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Company Law

Unit-I

Corporate Personality : Definition of Company, Extent and application of Companies Act,

2013, Nature of Corporate form and advantages, Disadvantages of incorporation, Kinds of
Company.
Registration and Incorporation : Formation of Company, Promoters, Certificate of
incorporation, Pre-incorporation contracts, Commencement of business
Memorandum of Association : Contents , Alteration, Binding force of memorandum and
articles, Doctrine of constructive notice and indoor management.
Prospectus : Definition, Contents, Liability for misrepresentation or untrue statement in
prospectus.
Shares : Allotment, Restriction on allotment, Share certificate, Transfer of shares, Forged
transfer, Issue of shares - on premium and discount, Call on shares, Forfeiture of shares,
Surrender of shares, Lien on shares, Dividend on shares.
Debentures: Meaning, Usual features, Kinds of debentures, Fixed and Floating charge,
Crystallisation of floating charge, Remedies of debenture holders, Share holder compared
with debenture holder.

Unit-II
Member : Modes of membership, who may be member, Ceaser of membership, Register of
members, Inspection and closing of register, Rectification of register, Annual returns.
Directors : Appointment, Qualification, Vacation of office, Removal, Powers, Position and
Duties, Corporate Social Responsibility.
Meetings : Kinds, Notice, Quorum, Voting, Kinds of resolutions
Investigation : Investigation of Companies Affairs (Sections : 201-229)
Prevention of Oppression and Mismanagement : Majority powers and Minority rights- Rule
in Foss v. Harbottle, Prevention of oppression and mismanagement (Sections : 241-246)
Winding up of Company : Modes - Winding up by Tribunal - Grounds, Who can apply, Powers
of Tribunal, Commencement of winding up, Consequences of winding up order, Dissolution
of company ; Voluntary Winding up - By ordinary & special resolution, Declaration of
solvency, Meeting of creditors, Appointment, powers & duties of company liquidator in
voluntary winding up, Final meeting and dissolution.

Suggested books :
Avtar Singh : Company Law
Kailash Rai : Company Law
S.M. Shah : Company Law
S.R. Myneni : Company Law
The Companies Act, 2013 (Bare Act)
A. Ramaiya's Guide to the Companies Act
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UNIT – I

CORPORATE PERSONALITY

Introduction

The concept of ‘Company’ or ‘Corporation’ in business is not new but was dealt with, in 4 th
century BC itself during ‘Arthashastra’ days. Its’ shape got revamped over a period according to
the needs of business dynamics. Company form of business has certain distinct advantages over
other forms of businesses like Sole Proprietorship/Partnership etc. It includes features such as
Limited Liability, Perpetual Succession etc.

Meaning of a Company

The word ‘company’ is derived from the Latin word (Com=with or together; panis =bread), and
it
originally referred to an association of persons who took their meals together. In the leisurely
past,
merchants took advantage of festive gatherings, to discuss business matters.

Nowadays, business matters have become more complicated and cannot be discussed at festive
gatherings. Therefore, the company form of organization has assumed greater importance. It
denotes a joint-stock enterprise in which the capital is contributed by several people. Thus, in
popular parlance, a company denotes an association of likeminded persons formed for the
purpose of carrying on some business or undertaking.

A company is a corporate body and a legal person having status and personality distinct and
separate from the members constituting it.

It is called a body corporate because the persons composing it are made into one body by
incorporating it according to the law and clothing it with legal personality. The word
‘corporation’ is derived from the Latin term ‘corpus’ which means ‘body’. Accordingly,
‘corporation’ is a legal person created by a process other than natural birth. It is, for this reason,
sometimes called an artificial legal person. As a legal person, a corporation can enjoy many of
the rights and incurring many of the liabilities of a natural person.

An incorporated company owes its existence either to a special Act of Parliament or to company
law. Public corporations like Life Insurance Corporation of India, SBI etc., have been brought
into existence by special Acts of Parliament, whereas companies like Tata Steel Ltd., Reliance
Industries Limited have been formed under the Company law i.e. Companies Act, 1956 which is
being replaced by the Companies Act, 2013.

DEFINITION OF COMPANY
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In the legal sense, a company is an association of both natural and artificial persons (and is
incorporated under the existing law of a country). In terms of the Companies Act, 2013 (Act No.
18 of 2013) a “company” means a company incorporated under this Act or under any previous
company law [Section 2(20)].

In common law, a company is a “legal person” or “legal entity” separate from, and capable of
surviving beyond the lives of its members. However, an association formed not for profit also
acquires a corporate character and falls within the meaning of a company by reason of a license
issued under Section 8(1) of the Act.

A company is not merely a legal institution. It is rather a legal device for the attainment of the
social and economic end. It is, therefore, a combined political, social, economic and legal
institution. Thus, the term company has been described in many ways. “It is a means of
cooperation and organization in the conduct of an enterprise”.

It is “an intricate, centralized, economic and administrative structure run by professional

managers who hire capital from the investor(s)”.

Lord Justice Lindley has defined a company as “an association of many persons who contribute
money or money’s worth to common stock and employ it in some trade or business and who
share
the profit and loss arising therefrom. The common stock so contributed is denoted in money and
is the capital of the company.

The persons who contributed in it or form it, or to whom it belongs, are members. The proportion
of capital to which each member is entitled is his “share”. The shares are always transferable
although the right to transfer them may be restricted.”

From the foregoing discussion, a company has its own corporate and legal personality distinct
which is separate from its members. A brief description of the various attributes is given here to
explain the nature and characteristics of the company as a corporate body.

EXTENT AND APPLICATION OF COMPANIES ACT 2013-

Extent of the Act

The Act extends to the whole of India except:

1. As regards the State of Nagaland, it applies, subject to such modifications, if any, as the
Central Government may, by notification in the Official Gazette, specify [s.1 (3)];

2. As regards Goa, Daman and Diu, some of the provisions of the Act shall not apply or shall
apply only with such exceptions and modifications or adaptations to any existing company
registered under the Act and for such a period or periods as may be specified by notification by
the Central Government in the Official Gazette (s.620B); and
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3. As regards Jammu and Kashmir, some of the provisions of the Act as the Central Government
may, by notification in the Official Gazette, direct, shall not apply or shall apply only with such
exceptions and modifications or adaptations to any existing company or any company registered
under the Act as may be specified, after the commencement of the Central Laws (Extension to
Jammu and Kashmir) Act, 1968 (i.e., 15 August, 1968) (s.620C).

Application of the Act

The Act applies to the following companies:

1. Companies formed and registered under the Companies Act, 1956.

2. Companies formed and registered under the previous company laws, i.e., the existing
companies (s.561).

3. Companies registered but not formed under any previous company laws to the extent and in
the manner declared in Part IX (dealing with ‘Companies authorized to register under the Act’)
of the Act (s.562).

4. Unlimited companies registered as limited companies in pursuance of any previous company

laws (s.563).

5. Unregistered companies for the purpose of winding up under Part X (dealing with ‘Winding
up of Unregistered Companies,) of the Act (Ss.582, 583 and 589).

6. Foreign Companies (s.592 to 602).

7. Insurance companies, banking companies, electricity companies and any other company
governed by any special Act for the time being in force, except as far as the provisions of the
Companies Act, 1956 are inconsistent with the provisions of the Insurance Act, 1938; Banking
Regulation Act, 1949; Indian Electricity Act, 1910; or the Electricity Supply Act, 1948; or any
Special Act respectively.

The provisions of the Companies Act, 1956 apply to these special classes of companies to the
extent that such provisions are not inconsistent with those of the Special Acts governing them
[clauses (a) to (d) of s.616].

8. Such corporate body incorporated by any Act for the time being in force as the Central
Government may, by notification in the Official Gazette, specify on its behalf subject to such
exceptions, modifications or adaptations as may be specified therein [clause (e) of s.616].

9. Government Companies (s.617).

10. Nidhis or Mutual Benefit Societies declared as such by the Central Government by
notification in the Official Gazette [s.620A(2)].
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11. Producer Companies (s.581A to 581ZT).

Non-applicability of the Act

The Companies Act, 1956 is not applicable to certain associations. These are:

1. Companies established under Special Acts of Parliament, such as Life Insurance Corporation
of India, Indian Airlines Corporation, (s.616).
2. Partnership firms which are governed by the Indian Partnership Act, 1932.
3. Co-operative Societies which are governed by the Co-operative Societies Act, 1912.
4. Trusts which are governed by the Indian Trusts Act, 1882.
5. Societies registered under the Societies Registration Act, 1860.

NATURE OF CORPORATE FORM AND ADVANTAGES –

Incorporation offers certain advantages to the business community as compared with all other
kinds of business organisation.

(i) Independent corporate existence

A company incorporated under the Act is vested with a corporate personality so it redundant
bears its own name, acts under a name, has a seal of its own and its assets are separate and
distinct from those of its members. It is a different ‘person’ from the members who compose it.
Therefore, it is capable of owning property, incurring debts, borrowing money, having a bank
account, employing people, entering into contracts and suing or being sued in the same manner
as an individual.

Its members are its owners however they can be its creditors simultaneously. A shareholder
cannot be held liable for the acts of the company even if he holds virtually the entire share
capital.

A Company is an artificial person created by law. It is not a human being, but it acts through
human beings. It is considered as a legal person which can enter contracts, possess properties in
its own name, sue and can be sued by others etc. It is called an artificial person since it is
invisible, intangible, existing only in the contemplation of law. It can enjoy rights and being
subject to duties.

(ii) Limited Liability

The privilege of limited liability for business debts is one of the principal advantages of doing
business under the corporate form of organization. The company, being a separate person, is the
owner of its assets and bound by its liabilities.

The liability of a member as a shareholder extends to the contribution to the capital of the
company up to the nominal value of the shares held and not paid by him. Members, even as a
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whole, are neither the owners of the company’s undertakings nor liable for its debts. There are
various exceptions to the principle of limited liability.

In other words, a shareholder is liable to pay the balance, if any, due on the shares held by him,
when called upon to pay and nothing more, even if the liabilities of the company far exceed its
assets. This means that the liability of a member is limited.

(iii) Perpetual Succession

An incorporated company never dies, except when it is wound up as per law. A company, being
a separate legal person is unaffected by death or departure of any member and it remains the
same entity, despite the total change in the membership. A company’s life is determined by the
terms of its Memorandum of Association.

It may be perpetual, or it may continue for a specified time to carry on a task or object as laid
down in the Memorandum of Association. Perpetual succession, therefore, means that the
membership of a company may keep changing from time to time, but that shall not affect its
continuity.

The membership of an incorporated company may change either because one shareholder has
sold/transferred his shares to another or his shares devolve on his legal representatives on his
death or he ceases to be a member under some other provisions of the Companies Act.

Thus, perpetual succession denotes the ability of a company to maintain its existence by the
succession of new individuals who step into the shoes of those who cease to be members of the
company. Professor L.C.B. Gower rightly mentions,

“Members may come and go, but the company can go on forever. During the war, all the
members of one private company, while in general meeting, were killed by a bomb, but the
company survived— not even a hydrogen bomb could have destroyed it”.

(iv) Separate Property

A company is a legal person and entirely distinct from its members, is capable of owning,
enjoying and disposing of property in its own name. The company is the real person in which all
its property is vested, and by which it is controlled, managed and disposed of. Their Lordships of
the Madras High Court in R.F. Perumal v. H. John Deavin, A.I.R. 1960 Mad. 43 held that “no
member can claim himself to be the owner of the company’s property during its existence or in
its winding-up”. A member does not even have an insurable interest in the property of the
company.

(v) Transferability of Shares

The capital of a company is divided into parts, called shares. The shares are said to be a movable
property and, subject to certain conditions, freely transferable, so that no shareholder is
permanently or necessarily wedded to a company. When the joint-stock companies were
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established, the object was that their shares should be capable of being easily transferred, [In Re.
Balia and San Francisco Rly., (1968) L.R. 3 Q.B. 588].

Section 44 of the Companies Act, 2013 enunciates the principle by providing that the shares held
by the members are movable property and can be transferred from one person to another in the
manner provided by the articles.

If the articles do not provide anything for the transfer of shares and the Regulations contained in
Table “F” in Schedule I to the Companies Act, 2013, are also expressly excluded, the transfer of
shares will be governed by the general law relating to the transfer of movable property.

A member may sell his shares in the open market and realize the money invested by him. This
provides liquidity to a member (as he can freely sell his shares) and ensures stability to the
company (as the member is not withdrawing his money from the company). The Stock Exchanges
provide adequate facilities for the sale and purchase of shares.

