COMPANY LAW

Meaning of a Company
There are many definitions of a Company by various legal experts.
However, Section 2(20) of the Companies Act, 2013, defines the term
‘Company’ as follows: “Company means a company incorporated
under this Act or under any previous company law.”

Hence, in order to understand the meaning of a Company, it is

important to look at the distinctive features that explain the realm of a
Company.

Features of a Company
A Company is a Separate Legal Entity

One of the most distinctive features of a Company, as compared to

other organizations, is that it acquires a unique character of being a
separate legal entity. Hence, when you register a company, you give it a
legal personality with similar rights and powers as a human being.

The existence of a company is distinct and separate from that of its

members. It can own property, bank accounts, raise loans, incur
liabilities and enter into contracts. According to Law, it is altogether
different from the subscribers to the Memorandum of Association.

Also, it has a distinct personality which is different from those who

compose it. Member can also contract with the Company and acquire a
right against it or incur a liability to it. However, for any debts, the
creditors can sue the Company but the members cannot.

A Company can own, enjoy, and dispose of a property in its own name.
While the shareholders contribute to the capital and assets, the company
is the rightful owner of such assets and capital. Further, the shareholders
are not private or joint holders of the company’s property.

Perpetual Succession

Another important feature of Company is that it continues to carry on its

business notwithstanding the death of change of its members until it is
wound up on the grounds specified by the Act. Further, the shares of the
company change hands infinitely, but that does not affect the existence
of the company.
In simple words, the company is an artificial person which is brought
into existence by the law. Hence, it can be ended by law alone and is
unaffected by the death or insolvency of its members.

Limited Liability

One of the important features of a company is the limited liability of its

members. The liability of a member depends on the type of company.

 In the case of a limited liability company, the debts of the company in

totality do not become the debts of its shareholders. In such case, the
liability of its members is limited to the extent of the nominal value
of shares held by them. The shareholders cannot be asked to pay
more than the unpaid value of their shares.
 In the case of a company limited by guarantee, members are liable
only to the extent of the amount guaranteed by them. Further, this
liability arises only when the company goes into liquidation.
 Finally, if it is an unlimited company, then the liability of its
members is unlimited too. But such instances are very rare.
Artificial Legal Person

Another one of the features of a company is that it is known as an

Artificial Legal Person.

 Artificial – because its creation is by a process other than natural

birth.
 Legal – because its creation is by law, and
 Person – because it has similar rights to a human being.
Further, a company can own property, bank accounts, and do everything
that a natural person can do except go to jail, marry, take an oath, or
practice a learned profession. Hence, it is a legal person in its own
sense.

Since a company is an artificial person, it needs humans to function.

These humans are Directors who can authenticate the company’s formal
acts either on their own or through the common seal of the company.

Common Seal

While a company is an artificial person and works through the agency

of human beings, it has an official signature. This is affixed by the
officers and employees of the company on all its documents. This
official signature is the Common Seal.

However, the Companies (Amendment) Act, 2015 has made the

Common Seal optional. Section 9 of the Act does not have the phrase
‘and a common seal’ in it. This provides an alternative mode of
authorization for companies who do not wish to have a common seal.

According to this amendment, if a company does not have a common

seal, then the authorization shall be done by:

 Two Directors or
 One Director and the Company Secretary (if the company has
appointed a Company Secretary).

Corporate veil:
A legal concept that separates the personality of a corporation from the personalities of its
shareholders, and protects them from being personally liable for the company’s debts and other
obligations.

Lifting of Corporate veil:

At times it may happen that the corporate personality of the company is used to commit frauds and
improper or illegal acts. Since an artificial person is not capable of doing anything illegal or
fraudulent, the façade of corporate personality might have to be removed to identify the persons
who are really guilty. This is known as ‘lifting of corporate veil’.

It refers to the situation where a shareholder is held liable for its corporation’s debts despite the
rule of limited liability and/of separate personality. The veil doctrine is invoked when shareholders
blur the distinction between the corporation and the shareholders. A company or corporation can
only act through human agents that compose it. As a result, there are two main ways through which
a company becomes liable in company or corporate law: firstly through direct liability (for direct
infringement) and secondly through secondary liability (for acts of its human agents acting in the
course of their employment).

There are two existing theories for the lifting of the corporate veil. The first is the “alter-ego” or
other self theory, and the other is the “instrumentality” theory.

The alter-ego theory considers if there is in distinctive nature of the boundaries between the
corporation and its shareholders.

The instrumentality theory on the other hand examines the use of a corporation by its owners in
ways that benefit the owner rather than the corporation. It is up to the court to decide on which
theory to apply or make a combination of the two doctrines.

Concept of limited liability:

One of the main motives for forming a corporation or company is the limited liability that it offers
to its shareholders. By this doctrine, a shareholder can only lose what he or she has contributed as
shares to the corporate entity and nothing more. This concept is in serious conflict with the doctrine
of lifting the veil as both these do not co-exist which is discussed by us in the paper in detail.
DEVELOPMENT OF THE CONCEPT OF
“LIFTING THE CORPORATE VEIL”
One of the main characteristic features of a company is that the company is a separate legal entity
distinct from its members. The most illustrative case in this regard is the case decided by House
of Lords- Salomon v. A Salomon & Co. Ltd[i]. In this case Mr. Solomon had business of shoe and
boots manufacture. ‘A Salomon & Co. Ltd.’ was incorporated by Solomon with seven subscribers-
Himself, his wife, a daughter and four sons. All shareholders held shares of UK pound 1 each. The
company purchased business of Salomon for 39000 pounds, the purchase consideration was paid
in terms of 10000 pounds debentures conferring charge on the company’s assets, 20000 pounds in
fully paid 1 pound share each and the balance in cash. The company in less than one year ran into
difficulties and liquidation proceedings commenced. The assets of the company were not even
sufficient to discharge the debentures (held entirely by Salomon itself) and nothing was left to the
insured creditors. The House of Lords unanimously held that the company had been validly
constituted, since the Act only required seven members holding at least one share each and that
Salomon is separate from Salomon & Co. Ltd. The entity of the corporation is entirely separate
from that of its shareholders; it bears its own name and has a seal of its own; its assets are distinct
and separate from those of its members; it can sue and be sued exclusively for its purpose; liability
of the members are limited to the capital invested by them.[ii]Further in Lee v. Lee’s Air Farming
Ltd.[iii], it was held that there was a valid contract of service between Lee and the Company, and
Lee was a therefore a worker within the meaning of the Act. It was a logical consequence of the
decision in Salomon’s case that one person may function in the dual capacity both as director and
employee of the same company.

In The King v Portus; ex parte Federated Clerks Union of Australia[iv], where Latham CJ while
deciding whether or not employees of a company owned by the Federal Government were not
employed by the Federal Government ruled that the company is a distinct person from its
shareholders. The shareholders are not liable to creditors for the debts of the company. The
shareholders do not own the property of the company.

In course of time, the doctrine that a company has a separate and legal entity of its own has been
subjected to certain exceptions by the application of the fiction that the veil of corporation can be
lifted and its face examined in substance.

Thus when “Tata Company” or “German Company” or “Government Company” is referred to, we
look behind the smoke-screen of the company and find the individual who can be identified with
the company. This phenomenon which is applied by the courts and which is also provided now in
many statutes is called “lifting of the corporate veil”. As a consequence of the lifting of the
corporate veil, the company as a separate legal entity is disregarded and the people behind the act
are identified irrespective of the personality of the company. So, this principle is also
called “disregarding the corporate entity”.

