.
Procedure for E–voting in India. The company shall follow the following procedure,
namely:
(i) the notices of the meeting shall be sent to all the members, auditors of the
company, or directors;
as
(ii) the notice shall also be placed on the website of the company, if any;
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(iii) the notice of the meeting shall clearly mention that the business may be
iv
transacted through electronic voting system and the company is
Sh
providing facility for voting by electronic means;
(iv) the notice shall clearly indicate the process and manner for voting by
electronic means and the time schedule including the time period during
which the votes may be cast and shall also provide the login ID and
create a facility for generating password and for keeping security and
casting of vote in a secure manner;
(v) the company shall cause an advertisement to be published, not less than
5 days before the date of beginning of the voting period, at least once in
a vernacular newspaper and at least once in an English newspaper
including the following matter, namely:
(a) statement that the business may be transacted by electronic voting;
(b) the date of completion of sending of notices;
(c) the date and time of commencement of voting through electronic means;
(d) the date and time of the end of voting through electronic means;
(e) the statement that voting shall not be allowed beyond the said date
and time;
(f) website address of the company and agency, if any, and
(g) contact details of the person responsible to address the grievances
connected with the electronic voting;
(vi) the e-voting shall remain open for not less than 1 day and not more than
3 days:
In all such cases, such voting period should be completed 3 days prior to
the date of the general meeting:
(vii) during the e-voting period, shareholders of the company, may cast their
vote electronically;
(viii) at the end of the voting period, the portal where votes are cast shall
forthwith be blocked;
(ix) the Board of Directors shall appoint one scrutiniser;
(x) the scrutiniser shall, within a period of not exceeding 3 working days
from the date of conclusion of e-voting period, unblock the votes in the
presence of at least 3 witnesses not in the employment of the company
and make a scrutiniser’s report of the votes cast in favour or against, if
any, forthwith to the Chairman;
(xi) subject to the receipt of sufficient votes, the resolution shall be deemed to
be passed on the date of the relevant general meeting of the members.
Distinction between passing resolution through E–voting and passing
resolution through postal–ballot in AGM.
Basis of E–voting Postal Ballot
Distinction
1. Meaning It means casting of votes by It means casting of votes by
shareholders in an shareholders by post or
electronic form. through any electronic mode.
2. Eligibility for Every listed company and A company, other than one
as
the facility every company having person companies and other
D
1,000 or more shareholders. companies having upto 200
iv
members.
Sh
3. Items of The items of business in A company shall transact
Business which the resolution shall only limited items of
be passed through postal business only by means of
ballot are not limited. Any postal ballot e.g., Alteration
item can be transacted by of the Objects class,
means of E–voting. Alteration of Articles of
Association etc.
4. Results Results declared along with Results declared along with
the scrutinizer’s report is to the scrutinizers’s report is to
be placed on the website of be placed on the website of
the company as well as the the company only.
Recognised stock exchange
on which the shares of the
company are listed.
Q. 6. Board of PQR Ltd. was divided in two dissenting groups and there was
complete deadlock in the board for taking any decisions for company. Besides
deadlock independent directors of PQR Ltd. had pointed in their annual report
reservations about the way company was being managed by promoters for
their personal benefits by cooking up accounting books creating false image in
the minds of shareholders. As a shareholder of PQR Ltd. how would you
proceed with compulsory winding up by NCLT.? What are the other grounds
for approaching NCLT for compulsory winding up of such company? What
will be consequences of such winding up order by NCLT in case of PQR Ltd.
Ans. For compulsory winding up of PQR Ltd. a petition would be filed with
NCLT. The grounds covered in this case are as follows:
1. Deadlock in management. Where there is a complete deadlock in the
management of the company, the company may be ordered to be wound up on
just and equitable grounds [Re. Akola Electric Supply Co. Ltd.]. For instance,
when directors are not on speaking terms or are bitterly hostile to each other.
2. Guilty of fraud, misfeasance or misconduct. 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.
Other grounds for approaching NCLT for compulsory winding up of a
company:
(a) if the company has, by special resolution, resolved that the company be
wound up by the Tribunal;
(b) if the company has acted against the interests of the sovereignty and in-
tegrity of India, the security of the State, friendly relations with foreign
States, public order, decency or morality;
(c) if the company has made a default in filing with the Registrar its finan-
s
cial statements or annual returns for immediately preceding five con-
Da
secutive financial years; or
iv
(d) if the Tribunal is of the opinion that it is just and equitable that the com-
h
pany should be wound up.
S
(e) Loss of substratum. If the company has failed to materialise its objects
(f) Losses. Where the business of the company cannot be carried on except
(g) Oppression of minority. Where the majority of shareholders is
(h) Illegality of objects and fraud. Where the company was formed to carry
(i) Bubble company. Where the company does not carry on any business
Consequences of the Winding up Order by NCLT. See Q. 3, Chapter 16.
[Page 139
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Corporate Law SHIVDAS