Further, as of now, in most of the listed companies, the shares are also transferable through
electronic mode i.e. through Depository Participants in dematerialized form instead of physical
transfers. However, there are restrictions with respect to transferability of shares of a Private
Limited Company.

(vi) Common Seal

Upon incorporation, a company becomes a legal entity with perpetual succession and a common
seal. Since the company has no physical existence, it must act through its agents and all contracts
entered by its agents must be under the seal of the company. The Common Seal acts as the
official signature of a company. The name of the company must be engraved on its common seal.

A rubber stamp does not serve the purpose. A document not bearing a common seal of the
company, when the resolution passed by the Board, for its execution requires the common seal
to be affixed is not authentic and shall have no legal force behind it.

However, a person duly authorized to execute documents pursuant to a power of attorney granted
in his favour under the common seal of the company may execute such documents and it is not
necessary for the common seal to be affixed to such documents.

The person, authorized to use the seal, should ensure that it is kept under his personal custody
and is used very carefully because any deed, instrument or a document to which seal is
improperly or fraudulently affixed will involve the company in legal action and litigation.

(vii) Capacity to sue or be sued

A company is a body corporate, can sue and be sued in its own name. To sue means to institute
legal proceedings against (a person) or to bring a suit in a court of law. All legal proceedings
against the company are to be instituted in its name. Similarly, the company may bring an action
against anyone in its own name.
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A company’s right to sue arises when some loss is caused to the company, i.e. to the property or
the personality of the company. Hence, the company is entitled to sue for damages in libel or
slander as the case may be [Floating Services Ltd. v. MV San Fransceco Dipaloa (2004) 52
SCL 762 (Guj)].

A company, as a person distinct from its members, may even sue one of its own members. A
company has a right to seek damages where a defamatory material published about it, affects its
business.

Where video cassettes were prepared by the workmen of a company showing, their struggle
against the company’s management, it was held to be not actionable unless shown that the
contents of the cassette would be defamatory. The court did not restrain the exhibition of the
cassette. [TVS Employees Federation v. TVS and Sons Ltd., (1996) 87 Com Cases 37]. The
company is not liable for contempt committed by its officer. [Lalit Surajmal Kanodia v. Office
Tiger Database Systems India (P) Ltd., (2006) 129 Com Cases 192 Mad].

(viii) Contractual Rights

A company, being a legal entity different from its members, can enter into contracts for the
conduct of the business in its own name. A shareholder cannot enforce a contract made by his
company; he is neither a party to the contract nor be entitled to the benefit derived from of it, as a
company is not a trustee for its shareholders.

Likewise, a shareholder cannot be sued on contracts made by his company. The distinction
between a company and its members is not confined to the rules of privity but permeates the
whole law of contract. Thus, if a director fails to disclose a breach of his duties towards his
company, and in consequence, a shareholder is induced to enter into a contract with the director
on behalf of the company which he would not have entered into had there been disclosure, the
shareholder cannot rescind the contract.

Similarly, a member of a company cannot sue in respect of torts committed against the company,
nor can he be sued for torts committed by the company. [British Thomson-Houston Company v.
Sterling Accessories Ltd., (1924) 2 Ch. 33]. Therefore, the company as a legal person can take
action to enforce its legal rights or be sued for breach of its legal duties. Its rights and duties are
distinct from those of its constituent members.

(ix) Limitation of Action

A company cannot go beyond the power stated in its Memorandum of Association. The
Memorandum of Association of the company regulates the powers and fixes the objects of the
company and provides the edifice upon which the entire structure of the company rests.

The actions and objects of the company are limited within the scope of its Memorandum of
Association.
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In order to enable it to carry out its actions without such restrictions and limitations in most
cases, sufficient powers are granted in the Memorandum of Association. But once the powers
have been laid down, it cannot go beyond such powers unless the Memorandum of Association,
itself altered prior to doing so.

(x) Separate Management

As already noted, the members may derive profits without being burdened with the management
of the company. They do not have effective and intimate control over its working, and they elect
their representatives as Directors on the Board of Directors of the company to conduct corporate
functions through managerial personnel employed by them. In other words, the company is
administered and managed by its managerial personnel.

(xi) Voluntary Association for Profit

A company is a voluntary association for profit. It is formed for the accomplishment of some
stated goals and whatsoever profit is gained is divided among its shareholders or saved for the
future expansion of the company. Only a Section 8 company can be formed with no profit
motive.

(xii) Termination of Existence

A company, being an artificial juridical person, does not die a natural death. It is created by law,
carries on its affairs according to law throughout its life and ultimately is effaced by law.
Generally, the existence of a company is terminated by means of winding up. However, to avoid
winding up, sometimes companies adopt strategies like reorganization, reconstruction, and
amalgamation.

DISADVANTAGES OF INCORPORATION –

The disadvantages of incorporation are –

Cost - Initial costs for incorporation involve filing fees, potential legal or accounting expenses
and the option of using incorporation services. Ongoing fees for maintaining a corporation also
contribute to the overall cost.

Double Taxation - Certain types of corporations, such as C Corporations, may face “double
taxation.” This occurs when the company is taxed on its profits and again on the dividends
distributed to shareholders.

Loss of Personal Control - In stock corporations, individuals may lose complete control of the
entity. Governance shifts to a board of directors elected by shareholders, diminishing the singular
ownership control.
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Required Structure - Corporations must adhere to state regulations, encompassing corporate

management, operational protocols and accounting practices. Strict compliance with these rules
is mandatory.

Ongoing Paperwork - Corporations are obligated to file annual reports detailing the financial
status of the company. Continuous paperwork includes tax returns, accounting records, meeting
minutes and any necessary licenses and permits.

Difficulty in Dissolving - While perpetual existence is a positive aspect, the process of

dissolution can be challenging, requiring significant time and financial resources to complete the
necessary procedures.

Lifting of Corporate Veil - The legal principle of the “Lifting of Corporate Veil” posits that a
company is a distinct legal person from its members. However, there are instances when the
court may lift or ignore this corporate veil. This occurs to unveil the true nature of the company
or when it is perceived that the corporate form is being misused or abused.

The court, in such cases, exposes the actual character and nature of the concerned company. This
principle is evident in the landmark case of Salomon v. Salomon and Co. Ltd. (1897) A.C 22,
where the court recognised the separate legal identity of the company but retained the authority
to pierce the corporate veil when necessary to prevent misuse of the corporate structure.

KINDS OF COMPANIES -

Types of companies based on liability –

Based on liability companies can be divided into 3 parts-

 Companies limited by shares: It refers to a company in which the liability of its partners
is limited to the amount specified in the partnership agreement. However, any unpaid
amount on the share may be called upon to settle the liability. Liability against partners
can be enforced during the existence of the company even during liquidation. It is
important to note that no amount can be claimed from the members after the shares have
been fully repaid.
For example- X is a shareholder who has paid 75 for a share with a face value of 100.
The company can call upon X to pay only the remaining 25 rupees and not exceed that
amount. By far the most important are limited liability companies.

 Companies limited by guarantee: In this type of company, the liability of the partners is
limited to the amount they undertake to contribute to the assets of the company in the
event of its dissolution. Simply put, the liability of the shareholders is limited by the
amount of the guarantee they give in the partnership agreement.
During the liquidation of the company, the members are placed in the position of
guarantors for the fulfillment of the company’s debt. Examples of such societies are
clubs, trade associations, research associations, etc.
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 Companies with unlimited liability: It applies to those companies that do not determine
the liability of their members. Members’ liability is unlimited and their assets can be used
to satisfy the company’s debt. They may or may not have share capital.

Types of companies based on company incorporation –

Based on the establishment, companies can be divided into 2 categories:

 Statutory Companies: It applies to those companies which are incorporated by a special

Act of Parliament or State Legislature. The main objective of this type of company is to
provide a public service. Since they are established under a separate law, the Companies
Act, 2013 has limited scope for them. If there is any conflict, the Special Act for the
circumstance will prevail over the Companies Act, 2013.

 Registered Companies: Companies that are registered under the provisions of the
Companies Act, 2013 or any previous Companies Act are called registered companies.
This type of company is formed when they have received a certificate of incorporation
(ROC).

Types of companies based on the number of members –

In this category, companies can be divided into 3 parts –

 Public Companies: A public company is defined in Section 2 (71) of the Companies Act
of 2013. To establish a public company, it is necessary to have at least 7 partners. One of
the special features of a public company is that there are no restrictions on the buying and
selling of shares. Section 58 stipulates that the shares of a public company are freely
transferable. If the company does not comply with the above provisions, it will renounce
the status of “private company”. To transform a public company into a private company,
it is necessary to adopt a special resolution at the general meeting (3/4 majority).

 Private companies: A private company [Section 2(68)] refers to an association of

persons whose maximum number of members is limited to 200. A private company
cannot invite the general public to subscribe to its shares or debentures. Shares in a
private company are not freely transferable and cannot be transferred. All such
restrictions must be expressly stated in the Articles of Association (AOA). As with a
public company, a private company can change its status by passing a special resolution
(3/4 majority) at the general meeting.

 One-Person Company (OPC): According to Section 2(62) of the Companies Act 2012,
a sole proprietorship is a company that has only one person as a partner or shareholder.
The board of directors must have 1 director and its only member can also hold the role of
director. In this type of company, the term “nominee” assumes the highest importance
because, after the death of the original member, the business of the company would
cease. It is therefore necessary to mention the name of the candidate when registering
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such a company. It is not followed in other types of companies because they have
perpetual succession.

Types of Companies in India Based on Residence –

 Foreign companies: According to Section 2(42) of the Companies Act, 2013, “foreign
company” means any company or body corporate having its place of business or carrying
on business in India (through itself or its agent). The provisions listed in Section 379 -393
apply to this type of company.

 Indian companies: It applies to those companies where incorporation and registration

are done in India. It is an umbrella term and almost all other types of companies fall
under it.

Other types of companies in India –

 Section 8 Company: A company registered under Section 8 of the Companies Act 2013
is a Section 8 Company. It is also known as a non-profit company. The features of this
company are:

The object of the company is the promotion of commerce, art, science, sport, education,
research, welfare, religion, charity, environmental protection, or any other object;

o Any profit achieved will be used to achieve the company’s goals.

o It prohibits the payment of dividends to its members.
o A Section 8 company is exempt from using “Ltd” or “private Ltd” as a suffix to
its name.
o Government companies
o A government company is a company in which the Central Government, State
Government, or a combination holds at least 51% of the paid-up share capital.
 Small companies: According to Section 2(85) of the Companies Act 2013, “small
company” means a company other than a public company in which the following
conditions are met—
 share capital paid up not exceeding 50 lakh rupees.
 Turnover for the previous year does not exceed 2 crore rupees in the
previous year.
 Subsidiary Company: According to Section 2 sub-section 87 Companies Act of 2013, a
subsidiary company is a company in which the holding company-
 Manage and control the composition of the board of directors. Control can
be determined if the holding company has the right to appoint or remove a
majority of the board members.
 Exercise control over more than half of the subsidiary’s voting rights.
 Holding companies: The definition of a holding company is given in Section 2 (46) of
the Companies Act of 2013. It is a company of which these companies are subsidiaries.
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 Associated companies: According to Section 2(6) of the Companies Act 2013, an

associated company means a company in which another company has substantial
influence but is not a subsidiary of the company exercising influence. The term
“significant decision” means the power to control at least 20% of the total voting rights or
participation in the management affairs of an affiliate.

 Producer Companies: It refers to a legally recognized association of farmers/farmers to

improve their standard of living and ensure stable income and profitability. Some
conditions for Producer Company-
 Only a person working in the primary sector can be a member of such a
company.
 The company name ends with the words “Producer Company Limited”.
 The minimum and maximum number of directors in a production
company are 5 and 15 respectively.
 Sleeping or Dormant Companies: It refers to a company that has not carried out its
business or carried out significant accounting transactions in the last 2 financial years.
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REGISTRATION AND INCORPORATION

The Companies Act, 2013 details the regulations and company registration papers essential for
the incorporation of a company. In this article, we will understand all such rules and documents
listed in the Act. To begin with, let’s define the promoters of a company.

FORMATION OF A COMPANY

Section 3 of the Companies Act, 2013, details the basic requirements of forming a company as
follows:

 Formation of a public company involves 7 or more people who subscribe their names to
the memorandum and register the company for any lawful purpose.
 Similarly, 2 or more people can form a private company.
 One person can form a One-person company.