LIFTING THE CORPORATE VEIL

Meaning of the doctrine:
Lifting the corporate refers to the possibility of looking behind the company’s framework (or
behind the company’s separate personality) to make the members liable, as an exception to the
rule that they are normally shielded by the corporate shell (i.e. they are normally not liable to
outsiders at all either as principles or as agents or in any other guise, and are already normally
liable to pay the company what they agreed to pay by way of share purchase price or guarantee,
nothing more).[v]

When the true legal position of a company and the circumstances under which its entity as a
corporate body will be ignored and the corporate veil is lifted, the individual shareholder may be
treated as liable for its acts.
The corporate veil may be lifted where the statute itself contemplates lifting the veil or fraud or
improper conduct is intended to be prevented.

“It is neither necessary nor desirable to enumerate the classes of cases where lifting the veil is
permissible, since that must necessarily depend on the relevant statutory or other provisions, the
object sought to be achieved, the impugned conduct, the involvement of the element of public
interest, the effect on parties who may be affected, etc.”. This was iterated by the Supreme Court
in Life Insurance Corporation of India v. Escorts Ltd.[vi]

The circumstances under which corporate veil may be lifted can be categorized broadly into two
following heads:

1. Statutory Provisions
2. Judicial interpretation

STATUTORY PROVISIONS
Section 5 of the Companies Act defines the individual person committing a wrong or an illegal act
to be held liable in respect of offences as ‘officer who is in default’. This section gives a list of
officers who shall be liable to punishment or penalty under the expression ‘officer who is in
default’ which includes a managing director or a whole-time director.

Section 45– Reduction of membership below statutory minimum: This section provides that if the
members of a company is reduced below seven in the case of a public company and below two in
the case of a private company (given in Section 12) and the company continues to carry on the
business for more than six months, while the number is so reduced, every person who knows this
fact and is a member of the company is severally liable for the debts of the company contracted
during that time. In the case of Madan lal v. Himatlal & Co.[vii] the respondent filed suit against
a private limited company and its directors for recovery of dues. The directors resisted the suit on
the ground that at no point of time the company did carry on business with members below the
legal minimum and therefore, the directors could not be made severally liable for the debt in
question. It was held that it was for the respondent being dominus litus, to choose persons of his
choice to be sued.

Section 147- Misdescription of name: Under sub-section (4) of this section, an officer of a
company who signs any bill of exchange, hundi, promissory note, cheque wherein the name of the
company is not mentioned is the prescribed manner, such officer can be held personally liable to
the holder of the bill of exchange, hundi etc. unless it is duly paid by the company. Such instance
was observed in the case of Hendon v. Adelman.[viii]

Section 239– Power of inspector to investigate affairs of another company in same group or
management: It provides that if it is necessary for the satisfactory completion of the task of an
inspector appointed to investigate the affairs of the company for the alleged mismanagement, or
oppressive policy towards its members, he may investigate into the affairs of another related
company in the same management or group.

Section 275- Subject to the provisions of Section 278, this section provides that no person can be
a director of more than 15 companies at a time. Section 279 provides for a punishment with fine
which may extend to Rs. 50,000 in respect of each of those companies after the first twenty.

Section 299- This Section gives effect to the following recommendation of the Company Law
Committee: “It is necessary to provide that the general notice which a director is entitled to give
to the company of his interest in a particular company or firm under the proviso to sub-section (1)
of section 91-A should be given at a meeting of the directors or take reasonable steps to secure that
it is brought up and read at the next meeting of the Board after it is given.[ix] The section applies
to all public as well as private companies. Failure to comply with requirements of this Section will
cause vacation of the office of the Director and will also subject him to penalty under sub-section
(4).

Sections 307 and 308- Section 307 applies to every director and every deemed director. Not only
the name, description and amount of shareholding of each of the persons mentioned but also the
nature and extent of interest or right in or over any shares or debentures of such person must be
shown in the register of shareholders.

Section 314- The object of this section is to prohibit a director and anyone connected with him,
holding any employment carrying remuneration of as such sum as prescribed or more under the
company unless the company approves of it by a special resolution.

Section 542- Fraudulent conduct: If in the course of the winding up of the company, it appears
that any business of the company has been carried on with intent to defraud the creditors of the
company or any other person or for any fraudulent purpose, the persons who were knowingly
parties to the carrying on of the business, in the manner aforesaid, shall be personally responsible,
without any limitation of liability for all or any of the debts or other liabilities of the company, as
the court may direct. In Popular Bank Ltd., In re[x] it was held that section 542 appears to make
the directors liable in disregard of principles of limited liability. It leaves the Court with discretion
to make a declaration of liability, in relation to ‘all or any of the debts or other liabilities of the
company’. This [xi]section postulates a nexus between fraudulent reading or purpose and liability
of persons concerned.

JUDICIAL INTERPRETATIONS
By contrast with the limited and careful statutory directions to ‘lift the veil’ judicial inroads into
the principle of separate personality are more numerous. Besides statutory provisions for lifting
the corporate veil, courts also do lift the corporate veil to see the real state of affairs. Some cases
where the courts did lift the veil are as follows:

1. United States v. Milwaukee Refrigerator Transit Company[xii]– In this case the U.S.
Supreme Court held that “where the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud or defend crime, the law will disregard the
corporate entity and treat it as an association of persons.”

Some of the earliest instances where the English and Indian Courts disregarded the principle
established in Salomon’s case are:

2. Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (Great Britain) Ltd[xiii]– This is an
instance of determination of enemy character of a company. In this case, there was a
German company. It set up a subsidiary company in Britain and entered into a contract
with Continental Tyre and Rubber Co. (Great Britain) Ltd. for supply of tyres. During the
time of war the British company refused to pay as trading with an alien company is
prohibited during that time. To find out whether the company was a German or a British
company, the Court lifted the veil and found out that since the decision making bodies, the
board of directors and the general body of share holders were controlled by Germans, the
company was a German company and not a British company and hence it was an enemy
company.

3. Gilford Motor Co. v. Horne[xiv]– This is an instance for prevention of façade or sham. In
this case an employee entered into an agreement that after his employment is terminated
he shall not enter into a competing business or he should not solicit their customers by
setting up his own business. After the defendant’s service was terminated, he set up a
company of the same business. His wife and another employee were the main share holders
and the directors of the company. Although it was in their name, he was the main controller
of the business and the business solicited customers of the previous company. The Court
held that the formation of the new company was a mere cloak or sham to enable him to
enable him to breach the agreement with the plaintiff.

4. Re, FG (Films) Ltd[xv]– In this case the court refused to compel the board of film censors
to register a film as an English film, which was in fact produced by a powerful American
film company in the name of a company registered in England in order to avoid certain
technical difficulties. The English company was created with a nominal capital of 100
pounds only, consisting of 100 shares of which 90 were held by the American president of
the company. The Court held that the real producer was the American company and that it
would be a sham to hold that the American company and American president were merely
agents of the English company for producing the film.
 5. Jones v. Lipman[xvi]– In this case, seller of a piece of land sought to evade specific
performance of a contract for the sale of the land by conveying the land to a company
which he formed for the purpose and thus he attempted to avoid completing the sale of his
house to the plaintiff. Russel J. describing the company as a “devise and a sham, a mask
which he holds before his face and attempt to avoid recognition by the eye of equity” and
ordered both the defendant and his company specifically to perform the contract with the
plaintiff.

6. Tata Engineering and Locomotive Co. Ltd. State of Bihar[xvii] – In this case it was stated
that a company is also not allowed to lay claim on fundamental rights on the basis of its
being an aggregation of citizens. Once a company is formed, its business is the business of
an incorporated body thus formed and not of the citizens and the rights of such body must
be judged on that footing and cannot be judged on the assumption that they are the rights
attributable to the business of the individual citizens.

7. N.B. Finance Ltd. v. Shital Prasad Jain[xviii]– In this case the Delhi High Court granted
to the plaintiff company an order of interim injunction restraining defendant companies
from alienating the properties of their ownership on the ground that the defendant
companies were merely nominees of the defendant who had fraudulently used the money
borrowed from the plaintiff company and bought properties in the name of defendant
companies. The court did not in this case grant protection under the doctrine of corporate
veil.

