UNIT II COMPANY LAW 2013

Major principles – Nature and types of companies,

Formation, Memorandum and Articles of Association,
Prospectus, Power, duties and liabilities of Directors,
winding up of companies, Corporate Governance.
Company Law
A company is an association of many person who
contribute money or money’s worth to a common
stock and employ it in some common trade or business
and who share the profit or loss arising therefrom. The
common stock so contributed is donated in money
and is the capital of the company.
The persons who contribute it, or to whom it belongs,
are members.
The proportion of capital to which each member is
entitled is his share.
Nature of a Company
 Separate legal entity: A company is in law regarded as an entity separate
from its members. It has an independent corporate existence. The
company’s properties belong to the company and not to the shareholders.
 Limited liability: A company may be limited by shares or a company
limited by guarantee. In a company limited by shares, the liability of
members is limited to the unpaid value of the shares. For example, if the
face value of a share in a company is Rs.10 and a member has already paid
Rs.7 per share, he can be called upon to pay not more than Rs.3 per share
during the lifetime of the company. In a company limited by guarantee, the
liability of members is limited to such amount as the members may
undertake to contribute to the assets of the company, in the event of its
being wound up.
 Perpetual succession: A company is a juristic person with a perpetual
succession. As such it never dies nor does its life depend on the life of its
members.
Nature of a Company
Common seal: Since the company has no physical
existence it must act through its agent. The common
seal acts as the official signature of the company.
Transferability of shares: The capital of the company
is divided into parts, called shares. These shares are
freely transferable.
Separate property: As a company is a legal person
distinct from its members it is capable of owing,
enjoying and disposing of property in its own name.
Capacity to sue: A company can sue and be sued in its
corporate name.
On the basis of Incorporation
a) Chartered Company:
Companies that are formed by the Royal Charter or on any
special order granted by the King or Queen are called as
Chartered Companies.
Such companies enjoy exclusive powers and privileges and
can be set up only in the countries having a system of
Kingship.
This type of company is not found in India nowadays.
 Examples: The Bank of England, The East India Company
On the basis of Incorporation
b) Statutory company:
 Statutory company is formed under a special Act passed by Parliament or by
the State legislature.
 The powers of such a company are defined by the Act constituting it.
 This company is not required to have a Memorandum of Association and
need not use the word ‘Limited’ against its name.
 The audit of such a company is to be conducted under the supervision of C&
AG ( Comptroller and Auditor General of India).
 Examples: The Reserves bank of India, The Life Insurance Corporation of
India
c) Registered or incorporated company:
 A company that is registered under the Companies Act is known as a
Registered Company.
 Nowadays registered companies are most common in practice.
 Examples: Steel Authority of India Ltd and Reliance Industries
According to liability of members
a) Company limited by shares:
A company in which the liability of the members is limited
to the face value of the shares held by them is known as
Company limited by shares.
If a member has paid the full face value of the shares held
by him, he does not owe any further liability to the
company.
But in the case of partly paid shares, the liability of
members is limited to the unpaid amount on the shares
held by them.
According to liability of members
b) Company Limited by guarantee:
 In this type of company, the liability of members is limited to an amount as they
agree to contribute to the assets of the company in the case of winding up of
the company.
 This amount is known as the ‘guarantee’ and it is also stated in the
Memorandum of Association.
 The amount which was guaranteed by the members can only be called up at
the time of winding up of the company.
 This type of company is normally formed to promote education, art, science,
culture, and sports.

Not for profit Companies: Sec 25 companies are generally formed to promote
charity and philanthropy or any other useful public objectives and have to invest
profit or other income from it to further promote these aims, unlike a regular
company where shareholders and owners make profits or receive dividends.
According to liability of members
c) Unlimited liability:
In this company, the liability of every member is
unlimited and extends to his personal property.
The members are personally liable to pay the debts
of the company as per their share of interest.
Sec 12-C of the Companies Act, 1956 provides the
incorporation of a company having an unlimited
liability of its members.
On the basis of Transferability of shares

a) Private Company:
 A private company means which has a paid-up capital of Rs 1 lakh or
higher paid-up capital as prescribed and which by its Articles of Association:
 (a) restricts the right of members to transfer its shares;
 (b) has a minimum of 2 and a maximum of 200 members, excluding the
present and past employees;
 (c) does not invite the public to subscribe to its shares or debentures
 (d) does not invite or accept deposits from persons other than its members,
directors, or their relatives.