PROMOTERS –

Section 2(69) of the Companies Act, 2013, defines promoters as an individual who:-

 Is named as a promoter in the prospectus or in the annual returns of the company.

 Controls the affairs of a company, directly or indirectly.
 Advises, directs, or instructs the Board of Directors.

Hence, we can say that promoters are people who originally come up with the idea of the
company, form it and register it. However, solicitors, accountants, etc. who act in their
professional capacity are NOT promoters of the company.

Registration or Incorporation of a Company

Section 7 of the Companies Act, 2013, details the procedure for incorporation of a company.
Here is the procedure:

Filing of company registration papers with the registrar –

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To incorporate a company, the subscriber has to file the following company registration papers
with the registrar within whose jurisdiction the location of the registered office of the proposed
company falls.

1. The Memorandum and Articles of the company. All subscribers have to sign on the
memorandum.
2. The person who is engaged in the formation of the company has to give a declaration
regarding compliance of all the requirements and rules of the Act. A person named in the
Articles also has to sign the declaration.
3. Each subscriber to the Memorandum and individuals named as first directors in the
Articles should submit an affidavit with the following details:
i. Declaration regarding non-conviction of any offence with respect to the
formation, promotion, or management of any company.
ii. He has not been found guilty of fraud or any breach of duty to any company in the
last five years.
iii. The documents filed with the registrar are complete and true to the best of his
knowledge.
4. Address for correspondence until the registered office is set-up.
5. If the subscriber to the Memorandum is an individual, then he needs to provide his full
name, residential address, and nationality along with a proof of identity. If the subscriber
is a body corporate, then prescribed documents need to be provided.
6. Individuals mentioned as subscribers to the Memorandum in the Articles need to provide
the details specified in the point above along with the Director Identification Number.
7. The individuals mentioned as first directors of the company in the Articles must provide
particulars of interests in other firms or bodies corporate along with their consent to act as
directors of the company as per the prescribed form and manner.

ISSUING THE CERTIFICATE OF INCORPORATION

Once the Registrar receives the information and company registration papers, he registers all
information and documents and issues a Certificate of Incorporation in the prescribed form.

Corporate Identity Number (CIN)

The Registrar also allocates a Corporate Identity Number (CIN) to the company which is a
distinct identity for the company. The allotment of CIN is on and from the company’s
incorporation date. The certificate carries this date.

Maintaining copies of Company registration papers

The company must maintain copies of all information and documents until dissolution.

Furnishing false information at the time of incorporation

During the formation of a company, an individual can:

 16

 Furnish incorrect or false information

 Suppress any material information in the documents provided to the Registrar for the
incorporation, on purpose

In such cases, the individual is liable for action for fraud under section 447.

The company is already incorporated based on false information

If a company is already incorporated but it is found at a later date that the information or
documents submitted were false or incorrect, then the promoters, first directors, and persons
making a declaration is liable for action for fraud under section 447.

Effect of Registration of a Company

According to Section 9 of the Companies Act, 2013, these are the effects of registration of a
company:

 From the date of incorporation, the subscribers to the Memorandum and all subsequent
members of the company are a body corporate.
 A registered company can exercise all functions of a company incorporated under the
Act. Also, the company has perpetual succession with power to acquire, hold, and
dispose of property of all forms. Also, it can contract, sue and be sued by the said name.
 Further, the company becomes a legal person separate from the incorporators from the
date of incorporation. Also, a binding contract comes into existence between the
company and its members as mentioned in the Memorandum and Articles of Association.
Until the company dissolves or the Registrar removes it from the register, it has perpetual
existence.

PRE INCORPORATION CONTRACTS –

Before a company commences business, it has to enter into several contracts and incur several
initial expenses to get started. Contracts which are entered into by promoters with parties to
acquire either some property or right for and on behalf of a company which is yet to be formed
are called as ‘pre-incorporation contracts’ or ‘preliminary contracts’.

An agreement made by a person for a company which is not yet into existence at the time of
signing of such agreement is called a pre-incorporation contract.

The person who enters into a pre-incorporation agreement is usually called the Promoter.
Promoter is a person who initially gets the idea of the formation of a company. The Companies
Act however defines promoter as a person who is so named in the prospectus of the company,
who has control over the affairs of the company and according to whom the directors of the
company act.

Legal status of Pre-incorporation contract –

 17

Legal status of a pre-incorporation contract is not at all easy to define in specific terms. If
considered as per the definition of contract under the Contract Act, it is necessary to have at least
two parties to constitute a valid contract so as to enter into a contract with each other. As the
general principle is that no contract exists if one party to the contract is not in existence at the
time of entering the contract. This in turn leads to that a company cannot enter into a contract
before it comes into existence. A company is said to be existing only after it has been duly
incorporated. This is one such facet of a pre-incorporation contract

However, it may be argued that, the pre-incorporation contract is entered into by the promoters
on behalf of the company, representing the company. But here too, there is a catch. The
promoters enter into the contract as agents of the company. The question which arises is if the
principal i.e. the company, itself, is not into existence, how can it have authority to appoint
agents to act on behalf of it?

So, its the promoters, and not the company, who become personally liable for all contracts
entered into by them even though they claim to be acting for the prospective company.

But, u/s 230 of the Indian Contract Act, an agent does have authority to personally enforce
contracts entered by himself on behalf of the principal and he also is not personally bound for
them if it is very clearly stated by him about his being not liable under the contract. So if this
principle is applied, the contract becomes in fructuous as neither of the parties is liable under the
contract.

However, u/s 15 (h) and 19 (e) of the Specific Relief Act of 1963, lies the solution to our
problem.

According to Section 15(h) of the Specific Relief Act, specific performance of a contract can be
obtained by any party or a representative on behalf of the principal, when the Promoters of a
company enter into a contract before the company’s incorporation and when such a contract is
warranted under the company’s incorporation terms.

Similarly, under Section 19(e) of the Specific Relief Act if the newly incorporated company has
accepted the pre-incorporation contract and has communicated its acceptance to the other party,
relief against parties can be claimed under subsequent title.

Therefore, pre-incorporation contracts can be enforced in India by:

(i) Incorporating the contract in the terms of incorporation,

(ii) By entering into a new contract with the other party or the Promoter,

(iii) By expressly or impliedly accepting the benefits of the pre- incorporation contract.

These provisions, in a way deviate from the common law principles to some extent, which make
pre-incorporation contracts valid under section 15. Except as otherwise provided by this Chapter,
 18

the specific performance of a contract may be obtained by–

(a) any party thereto;
(b) the representative in interest of the principal, of any party thereto

In Weavers Mills Ltd. v. Balkies Ammal [AIR 1969 Mad 462], the Madras High Court extended
the scope of this principle through its given decision. In this case, the promoters had agreed to
purchase some properties for and on behalf of the company which was yet to be incorporated.
After incorporation of the company, the company assumed possession of the properties and
constructed some structures on the property. It was held that even in absence of conveyance of
property by the promoter in favor of the company after its incorporation, the company’s title over
the property could not be set aside.

How does a company ratify a pre incorporation contract under Indian law?

It is a universal and wide known fact that the company is considered to be a separate legal entity
and all the members of the company are separate from its members. Since a company is an
artificial person and separate from its members, therefore it can enter into its own contracts and
on the property in its own name. Company being an artificial person who is not born at the time
of the incorporation, it cannot enter into any agreement before incorporation. It is the time where
the work of the promoter comes into the picture where he is responsible and obliged to bring the
company into the legal existence. Now, therefore, in order to ensure that the company is
successfully brought into existence and is running smoothly and fulfilling its obligations, the
promoter has to enter into some contracts on behalf of the company. Such contracts are called the
contracts formed before the incorporation stage or the Promoter’s Contract. Such contracts
cannot be ignored before the incorporation of the company and are inevitable for the registration
and are therefore recognized under The Companies Act, 2013 and The Specific Relief Act,
1963.

CERTIFICATE OF COMMENCEMENT OF BUSINESS –

The Certificate of Commencement of Business is a declaration made by the directors of a

company within 180 days of its incorporation. This declaration confirms that the subscribers to
the Memorandum of Association (MOA) have paid the agreed-upon value of shares. Along with
a Bank Statement as evidence of the subscription money received by the company, this
declaration must be filed with the RoC using Form 20A.

The form is also subject to verification by Chartered Accountants, Company Secretaries, or Cost
Accountants. If errors or discrepancies are found in the form after verification, these practicing
professionals will be held responsible and may face undesirable consequences for inaccuracies.

Eligibility Criteria for Commencement of Business (COB) Certificate

Under the provisions of the Companies Act of 2013, specific companies are obligated to secure a
Commencement of Business (COB) Certificate before commencing their business operations.
This requirement applies to companies with a share capital structure, and it is essential to adhere
 19

to Section 10A (1)(a) of the Companies Act in conjunction with the Companies (Incorporation)
Rules, 2014.

The COB Certificate is a requisite for the following types of companies:

 Companies Formed after November 2nd, 2018: Companies incorporated after this date
must procure a COB Certificate within 180 days from their incorporation date.
 Companies with Share Capital: Irrespective of the nature of business, all companies
operating with a share capital framework must apply for and obtain the COB Certificate.

MEMORANDUM OF ASSOCIATION

A company is formed when a number of people come together for achieving a specific purpose.
This purpose is usually commercial in nature. Companies are generally formed to earn profit
from business activities. To incorporate a company, an application has to be filed with the
Registrar of Companies (ROC). This application is required to be submitted with a number of
documents. One of the fundamental documents that are required to be submitted with the
application for incorporation is the Memorandum of Association.

Definition of Memorandum of Association –

Section 2(56) of the Companies Act, 2013 defines Memorandum of Association. It states that a
“memorandum” means two things:
 Memorandum of Association as originally framed.
Memorandum as originally framed refers to the memorandum as it was during the incorporation
of the company.
 Memorandum as altered from time to time.
This means that all the alterations that are made in the memorandum from time to time will also
be a part of Memorandum of Association.

The section also states that the alterations must be made in pursuance of any previous company
law or the present Act.

In addition to this, according to Section 399 of the Companies Act, 2013, any person can inspect
any document filed with the Registrar in pursuance of the provisions of the Act. Hence, any
person who wants to deal with the company can know about the company through the
Memorandum of Association.
 20

Meaning of Memorandum of Association

Memorandum of Association is a legal document which describes the purpose for which the
company is formed. It defines the powers of the company and the conditions under which it
operates. It is a document that contains all the rules and regulations that govern a company’s
relations with the outside world.

It is mandatory for every company to have a Memorandum of Association which defines the
scope
of its operations. Once prepared, the company cannot operate beyond the scope of the document.
If the company goes beyond the scope, then the action will be considered ultra vires and hence
will be void.

It is a foundation on which the company is made. The entire structure of the company is detailed
in the Memorandum of Association.

The memorandum is a public document. Thus, if a person wants to enter into any contracts with
the company, all he has to do is pay the required fees to the Registrar of Companies and obtain
the
Memorandum of Association. Through the Memorandum of Association, he will get all the
details
of the company. It is the duty of the person who indulges in any transactions with the company
to
know about its memorandum.

Object of registering a Memorandum of Association or MOA

Memorandum of Association is an essential document that contains all the details of the
company.
It governs the relationship between the company and its stakeholders. Section 3 of the
Companies
Act, 2013 describes the importance of memorandum by stating that, for registering a company,

(a) In case of a public company, seven or more people are required.

(b) In case of a private company, two or more people are required.
(c) In case of a one-person company, only one person is required.

In all the above cases, the concerned people should first subscribe to a memorandum before
registering the company with Registrar.

Thus, Memorandum of Association is essential for registration of a company. Section 7(1)(a) of

the Act states that for incorporation of a company, Memorandum of Association and Articles of

Association of the company should be duly signed by the subscribers and filed with the
Registrar.
 21

In addition to this, a memorandum has other objects as well. These are,

1. It allows the shareholders to know about the company before buying it shares. This helps
the shareholders determine how much capital will they invest in the company.

2. It provides information to all the stakeholders who are willing to associate with the
company in any way.

Format of Memorandum of Association

Section 4(5) of the Companies Act states that a memorandum should be in any form as given in
Tables A, B, C, D, and E of Schedule 1. The Tables are of different kinds because of different
kinds of companies.

Table A – It is applicable to a company limited by shares.