8. Shri Ambica Mills Ltd. v. State of Gujarat[xix]– It was held that the petitioners were as
good as parties to the proceedings, though their names were not expressly mentioned as
persons filing the petitions on behalf of the company. The managing directors in their
individual capacities may not be parties to such proceedings but in the official capacity as
managing directors and as officers of the company, they could certainly be said to represent
the company in such proceedings. Also as they were required to so act as seen from the
various provisions of the Act and the Rules they could not be said to be total strangers to
the company petition.

TYPES OF COMPANIES

There are mainly six types of Company registration in india,

1. Private Limited Company

It is one of the most sophisticated forms of business entities in India. Here, business assets are
separated from personal assets. Every shareholder is just responsible for his share of the total
capital. Pvt Ltd Companies need to maintain records of financial transactions, board meetings,
and annual reports and so on.

A Pvt Ltd company consists of a group of shareholders and the total capital of the entity is made
up of shares. These shares can be sold/transferred to another individual who then also becomes
one of the owners of the company.

Private Limited Company can be of three types:

i) Company limited by shares – A company having the liability of its members limited by the
memorandum to the amount, if any, unpaid on the shares respectively held by them.

ii) Company limited by guarantee – A company having the liability of its members limited by the
memorandum to such amount as the members may respectively undertake to contribute to the
assets of the company in the event of its being wound-up.

iii) Unlimited company – A company not having any limit on the liability of its members.

2. Partnership

Partnership business entities are quite similar to sole proprietorship. The basic difference
between partnership and sole proprietorship is that more than one individual is involved in a
partnership. The roles, responsibilities and the share of each partner are specifically defined in a
legal partnership agreement.

Any profit earned by the business is shared between partners according to the legal partnership
agreement. In case there are losses, each of the partners is personally responsible. Personal assets
of partners may be used to compensate the losses incurred, if any.

3. Limited Liability Partnership

With the concept introduced in 2009, a LLP functions as a structured business model. It is a
separate legal entity from the partnership entity and business assets are separate from the
personal assets of the partners. In case the business incurs losses, the personal assets of partners
are not put at risk as the maximum liability of every partner is defined by his share capital in the
entity.

Compared to Partnership and Sole Proprietorship, Limited Liability Companies always have
better credibility among investors. The main reasons include proper maintenance of financial
records, incorporation records and tax records.

4. Proprietorship

A business registered in the name of an individual is called Sole Proprietorship. A single person
is completely responsible for the entire business with the business and the owner not being
separate from each other. The owner funds the business, takes any profits and bears any losses.

It does not involve any complex rules or accounting. Personal assets and business assets are not
separated from each other. Any profits from the business are just added to the business owner’s
income for taxation purposes.

Similarly, any losses become the personal losses of a business owner. In case the business starts
incurring losses and additional money is needed to compensate those losses, the personal assets
of the owner itself are put at risk.

5. One Person Company

One Person Company(OPC) is a newly introduced type of company and was introduced in the
Companies Act, 2013 to support entrepreneurs who on their own are capable of starting a venture
by allowing them to create a single person economic entity. One of the biggest advantages of a
OPC is that there can be only one member in a OPC, while a minimum of two members are
required for incorporating and maintaining a Private Limited Company or a Limited Liability
Partnership.

Similar to a Company, an OPC is a separate legal entity from its members, offers limited liability
protection to its shareholders, has continuity of business and is easy to incorporate.

6. Section 8 Company

A Section 8 Company is an organization which is registered as a Non-Profit Organization

(NPO). NPO/company has its objective of promotion of arts, commerce, charity, education,
protection of environment, science, social welfare, sports, research, religion and intends to apply
its profits, if any, or other income in promoting its objects. It functions exactly like a limited
company including all the rights and obligations that come with such a company. However, it
differs from a company in one very crucial aspect, i.e. it cannot use the words “Section 8” or
“Limited” in its name.

Promoters of a Company
We can define the expression ‘promoter’ referring to a promoter who has a party to the
preparation of company prospectus, but is not inclusive of any person by reason of his acting in a
professional capacity in enabling the formation of the company. The article studies the
categories, functions and duties of the promoter of a company.

Definition of Company Promoter

According to section 2(69) of the Companies Act, 2013 the term ‘Promoter’ can be defined as
the following:

1. A person who has been named as such in a prospectus or is identified by the company in
the annual return in section 92; or
2. A person who has control over the affairs of the company, directly or indirectly whether
as a shareholder, director or otherwise; or
3. A person who is in agreement with whose advice, directions or instructions the Board of
Directors of the company is accustomed to act.

In USA, Securities Exchange Commission Rule 405(a) defines a promoter as “a person who,
acting alone or in conjunction with other persons directly or indirectly takes the responsibility in
founding or organizing the business enterprise.”

Categories of Company Promoter

A promoter is the one who decides an idea for creating a particular business at a given place and
carries out a range of formalities required for starting a business. A promoter is the one who
decides an idea for setting up a particular business at a given place and carries out a range of
formalities required for the setting up of a business. A promoter may perhaps be an individual, a
firm, and an association of persons or a company.

The promoters may perhaps be professional, occasional, financial or managing promoters. A

professional promoter gives away the company to the shareholders when the company starts.
Regrettably, such promoters are very inadequate in the developing countries.

They have played a significant role in many countries and aided the business community to a
great extent. In U.K. the issue houses, in U.S. investment banks and in Germany.

 Joint Stock Banks have enacted the role of promoters very appreciably and effectively.
 Occasional promoters are those whose most important interest is the floating of
companies. They are not in promotion work on standard basis but take up promotion of
some companies and then go to their former profession. For example, engineers, lawyers
etc. may perhaps float some companies.
 Financial promoters perform the task of promoting the financial institutions. They usually
take up this work when financial environment is constructive at the time. Managing
promoters played an important role in promoting new companies and then got their
managing agency rights.
A promoter is neither an agent nor a trustee of the company as it is a non-entity before
incorporation. Some legal cases have attempted to spell out the standing of promoters.

Functions of Company Promoter

Promoters are usually the first persons who envision the idea of business. They perform the
compulsory investigation to find out whether the formation of a company is probable and
profitable. Afterward they systematize the resources to convert the idea into a reality by founding
a company; or in other words we can declare that it is the promoter:

 who settles the name of the company thus determine the name will be acceptable by the
registered official of the office;
 who decides the content or details as to the Articles of the companies; (here, articles
refers to Articles of association & Memorandum of association);
 who proposes the directors, bankers, auditors and etc.;
 who decides the place where registered office or head office has to be situated;
 who prepares the Memorandum of Association, Prospectus and other essential documents
and file them for the reason of incorporation.

Duties of Company Promoter

The promoters occupy a significant position and have wide range of powers related to the
formation of a company. It is, nevertheless, interesting to note that so far as the legal position is
referred, he is neither an agent nor a trustee of the proposed company. However it does not
signify that the promoter does not have any legal relationship with the proposed company. The
promoters stand in a fiduciary relation to the company they support and to those persons, whom
they persuade to become shareholders in it.