 The minimum number of members to form a private company is two and a
private company must use the word “Private Limited” or “Pvt. Ltd.” in its
name.
On the basis of Transferability of shares
b) Public company:
A public company means a company which
(a) is not a private company
(b) has a minimum of 7 members and no limit on the
maximum members
(c) has a paid-up capital of Rs 5 lakh or higher paid-up
capital as may be prescribed
(d) has no restriction on transfer of securities
(e) a private company which is a subsidiary of a public
company
According to ownership and control

a) Holding company:
 Any company that directly or indirectly holds more than half of the
equity share capital of another company or controls the composition of
the Board of Directors of some other company.
 A company can become a holding company of another company in the
following ways:
i) By holding more than 50 % of the issued equity capital of the company
ii) By holding more than 50% of the voting rights in the company
iii) By holding the right to appoint the majority of the directors of the
company
According to ownership and control
b) Subsidiary company:
The subsidiary company is the one in which another company holds more than
51% of the nominal value of its equity share capital or more than 51 % of its
voting power or control the majority composition of its Board of Directors or is the
subsidiary of another subsidiary company.

c) Government Company:
• A Government company is the one in which 51 % or more of the paid-up
share capital is held by the Central or State Governments.
• A company can be partly or fully owned by the Government. Government
Companies are incorporated under the Companies Act, 1956.
• Normally, public enterprises which undertake industrial and commercial
activities are incorporated as Government companies.
• Examples: Hindustan Shipyard, Hindustan Aeronautics Limited, Steel
Authority of India Limited (SAIL), Bharat Heavy Electricals Limited (BHEL)
Formation Of Company
Incorporation of Company:
Mode of forming incorporated company:
Any 7 or more person (2 or more in case of a private
company) associated for any law full purpose may
form an incorporated company with or without
limited liability. A company so formed may be:
 A company limited by shares.
 A company limited by guarantee.
 An unlimited company.
Documents to be filed with the registrar
 Before a company is registered, it is desirable to ascertain from the
registrar of companies if the proposed name of the companies is
approved.
The following documents duly stamped together with the
necessary fees :
 The memorandum of association duly signed by the subscribers.
 The articles of association if any signed by the subscribers to the
memorandum of association.
 The agreement if any, which the company proposes to enter into with
any individual for appointment as manager.
 A list of directors.
 A declaration stating that all the requirements of the companies act
and other formalities relating to registration have been complied with.
Formation Of Company
Certificate of incorporation: If the registrar is satisfied as to
the compliance of statutory requirements, he retains and
registers the memorandum, the articles and other documents
filed with him and issues a certificate of incorporation i.e., of the
formation of the company.
Effects of registration:
The company becomes a distinct legal entity. Its life commences
from the date mentioned in the certificate of incorporation.
The company acquires a perpetual succession. The members
may come and go, but it goes on for ever, unless it is wound up.
The company’s property is not the property of the shareholders.
Promoter
A promoter is a person who does the necessary preliminary
work incidental to the formation of a company.
Functions of a promoter:
He decides the name and ascertains that it will be accepted
by the Registrar of Companies.
He settles the details of the company’s memorandum and
articles, the nomination of directors, solicitors, bankers,
auditors and secretary and the registered office of the
company.
He arranges for the printing of the Memorandum and
Articles, the registration of the company, the issue of
prospectus.
Legal status of a promoter
Quasi trustee:
A promoter is not an agent because there is no principal
born by that time and he is not a trustee because there is
no cestui que trust in existence.
Fiduciary position:
Not to make any profit at the expense of the company.
To give benefit of negotiation to the company.
To make full disclosure of interest or profit.
Not to make unfair use of position.
Promoter
Duty of promoter as regards prospects: The promoter
must see, if it is issues: contains the necessary particulars
and does not contain any untrue or misleading statements
or does not omit any material fact.
Remuneration of promoters:
He may sell his own property at a profit to the company for
cash or fully paid up shares provided he makes a disclosure
to this effect.
He may be given an option to buy a certain number of
shares in the company at par.
He may take a commission on the shares sold.