Table B – It is applicable to a company limited by guarantee and not having a share capital.
Table C – It is applicable to a company limited by guarantee and having a share capital.
Table D – It is applicable to an unlimited company not having a share capital.
Table E – It is applicable to an unlimited company having a share capital.

The memorandum should be printed, numbered and divided into paragraphs. It should also be
signed by the subscribers of the company.

CONTENTS

Section 4 of the Companies Act, 2013 states the contents of the memorandum. It details all the
essential information that the memorandum should contain.
Name Clause

The first clause states the name of the company. Any name can be chosen for the company. But
there are certain conditions that need to be complied with.

Section 4(1)(a) states:

 If a company is a public company, then the word ‘Limited’ should be there in the name.
Example, “Robotics”, a public company, its registered name will be “Robotics Limited”.
 If a company is a private company, then ‘Private Limited’ should be there in the name.
“Secure “a private company, its registered name will be “Secure Private Limited”.
 This condition is not applicable to Section 8 companies.

What are Section 8 companies?

Section 8 Company is named after Section 8 of the Companies Act,2013. It describes companies
which are established to promote commerce, art, sports, education, research, social welfare,
 22

religion etc. Section 8 companies are similar to Trust and Societies, but they have a better
recognition and legal standing than Trust and Societies.

What kind of names are not allowed?

The name stated in the memorandum shall not be,

 Identical to the name of another company.
 Too nearly resembling the name of an existing company.

What’s the use of Memorandum of Association?

1. It defines the scope & powers of a company, beyond which the company cannot operate.
2. It regulates company’s relation with the outside world.
3. It is used in the registration process; without it the company cannot be incorporated.
4. It helps anyone who wants to enter into a contractual relationship with the company to gain
knowledge about the company.
5. It is also called the charter of the Company, as it contains all the details of the company,
its members and their liabilities.

Alteration, Amendment & Change in Memorandum of Association under Companies Act,

2013

The term “alter” or “alteration” is defined in Section 2(3) of the Act, as any additions, omissions
or substitutions. A company can alter the memorandum only to the extent as permitted by the
Act.

According to Section 13, the company can alter the clauses in the memorandum by passing a
special resolution.

A resolution is a formal decision taken in a meeting. There are two kinds of resolutions, ordinary
and special. A special resolution is one which requires at least 2/3rd majority to be effective. The
alteration to the clauses also requires the approval of the Central Government in writing.

The alteration of memorandum can happen for a variety of reasons. The alteration can be made
if,

1. Enables the company to carry its business more effectively.

2. Helps to achieve the objectives.
3. Helps the company to amalgamate with another company.
4. Helps the company dispose of any undertaking.

Alteration of Memorandum

The alteration of various clauses of the memorandum have different procedures:

 23

1. Alteration to the Name Clause: To alter the name of the company, a special resolution is
required. After the resolution is passed, the copy is sent to the registrar. For changing the name,
the application needs to be filed in Form INC- 24 with the prescribed fees. After the name is
changed, a new certificate of incorporation is issued.

2. Alteration to the Registered Office Clause: The application for changing the place for
Registered Office of the company shall be filed with the Central Government in Form INC-23
with the prescribed fees.

If the company is changing its Registered Office from one to another, then the approval of the
Central Government is required. The Central Government is required to dispose off the matter
within 60 days and should ensure that the change of place has the consent of all the stakeholders
of the company.

 Alteration to the Object Clause: To alter the object clause, a special resolution is required to be
passed. The changes must be confirmed by the authority. The document which confirms the
changes by authority with a printed copy of the altered memorandum should be filed with the
Registrar.

If the company is a public company, then the alteration should be published in the newspaper
where the Registered Office of the company is located. The changes to the object clause must
also
mentioned on the company’s website.

 Alteration to the Liability Clause: The Liability clause of the memorandum cannot be altered
except with the written consent of all the members of the company. By altering the liability
clause, the liability of the directors of the company can be made unlimited. In any case, the
liability of the shareholders cannot be made unlimited. Changes in the liability clause can be
made by passing a special a special resolution and sending a copy of the resolution to the
Registrar of Companies.

Alteration to the Capital Clause: The capital clause of a company can be altered by an ordinary
resolution.

The company can,

1. Increase its authorised share capital.

2. Convert the shares into stock.
3. Consolidate and divide all of its shares.
4. Cancel the shares which have not been subscribed to.
5. Diminish the share capital of the shares cancelled.

The altered Memorandum of Association should be submitted to the Registrar within 30 days of
passing the resolution.

Binding force of Memorandum and Articles of Association

 24

After the Articles and the Memorandum of a company are registered, they bind the company and
its members to the same extent as if they had been signed by each of the members of the
company.
However, while the company’s articles have a binding effect, it does not have as much force as a
statute does. The effect of binding may work as follows:

Binding the company to its members

The company is naturally completely bound to its members to adhere to the articles. Where the
company commits or is in a place to commit a breach of the articles, such as making ultra vires
or
otherwise illegal transaction, members can restrain the company from doing so, by way of an
injunction. Members are also empowered to sue the company for the purpose of enforcement of
their own personal rights provided under the Articles, for instance, the right to receive their share
of declared divided.

It should be noted, however, that only a shareholder/member, and only in his capacity as a
member,
can enforce the provisions contained in the Articles. For instance, in the case of Wood v. Odessa
Waterworks Co., the articles of Waterworks Co. provided that the directors can declare a
dividend
to be paid to the members, with the sanction of the company at a general meeting. However,
instead
of paying the dividend to the shareholders in cash a resolution was passed to give them debenture
bonds. It was finally held by the court, that the word “payment” referred to payment in cash, and
the directors were thus restrained from acting on the resolution so passed.

Members bound to the company

Each member of the company is bound to the company and must observe and adhere to the
provisions of the memorandum and the articles. All the money that may be payable by any
member
to the company shall be considered as a debt due. Members are bound by the articles just as
though
each and every one of them has signed and contracted to conform to their provisions. In
Borland’s
Trustees v. Steel Bros. & Co. Ltd., the articles the company provided that in the event of
bankruptcy of any member, his shares would be sold at a price affixed by the directors. Thus,
when
Borland went bankrupt, his trustee expressed his wish to sell these shares at their original value
and contended that he could do so since he was not bound by the articles. It was held, however,
that he was bound to abide by the company’s articles since the shares were bought as per the
provisions of the articles.

Binding between members

 25

The articles create a contract between and amongst each member of the company. However, such
rights can only be enforced by or even against a member of the company. Courts have been
known to make exceptions and extend the articles to constitute a contract even between
individual members. In the case of Rayfield v Hands Rayfield was a shareholder in a particular
company., who was required to inform directors if he intended to transfer his shares, and
subsequently, the directors were required to buy those shares at a fair value. Thus, Rayfield
remained in adherence to the articles and informed the directors. The directors, however,
contended that they were not bound to pay for his shares and the articles could not impose this
obligation on them. The courts, however, dismissed the directors’ argument and compelled them
to buy Rayfield’s shares at a fair value. The court further held that it was not mandatory for
Rayfield to join the company to be allowed to bring a suit against the company’s directors.

No binding in relation to outsiders

Contrary to the above conditions, neither the memorandum nor the articles constitute a contract
between the company and any third party. The company and its members are not bound to the
outsiders with respect to the provisions of the memorandum and the articles. For instance, in the
case of Browne v La Trinidad, the articles of the company included a clause that implied that
Browne should be a director that should not be removed or removable. He was, however,
removed regardless and thus brought an action to restrain the company from removing him. Held
that since there was no contract between Browne and the company, being an outsider, he cannot
enforce articles against the company even if they talk about him or give him any rights.
Therefore, an outsider may not take undue advantage of the articles to make any claims against
the company.

DOCTRINE OF CONSTRUCTIVE NOTICE

When the Memorandum and Articles of Association of any company, are registered with the
Registrar of Companies they become “public documents” as per section 399 of the Act. This
implies that any member of the general public may view and inspect these documents at a
prescribed fee. A member of the public may make a request to a specific company, and the
company, in turn, must, within seven days send that person a copy of the memorandum, the
articles and all agreements and resolutions that are mentioned in section 117(1) of the Act.

If the company or its officers or both, fail to provide the copies of the requisite documents, every
defaulting officer will be liable to a fine of Rs. 1000, for every day, until the default continues, or
Rs. 1,00,000 whichever is less.

Therefore, it is the duty of every person that deals with the company to inspect these public
documents and ensure in his own capacity that the workings of the company are in conformity
with the documents. Irrespective of whether a person has actually read the documents or not, it is
assumed that he familiar with the contents of these documents, and that he has understood them
in their proper meaning. The memorandum and articles of association are thus deemed as notices
to the public, hence a ‘constructive notice’.
 26

Illustration: If the articles of Company A, provided that any bill of exchange must be signed by a
minimum of two directors, and the payee receives a bill of exchange signed only by one, he will
not have the right to claim the amount.

DOCTRINE OF INDOOR MANAGEMENT

 27

The concept of the Doctrine of Indoor Management can be most elaborately explained by
examining the facts of the case of Royal British Bank v. Turquand, which in fact, first laid down
the doctrine. It is due to this that the doctrine of indoor management is also known as the
“Turquand Rule”.

The directors of a particular company were authorised in its articles to engage in the borrowing
of bonds from time to time, by way of a resolution passed by the company in a general meeting.

However, the directors gave a bond to someone without such a resolution being passed, and
therefore the question that arose was whether the company was still liable with respect to the
bond. The company was held liable, and the Chief Justice, Sir John Jervis explained that the
understanding behind this decision was that the person receiving the bond was entitled to assume
that the resolution had been passed, and had accepted the bond in good faith.

However, the judgement, in this case, was not fully accepted into in law until it was accepted and
endorsed by the House of Lords in the case of Mahony v East Holyford Mining Co. Therefore,
the primary role of the doctrine of indoor management is completely opposed to that of
constructive notice. Quite simply, while constructive notice seeks to protect the company from
an outsider, indoor management seeks to protect outsiders from the company. The doctrine of
constructive notice is restricted to the external and outside position of the company and, hence,
follows that there is no notice regarding how the internal mechanism of the company is operated
by its officers, directors and employees. If the contract has been consistent with the documents
on public record, the person so contracting shall not be prejudiced by any and all irregularities
that may beset the inside, or “indoor” operation of the company.

This doctrine has since then been adopted into Indian Law as well in cases such as Official
Liquidator, Manabe & Co. Pvt. Ltd. v. Commissioner of Police and more recently, in M.
Rajendra Naidu v. Sterling Holiday Resorts (India) Ltd. wherein the judgment was that the
organizations lending to the company should acquaint themselves well with the memorandum
and the articles, however, they cannot be expected to be aware of every nook and corner of every
resolution, and to be aware of all the actions of a company’s directors. Simply put, people
dealing with the company are not bound to inquire into every single internal proceeding that
takes place within the company.

Exceptions to the Doctrine of Indoor Management

Where the outsider had knowledge of the irregularity— Although people are not expected to
know about internal irregularities within a company, a person who did, in fact, have knowledge,
or even implied notice of the lack of authority, and went ahead with the transaction regardless,
shall not have the protection of this doctrine. Illustration: In Howard v. Patent Ivory Co. (38 Ch.
D 156), the articles of a company only allowed the directors to borrow a maximum amount of
one thousand pounds, however, they could exceed this amount by obtaining the consent of the
company in a general meeting. However, in this case, without obtaining this requisite consent,
the directors borrowed a sum of 3,500 Pounds from one of the directors in exchange for
debentures. The company then refused to pay the amount. It was eventually held that the
debentures were only good to the extent of one thousand pounds since the director had full
 28

knowledge and notice of the irregularity since he was a director himself involved in the internal
working of the company.

Lack of knowledge of the articles— Naturally, this doctrine cannot and will not protect
someone
who has not acquainted himself with the articles or the memorandum of the company for
example
in the case of Rama Corporation v. Proved Tin & General Investment Co. wherein the officers of
Rama Corporation had not read the articles of the investment company that they were
undertaking
a transaction with.

Negligence— This doctrine does not offer protection to those who have dealt with a company
negligently. For example, if an officer of a company very evidently takes an action which is not
within his powers, the person contracting should undertake due diligence to ensure that the
officer is duly authorized to take that action. If not, this doctrine cannot help the person so
contracting, such as in the case of Al Underwood v. Bank of Liverpool.