PRE INCORPORATION CONTRACTS

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

1. Legal status of Pre-incorporation contract

The legal status of a pre-incorporation contract is not easy to define. Going by the definition of
the contract, there have to be at least two parties/persons who enter into contract with each other.
So, the general principle goes that no contract is there if one of the parties to the contract is not in
existence at the time of entering into the contract. Hence, the company can’t enter into a contract
before it comes into existence, and it comes into existence only after its registration. It may be
argued that, the pre-incorporation contract is entered into by the promoters on behalf of the
company. But here also, is a tangle. The promoters, while entering into the contract, act as agents
of the company. But when the principal, i.e. the company is itself not in existence, how can it
appoint an agent to act for it? So, the promoters, themselves and not the company, 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 cannot personally enforce contracts entered into
by him on behalf of his principal, nor is he personally bound by them if he specifies clearly, at
the time of making the contract, that he is only acting as an agent and he is not personally 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 u/s 19 (e) of the Specific Relief Act of 1963, lies the solution to our
problem. These provisions, while deviating from the common law principles to some extent,
make the pre-incorporation contracts valid. U/s 15 (h), Except as otherwise provided by this
Chapter, the specific performance of a contract may be obtained by--
(a) any party thereto;
(b) the representative in interest or the principal, of any party thereto

Provided that where the learning , skill, solvency or any personal quality of such party is a
material ingredient in the contract, or where the contract provides that his interest shall not be
assigned, his representative in interest or his principal shall not be entitled to specific
performance his part of the contract, or the performance thereof by his representative in interest,
or his principal, has been accepted by the other party; when the promoters of a company have,
before its incorporation, entered into a contract for the purposes of the company, and such
contract is warranted by the terms of the incorporation, the company. U/s 19 (e), Except as
otherwise provided by this Chapter, specific performance of a contract may be enforced against
the company, when the promoters of a company have, before its incorporation, entered into a
contract for the purpose of the company and such contract is warranted by the terms of the
incorporation. In Weavers Mills Ltd. v. Balkies Ammal [AIR 1969 Mad 462], the Madras High
Court extended the scope of this principle through its decision. In this case, promoters had
agreed to purchase some properties for and on behalf of the company to be promoted. On
incorporation, the company assumed possession and constructed structures upon it. It was held
that even in absence of conveyance of property by the promoter in favour of the company after
its incorporation, the company’s title over the property could not be set aside.

MODULE 2

Memorandum and Articles of Association:

Introduction:

Memorandum of association is the charter of the company and defines the scope of its activities.
An article of association of the company is a document which regulates the internal management
of the company.

Memorandum of association defines the relation of the company with the rights of the members
of the company interest and also establishes the relationship of the company with the members.

Definition- Memorandum:

As per Section 2(56) of the Companies Act,2013 “memorandum” means the memorandum of
association of a company as originally framed or as altered from time to time in pursuance of any
previous company law or of this Act.

Memorandum Of Association:

Section 4 of the Companies Act,2013 deals with MOA. The Memorandum of a company shall
contain the following;

1. Name Clause:

The name of the company with the last word “Limited” in the case of a public limited company,
or the last words “Private Limited” in the case of a private limited company.

2. Situation Clause:

The State in which the registered office of the company is to be situated.

3.Object Clause:

The objects for which the company is proposed to be incorporated and any matter considered
necessary in furtherance thereof.
4.Liability Clause:

The liability of members of the company, whether limited or unlimited, and also state,—

(i) in the case of a company limited by shares– liability of its members is limited to the amount
unpaid, if any, on the shares held by them; and

(ii) in the case of a company limited by guarantee-the amount up to which each member
undertakes to contribute—

(A) to the assets of the company in the event of its being wound-up while he is a member or
within one year after he ceases to be a member, for payment of the debts and liabilities of the
company or of such debts and liabilities as may have been contracted before he ceases to be a
member,as the case may be; and

(B) to the costs, charges and expenses of winding-up and for adjustment of the rights of the
contributories among themselves;

5.Capital Clause:

(i) the amount of share capital with which the company is to be registered and the division
thereof into shares of a fixed amount and the number of shares which the subscribers to the
memorandum agree to subscribe which shall not be less than one share; and

(ii) the number of shares each subscriber to the memorandum intends to take, indicated opposite
his name;

In the case of One Person Company, the name of the person who, in the event of death of the
subscriber, shall become the member of the company.

Identical/undesirable names;

The name stated in the memorandum shall not—

(a) be identical with or resemble too nearly to the name of an existing company registered under
this Act or any previous company law; or

(b) be such that its use by the company—

(i) will constitute an offence under any law for the time being in force; or

(ii) is undesirable in the opinion of the Central Government

A company shall not be registered with a name which contains—

(a) any word or expression which is likely to give the impression that the company is in any way
connected with, or having the patronage of, the Central Government, any State Government, or
any local authority, corporation or body constituted by the Central Government or any State
Government under any law for the time being in force; or

(b) such word or expression, as prescribed in the Companies (Incorporation) Rules, 2014.

unless the previous approval of the Central Government has been obtained for the use of any
such word or expression.

Reservation of name:

A person may make an application in Form No. INC.1 along with the fee as provided in the
Companies (Registration offices and fees) Rules, 2014 to the registrar for the reservation of a
name set out in the application as-

(a) the name of the proposed company; or

(b) the name to which the company proposes to change its name

The Registrar may, on the basis of information and documents furnished along with the
application, reserve the name for a period of sixty days from the date of the application.

Penalty:

If the company has not been incorporated, the reserved name shall be cancelled and the person
making application shall be liable to a penalty which may extend to Rs.1,00,000/-

Action:

If the company has been incorporated, the Registrar may, after giving the company an
opportunity of being heard—

 either direct the company to change its name within a period of three months, after
passing an ordinary resolution;
 take action for striking off the name of the company from the register of companies;
or
 make a petition for winding up of the company.

Form of Memorandum:

The memorandum of a company shall be in respective forms as outlined below

S.No Table Form

1 Table A MOA of a company limited by shares
MOA of a company limited by guarantee and not having
2 Table B
share capital
MOA of a company limited by guarantee and having share
3 Table C
capital
4 Table D MOA of an unlimited company and not having share capital
5 Table E MOA of an unlimited company and having share capital

Any provision in the memorandum or articles, in the case of a company limited by guarantee and
not having a share capital, purporting to give any person a right to participate in the divisible
profits of the company otherwise than as a member, shall be void

Articles of Association:
Articles of Association is a document which prescribes the rules and bye-laws for the general
management of the company and for the attainment of its object as given in the memorandum of
association of the company.[1] It is a document of paramount significance in the life of a company as it
contains the regulations for the internal administration of the company’s affairs.

Definition –Articles:

As per Section 2(5) of the Companies Act,2013 “articles” means the articles of association of a
company as originally framed or as altered from time to time or applied in pursuance of any
previous company law or of this Act.

Section 5 of the Companies Act,2013 deals with AOA.

The articles of a company shall contain the regulations for management of the company.

The articles shall also contain such matters, as may be prescribed.

It shall be not prevent a company from including such additional matters in its articles as may be
considered necessary for its management.
Provisions for Retrenchment:

The articles may contain provisions for entrenchment to the effect that specified provisions of the
articles may be altered only if conditions or procedures as that are more restrictive than those
applicable in the case of a special resolution, are met or complied with.

The provisions for entrenchment shall only be made by

 on formation of a company, or
 by an amendment in the articles
Private Company agreed to by all the members of
the company

Public company By a special resolution

Notice to Registrar:

Where the articles contain the provisions for entrenchment, the company shall give notice to the
Registrar of such provisions in Form No.INC.2 or Form No.INC.7, as the case may be, along
with the fee as provided in the Companies (Registration offices and fees) Rules, 2014 at the
time of incorporation of the company or in case of existing companies, the same shall be filed in
Form No.MGT.14 within thirty days from the date of entrenchment of the articles, as the case
may be, along with the fee as provided in the Companies (Registration offices and fees) Rules,
2014

Form of Article :

The articles of a company shall be in respective forms as outlined below;

S.No Table Form

1 Table F AOA of a company limited by shares
AOA of a company limited by guarantee and having share
2 Table G
capital
AOA of a company limited by guarantee and not having share
3 Table H
capital
4 Table I AOA of an unlimited company and having share capital
5 Table J AOA of an unlimited company and not having share capital

A company may adopt all or any of the regulations contained in the model articles applicable to
such company.

In case of any company, which is registered after the commencement of this Act, in so far as the
registered articles of such company do not exclude or modify the regulations contained in the
model articles applicable to such company, those regulations shall, so far as applicable, be the
regulations of that company in the same manner and to the extent as if they were contained in the
duly registered articles of the company.