He may be paid a lump sum by the company.
Memorandum of Association
 It contains the fundamental conditions upon which alone the
company is allowed to be incorporated. It is the charter of the
company and defines the reason for its existence. It lays down the
area of operation of the company. It also regulates the external
affairs of the company in relation to outsiders.
Purpose of memorandum:
 The prospective shareholders shall know the field in, or the
purpose for, which their money is going to be used by the company
and what risk they are undertaking in making investment.
 The outsiders dealing with the company shall know with certainty
as to what the objects of the company are and as to whether the
contractual relation into which they contemplate to enter with the
company is within the objects of the company.
Memorandum of Association
Printing and signing of Memorandum:
The MOA shall be printed, divided into paragraphs numbered
consecutively and signed by 7 (2 in case of a private company)
subscribers.
Contents of Memorandum:
The MOA shall contain the following clauses:
1. Name clause: The name of a company establishes its identity
and is the symbol of it s existence.
Rules regarding name:
Undesirable name to be avoided: Too similar to the name of
another company or Misleading i.e., suggesting that the company
is connected with a particular business when this not the case.
Contents of Memorandum
Injunction if identical name adopted: An existing
company can apply to the court for an injunction to
restrain the new company from adopting the identical
name.
‘Limited’ or ‘Private Limited’ must come last of
the company name.
Prohibition of use of certain names.
Use of some key words according to authorized
capital. Ex: Corporation Rs 5 crores, International,
Industries Rs. 1 crore
Contents of Memorandum
2. The registered office clause: Every company shall have
a registered office from the day on which it begins to carry
on business, or as from the 30th day after the date of its
incorporation, whichever is earlier.
3. The objects clause: States the main objects of the
company to be pursued by the company on its incorporation
and other objects of the company not included in the above
clause.
4. The capital clause: The MOA shall state the amount of
the share capital with which the company is to be registered
and the division thereof into shares of a fixed amount.
Contents of Memorandum
5. The liability clause: The memorandum of a
company limited by shares and guarantee shall also
state that the liability of its members is limited.
6. The association clause: The names, addressed
and descriptions of the subscribers and the number of
shares taken by each one of them. Each subscriber has
to take atleast 1 share.
Alteration of Memorandum
1. Change of name:
By special resolution: A company may change its name by a
special resolution and with the approval of the central government
signified in writing.
By ordinary resolution: May change its name by ordinary
resolution and with the previous approval of central government,
shall change its name if the central government so directs within 12
months of its registration.
2. Change of registered office:
Change of registered office from one place to another place in the
same city, town,
Change of registered office from one town to another in the same
state.
Change of registered office from one state to another.
Alteration of Memorandum
3. Alteration of object: The power of alteration of objects is subject to limits
namely:
Substantive limit:
 To carry on its business more economically or more efficiently.
 To attain its main purpose by new or improved means.
 To enlarge or change the local one of its operations.
 To carry on some business which may conveniently or advantageously be
combined with the objects specified in the memorandum.
Procedure of alteration:
 Special resolution at general meeting.
 Confirmation by the company law board.
 Notice to affected parties- creditors.
 Notice to registrar
 Power of the company law board to confirm alteration discretionary.
 Rights and interest of members and creditors to be taken care.
 Copy of the order of the company law board to be filled with the registrar within
3 months.
Alteration of Memorandum
4. Change in liability clause: A company limited by
shares or guarantee cannot change its memorandum
so as to impose any additional liability on the
members or to compel them to buy additional shares
of the company, unless all the members agree in
writing to such change either before or after the
change.
5. Change in capital clause: Involves increase,
reduction of share capital.
Doctrine of Ultra Vires
A company has the power to do all such things as are:
Authorized to be done by the companies act.
Essential to the attainment of its objects specified in the
Memorandum.
Reasonably and fairly incidental to its objects.
Everything else is ultra vires the company. ‘Ultra’ means ‘beyond’
and ‘vires’ means ‘ powers’. The term ultra vires for a company
means that the doing of the act is beyond the legal power and
authority of the company.
The purpose of these restrictions is to protect:
Investors in the company so that they may know the objects in
which their money is to be employed and
Creditors by ensuring that the company’s funds are not wasted in
unauthorized activities.
Articles of Association
The AOA are the rules, regulations and bye-laws for
the internal management of the affairs of a company.