Forgery— Any transaction which involves forgery or is illegal or void ab initio, implies the lack
of free will while entering into the transaction, and hence does not invoke the doctrine of indoor
management. For example, in the case of Ruben v. Great Fingal Consolidated, the secretary of a
company illegally forged the signatures of two directors on a share certificate so as to issue
shares
without the appropriate authority. Since the directors had no knowledge of this forgery, they
could
not be held liable. The share certificate was held to be in nullity and hence, the doctrine of indoor
management could not be applied. The wrongful an unauthorized use of the company’s seal is
also
included within this exception.

Further, this doctrine cannot include situations where there was third agency involved or
existent.
For example, in the case of Varkey Souriar v. Keraleeya Banking Co. Ltd. this doctrine could not
be applied where there was any scope of power exercised by an agent of the company. The
doctrine
cannot be implied even in cases of Oppression
 29

PROSPECTUS

DEFINITION

The Companies Act, 2013 defines a prospectus under section 2(70). Prospectus can be defined as
“any document which is described or issued as a prospectus”. This also includes any notice,
circular, advertisement or any other document acting as an invitation to offers from the public.
Such an invitation to offer should be for the purchase of any securities of a corporate body. Shelf
prospectus and red herring prospectus are also considered as a prospectus.

Essentials for a document to be called as a prospectus –

For any document to considered as a prospectus, it should satisfy following conditions:

 The document should invite the subscription to public share or debentures, or it should invite
deposits.
 Such an invitation should be made to the public.
 The invitation should be made by the company or on the behalf of the company.
 The invitation should relate to shares, debentures or such other instruments.

Statement in lieu of prospectus

Every public company either issue a prospectus or file a statement in lieu of prospectus. This is
not mandatory for a private company. But when a private company converts from private to
public
company, it must have to either file a prospectus if earlier issued or it has to file a statement in
lieu
of prospectus.

The provisions regarding the statement in lieu of prospectus have been stated under section 70 of
the Companies Act 2013.
 30

Advertisement of prospectus –

Section 30 of the Companies Act 2013 contains the provisions regarding the advertisement of the
prospectus. This section states that when in any manner the advertisement of a prospectus is
published, it is mandatory to specify the contents of the memorandum of the company regarding
the object, member’s liabilities, amount of the company’s share capital, signatories and the
number of shares subscribed by them and the capital structure of the company. Types of the
prospectus as
follows.

 Shelf Prospectus
 Red Herring Prospectus
 Abridged prospectus
 Deemed Prospectus

Shelf Prospectus

Shelf prospectus can be defined as a prospectus that has been issued by any public financial
institution, company or bank for one or more issues of securities or class of securities as
mentioned
in the prospectus. When a shelf prospectus is issued then the issuer does not need to issue a
separate
prospectus for each offering, he can offer or sell securities without issuing any further
prospectus.

The provisions related to shelf prospectus has been discussed under section 31 of the Companies
Act, 2013.

The regulations are to be provided by the Securities and Exchange Board of India for any class
or
classes of companies that may file a shelf prospectus at the stage of the first offer of securities to
the registrar.

The prospectus shall prescribe the validity period of the prospectus and it should be not be
exceeding one year. This period commences from the opening date of the first offer of the
securities. For any second or further offer, no separate prospectus is required. While filing for a
shelf prospectus, a company is required to file an information memorandum along with it.

Information Memorandum [Section 31(2)]

The company which is filing a shelf prospectus is required to file the information memorandum.
It should contain all the facts regarding the new charges created, what changes have undergone
in the financial position of the company since the first offer of the security or between the two
offers. It should be filed with the registrar within three months before the issue of the second or
subsequent offer made under the shelf prospectus as given under Rule 4CCA of section 60A(3)
under the Companies (Central Government’s) General Rules and Forms, 1956.
 31

When any company or a person has received an application for the allotment of securities with
advance payment of subscription before any changes have been made, then he must be informed
about the changes. If he desires to withdraw the application within 15 days, then the money must
be refunded to them.

After the information memorandum has been filed, if any offer or securities is made, the
memorandum along with the shelf prospectus is considered as a prospectus.

Red herring prospectus

Red herring prospectus is the prospectus which lacks the complete particulars about the quantum
of the price of the securities. A company may issue a red herring prospectus prior to the issue of
prospectus when it is proposing to make an offer of securities.

This type of prospectus needs to be filed with the registrar at least three days prior to the opening
of the subscription list or the offer. The obligations carried by a red herring prospectus are same
as a prospectus. If there is any variation between a red herring prospectus and a prospectus then
it should be highlighted in the prospectus as variations.
When the offer of securities closes then the prospectus has to state the total capital raised either
raised by the way of debt or share capital. It also has to state the closing price of the securities.

Any other details which have not been included in the prospectus need to be registered with the
registrar and SEBI.

The applicant or subscriber has right under Section60B (7) to withdraw the application on any
intimation of variation within 7 days of such intimation and the withdrawal should be
communicated in writing.

Abridged Prospectus

The abridged prospectus is a summary of a prospectus filed before the registrar. It contains all
the
features of a prospectus. An abridged prospectus contains all the information of the prospectus in
brief so that it should be convenient and quick for an investor to know all the useful information
in short.

Section33(1) of the Companies Act, 2013 also states that when any form for the purchase of
securities of a company is issued, it must be accompanied by an abridged prospectus.

It contains all the useful and materialistic information so that the investor can take a rational
decision and it also reduces the cost of public issue of the capital as it is a short form of a
prospectus.

Deemed Prospectus
 32

A deemed prospectus has been stated under section 25(1) of the Companies Act, 2013. When
any company to offer securities for sale to the public, allots or agrees to allot securities, the
document will be considered as a deemed prospectus through which the offer is made to the
public for sale. The document is deemed to be a prospectus of a company for all purposes and all
the provision of content and liabilities of a prospectus will be applied upon it.

In the case of SEBI v. Kunnamkulam Paper Mills Ltd., it was held by the court that where a
rights
issue is made to the existing members with a right to renounce in the favour of others, it becomes
a deemed prospectus if the number of such others exceeds fifty.

Process for filing and issuing a prospectus

Application forms

As stated under section 33, the application form for the securities is issued only when they are
accompanied by a memorandum with all the features of prospectus referred to as an abridged
prospectus.

The exceptions to this rule are:

 When an application form is issued as an invitation to a person to enter into underwriting
agreement regarding securities.
 Application issued for the securities not offered to the public.
CONTENTS

For filing and issuing the prospectus of a public company, it must be signed and dated and
contain
all the necessary information as stated under section 26 of the Companies Act,2013:

1. Name and registered address of the office, its secretary, auditor, legal advisor, bankers,
trustees, etc.
2. Date of the opening and closing of the issue.
3. Statements of the Board of Directors about separate bank accounts where receipts of issues are
to be kept.
4. Statement of the Board of Directors about the details of utilization and non-utilisation of
receipts of previous issues.
5. Consent of the directors, auditors, bankers to the issue, expert opinions.
6. Authority for the issue and details of the resolution passed for it.
7. Procedure and time scheduled for the allotment and issue of securities.
8. The capital structure of the in the manner which may be prescribed.
9. The objective of a public offer.
10. The objective of the business and its location.
11. Particulars related to risk factors of the specific project, gestation period of the project, any
pending legal action and other important details related to the project.
12. Minimum subscription and what amount is payable on the premium.
13. Details of directors, their remuneration and extent of their interest in the company.
 33

14. Reports for the purpose of financial information such as auditor’s report, report of profit and
loss of the five financial years, business and transaction reports, statement of compliance with
the provisions of the Act and any other report.

LIABILITY FOR MISREPRESENTATION OR UNTRUE STATEMENT IN

PROSPECTUS

If a prospectus is issued in contravention of the provision under section 26 of the Companies Act
2013, then the company can be punished under section 26(9). The punishment for the
contravention is:
 Fine of not less than Rs. 50,000 extending up to 3,00,000.
If any person becomes aware of such prospectus after knowing the fact that such prospectus is
being issued in contravention of section 26 then he is punishable with the following penal
provisions.
 Imprisonment up to a term of 3 years, or
 Fine of more than Rs. 50,000 not exceeding Rs. 3,00,000.

SHARES

Shares in a company show the percentage of ownership of a person or member in that company,
which is a single unit that is further divided into several units with their own price. All of these
units are of a specific amount, and when someone purchases these units, they also purchase
certain defined units of the share capital of the company, which makes that person a shareholder
in the company.

The term share has been defined under Section 2(84) of the Act, which means a share in the
share capital of the company and includes stock.

It signifies the interests of the shareholders in the company, measured for the purposes of
liability and dividends.

A share, debenture, or any interest held by a member of a company is deemed movable property
and can be transferred as stipulated in the company’s articles of association.

ALLOTMENT OF SHARES –

"Allotment" refers to the process by which a company allocates and assigns shares or securities
to individuals or entities who have applied to purchase them. It's a crucial step in the process of
issuing securities, such as shares, to investors. Allotment determines the final distribution of
securities among applicants and solidifies their ownership in the company.
 34

The court in the case of Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd,
(1964) defined the allotment of shares as the appropriation of the unappropriated capital of the
company by giving a certain number of shares to certain people.

Key points about allotment:

1. Application Process: Before shares are allotted, interested investors need to submit
applications indicating the number of shares they wish to purchase and the price they are
willing to pay.

2. Allotment Decision: The company's board of directors or designated committee reviews

the applications and decides how many shares to allocate to each applicant based on
factors such as demand, availability of shares, and applicable regulations.

3. Pro Rata Allotment: In cases where demand for shares exceeds supply, the company
might opt for a pro rata allotment. This means that shares are allotted to applicants in
proportion to the number of shares they applied for relative to the total demand.

4. Over-Subscription: If the number of applications exceeds the number of shares available,

the company might be oversubscribed. In such cases, allotment decisions become more
critical, and the pro rata principle may be applied.
5. Refunds: In case of undersubscription or when the number of shares applied for is less
than the number available, the company refunds the excess application money to
applicants.

6. Allotment Letter: Once the allotment decision is made, the company issues an allotment
letter to successful applicants, confirming the number of shares allotted to them. This
letter serves as evidence of ownership.

7. Payment and Share Issuance: Successful applicants are required to make the payment for
the allotted shares within a specified period. Once payment is received, the company
issues share certificates or dematerializes the shares, depending on the mode of holding.

8. Listing and Trading: If the company is listed on a stock exchange, the allotted shares may
become tradable once they are listed. Investors can buy and sell the shares in the
secondary market.

9. Regulatory Compliance: The allotment process must comply with applicable laws and
regulations, ensuring transparency, fairness, and protection for investors.

10. Company Act Compliance: The Companies Act and relevant securities regulations in
each jurisdiction provide guidelines for the allotment process to ensure it is conducted
ethically and in accordance with the law.

Allotment is a critical step that completes the process of issuing shares or securities to
 35

investors. It formalizes ownership and enables successful applicants to become

shareholders in the company. The process must be conducted in a transparent and
equitable manner, ensuring compliance with legal requirements and protecting the
interests of both the company and the investors.

STATUTORY RESTRICTIONS ON ALLOTMENT OF SHARES –

Statutory restrictions on allotment refer to legal limitations and regulations imposed by company
laws and securities regulators on how companies can allocate and issue shares or securities to
investors. These restrictions are in place to ensure fairness, transparency, and proper functioning
of the capital markets. Here are some common statutory restrictions on allotment:

 Minimum Subscription & Application Money (Section 69) : Some jurisdictions require
that a company cannot allot shares unless a minimum amount of capital has been
subscribed by the public. This ensures that the company has sufficient funds to start its
operations.

 Maximum Number of Allotments: In certain cases, there might be restrictions on the

maximum number of allotments a company can make within a specific period. This
prevents companies from excessively diluting existing shareholders by making too many
allotments.

 Prohibition on Allotment at Discount: Many jurisdictions prohibit companies from

issuing shares at a discount to their face value or market price. This is to protect the
interests of existing shareholders and prevent unfair dilution.

 Allotment within Time Limits: Some laws stipulate that shares must be allotted within a
specified time frame from the date of receipt of application money. This prevents
companies from holding onto funds for extended periods without providing shares in
return.

 Consent for Listing: If a company plans to list its shares on a stock exchange, there might
be requirements that shares can only be allotted if the application for listing has been
approved by the exchange.

 Approval from Regulatory Authority: In certain cases, companies may need approval
from the securities regulatory authority before they can make allotments. This is often the
case for public offerings.

 Preemption Rights: Some jurisdictions grant existing shareholders the right of first
refusal (preemption rights) to subscribe to new shares before they are offered to external
investors. This ensures that existing shareholders have the opportunity to maintain their
proportional ownership.