Nothing in this section shall apply to the articles of a company registered under any previous
company law unless amended under this Act
 PROSPECTUS
A prospectus is a document issued by the company inviting the public and investors for the subscription
of its securities. A prospectus also helps in informing the investors about the risk of investing in the
company. A Prospectus is required to be issued only after the incorporation of the company. These
documents describe stocks, bonds and other types of securities offered by the company. Mutual fund
companies also provide a prospectus to prospective clients, which includes a report of the money’s
strategies, the manager’s background, the fund’s fee structure and a fund’s financial statements. A
prospectus is always accompanied by performance history and financial information of the company.
The reason for accompanying such an information along with the prospectus is to make sure that, the
investors are well aware of the company’s background and overall performance and the investors do
not fall into the prey of investing in a bad company

Section 2(70) of the Act defines prospectus as, “A prospectus means any document described or
issued as a prospectus and includes a red herring prospectus referred to in section 32 or shelf
prospectus referred to in section 31 or any notice, circular, advertisement or other document
inviting offers from the public for the subscription or purchase of any securities of a body
corporate.”

Thus, it is clear from the above definition of the prospectus that, a prospectus is a just an
invitation to offer securities to the public and not an offer in the contractual sense.

Companies that are required to issue a prospectus

 A public listed company who intends to offer shares or debentures can issue prospectus.
 A private company is prohibited from inviting the public to subscribe to their shares and
thus cannot issue a prospectus. However, a private company which has converted itself
into a public company may issue a prospectus to offer shares to the public.

Types of Prospectus under the Companies Act, 2013

There are four types of a prospectus, which are as under:

 Abridged Prospectus

According to Section 2(1) of the Act, abridged prospectus means a memorandum containing
such salient features of a prospectus as may be specified by the SEBI by making regulations in
this behalf. It means that a company cannot issue application form for purchase of securities
unless such form is accompanied by an abridged prospectus.

 Deemed Prospectus

According to Section 25(1) of the Act, where a company allots or agrees to allot any securities of
the company with a view to all or any of those securities being offered for sale to the public. Any
document by which such offer for sale to the public is made is deemed to be a prospectus by
implication of law.

 Shelf Prospectus

According to Section 31 of the Act, Shelf prospectus is a prospectus in respect of which the
securities or class of securities included therein are issued for subscription in one or more issues
over a certain period without the issue of a further prospectus. Only the companies which have
been prescribed by the SEBI can issue a Shelf prospectus with the Registrar.
  Red Herring Prospectus (RHP)

According to Section 32 of the Act, an RHP means a prospectus which does not have complete
particulars on the price of the securities offered and quantum of securities to be issued. A
company may issue an RHP prior to the issue of a prospectus. The company shall file RHP with
Registrar at least three days prior to the opening of the subscription list and the offer. An RHP
carries the same obligations as are applicable to a prospectus and any variation between the RHP
and a prospectus shall be highlighted as variations in the prospectus

Misstatements in the Prospectus

Contravention of Section 26 of the Companies Act, 2013

 If a prospectus is issued in contravention of the provisions of this section, then the

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

Criminal Liability for Misstatement in the prospectus

Where a prospectus is issued which includes any statement which is untrue or misleading in form
or context or any matter is likely to mislead the investor, then every person who authorizes the
issue of prospectus shall be punishable with imprisonment for a term which may not be less than
six months, but which may extend to ten years; or a fine not less than the amount involved in
fraud but it may extend to three times the amount of fraud; or with both.

Civil Liability for Misstatement in the prospectus

If there is any inclusion or omission of any matter in the prospectus issued, which is misleading
and the person who has subscribed the securities has sustained any loss or damage, then the
company and every person who is a director, promoter and expert at the time of issue of
prospectus, shall be responsible and be liable for punishment under section 36 of the act, and
shall be liable to pay compensation to every person who has sustained such loss or damage.

MODULE 3
SHARES
Sub-section 84 of Sectopm 2 of the Companies Act 2013, defines “Shares” as, “Share” means a share in
the share capital of a company including stocks. Shares are considered as a type of security. Securities is
defined in the Sub-section 80 of Section 2 of the said Act, which refers to the definition of the securities
as defined in clause (h) of section 2 of the Securities Contracts Act, 1956.

According to Section 44 of the said Act, the shares of any member in a company shall be movable
property. It is considered to be transferable in the manner provided by the articles of the company.
1

According to Section 45 of the said Act, it mandates on all companies having a share capital to
ensure that the shares of the company shall be distinguished by a distinctive number. This
requirement does not apply where a share is held by a person whose name is entered as holder of
beneficial interest in the records of depository.
Allotment of Securities
Offers for shares are basically made when application forms are supplied by the company. It is
considered an allotment when an application is accepted. It is considered as an appropriation out
of the previously un-appropriated capital of a company. Consequently where forfeited shares are
re-issued, it is not the same thing as an allotment.3

For an allotment to be considered valid it shall comply with the requirements of the and principles
of the law of contract that is regarding acceptance of offers.

Statutory Restrictions on Allotment

1. Minimum subscription and application money

According to Section 49 of Companies Act, 2013 the first requisite of a valid allotment is that of
minimum subscription. In the given prospectus of the company the amount of minimum
subscription shall be stated when shares are offered to the public. No shares shall be allotted unless
a specified amount has been subscribed and the application money, which shall not be less than
the appeal that was held to be successful, the decision of stock exchange was set aside and the
listing would be granted. The allotment would be saved.4

2. Over-subscribed Prospectus

An allotment is valid when the permission of a stock exchange has been granted and the prospectus
being considered as over-subscribed portion of the money received shall be sent back to the
applicants within the given time frame.

Principles of Allotment of Shares

1. Allotment of shares by proper authority

Allotment is generally made by a resolution that consists of the Board of directors. But where the
articles so provided, an allotment made by secretaries and treasures was held to be regular.

2. Within the reasonable time

Allotment is basically made within a reasonable or specified period of time otherwise the
application shall lapse. The specified time frame of six months between application and allotment
is held to be not reasonable.

3. Shall be communicated

It is primary that there must be communication of the allotment to the applicant. Posting of a
properly addressed and stamped letter of allotment is considered as a sufficient communication
even if the letter were to be delayed or lost.5

4. Absolute and unconditional

As per the terms and conditions of the applicant the allotment must be absolute and unconditional.
Thus where a person applied for 400 shares on the condition that he would be appointed cashier
of a new branch of the company, the Bombay High Court held that he was not bound by any
allotment unless he was so appointed. 6

Global Depository Receipt

As given under Section 41 of the Companies Act 2013, a company may pass a resolution in its
general meeting authoritising it to issue depository receipts in any foreign country in such manner
and subject to such conditions as prescribed by the company.7
Private Placement

According to Section 42 of Companies Act 2013, a company may make a private placement
through issue of offer letters for private placement. Provisions of Section 42 become applicable to
such placement. Provisions of Section 42 become applicable to such placement. The offer of
securities or invitation to subscribe for securities can be made to a number of persons but not
exceeding 50 or such higher number as may be prescribed. This number is not to include qualified
institutional buyers and employees of the company being offered securities under a scheme of
employees stock option as per the provisions of Section 62(1)(b). This can be done in one financial
year and on such conditions as may be prescribed which is to include the form and manner of
private placement.8

The first Explanation to sub-section (2) provides that an offer of private placement to more than
the prescribed number is deemed to be an offer to the public and is governed by the provisions of
(Ss. 23-41) relating to public issues. This will be so whether the company intends to go in for
enlistment or not in or outside India.

The Second Explanation to Sub-Section (2) states that for the purposes of this sub-section, the
expression used in it will have the following meaning –

“A qualified institutional buyer” means one as defined in SEBI (Issue of Capital and Disclosure
Requirements) Regulations 2009 as amended from time to time.