They are framed with the object of carrying out the
aims and objects as set out in the MOA.
Contents of Articles of Association
 Share capital: including sub-division, rights of various shareholders,
the relationship of these rights, payment of commission, share
certificates.
 Lien of shares: Lien of shares means to retain possession of shares
incase the member is unable to pay his debt to the company.
 Calls on shares: Calls on shares include the whole or part remaining
unpaid on each share which has to be paid by the shareholders on the
company’s demand.
 Transfer of shares: The articles of association include the procedure
for the transfer of shares by the shareholder to the transferee.
 Transmission of shares: Transmission includes devolution of title
by death, succession, marriage, insolvency, etc. It is not voluntary but
is in fact brought about by operation of law.
 Forfeiture of shares: The articles of association provide for the
forfeiture of shares if the purchase requirements such as paying any
allotment or call money, are not met with.
Contents of Articles of Association
 Surrender of shares: Surrender of shares is when the shareholders
voluntary return the shares they own to the company.
 Conversion of shares in stock: In consonance with the articles of
association, the company can convert the shares into stock by an
ordinary resolution in a general meeting.
 Share warrant: A share warrant is a bearer document relating to the
title of shares and cannot be issued by private companies; only public
limited companies can issue a share warrant.
 Alteration of capital: Increase, decrease or rearrangement of capital
must be done as the articles of association provide.
 General meetings and proceedings: All the provisions relating to
the general meetings and the manner in which they are to be
conducted are to be contained in the articles of association.
 Voting rights of members, voting by poll, proxies: The members
right to vote on certain company matters and the manner in which
voting can be done is provided in the articles of association.
Contents of Articles of Association
Directors, their appointment, remuneration, qualifications,
powers and proceedings of the boards of directors meetings.
Dividends and reserves: The articles of association of a
company also provide for the distribution of dividend to the
shareholders.
Accounts and Audits: The auditing of a company shall be
done subject to the provisions of the articles of association of
the company.
Borrowing powers: Every company has powers to However,
this must be done according to the articles of association of the
company.
Winding up: Provisions relating to the winding up of the
company finds mention in articles of association of the
company and must be done accordingly.
Alteration of Articles
Companies have been given very wide powers to alter
their Articles.
Procedure of Alteration: A company may, by passing
a special resolution, alter its Articles any time. A copy
of every special resolution altering the Articles shall be
filed with the Registrar within 30 days of its passing
and attached to every copy of the Articles issued
thereafter. Any alteration so made in the Articles shall
be as valid as if originally contained in the Articles.
Limitations to alteration
Must not be inconsistent with the act.
Must not conflict with the Memorandum.
Must not sanction anything illegal.
Must be for the benefit of the company.
Must not increase liability of members.
Alteration by special resolution only.
Approval of Central Government when a public company is
converted into a private company.
Breach of contract.
Must not result in expulsion of a member.
No power of the Tribunal to amend Articles.
Alternation may be with retrospective effect.
Constructive notice of Memorandum and Articles
 Every outsider dealing with a company is deemed to have
notice of the contents of the Memorandum and the Articles of
Association. These documents, on registration with the
/registrar, assume the character of public documents. This is
known as constructive notice of Memorandum and Articles.
Doctrine of indoor management:
 The outsiders dealing with the company are entitled to assume
that as far as the internal proceedings of the company are
concerned, everything has been regularly done.
 The doctrine of constructive notice protects the company
against outsiders, the doctrine of indoor management seeks to
protect outsiders against the company.
Prospectus
“Any document described or issued as a prospectus
and includes any notice, circular, advertisement or
other document inviting deposits from the public or
inviting offers from the public for the subscription or
purchase of any shares in or debentures of, a body
corporate”.
Any document inviting deposits from the public or
inviting offers from the public for the subscription of
shares or debentures of a company is a prospectus.
Prospectus
 Prospectus to be in writing: A prospectus must be in writing. An oral
invitation to subscribe for shares in, or debentures of, a company, or deposits
is not a prospectus. An advertisement in television or a film is not treated to
be a prospectus.
 Invitation to public: A document is not a prospectus unless it is invitation
to the public to subscribe for shares in, or debentures of, a company.
 Offer to the public i.e., public issue.