 Debt-Equity Ratio Limits: In some cases, restrictions are placed on the debt-equity ratio a
company can maintain. This can impact the company's ability to raise funds through
 36

share allotment, especially if it would lead to an excessively leveraged capital structure.

 Public Disclosure and Prospectus Requirement: Companies must provide detailed

information about the allotment process in the prospectus, ensuring that potential
investors have a clear understanding of the terms and conditions.

 Reporting Obligations: Companies may have reporting obligations to the regulatory

authority regarding their allotment activities, including the number of shares allotted, the
names of allottees, and any deviation from the initial allotment plan.

CERTIFICATE OF SHARES –

A "Certificate of Shares" is a physical or electronic document issued by a company to its

shareholders as evidence of their ownership of a specific number of shares in the company. It
serves as a proof of ownership and is an essential document for shareholders to establish their
ownership rights and participation in the company. Here are the key points about a Certificate of
Shares:

 Ownership Proof: The certificate serves as tangible evidence that the shareholder holds a
certain number of shares in the company. It confirms the shareholder's ownership status
and the number of shares they own.

 Legal Recognition: The certificate is recognized as legal proof of ownership in many

jurisdictions. It reflects the shareholder's rights, privileges, and entitlements in relation to
the company.

 Information Included: A typical certificate of shares includes important information such

as the shareholder's name, the company's name, the class of shares, the number of shares
owned, any unique identification numbers, and the date of issue.

 Transfer of Ownership: When shares are transferred from one shareholder to another, the
certificate is usually endorsed and handed over to the new owner. This signifies the
transfer of ownership and helps maintain a clear record of ownership changes.

 Physical or Electronic Form: Traditionally, certificates of shares were issued in physical

form, often as printed documents with security features. In recent years, many companies
have transitioned to electronic records, storing ownership details in electronic databases
rather than issuing physical certificates.

 Dematerialization: Dematerialization is the process of converting physical share

certificates into electronic form. Many stock exchanges and regulatory bodies encourage
or mandate the dematerialization of shares to enhance transparency and reduce fraud.
 37

 Safety and Security: Physical certificates can be susceptible to loss, damage, or theft.
Electronic records and dematerialization provide a more secure way of maintaining
ownership records.

 Trading and Transactions: When shares are traded in the secondary market, ownership is
typically transferred electronically through trading platforms. The actual certificates may
not change hands during such transactions.

 Regulatory Requirements: The issuance of certificates of shares and their maintenance,

whether physical or electronic, often needs to comply with regulatory requirements set
forth by securities regulators and stock exchanges.

 Replacement of Lost Certificates: In case a physical certificate is lost or damaged,

shareholders can request a replacement certificate from the company by following a
specific process and paying any applicable fees.

Certificate of Shares is a document that provides proof of ownership of shares in a company. It

plays a crucial role in establishing a shareholder's ownership rights, entitlements, and
participation in the company's affairs. While the issuance of physical certificates has become less
common with the shift to electronic ownership records, the concept of a certificate of shares
remains essential in ensuring the clarity and legitimacy of ownership in a company.

TRANSFER OF SHARES –

The "Transfer of Shares" refers to the process of transferring ownership of shares from one
person or entity (the transferor or seller) to another person or entity (the transferee or buyer).
Shares can be transferred for various reasons, including investment, inheritance, gifting, or
changing ownership due to business transactions. The transfer process ensures that ownership
rights and entitlements associated with the shares are properly conveyed to the new owner.

Here are the key points to understand about the transfer of shares:

1. Transfer Deed : The transfer process typically involves the execution of a "Transfer
Deed" or "Instrument of Transfer." This is a legal document that outlines the details of
the transfer, including the names of the transferor and transferee, the number of shares
being transferred, and any consideration involved.

2. Stamp Duty : Transfer deeds often require payment of stamp duty, which varies based on
the jurisdiction and the value of the shares being transferred.

3. Company Approval : Some companies may require approval from their board of directors
or relevant authority before approving the transfer of shares. This is more common in
 38

private companies where shareholders' approval might be needed.

4. Restrictions and Preemption Rights : In certain cases, existing shareholders might have
preemption rights, which means they have the first opportunity to buy the shares being
transferred before they are offered to external parties. This is more common in private
companies.

5. Recording the Transfer : Once the transfer deed is executed and approved, the company
updates its records to reflect the change in ownership. This includes updating the register
of members and issuing a new share certificate to the transferee.

6. Transmission of Shares : In the event of the death of a shareholder, shares can be

transferred to the legal heirs or beneficiaries through a process called "Transmission of
Shares." This involves providing relevant legal documents and proofs to establish the
right to inherit the shares.

7. Broker Involvement : In publicly traded companies, shares are often bought and sold
through brokers on stock exchanges. The brokerage facilitates the transfer process,
including recording the transaction and ensuring settlement.

8. Dematerialization : With the advent of electronic records, shares are often held in
dematerialized form. Transfers of dematerialized shares involve updating ownership
records electronically with the relevant depository participant.

9. Consideration and Valuation : The transfer of shares may involve consideration in the
form of money, assets, or other forms of value. The value of the shares being transferred
is determined based on prevailing market prices or other agreed-upon methods.

10. Legal Formalities : Depending on the jurisdiction and the type of shares being
transferred, there may be specific legal formalities, documentation, and compliance
requirements to ensure a valid and legal transfer.

11. Reporting to Regulatory Authorities : In some cases, companies are required to report
large share transfers to regulatory authorities to ensure transparency and prevent market
manipulation.

The transfer of shares involves legal and procedural steps to change ownership from one entity to
another. It's important for all parties involved to adhere to the legal requirements and
documentation to ensure a valid and smooth transfer of ownership rights and entitlements
associated with the shares.

Registration on Transfer

"Registration on Transfer" refers to the formal process by which a company acknowledges and
records the change in ownership of shares from one shareholder (transferor) to another
 39

(transferee). This process involves updating the company's official records, including the register
of members, to reflect the new ownership and ensure that the new shareholder's rights and
entitlements are properly recognized. Here's how the registration on transfer process typically
works:

1. Transfer Deed Submission: The transferor (seller) and transferee (buyer) execute a
transfer deed, which is a legal document that outlines the details of the transfer, including
the names of the parties, the number of shares, and any consideration involved. The
transfer deed is then submitted to the company.

2. Company Approval : In some cases, the transfer may require approval from the
company's board of directors or relevant authority. This is more common in private
companies where certain restrictions on share transfers might apply.

3. Verification and Documentation : The company verifies the authenticity of the transfer
deed and checks whether it meets all legal requirements. This is done to prevent
fraudulent transfers.

4. Updating Records : Once the transfer is approved and verified, the company updates its
records to reflect the change in ownership. This includes updating the register of
members, which is a legal document that lists the names, addresses, and details of
shareholders along with the number of shares they own.

5. Issuing a New Share Certificate : If the company issues physical share certificates, a new
share certificate is issued to the transferee. This certificate reflects the new ownership and
the number of shares transferred.

6. Dematerialized Shares : In the case of dematerialized shares (held in electronic form), the
company updates its records electronically, and the depository participant updates its
records to reflect the new ownership.

7. Notification to Regulatory Authorities : Companies are often required to notify regulatory

authorities or stock exchanges about significant share transfers, ensuring transparency
and preventing market manipulation.

8. Rights and Entitlements : The new shareholder gains the rights and entitlements
associated with the transferred shares, including voting rights, dividend entitlement, and
participation in company decisions.

9. Stamp Duty : Depending on the jurisdiction, stamp duty might need to be paid on the
transfer deed. This is a tax levied on certain legal documents.
10. Documentation Retention : The company retains a copy of the transfer deed and any
relevant documentation as part of its records.

It's important to note that the registration on transfer process varies based on legal and regulatory
 40

requirements in different jurisdictions. Additionally, the specific procedures might differ for
private and public companies.

Overall, registration on transfer ensures that changes in ownership of shares are properly
documented, recognized, and recorded by the company. This process maintains transparency,
protects shareholder rights, and provides an accurate record of ownership for both the company
and the shareholders.

FORGED TRANSFER

It may happen that a forged instrument of transfer is presented to the company for registration. In
order to avoid the consequences which will follow a forged transfer, companies normally write
to the transferor about the lodgement of the transfer instrument so that he can object if he wishes.
The company informs him that if no objection is made by him before a day specified in the
notice, it would register the transfer.

Consequences of a Forged Transfer –

1. A forged transfer is a nullity and, therefore, the original owner of the shares continues to be
the shareholder and the company is bound to restore his name on the register of members.
[People’s Ins. Co. vs. Wood and Co.]

2. If the company issues a share certificate to the transferee and he sells the shares to an innocent
purchaser, the company is liable to compensate such a purchaser, if it refuses to register him as a
member, or if his name has to be removed on the application of the true owner.

The fact that the transferee was a bona fide purchaser for value did not make any difference and
the transferee was bound to return the scrips to the person to whom the same rightfully belong.
[Kaushalya Devi vs. National Insulated Cable Company of India]

3. If the company is put to loss by reason of the forged transfer, as it may have paid damages to
an innocent purchaser, it may recover the same independently from the person who lodged the
forged transfer.

4. Section 57 states that if any person deceitfully personates as an owner of any security, and
thereby obtains or attempts to obtain any such security, or receives or attempts to receive any
money due to any such owner, he shall be punishable with imprisonment for a term which shall
not be less than one year but which may extend to three years and with fine which shall not be
less than one lakh rupees but which may extend to five lakh rupees.

ISSUE OF SHARES –

Issue of Shares is the process by which companies pass on new shares to shareholders, who can
be either individuals or corporates. While acquiring the shares, companies follow the rules
prescribed by the Companies Act 2013.
 41

There are 3 basic steps of the procedure of issuing the shares.

1. Issue of Prospectus
2. Receiving Applications
3. Allotment of Shares
There are various ways or prices at which a company issues its shares like at par, at a premium
and at discount.

Face value of a share is the par value of the share. It is also known as the Nominal value or
denomination of a share. To issue shares a company follows a definite procedure which is
controlled and regulated by the Companies Act and Securities Exchange Board of India (SEBI).
A company’s shares can be issued at par, at a premium, or even at a discount. When the stock is
sold at its nominal value, it is said to be at par. The premium is the amount paid for shares sold at
a higher price than their nominal value. Shares sold at a discount, of course, are less expensive
than their face/nominal value.

a) Issue of Shares at par:

When the shares are sold at their nominal value, then they are said to be issued at par. For
example, if the face value of shares is ₹100 each and they are issued at ₹100 each, then it will
be Issue of Shares at Par. Generally new companies issue their shares at par.

b) Issue of Shares at Premium:

A company may issue securities at a premium when it is able to sell them at a price above par or
above face value, for example, ₹ 100 per share at a price of ₹ 120, thereby earning a premium of
₹ 20 per share. Here the company is issuing shares at 20% premium. Companies that are
financially solid, well-managed, and have a positive market reputation typically issue their shares
at a premium.

The Act, does not stipulate any conditions or restrictions regulating the issue of shares by a
company at a premium. However, the Act does impose conditions regarding the utilization of the
amount of premium collected on securities. Firstly, the premium cannot be treated as profit and,
therefore, cannot be distributed as dividend. However, the same can be capitalized and
distributed in the form of bonus shares. Secondly, the amount of premium, whether received in
cash or in kind, must be recorded in a separate account, known as the “securities premium A/c”.
Thirdly, the amount of share premium is to be maintained with the same sanctity as the share
capital.

Since the premium is not part of the Share Capital, it must be credited to a separate account
called Securities Premium A/c. It’s a gain for the corporation. According to the Companies Act
of 2013, the credit balance of the Securities Premium A/c is shown on the liabilities side of the
Balance Sheet under the heading ‘Reserves and Surplus.’ Section 52 of the Companies Act of
 42

2013 explains how a business can employ the Securities Premium. According to Section 52 (2),
the share premium can be utilised only for:

 issuing fully paid bonus shares to members.

 writing off the balance of the preliminary expenses of the company;
 writing off the commission paid or discount allowed, or expenses incurred on issue of
shares or debentures of the company;
 providing for the premium payable on redemption of any redeemable preference shares or
debentures of the company.
 for the purchase of its own shares or other securities under section 68.