According to [Section 42(3)] no fresh offer or invitation is to be made by the company unless
allotments under any earlier offer have been completed or that offer has been withdrawn or
abandoned.

All moneys payable towards subscription have to be paid through cheque or demand draft or other
banking channels and not cash.

As per Section 42(5) Securities have to be allotted within 60 days of receipt of application money
failing which the application money would have to be refunded within 15 days or else 12 per cent
interest would become chargeable. The money received on application is to be kept in a separate
bank account in a scheduled bank and is to be utilized only for adjustment against allotment of
securities or refund as given under Section 42(6).

Offers can be made only to persons whose names are recorded by the company prior to the offer.
They should receive the offer by name. A complete record of such offers has to be kept by the
company in a prescribed manner. A complete information about an offer has to be filed with the
Registrar within a period of 30 days of circulation of the relevant private placement offer letter.
As given under Section 42(7) a company offering securities under this section is not to release any
public advertisements or utilize any media, marketing distributing channels or agents to inform the
public about the offer.

Section 42(8) explains that after making allotments, the company shall file with the Registrar a
return of allotment in the prescribed by the company which consist of the complete list of all the
security holders along with their full names, addresses, number of securities allotted and also any
other information.

Consequences for the default

Section 42(10) provides an explanation stating that any contravention of the section would make
the company, its promoters and directors liable to a penalty which may extend to the amount
involved in the offer, or two crore rupees whichever is higher. The company shall then be in a
position to refund the money to subscribers within a specified time frame of 30 days of the order
imposing the penalty.

Numbering of shares
Every share in a company has to be distinguished by its distinctive number. The proviso to this
declaration says that this section is not to apply to a share held by a person whose name is entered
as a holder of beneficial interest in a share in the records of a depository.

Certification for shares

An allottee is generally permitted to have from the company a document, that is the share
certificate. And this certificate certifies the allottee is the holder of the specified number of shares
in the company.9 Shares in a depository record are not required be given their distinctive numbers.
The right of an allottee to get his certificate cannot be defeated by putting up the right of lien for
any dues owed by the allottee to the company.

A complaint was allowed to be filed at a place other than the company’s registered office.

Duplicate Certificate
A shareholder shall carefully preserve and store his certificate as he shall not be issued a duplicate
unless and until it he shows that the original certificate is lost, damaged or destroyed by any means
and is surrendered to the company.

Issue of Shares
When a company wishes to issue shares to the public, there is a procedure and rules that it must
follow as prescribed by the Companies Act 2013. The money to be paid by subscribers can even
be collected by the company in installments if it wishes. Let us take a look at the steps and the
procedure of issue of new shares.

Procedure of Issue of New Shares

1] Issue of Prospectus

Before the issue of shares, comes the issue of the prospectus. The prospectus is like an invitation
to the public to subscribe to shares of the company. A prospectus contains all the information of
the company, its financial structure, previous year balance sheets and profit and Loss statements
etc.

It also states the manner in which the capital collected will be spent. When inviting deposits from
the public at large it is compulsory for a company to issue a prospectus or a document in lieu of a
prospectus.

2] Receiving Applications

When the prospectus is issued, prospective investors can now apply for shares. They must fill out
an application and deposit the requisite application money in the schedule bank mentioned in the
prospectus. The application process can stay open a maximum of 120 days. If in these 120 days
minimum subscription has not been reached, then this issue of shares will be cancelled. The
application money must be refunded to the investors within 130 days since issuing of the
prospectus.

3] Allotment of Shares

Once the minimum subscription has been reached, the shares can be allotted. Generally, there is
always oversubscription of shares, so the allotment is done on pro-rata bases. Letters of
Allotment are sent to those who have been allotted their shares. This results in a valid contract
between the company and the applicant, who will now be a part owner of the company.

If any applications were rejected, letters of regret are sent to the applicants. After the allotment,
the company can collect the share capital as it wishes, in one go or in instalments.
Shares Issued at Premium
When the company decides to issue shares at a price higher than the nominal value or face value
we call it shares issued at a premium. It is quite a common practice especially when the company
has a great track record and strong financial performances and standing in the market.

So say the face value of a share is Rs 100/- and the company issues it at Rs 110/-. The share is
said to have been issued at a 10% premium. The premium will not make a part of the Share
Capital account but will be reflected in a special account known as the Securities Premium
Account.

Now, this amount of premium can be called up by the company at any given time, i.e. with any
call. The general norm is to collect the premium with either allotment or application money,
rarely with call money. The premium amount as we discussed is credited to the Securities
Premium Account. This account is found under the heading of Reserves and Surplus on the
liabilities side of the Balance Sheet.

Securities Premium Account

Now according to the Companies Act 2013, there are some laws about the utilization of the
Securities Premium Account. It states the specific purposes for which this balance may be used.
So the account can only be used for such specific purposes and no other purpose.

 To issue fully paid-up bonus shares to its existing shareholders. However, you cannot
exceed the limit of the unissued share capital of the company.
 Securities premium Account can be used for writing off any preliminary expenses of the
company.
 To write off expenses of issue of shares and debentures, such as commission paid or
discount given on the issue of shares.
 The balance can also be used to provide for the premium that is payable on the
redemption of debentures or of preference shares of the company.
 And finally, it can be utilized by the company to buy back its own shares.

ISSUE OF SHARES AT DISCOUNT

When Shares are issued at a price lower than their face value, they are said to have been issued at a
discount. For example, if a share of Rs 100 is issued at Rs 95, then Rs 5 (i.e. Rs 100—95) is the amount of
discount. It is 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.

Conditions to Issue Share at Discount:

Shares can be issued at discount subject to the following conditions:

(a) The shares must belong to a class already issued.

(b) Discount rate should not be more than 10%.

(c) One year must have passed since the date at which the company was allowed to commence
business.

(d) The issue of such shares must take place within two months after the date of court’s sanction
or within such extended time as the court may allow.

(e) The issue must be authorised by a resolution passed by the company in general meeting and
sanctioned by the Company Law Board.

Section 53 of Indian Companies Act 2013 "Prohibition on issue of shares at discount"

(1) Except as provided in section 54, a company shall not issue shares at a discount.
(2) Any share issued by a company at a discounted price shall be void.

Punishment for violation of Section 53

(3) Where a company contravenes the provisions of this section, the company shall be
punishable with fine which shall not be less than one lakh rupees but which may extend to five
lakh rupees and every officer who is in default shall be punishable with imprisonment for a term
which may extend to six months or with fine which shall not be less than one lakh rupees but
which may extend to five lakh rupees, or with both.

Section 54 of Indian Companies Act 2013 "Issue of sweat equity shares"

(1) Notwithstanding anything contained in section 53, a company may issue sweat equity shares
of a class of shares already issued, if the following conditions are fulfilled, namely:-

(a) the issue is authorised by a special resolution passed by the company;

(b) the resolution specifies the number of shares, the current market price, consideration, if any,
and the class or classes of directors or employees to whom such equity shares are to be issued;

(c) not less than one year has, at the date of such issue, elapsed since the date on which the
company had commenced business; and

(d) where the equity shares of the company are listed on a recognised stock exchange, the sweat
equity shares are issued in accordance with the regulations made by the Securities and Exchange
Board in this behalf and if they are not so listed, the sweat equity shares are issued in accordance
with such rules as may be prescribed.

(2) The rights, limitations, restrictions and provisions as are for the time being applicable to
equity shares shall be applicable to the sweat equity shares issued under this section and the
holders of such shares shall rank pari passu with other equity shareholders.

Why is issue of shares at discount(except

sweat equity shares) prohibited by the Indian
Companies Act, 2013?
Imagine two shops selling Samosas. Let us call them Shop A and Shop B.

So, Shop A is famous for its hot samosas and it is always crowded. It also sells its samosas a bit
costlier than its competitors. The reason for charging a higher price is the quality of food it offers
to its customers.