 Dating of prospectus: A prospectus issued by or in relation to an intended
company must be dated and that date is, unless the contrary is proved, taken
as the date of publication of the prospectus.
 Signing of prospectus: It has to be signed by the proposed directors of the
company or by their agents authorized in writing.
 Registration of prospectus: Can be issued by or on behalf of a company
only when a copy thereof has been delivered to the Registrar for registration.
The registration must be made on or before the date of publication thereof.
The prospectus must be issued within 90 days of the date on which a copy
thereof is delivered for registration and signed by directors. Penalty for non-
registration of prospectus is Rs.50,000.
Contents of Prospectus
Part I of Schedule II:
I. General Information
 Name and address of registered office of the company.
 Name of regional stock exchange where application is made for listing of
present issue.
 Declaration about refund of the issue if minimum subscription of 90% is
not received within 90days from closure of the issue.
 Name and address of trustee under debenture trust.
 Date of opening of the issue.
II. Capital Structure of the Company:
 Authorized, issued, subscribed and paid-up capital.
 Size of present issue giving separately reservation for preferential allotment
to promises and others.
 Paid-up Capital.
Contents of Prospectus
III. Terms of the Present Issues:
 Terms of payment.
 Rights of the instruments holders.
 How to apply- availability of forms.
 Any special tax benefits for company.
IV. Particulars of the Issue:
 Object.
 Project cost.
 Means of financing.
V. Company, Management and project:
 History and main objects of the company.
 Promoters.
 Location of project.
 Infrastructure facilities.
 Nature of product.
Contents of Prospectus
VI. Particulars in regard to the company and other listed companies
under the same management: Which made any capital issue during the
last 3 years.
 Name of the company.
 Year of the issue.
 Type of the issue.
 Amount.
 Date of Closure.
VII. Outstanding litigation pertaining to:
 Matters likely to affect operation.
 Particulars of default, if any in meeting statutory dues and institutional
dues.
VII. Management perception of risk factors:
 Ex. Sensitivity to foreign exchange rate fluctuations, difficulty in
availability of raw materials or in marketing of products, cost/time over-
run, etc.,
Contents of Prospectus
Part II of Schedule II:
A. General information:
 Content of directors, auditors, solicitors, managers to issue, registrar
of issue, bankers to the Company, Bankers to the issue and Experts.
 Experts opinion obtained, if any.
 Change, if any, in directors and auditors during the last 3 years, and
reasons thereof.
 Authority for the issue and details of resolution passed for the issue.
 Procedure and time schedule for allotment and issue of certificates.
 Names and addressed of the Company Secretary, Legal adviser,
Auditors, Bankers to the Company. Bankers to the issue and Brokers
to the issue.
Contents of Prospectus
B. Financial Information:
1. Report by the auditors: Profits and losses and assets and
liabilities and the rates of dividends paid by the company
during the preceding 5 financial years.
2. Reports by the accountants:
The report by the accountants on the profit and losses of
business for the preceding 5 financial years on a date which
shall not be more than 120 days from the date of issue of
prospectus.
A similar report to be submit to the acquiring company.
Principal terms of loans and asset charged as security.
Contents of Prospectus
C. Statutory and other information:
 Minimum subscription.
 Expenses of the issue giving separately fees payable to advisers, registrars to the
issue, managers to the issue, trustees for the debenture holders.
 Underwriting commission and brokerage.
 Previous issues for cash.
 Previous public or rights issue, if any.
 Commission or brokerage on previous issue.
 Issue of shares otherwise than for cash.
 Debentures and redeemable preference shares and other instruments issued by the
company outstanding.
 Option to subscribe.
 Details of purchase of property.
 Details of directors, proposed directors, whole-time directors, their remuneration.
 Rights of members regarding voting
 Restrictions if any, on transfer and transmission of shares/debentures.
 Revaluation of assets, if any.
 Material contracts and inspection of documents.
Contents of Prospectus
Part III of Schedule II:
A vendor has entered into contract to sell the product.
Reasonable time and place at which copies of all
balance sheet on which the report may be inspected.
Term year whenever used here in earlier means
financial year.
Misstatements in prospectus and their consequences
If there is any misstatements of a material fact, there may arise-
 Civil liability.
 Criminal liability.