In Re. Hyderabad Industries Ltd., [2004] 53 SCL 376 (AP) case, the Court held that unless
articles of association of company permit utilization of share premium account for purposes
other than mentioned in Section 52 of the Act, company court cannot approve resolution to that
effect. Court further held that unless and until there is diminution of the share capital and
corresponding reduction of the share premium account, no company can be allowed to write off
or adjust the loss against share premium account.

In Re. Mangalam Cement Ltd., [2008] 86 SCL 153 (Raj.). case, Rajasthan High Court has held
that a company can utilize credit balance in securities premium account for purpose of meeting
deferred tax liability.

c) Issue of Shares at Discount:

The issue of shares at a discount means the issue of the shares at a price less than the face value
of the share, for example, the shareholder pays ₹ 9 on a share of nominal or face value of ₹ 10,
then the share is said to be issued or sold at a discount. It is nothing but a loss to the company.

It should be noted that the issue of share below the market price but above face value is not
termed as ‘Issue of Share at Discount’ Issue of Share at Discount is always below the nominal
value of shares. It is debited to separate account called ‘Discount on Issue of Share’ Account.

According to Section 53 of the Act prohibits the issue of shares at discount as it states in its
clause (2) that any share (which means either equity share or preference share) issued by a
company at a discounted price shall be void.

CALL ON SHARES –

Sometimes a company does not demand the full amount of the nominal or face value of the
shares, and the premium, if any, on those shares in one lump sum at the time of application, and
instead demands it in instalments depending upon the requirements. The total amount may be
payable in four instalments, i.e. On application, on allotment, on first call and on second and
final call. The word ‘call’ means calling for The amount due on the share. A call may be defined
as a demand made by a company on its shareholders to pay part or whole of the moneys Unpaid
on their shares, after the allotment of the shares. A call becomes due when a notice is issued
making a call.
 43

The following are the essentials of a valid call:

1. Resolution of the Board : The call must be made by resolution of Board of Directors. The
resolution must be passed by a duly constituted meeting of the board of directors.

2. As per Articles : all must be made in accordance with the provisions of the articles of the
company. If the articles are silent, then “Table F” would apply.

3. Uniform basis : Section 49 provides that call must be made on a uniform basis, on all shares,
falling under the same class.

4. Bonafide : The call must be made bonafide By the board of directors in the best interest of the
company as the power to make calls is in the nature of trust. There is a lack of bonafide (i.e.
good faith) where, Without paying what is due on their own shares directors call upon other
shareholders to pay all money. [Alexander v. Automatic Telephone Co. (1900) 2 Ch. 56 CA].

5. Time and place of payment: Time place of payment must be specified either by board’s
resolution Or it may be fixed separately by directors without a formal resolution.

Interest or call in arrears: Call in arrears are the allotment and calls money not paid on the date
on which they should be paid. Usually the articles provided for payment of interest on calls in
arrears. If a certain rate is Specified in the articles then interest is charged at that rate on calls in
arrears. If the articles are silent then Table F is applicable. As per Table F, if the amount of calls
is not paid by due date, the person from whom the sum is due shall pay interest thereon from the
day fixed for payment to the time of actual payment at 10% per annum Or such lower rate as the
board of directors will determine. The board of directors can wave the payment of interest.
Articles usually prescribe higher rate of interest on calls in arrear.

Advance payment of calls : Calls in advance is the amount paid by the shareholders In excess of
the amount called on shares allotted by the company. According to section 50, company may, if
so authorised by the articles, accept the whole or a part of the amount remaining unpaid on any
share held by a shareholder, All the No part of that amount has been called up. As per Table F
The company may pay interest, not exceeding 12% per annum on calls in advance, as may be
agreed upon between the board, and the member paying the sum in advance from the date of
receipt of advance to the date of making the call. However, the company in general meeting may
sanction higher rate of interest on calls in advance.

NOTE :

1. In case, calls are made on the shares of a class for further issue of share capital, such calls
shall be made on a uniform basis on all the shares falling under that class.

2. In case of shares which are of the same nominal value, but on which different amounts have
been paid up, such shares shall not be deemed to fall under the same class.
 44

3. The calls should be made in accordance with the provisions of the Articles and if not, then
such calls will be invalid.

4. If any member intends to pay the call money beforehand, the company may, if so, authorized
by its Articles of Association, accept the whole or part of the amount remaining unpaid even if
such amount has not been called up. The amounts are received as termed as Payment in Advance
of Calls and on such Calls in Advance, company may pay interest as may be prescribed.

PROCEDURE -

1. Convene a Meeting of Board of Directors to Approve the Calling of Unpaid Amount on

Shares (As per section 173 & SS-1):

The company shall pass a Board Resolution in a duly convened board meeting, to approve and
authorize the following:

i. Approving the amount to be called on each share

ii. Approving the draft call letter
iii. Time, date and place of making the payment on calls
iv. date and period of closure of the books.
v. Company Secretary Or such other officer/Director to sign and authorise necessary documents
and take such necessary actions to give effect to the decision of the Board.

2. Filling Form MGT-14 with ROC:

The company shall file the copy Board Resolution passed in its duly convened Board Meeting in
Form MGT-14 Within 30 days of passing such resolution, along with the requisite documents
and fees, with the Registrar of the Companies (ROC).

3. Preparation of List of Members for Making Calls and Closure of Register of Members and
Share Transfer Book:

i. The company shall prepare a list for making calls on shares which mentions therein the name.

ii. Also, the share transfer book and register of members shall be closed for a period of 15 days.

4. Issue Call Letter to the Shareholders and Open Separate Bank Account:

i. The Company shall issue Call letter to all the shareholders of the same class with the details of
time, date, place, and mode of payment therein.

ii. The company shall open a separate bank account in a scheduled bank for holding the money
received on the calls.

Note:
 45

If a member fails to pay the money, then he would be liable to pay interest not exceeding the rate
specified in the Articles or as per the terms of the issue and a Board Resolution is to be is to be
passed for forfeiting such shares. The directors reserve the right to waive the payment of interest.

5. Making Entries in Various Registers:

On completion of the process of calling of unpaid amount on shares held by the shareholders and
upon receiving the same, the company shall make the necessary entries in various registers
maintained for this purpose and endorsements on the shares certificates shall also be made.

Note: The following points shall be ensured pertaining to making calls on remaining unpaid
amount of shares:

- Call Money should not exceed 50% of the face value of the shares at any point of time
- Once the call is made, the Board of Directors has the power to revoke or postpone such a call
- Joint shareholder shall be jointly and severally liable for the payment of calls
- There shall be at least 30 days interval between two successive calls made on remaining unpaid
amount of shares
- Any defaulting member will not have any voting right until he pays the money due from him.

FORFEITURE OF SHARES –

If a shareholder fails to pay the allotment money or call Money or any part there of due to the
shares held by him, His shares may be forfeited by a resolution of the board of directors, if the
article is empowered to do so. Thus, Forfeiture of shares means confiscation of shares of a
defaulting shareholder for non-payment of allotment, money or Call Money.

When shares are forfeited, the amount already paid is not refunded to him. His name is removed
from the register of members. He is also liable as a list B Contributory if the company is wound
up within a year of forfeiture. Before shares can be forfeited, every technicality must be strictly
observed. Forfeiture is valid if the following conditions are satisfied :

1. Provision in the Articles : The board of directors can forfeit the shares if the articles empower
them to do so. In Naresh Chandra Sanyal v. The Calcutta Stock Exchange Limited (1971) 1 SCC
50, it has been held that a company may by its articles lawfully provide for grounds of forfeiture
Other than non-payment of call also. The company may strictly follow the procedure laid down
in the articles of the company for forfeiture of the shares.

2. Notice of forfeiture: A notice must be served on the defaulting shareholder requiring payment
of call or instalment as is unpaid, together with interest accrued by a certain date. Table F
provides that a period of at least 14 days must be served. The notice must state that if the
payment is not made by the prescribed date, the shares will be forfeited.

3. Resolution of the board : If in spite of the notice, the shareholder does not pay the unpaid
amount On his shares by the prescribed date, his shares in respect of which the notice has been
given may be forfeited by a resolution of the board of directors. Resolution of forfeiture Of
 46

shares has to be passed after failure of shareholder to comply with notice of forfeiture, And not
in anticipation there of.

4. Bonafide : The power of forfeiture Of shares must be exercised bonafide, i.e. In good faith in
the interest of the company.

Table A Of the companies act, 2013 Empowers the board of directors to sell or otherwise dispose
of the forfeited shares on such terms as it thinks fit. Forfeited shares can be issued at par,
Premium or at discount. But the discount on reissue a share Cannot be more than the forfeited
amount of that forfeited share, credited to forfeited shares account at the time of forfeiture. For
example, if a share of ₹10, on which ₹4 has already been received, is forfeited and re-issued As
fully paid up, a minimum of ₹6 must be collected at the time of reissue. It means that maximum
₹4 can be allowed as discount on reissue of the share. The transferee’s Title to the shares will not
be affected by any irregularity or invalidity in forfeiture, sale or disposal of shares.

SURRENDER ON SHARES -

Surrender on shares means the return of shares by the shareholder to the company. There is no
provision in the Companies Act (including Table F) regarding surrender of shares. Thus, the
company, if authorised by the articles, can accept surrender of shares in the following cases:

1. Where shares are surrendered in exchange of other shares of the same nominal value. In this
case, the surrender of shares does not result in reduction of shares capital And therefore sanction
of the court is not required.

2. Where a shareholder is not able or willing to pay the unpaid call on his shares, he may
surrender the shares to the company as a shortcut to the long procedure of forfeiture of shares.
Surrender of shares in the circumstance in which the forfeiture of those shares Would be
justified, will be valid, provided the board of directors has been authorised by the articles to
accept the surrender of shares.

The effect of surrender of shares is similar as that of forfeiture of shares.

LIEN ON SHARES

Lien Is the right of a person to retain possession of property of another Until a claim due to him
is satisfied. Thus a company’s lien on shares is the right right of the company to prevent a
member To transfer his shares, unless he pays his debt payable to the company. A company as a
general rule, does not have lien On the shares of a member but articles may provide the company
shall have a paramount lien On the shares of every member of his debt and liabilities to the
company. Such a clause in the articles is valid. Lien is not limited to partly paid up shares, It may
extend to fully paid up shares as well. Lien May extend to dividends due on the shares and to
amount receivable by a member In respect of his shares on winding up of the company. The
company can exercise the right of lien even when the debt is time barred.
 47

Case: In Bradford Banking Company Limited v. Briggs & Co. Ltd. (1968) 12 App. Cas. 39],
The articles conferred on a company, a first and paramount lien on shares for all debts due from
the holder of the company. A shareholder delivered his share certificate to a bank as security for
repayment of all moneys or balances due or to become due. The bank gave notice of this fact to
the Company. Later on, the shareholder became indebted to the company. It was held that the
bank had priority over the company’s lien as the bank had given notice to the company of the
pledge of the shares.

The company can sell the shares on which the right of lien is exercised if the articles authorised
the company to sell the shares held under lien to recover debt. But the articles cannot empower a
company to forfeit the shares to enforce the right of lien.

Difference between Lien on Shares and Forfeiture of Shares-

BASIS Lien on shares Forfeiture of shares

Nature A company’s lien on shares is Forfeiture of shares means

the right of the company to confiscation of the shares of a
prevent a member to transfer shareholder by way of
his shares, unless he pays his penalty for his default in
debt payable to the company payment of calls

Exercise of Right
The lien on shares is Share are forfeited for non-
exercised for non-payment of payment of call by the
the debt or other liabilities shareholder
due from the shareholder to
the company.

Enforcement of Right Lien shares can be enforced Forfeiture of shares can be

by the company by sale of enforced by forfeiting shares,
shares held under lien. i.e. by forfeiting the amount
already paid on the shares.

Effect on share capital Enforcement of lien does not Forfeiture reduces share
reduce the share capital as it capital if the forfeited shares
is done by sale of those are not reissued.
shares.

Surplus When lien is enforced by sale Gain from the reissue of

of the shares the surplus from forfeited shares is retained by
sale proceeds after deducting the company and it is
the amount due to the transferred to capital reserve.
company belongs to the
former shareholder of those
shares.
 48

DIVIDEND ON SHARES –

Dividends are an important source of income for shareholders of a company. In simple terms, a
dividend is a distribution of a company’s profits to its shareholders. The Companies Act, 2013,
contains various provisions relating to the payment of dividends by companies to their
shareholders. These provisions lay down the legal framework for the payment of dividends and
set out the rights and obligations of companies and shareholders.