On the other hand Shop B has handful customers in a day. The reason is low quality of samosas.
Hence, it charges very less compared to its peers.

You see, the same happens in case of companies. The companies with great fundamentals charge
premium for their share similar to that of Shop A. This is allowed as per companies act.
However, the companies with weak fundamentals can’t simply offer discount to attract the
shareholders to buy their shares. Hence, the companies act simply prohibits the issue of shares at
discount. This is to protect the interest of shareholders.

To conclude-

1. The companies act 2013, allows issue of shares at premium (Section 52).
2. The companies act 2013, prohibits the issue of shares at discount (Section 53).
However, there are few exceptions to Section 53. Following are those exceptions:

1. Companies can issue shares at discount to its promotors.

2. Companies act also allows the issue of shares at discount to the employees and directors
in the form of sweat equity shares.

Why is the exception needed?

1. The promotors of a company are not allowed to withdraw any remuneration or salary as
per companies act. Hence, in order to reward them for their relentless services, there is a
provision in the companies act where the shares can be issued to promotors at discounted
rate.
2. Also in case of employees or directors who have been working hard for the progress of
the company and who have contributed in the form of intellectual property rights or value
additions, the issue of shares at discount is allowed to help the companies retain them by
rewarding them shares at discounted amount. Hence the name ‘Sweat’ equity.

Will the regular shareholders of the company raise questions in case of sweat equity
shares?

Certainly. Issuing shares at discount could raise the eyebrows of shareholders. Hence, they have
to be justified by the company. For this, the company issues an explanatory statement along with
the notice and the company have to pass a Special Resolution requiring the approval of not less
than 3/4 th of the shareholders.

Share Certificate:
A share Certificate is a document issued by company evidencing that the person named in the
certificate is owner of number shares of Company as specified in the Certificate.

TIME PERIOD FOR ISSUE OF SHARE CERTIFICATES:

 In case of Incorporation: With in a period of 2 (Two) Month from the date of Incorporation
to the subscriber of Memorandum.
 In case of Allotment: With in a period of 2 (Two) Month from the date of allotment of
shares.
 In case of Transfer: With in a period of 1 (One) Month from the date of receipt of
instrument of Transfer by the Company
Forfeiture of shares:

When any company allots share to the applicants, it is done on the basis of a legal contract
between the company and the applicant, which makes it binding upon the shareholders to pay the
amount of allotment and calls whenever they are due. Now if any shareholder fails to pay the
allotment and or call money due to him, the shareholder violates the contract and the company is
entitled to take its share back, which is known as forfeiture of shares. The company can forfeit
such shares if authorised by the Articles of Association. Forfeiture of share can be done
according to the rules laid sown in the Articles and if no rules are given in Articles, the
provisions of Table A, regarding forfeiture will apply. Forfeiture of shares means cancellation of
allotment to defaulting shareholders and to treat the amount already received on such shares is
not returnable to him – it is forfeited.

Procedure for forfeited shares:

The usual procedure is that the defaulting shareholder must be given a minimum 14 days notice
requiring him to pay the amount due on his shares along with interest on it stating that if he fails
to pay the amount and the interest on it, the shares will be forfeited. Inspite of this notice, the
shareholder does not pay the unpaid amount. The directors after passing a resolution will forfeit
the shares and information will be given to the defaulting shareholder about the forfeiture his
shares.

Effect of forfeiture of shares:

1. section 79 of the Companies Act 1956:The membership of the defaulting will be

terminated and they lose all the rights and interest on those shares i.e. ceases to be the
member / shareholder / owner of the company and his name will be removed from the
Register of Members
2. Seizure of money paid:The amount already paid on the forfeited shares by the defaulting
shareholders will be seized by the company and in no case will be refunded back to the
shareholder.
3. Non payment of dividend:When shares are forfeited the shareholder remains no longer
the member of the company therefore he loses the right to receive future dividend.
4. Reduction of share capital: Forfeiture of shares result in the reduction of share capital to
the extent of amount called up on such shares.

Surrender of shares:

When a shareholder feels that he cannot pay further calls; he may himself surrender the shares to
the company. These shares are then cancelled. Surrender of shares is a voluntary return of shares
for the purposes of cancellation. The directors can accept the surrender of shares only when the
Articles of Association authorise them to do so. Surrender is lawful only in two cases viz.

(a) where it is done as a short cut to forfeiture to avoid the formalities for a valid forfeiture and

(b) where shares are surrendered in exchange for new shares of the same nominal value. A
surrender will be void if it amounts to purchase of the shares by the company or if it is accepted
for the purpose of relieving a member from his liabilities. Entries are passed just like forfeiture
of shares.

Thus, surrender of shares is at the instance of shareholder whereas forfeiture of shares at the
instance of company.
TRANSFER AND TRANSMISSION OF SHARES
Basis for
Transfer of shares Transmission of shares
Comparison
Transfer of shares refers to the transfer Transmission of shares means the
Meaning of title to shares, voluntarily, by one transfer of title to shares by the
party to another. operation of law.
Insolvency, death, inheritance or
Affected by Deliberate act of parties.
lunacy of the member.
Initiated by Transferor and transferee Legal heir or receiver
Consideration Adequate consideration must be there. No consideration is paid.
Execution of valid
Yes No
transfer deed
Liabilities of transferor cease on the Original liability of shares continues
Liability
completion of transfer. to exist.
Stamp duty Payable on the market value of shares. No need to pay.

Definition of Transfer of Shares

Transfer of shares refers to the intentional transfer of title (rights as well as duties) to shares by
one person to another. There are two parties to transfer of shares, i.e. transferor and transferee.

The shares of the public company are freely transferable unless there is an express restriction
provided in the articles of association. However, the company can refuse the transfer of shares, if
it has a valid reason for the same. In the case of a private company, there is a restriction on the
transfer of shares subject to certain exceptions.

Definition of Transmission of Shares

There are some cases when the transfer of shares occurs due to the operation of law, i.e. when
the registered shareholder is no more, or when he is insolvent or lunatic. Transmission of shares
also occurs when the shares are held by a company, and it is wound up.

The shares are transferred to the legal representative of the deceased and the official assignee of
the insolvent. The transmission is recorded by the company when the transferee gives the proof
of entitlement of shares.

MODULE 4
DIRECTORS
I. Definition:- As per Section 2(34) of Companies Act 2013 Director means a director appointed
to the Board of a Company.

II. Responsibility:- The board of directors of a company is primarily responsible for:

 determining the company’s strategic objectives and policies;

 monitoring progress towards achieving the objectives and policies;
 appointing senior management;
 accounting for the company’s activities to relevant parties, e.g. shareholders.

III. Minimum Directors Required in Company:-

i. One Person Company:- One Director.

ii. Private Limited Company:- Two Directors.

iii.Public Limited Company:- Three Directors.

Maximum 15 directors can be appointed in any format of Company (OPC, Public, Private).
Bypassing Special Resolution Company can increase the number of Directors beyond 15. Out of
appointed directors one director should be resident in India for more than 182 days in previous
calendar year.

IV. Types of Directors:-

1. Residential Director:- As per Section 149(3) of Companies Act,2013 every company shall at
one director who has stayed in India for a total Period of not less than 182 days in the Previous
calendar year.

2. Independent Director:- As per section 149(6) an independent director in relation to a

company, means a director other than a Managing Director, Whole Time Director Or Nominee
Director. Companies which have to appoint Independent Director:- As per Rule 4 of Companies
(Appointment and Qualification of Directors) Rules,2013 the following class of companies have
to appoint atleast two independent directors:-

A} Public Companies having Paidup Share Capital-Rs.10 Crores or More;

B} Public Compnies having Turnover- Rs.100 Crores or More;

C} Public Companies have total outstanding loans, debenture and deposits of Rs. 50 Crores
or More.