1. Civil Liability:
 A person who has been induced to subscribe for shares (or
debentures) on the faith of a misleading prospectus has remedies
against the company, and the directors, promoters and experts.
1. Remedies against the company:
If there is a misstatement or withholding of a material information in a
prospectus, and if it has induced any shareholder to purchase shares,
he can-
 Rescind the contract and
 Claim damages from the company whether the statement is
fraudulent or an innocent one.
Misstatements in prospectus and their consequences
2. Remedies against the directors, promoters and experts:
(i). Liability for damages for misstatement in prospectus:
 Every director, promoter and every person who authorizes the issue of
the prospectus is liable to pay compensation to the aggrieved party for
loss. Defenses of directors, promoters etc shall not be liable if he puts
up the following defenses:
 Withdrawal of consent.
 Absence of consent.
 Ignorance of untrue statement.
 Reasonable ground for belief.
 Statement of expert.
(ii). Liability for damages for non-compliance with.
(iii). Liability under the general law.
Misstatements in prospectus and their consequences
2. Criminal Liability:
Where a prospectus contains any untrue statement,
every person who authorized the issue of the
prospectus is punishable with imprisonment which
may extend to 2 years, or with fine which may extend
to Rs. 50,000 or with both.
He is not liable if he proves either:
That the statement was immaterial, or
That he had reasonable ground to believe that the
statement was true.
Statement in Lieu of prospectus
Where a public company does not invite public to
subscribe for its shares, but arrange to get money from
private sources, it need not issue a prospectus to the
public. In such a case the promoters are required to
prepare a draft prospectus known as a ‘statement in lieu of
prospectus’, which should contain the information
required to be disclosed by the Act.
Commencement of Business:
A private company can commence business immediately
after its incorporation. A public company can do so only
after it obtains a ‘certificate of commencement of business’.
Directors
Directors include any person occupying the position
of director, by whatever name called. He may be
defined as a person having control over the direction,
conduct, management or superintendence of the
affairs of a company. Only individuals can be directors.
Number of directors:
Every public company shall have at least three
directors and every other company shall have at least
two directors.
Power of directors
1. General powers of the Board:
 The BOD of a company is entitled to exercise all such powers and
to do all such acts and things as the company is authorized to
exercise and do.
2. Powers to be exercised at Board meetings:
 Make calls on shareholders in respect of money unpaid on their
shares.
 Issue debentures.
 Borrow moneys
 Invest the funds of the company and
 Make loans.’
Power of directors
3. Other powers:
To fill vacancies.
To sanction for certain contracts.
To receive notice of disclosure of directors interest in any contract.
Appoint of a MD .
4. Powers to be exercised with the approval of companies in the
general meeting:
 To sell, lease or otherwise dispose of the whole of the undertaking of
the company.
 To remit or give time for repayment of any debt due to the company by
a director.
 To invest the amount of compensation received by the company.
 To borrow moneys where the moneys to be borrowed one more than
the paid up capital to the company.
Duties of directors
1. Fiduciary duties: The directors must:
Exercise their powers honestly and bonafide for the
benefit of the company as a whole and
Not place themselves in a position in which there is a
conflict between their duties to the company ands
their personal interests. They must not make any
secret profit out of their position.
The fiduciary duties of directors are owned to the
company and not to the individual shareholders.
Duties of directors
2. Duties of care, skill and diligence: The standard of care, skill,
and diligence depends upon the nature of the company’s business.
There are various standards of the care depending upon:
 The type and nature of work,
 Division of powers between directors and other officers.
 General usages and customs in that type of business and
 Whether directors work gratuitously or remuneratively.
3. Other duties of directors:
 To attend board meetings.
 Not to delegate his functions except to the extent authorized by the
Act.
 To disclose his interest.
Liabilities of directors
1. Liability to third parties:
(i) Under the Act: Liability of directors to third party may arise in
connection with the issue of prospectus which does not contain the
particulars required by the Companies Act, or which contains material
misrepresentations.
Directors may also incur personal liability:
 On their failure to repay application money if minimum
subscription has not been subscribed.
 On an irregular allotment of shares to an allottee if loss or damage is
sustained.
 On failure by the company to pay a bill of exchange, promissory
note, cheque or order for money or goods wherein the name of the
company is not mentioned in legible characters.