Legal Provisions related to Dividend under Companies Act, 2013 –

Section 2(35) of the Companies Act, 2013, defines the term “dividend” as any distribution of
profits by a company to its shareholders, whether in cash or in kind. It includes bonus shares, but
does not include the distribution of assets on liquidation of a company.

Section 123 of the Companies Act, 2013, lays down the provisions for the declaration and
payment of dividends. According to this section, a company may declare and pay dividends only
out of the profits of the company for that year or any previous year(s) after providing for
depreciation or out of the profits of the company for any previous year(s) after providing for
depreciation and after setting aside an amount for reserves as may be prescribed.

Further, the company may declare interim dividends during any financial year or at any time
before the finalization of the accounts of that year. However, such interim dividends can be paid
only out of the surplus in the profit and loss account and the reserves of the company.

Forms

The declaration and payment of dividends require compliance with various forms under the
Companies Act, 2013. Some of the important forms are:

1. Form MGT-14: This form is used for filing the resolution passed by the board of directors for
the declaration of dividends with the Registrar of Companies.

2. Form SH-9: This form is used for the issue of duplicate dividend warrants to the shareholders
in case the original warrant is lost, stolen, or destroyed.

3. Form MGT-15: This form is used for the filing of the resolution passed by the board of
directors for the declaration of interim dividends with the Registrar of Companies.

Explanations related to Dividend under Companies Act, 2013

The following explanations provide a deeper understanding of dividends under the Companies
Act, 2013:
 49

1. Declaration of Dividends:

The declaration of dividends is a decision taken by the board of directors of a company. The
board must pass a resolution to declare dividends, and the resolution must be filed with the
Registrar of Companies in Form MGT-14. The declaration of dividends must be made out of the
profits of the company for that year or any previous year(s) after providing for depreciation or
out of the profits of the company for any previous year(s) after providing for depreciation and
after setting aside an amount for reserves as may be prescribed.

2. Interim Dividends:

Interim dividends are declared and paid during any financial year or at any time before the
finalization of the accounts of that year. However, such dividends can be paid only out of the
surplus in the profit and loss account and the reserves of the company.

3. Unpaid Dividends:

In case of unpaid dividends, the amount of the dividend must be transferred to a special account
within 30 days of the expiry of the due date for payment of the dividend. The unpaid dividend
account must be managed by a designated person and must be transferred to the Investor
Education and Protection Fund (IEPF) after seven years.

Case Laws related to Dividend under Companies Act, 2013

The following case laws provide a better understanding of the legal provisions relating to
dividends under the Companies Act, 2013:
1. In the case of Tata Consultancy Services Limited v. State of Maharashtra and Others, the
Bombay High Court held that a company cannot be compelled to declare dividends. The court
held that the power to declare dividends rests with the board of directors, and shareholders
cannot compel the company to declare dividends.

2. In the case of Srichand P. Hinduja and Another v. Hinduja Foundries Limited and Others, the
Supreme Court of India held that interim dividends can be declared and paid by a company
during any financial year or at any time before the finalization of the accounts of that year. The
court held that the payment of interim dividends must be made out of the surplus in the profit and
loss account and the reserves of the company.

3. In the case of Rajan Nanda v. Jayant Nanda and Others, the Delhi High Court held that the
declaration of dividends must be made out of the profits of the company for that year or any
previous year(s) after providing for depreciation or out of the profits of the company for any
previous year(s) after providing for depreciation and after setting aside an amount for reserves as
may be prescribed. The court held that a company cannot declare dividends out of borrowed
funds or capital.
 50

DEBENTURES

MEANING:

The word ‘debenture’ has been derived from a Latin word ‘debere’ which means to borrow.

Section 2(30) of the Companies Act, 2013 define “debenture" which includes debenture stock,
bonds or any other instrument of a company evidencing a debt, whether constituting a charge on
the assets of the company or not.

However, the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934
and such other instrument, as may be prescribed by the Central Government in consultation with
the Reserve Bank of India, issued by a company, shall not be treated as debenture.
 51

Thus, Debenture is a written instrument acknowledging a debt to the Company. It contains a

contract for repayment of principal after a specified period or at intervals or at the option of the
company and for payment of interest at a fixed rate payable usually either half-yearly or yearly
on fixed dates.

USUAL FEATURES OF A DEBENTURE –

A debenture typically carries the following features:

1. Debentures are nothing but documents. In other words, they possess documentary value.

2. These documents are evidence of debt. This shows that the company owes a debt to the
debenture-holder.

3. The interest on debentures is always payable at a fixed rate. Further, the company has to pay
interest regardless of whether it makes profits or not.

4. The company may either repay the debt or even convert the debenture into shares or other
debentures.

5. Debentures may or may not carry a charge on the company’s assets.

6. Finally, debentures are generally transferable. Debenture-holders can sell them on stock
exchanges at any price.

KINDS OF DEBENTURES –
 52

Security

(a) Secured Debentures refer to those debentures where a charge is created on the assets of the
company for the purpose of payment in case of default. A charge ranking Pari Passu with the
first charge on any assets referred to in Schedule III of the Companies Act, 2013 excluding
intangible assets of the company. The secured debenture holders have greater protection. Holders
of secured debentures remain convinced about the payment of interest and payment of principal
in the event of redemption.

Condition for Issue of Secured Debenture:

1. Redemption Period : An issue of secured debentures may be made, provided the date of its
redemption shall not exceed ten years from the date of issue.

However, the following classes of companies may issue secured debentures for a period
exceeding ten years but not exceeding thirty years,

(i) Companies engaged in setting up of infrastructure projects;

(ii) 'Infrastructure Finance Companies' as defined in clause (viia) of sub direction (1) of direction
2 of Non-Banking Financial (Non-deposit accepting or holding) Companies Prudential Norms
(Reserve Bank) Directions, 2007;
 53

(iii) Infrastructure Debt Fund Non-Banking Financial Companies’ as defined in clause (b) of
direction 3 of Infrastructure Debt Fund Non-Banking Financial Companies (Reserve Bank)
Directions, 2011;

(iv) Companies permitted by a Ministry or Department of the Central Government or by Reserve

Bank of India or by the National Housing Bank or by any other statutory authority to issue
debentures for a period exceeding ten years.

2. Creation of Charge:

Debentures shall be secured by the creation of a charge on the properties or assets of the
company or its subsidiaries or its holding company or its associates companies, having a value
which is sufficient for the due repayment of the amount of debentures and interest
thereon.

(b) Unsecured Debentures These debentures are also known as naked debentures. These
debentures are not secured by way of charge on the company’s assets. Interest rate payable on
unsecured debentures is generally higher than that which is payable on secured debentures.

Tenure

(c) Redeemable Debentures are those which are payable on the expiry of the specific period
(Maximum period 10 years from the date of issue) either in lump sum or in instalments during
the life time of the company. Debentures can be redeemed either at par or at premium.

(d) Irredeemable Debentures are also known as Perpetual Debentures because the company
does not give any undertaking for the repayment of money borrowed by issuing such debentures.
These debentures are repayable on the winding-up of a company or on the expiry of a long
period. They can legally be framed as payable to bearer.

Under the Companies Act, 2013, it is reiterated that in case of Redeemable Debentures the
maximum period of redemption is 10 years from the date of issue, except certain specified
companies infrastructure companies where the maximum redemption period can be exceeding
ten years but not exceeding thirty years.

Mode of redemption

• Convertible Debentures: Debentures which are changeable to equity shares or in any

other security either at the choice of the enterprise or the debenture holders are called
convertible debentures. These debentures are either entirely convertible or partly
changeable.
• Non-Convertible Debentures: The debentures which can’t be changed into shares or in
other securities are called Non-Convertible Debentures. Most debentures circulated by
enterprises fall in this class.

Negotiability
 54

Registered Debentures: As the name suggests, the details of these debenture holders are
registered in the company’s records. Only the debenture holders can redeem these debentures.
Hence, they are not freely transferable. They can be transferred only if relevant provisions of the
Companies Act, 2013 are fulfilled.
Bearer Debentures: Companies do not register details of debenture holders in this case. They
can be redeemed by the person owning them, without their identity being checked. This happens
because these debentures are freely transferable. Thus, anybody can sell and buy them from their
holders.
 55

CHARGE

Essential Features of Charge

Essential features of the charge are:

1. There are two parties, one is the creator of the charge (company on whose property the
charge is created), and the other is the charge holder (one who lends money).
2. There must be a subject matter for which the charge is created. Subject-matter here
relates to security, and it can be any current or future assets or any other property of the
borrower.
3. There will be an agreement between the two parties specifying the security rendered for
repayment of borrowed money, the interest rate in favour of the lender, etc.
4. A charge is of two types – fixed and floating.

Kinds of Charges

The charge on the property of the borrower as security can be of two types, namely:

1. Fixed or specific charge

2. Floating charge

What Is Fixed or Specific Charge

The charge is fixed or specific when the property or assets given as security are definite and
ascertained. The company loses its right to dispose of or transfer that property from the moment
it is given as security to the charge holder.

What Is Floating Charge

Floating charge is also created on the assets or property put as security, but it is not attached to
any definite property. This charge can also be created on future assets. Floating charge is of
changing nature. Example: Stock-in-trade

In a floating charge, even if the inventory or stocks are kept as security with the charge holder,
still the company can increase, decrease the price of stocks and even modify the inventory until
the charge holder wishes to enforce the security.

Case Laws Related to Charge

After reading the concept of charges, it is important to study some related case laws.

Official Liquidator vs Sri Krishna Deo (1958)

 56

As a company’s plant and machinery embedded in the earth or permanently fastened things
attached to the earth became part of the company’s immovable property, registration under the
Indian Registration Act, 1908 in addition to the Companies Act, 2013 would be required to make
the charge valid and effective.

Re Cosslett (Contractors) Ltd

During the construction period, a construction company’s washing machine that was in use on
the job site was declared to be the employer’s property under the terms of the contract. Because
the machine was simply one fixed object and was not likely to modify, this was considered to
have caused a fixed rather than a floating charge.
 57

CRYSTALLISATION OF FLOATING CHARGE

Crystallisation can be understood by the word crystal, which means to freeze. You can easily
understand that crystallisation of floating charge means freezing of floating charge.

For example: Suppose Apple company (makers of iPhone) borrowed money from SBI bank till
2015, and the bank has created a floating charge on the company’s stock. If the company does
not pay the borrowed amount till 2015, then their stock will be crystallised, and they won’t be
able to sell iPhones from 2015.

From the above example, it is clear that the company has the right to carry on its business with
its stock having a floating charge till the time the charge comes into action or the charge holder
determines its rights.

RIGHTS/REMEDIES OF DEBENTURE HOLDER –

 According to the rule 18 it is the duty of the debenture trustee to communicate debenture
holders defaults, if occurs, with respect to redemption of debentures or payment of
interest and any either action taken by the trustee himself. Besides , the debenture trustee
appoints a nominee director on the board of the company if there are 2 consecutive
defaults by the company in payment of interest to the debenture holder or failure in
redemption of debentures.

As per the section 71(8) of the Companies Act, 2013 the debenture holder is entitled to
interest and redemption of debentures in accordance with the conditions of their issue.

In section 71(10) of the Companies Act, 2013 there is a provision if the company makes a
default either in payment of interest due or in redemption of debentures on date of
maturity of debentures, the Tribunal may , on application wither of debenture trustee or
of any or all of the debentures and, after hearing the parties involved , direct, through
order , the company to redeem the debenture with payment of principal amount as well as
the interest overdue.

Further if the companies make a default in complying with the order of the tribunal, the
section 71(11) of the Companies Act, 2013 provides that the tribunal shall punish the
officers in default with an imprisonment which may extend to 3 years or with fine shall
minimum be of 2,00,000 rupees and can extend to 5,00,000 rupees or both. This section
is applicable to both secured and unsecured debenture holder. The debenture holder can
give an application to the Tribunal to pass an order of payment for the company which
has defaulted. The Tribunal before passing an order takes into account the circumstances
under which the company defaulted in making payment.

Section 164(2)(b) imposes for disqualification of the directors of the company who has
defaulted in redemption of debentures on the date of maturity and if such default has
 58

continued for 1 year or more. Such a person will not be able to be director of that
company ever again or of any other company for 5 years from the date on which the
company has failed to redeem the debentures.

Section 186(8) of the Companies Act, 2013 provides that any company who has failed to
repay any deposits or payment of interest shall not give any loan or guarantee or make
any acquisition or provide any security till such default subsists.