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Corporate Law SHIVDAS

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Shiv Das

Delhi University Series

Shiv Das & Sons

2. Types of Companies ... ... 8

3. Formation of Company ... ... 18

4. Memorandum of Association ... ... 24

5. Articles of Association ... ... 33

6. Prospectus ... ... 41

7. Allotment of Securities ... ... 52

8. Shares and Share Capital ... ... 57

9. Forfeiture and Surrender of Shares ... ... 67

10. Transfer and Transmission of Securities ... ... 70

11. Management ... ... 74

12. Convening & Conduct of Shareholders’ Meetings ... ... 99

13. Dividend Provisions ... ... 115

14. Books of Accounts ... ... 120

15. Audit and Auditors ... ... 129

16. Concept and Modes of Winding up ... ... 137

17. Miscellaneous Provisions—

18. The Depositories Act ... ... 147

Voluntary Winding up and Insolvency come under ... ... 155-156

University Question Papers with

Q. 1. Define a Company, giving its characteristics.

(iii) For investigation of ownership of company. Under Section 216, the

Q. 1. What is a private company? What are the privileges enjoyed by such a

Distinction between a Public Company and a Private Company

converting a private company into a public company, Articles has to be altered in

(c) Association not for Profit,

2. Unlimited personal liability of the members. Every member is personally

Q. 1. “A promoter stands in a fiduciary relationship towards the company he

Features of Preliminary Contracts:

5. Ratification Can be made binding by Become binding as soon as the

Section 35 of the Companies Act provided that the Certificate of Incorporation

Q. 1. What is a Memorandum of Association? Explain its importance.

(ii) By refunding surplus of the fully paid-up capital.

(ii) Personal liability of directors. It is one of the duties of directors to see

Q. 1. What are “Articles of Association”? Is it essential for every company to

clauses (b) and (c) only.

Q. 2. How can the Articles of a company be changed?

bound to look into the formalities of company’s internal functioning or the

Q. 1. What is a “Prospectus”? What are the legal requirements as to the issue

(xii) Minimum subscription, amount payable by way of premium, issue of

occurred between the first offer of securities or the previous offer of

(viii) Bids are entered within the specified price band.

shall be placed at the meeting of the Board of Directors of the company

Q. 1. What is meant by allotment of securities (shares)? State various

(c) If restriction no. (vi) (public offer of securities (shares) to be in demat

Q. 1. Distinguish between Shares and Stocks.

shares shall have differential rights as to dividend, voting or otherwise in

7. Register of securities bought back. The company is required to maintain a

(b) Resolution must state

5. Money to be kept Money received on issue Since, no payment is

Q. 1. Discuss the rules regarding forfeiture of shares and reissue of such

4. On forfeiture, the forfeited shares become the property of the company

3. Validity Forfeiture is valid only Surrender is valid under

Q. 1. What is ‘Transfer of Securities (shares)’? Explain in brief the procedure

Q. 2. When can a company refuse to register a transfer of its securities

3. Consideration Securities (shares) are Securities (shares) are

such holding company, for such amount as may be prescribed

(iv) Remuneration. An Independent Director shall not be entitled to any

5. he has been convicted of an offence and sentenced in respect thereof to

the office of director before such commencement and the concerned

(vii) Punishment for contravention. If any individual or director of a