Liabilities of directors
(ii) Independently of the Act: Directors as agents of a company,
are not personally liable on contracts entered into as agents on
behalf of the company.
2. Liability to the company:
(i) Ultra vires acts: Directors are personally liable to the company
in respect of ultra vires acts and it is not necessary to prove fraud in
such cases.
(ii) Negligence: A director may incur liability for the negligence in
the exercise of his duties.
(iii) Breach of trust: Hold the position of trustees as regards its
money and property which comes into their hands and of the
powers entrusted to them by the Articles.
(iv) Misconduct: They are responsible for willful misconduct for
which they may be sued in a Law Court.
Liabilities of directors
3. Liability for breach of statutory duties: They are
maintenance of proper accounts, filing of returns or
observance of certain statutory formalities.
4. Liabilities for the acts of his co-directors: A
director is not liable for the acts of his co-directors
provided he has no knowledge and he is not a party.
Winding up
 Winding up of a company is a process whereby its life
is ended and its property administered for the benefit
of its creditors and members.
An administrator, called liquidator, is appointed and
he takes control of the company, collects its assets,
pays its debts and finally distributes any surplus
among the members in accordance with their rights.
Modes of Winding Up
There are three modes of winding up of a company, viz.,
1. Winding up by the Court, i.e., Compulsory
winding up.
2. Voluntary winding up.
This may be:
Members voluntary winding up or
Creditors voluntary winding up
3. Winding up subject to supervision of Court.
Winding up by the Court
Winding up of a company under the order of a Court
is also known as ‘compulsory winding up’:
Grounds for compulsory winding up:
A company may be wound by the Court in the
following cases:
1. Special resolution of the company: Members of a
company prefer to wind up the company voluntarily for
in such a case they shall have a voice in its winding up. It
is far cheaper and speedier than a winding up by the
Court.
Winding up by the Court
2. Default in delivering the statutory report to the Registrar or in
holding statutory meeting: A petition for winding up can be filed only
after the expiry of 14 days from the days of statutory meeting. The Court
may order the cost to be paid by any persons who are responsible for the
default.
3. Failure to commence, or suspension of, business: The tribunal
exercise power in the case only if the company has no intention of
carrying on its business.
 In case of suspension it has to begin within the year, the tribunal will
not wind it up if:
 There are reasonable prospectus of the company starting business
within a reasonable time, and
 There are good reasons for the delay, i.e., the suspension of business is
satisfactorily accounted for and appears to be due to temporary causes.
Winding up by the Court
4. Reduction in membership: If at any time, the
number of members of a company is reduced in the
case of a public company, below 7 or in the case of a
private company, below 2, the company may be
ordered to be wound up by the Court.
5. Inability to pay its debts: A company may be
wound up by the Court if it is unable to pay its debts.
The test is whether the company has reached a stage
where it is commercially insolvent.
Winding up by the Court
6. Just and equitable: The court may order winding up under the
following cases:
When the substratum of a company is gone.
When the management is carried on in such a way that the
minority is disregarded or oppressed.
Where there is a deadlock in the management of the company.
Where public interest is likely to be prejudiced.
When the company was formed to carry out fradulent or illegal
business or when the business of the company becomes illegal.
When the company is a mere bubble and does not carry on any
business or does not have any property.
Commencement of winding up
The winding up of a company by the court is deemed
to commence at the time of presentation of the
petition for winding up.
If before the presentation of the petition a resolution
has been passed by the company for voluntary winding
up shall be deemed to have commencement up the
time of passage of resolution.
Procedure of winding up by the court
 Official liquidator: For the purpose of winding up of the
companies by the court there shall be attached to each High Court
on Official Liquidator appointed by the Central Government.
Duties of liquidator:
 Proceedings in winding up.
 To prepare preliminary report.
 Custody of company’s property.
 Exercise and control of liquidator’s powers.
 Meeting of creditors and contributories.
 Direction from the court.
 Proper books.
 Audit of accounts.
 Appointment of committee of inspection.
 Pending liquidation.
Powers of liquidator
1. Power exercisable with the sanction of the court:
 To institute or defend suits and other legal proceedings, in the name and
on behalf of the company.
 To carry on the business of the company so far as may be necessary for
the beneficial winding up of the company.
 To sell the movable and immovable property by public auction or private
contract.
 To raise money on the security of the company’s assets.
2. Powers exercisable without the sanction of the court:
 To do all acts and to execute documents and deeds on behalf of the
company under its seal.
 To inspect the records and returns of the company.
 To prove rank and claim in the insolvency of any contributory.
 To draw, accept and endorse any bill of exchange.
 To appoint agents whenever necessary.
Powers of liquidator
3. Powers exercisable in case of onerous contract:
The term ‘onerous’ means a right to property, e.g., a
lease, in which the obligations attaching to it exceed
the advantage to be derived from it. The liquidator
may, with the leave of the Court, disclaim onerous
contracts, and properties. This shall be done within 12
months after the commencement of the winding up,
unless the Court extends time.
Dissolution of company
Dissolution puts an end to the existence of a company. A
Company which has been dissolved no longer exists as a
separate entity capable of holding property or of being sued
in the Court.
Ground for dissolution: The Court shall make an order for
the dissolution of a company:
When the affairs of the company have been completely
wound up, or
When the Court is of opinion that the liquidator cannot
proceed with the winding up for want of funds and assets, or,
For any other reason.
Voluntary winding up
 Voluntary winding up means winding up by the members or creditors
of a company without interference by the Court.
 The object of a voluntary winding up is that the company, i.e., the
members as well as the directors, are left free to settle their affairs
without going to the Court.
Circumstances in which a company may be wound up voluntarily:
 (i) By passing an ordinary resolution: When the period, if any,
fixed for the duration of a company by the Articles has been expired,
the company in general meeting may pass an ordinary resolution for
its voluntary winding up.
 (ii) By passing a special resolution: A company may at any time
pass a special resolution that it be wound up voluntarily. No reasons
need be given where the members pass a special resolution for the
voluntary winding up of the company.
Voluntary winding up
Commencement of voluntary winding up: A voluntary
winding up shall be deemed to commence at the time
when the resolution for its voluntary winding up is passed.
Advertisement of resolution: Within 14 days of the
passing of the resolution, the company shall give notice of
the resolution by advertisement in the Official Gazette and
also in some newspapers circulating in the district of the
registered office of the company.
Types of voluntary winding up:
1. Members voluntary winding up or
2. Creditors voluntary winding up.
Members Voluntary Winding Up
Declaration of solvency: The declaration shall be made by a majority
of the directors at a meeting of the Board that the company has no
debts or that it will be able to pay its debts in full within 3 years from
the commencement of the winding up. The declaration shall made be
verified by an affidavit.
Provisions applicable to a members voluntary winding up:
1. Appointment and remuneration of liquidators.
2. Board’s powers to cease on appointment of a liquidator.
3. Power to fill vacancy in office of liquidator.
4. Notice of appointment of liquidator to be given to Registrar.
5. Power of liquidator to accept shares, etc.,
6. Duty of liquidator to call creditors meeting in case of insolvency.
7. Duty to call general meeting at the end of each year.
8. Final meeting and dissolution.
9. Provisions as to annual and final meeting in case of insolvency.
Creditors voluntary winding up
 A voluntary winding up of a company in which a declaration of its
solvency is not made is referred to as a creditors voluntary winding up.
Provisions applicable to creditors voluntary winding up:
1. Meeting of creditors.
2. Notice of resolution to be given to Registrar.
3. Appointment of liquidator.
4. Appointment of committee of inspection.
5. Liquidator’s remuneration.
6. Board’s power to cease on appointment of liquidator.
7. Power to fill vacancy in office of liquidator.
8. Power of liquidator to accept shares etc., as consideration for sale of
property.
9. Duty of liquidator to call meeting at the end of each year.
10. Final meeting and dissolution.
Consequences of winding up
1. Consequences as to shareholders/members: In a company
limited by shares, a shareholder is liable to pay the full amount up
to the face value of the shares held by him. In a company limited
by guarantee, the members are liable to contribute up to the
amount guaranteed by them.
2. Consequences as to creditors:
Where the company is solvent: Where a company is being
wound up, all debts payable on a contingency and all claims
against the company, present or future, certain or contingent,
ascertained or sounding only in damages, shall be admissible to
proof against the company. Where a solvent company is wound
up, all the claims of creditors , when proved , are fully met.