Person Qualified for Independent Directorship:-

A) Who, in the opinion of the Board , is a person of integrity and possesses relevant experties &
experience;

B) i) Who is or was not a promoter of the Company or its Holding, Subsidiary or Associate
Company(HSA Companies);

ii) Who is not related to Promoters or directors in the company, its HSA companies;

C) Who has or had no Pecuniary (relating to Money) relationship with Company and its HSA
company or their promoters, directors during the 2 immediately preceding financial years or
during the current financial year;

D) none of whose relatives has or had pecuniary relationship with company, its HSA company or
their Promoters, directors -amounting to 2% or more of its gross turnover or total income; -or
fifty lakhs or such higher amount as may be prescibed, whichever is lower. During the 2
immediately preceding financial years or during current financial year.

E) Who neither himself nor any of his relative-

1. holds or has held the position of KMP or has been employee of the Company or its HSA
companies in any of the 3 financial years;

2.he or his relative has an employee or proprietor or a partner in any of the three financial years
immediately preceding the financial year in which he is proposed to be appointed- as a auditor
firm, Company Secretary in practice, Cost Auditor, Legal Consultant of the company or its HSA
companies;

3. Holds with relaives 2% or more of the total voting power of the Company;

4. he or his has not be Chief Executive or Director of any Non Profit Organization that receive
25% of its receipt from the Company or HSA Companies or its Promoters or directors or that
NGO holds 2% or more of the total voting power of the Company.
F) Who possesses such other qualification as may be prescribed. Tenure of Director:- an
independent director hold office for a term up to 5 consecutive years, -Also eligible for
reappointment by passing Special Resolution and also require its reappointment in Boards
Report. -He shall not hold office for more than 2 Consecutive terms, but shall not be eligible to
appoint after expiration of 3 Years of ceasing to become an independent director. Remuneration
to Independent Director:- An independent director shall not be eligible for any stock option as
per section 149(9) of Act. But they may receive remuneration by way of fee provided under
section 197(5) of the Act. Sitting fees for Board meeting and other committee meeting shall not
be exceed Rs. 1,00,000 per meeting.

3. Small Shareholders Directors:- A listed Company may have one director elected by small
shareholders. May appoint upon notice of not less than 1000 Shareholders or 1/10th of the
total shareholders, whichever is lower have a small shareholder director which elected form
small shareholder.

4. Women Director:- As per Section 149 (1) (a) second proviso requires certain categories of
companies to have At Least One Woman director on the board. Such companies are any listed
company, and any public company having-

1. Paid Up Capital of Rs. 100 crore or more, or

2. Turnover of Rs. 300 crore or more.

5. Additional Directors: Any Individual can be appointed as Additional Directors by a company

under section 161(1) of the New Act.

6. Alternate Directors:- As per Section 161(2) A company May appoint, if the articles confer
such power on company or a resolution is passed (if an Director is absent from India for
atleast three months).

 An alternate Director cannot hold the office longer than the term of the Director in
whose place he has been appointed.
 Additionally, he will have to vacate the office, if and when the original Director returns
to India.
 Any alteration in the term of office made during the absence of the original Director will
apply to the original Director and not to the Alternate Director.

7. Shadow Director:- A person, who is not appointed to the Board, but on whose directions the
Board is accustomed to act, is liable as a Director of the company, unless he or she is giving
advice in his or her professional capacity.

8. Nominee Directors:- They can be appointed by certain shareholders, third parties through
contracts, lending public financial institutions or banks, or by the Central Government in case of
oppression or mismanagement.

9. Difference Between Executive and Non-Executive Director:- An Executive Director can be

either a Whole-time Director of the company (i.e., one who devotes his whole time of working
hours to the company and has a significant personal interest in the company as his source of
income), or a Managing Director (i.e., one who is employed by the company as such and has
substantial powers of management over the affairs of the company subject to the
superintendence, direction and control of the Board). In contrast, a non-executive Director is a
Director who is neither a Whole-time Director nor a Managing Director.

MODULE V
Meaning of Winding Up:

“Winding up is a means by which the dissolution of a company is brought about and its
assets are realised and applied in the payment of its debts. After satisfaction of the
debts, the remaining balance, if any, is paid back to the members in proportion to the
contribution made by them to the capital of the company.”
1. “The liquidation or winding up of a company is the process whereby its life is ended
and its property is administered for the benefit of its creditors and members. An
Administrator, called a liquidator, is appointed and he takes control of the company,
collects its assets, pays its debts and finally distributes any surplus among the members
in accordance with their rights.”

2. As per Section 2(94A) of the Companies Act, 2013, “winding up” means winding up
under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016.

Thus, winding up ultimately leads to the dissolution of the company. In between

winding up and dissolution, the legal entity of the company remains and it can be sued
in a Tribunal of law.

Meaning of Dissolution of a Company:

A company is said to be dissolved when it ceases to exist as a corporate entity. On

dissolution, the company’s name shall be struck off by the Registrar from the Register of
Companies and he shall also get this fact published in the Official Gazette. The
dissolution, thus puts an end to the existence of the company.

Difference between Dissolution & Winding Up of a Company:

S. No. Winding Up Dissolution

1. Winding up is one of the Dissolution is the end result of
methods by which dissolution winding up.
of a company is brought about.
2. Legal entity of the company Dissolution brings about an end to the
continues at the legal entity of the company
commencement of the winding
up.
3. A company may be allowed to Company ceases to exist on its
continue its business as far it is dissolution.
necessary for the beneficial
winding up of the company

Modes of Winding Up of a Company:

A company may be wound up in any of the following two ways:

1. Compulsory Winding Up of a Company:

Winding up a company by an order of the Tribunal is known as compulsory winding up.

Who may file a Petition to the Tribunal?

A petition for compulsory winding up of a company may be filed in the Tribunal by any
of the following persons. (Sec. 272)

i. Petition by the Company - A company can file a petition to the Tribunal for its
winding up when the members of the company have resolved by passing a Special
Resolution to wind up the affairs of the company. Managing Director or the directors
cannot file such a petition on their own account unless they do it on behalf of the
company and with the proper authority of the members in the General Meeting.

ii. Petition by the Contributories - A contributory shall be entitled to present a

petition for the winding up of the company, notwithstanding that he may be the holder
of fully paid-up shares or that the company may have no assets at all, or may have no
surplus assets left for distribution among the holders after the satisfaction of its
liabilities. It is no more required of a contributory making petition to have tangible
interest in the assets of the company

iii. Petition by the Registrar - Registrar may with the previous sanction of the
Central Government make petition to the Tribunal for the winding up the company only
in the following cases:

(a) If the company has made a default in filing with the Registrar its financial
statements or annual returns for immediately preceding five consecutive financial
years;

(b) If the company has acted against the interests of the sovereignty and integrity of
India the security of the State friendly relations with foreign States, public order,
decency or morality;

(c) If on an application made by the Registrar or any other person authorised by the
Central Government by notification under this Act, the Tribunal is of the opinion that
the affairs of the company have been conducted in a fraudulent manner or the company
was formed for fraudulent and unlawful purpose or the persons concerned in the
formation or management of its affairs have been guilty of fraud, misfeasance or
misconduct in connection therewith and that it is proper that the company be wound
up.

iv. Petition by the Central Government or a State Government on the ground

that company has acted against the interests of the sovereignty and integrity of India,
the security of the State, friendly relations with foreign States, public order, decency or
morality.

v. Any person authorised by the Central Government in that behalf.

2. Liquidation under Insolvency and Bankruptcy Code 2016:

The Insolvency and Bankruptcy Code, 2016 relates to re-organisation and insolvency
resolution of companies, partnership firms and individuals in a time bound manner.

The Insolvency and Bankruptcy Code, 2016 applies to matters relating to the insolvency
and liquidation of a company where the minimum amount of the default is Rs. 1 lakh
(may be increased up to Rs.1 cr by the Government, by notification).

The Code lays down two stages:

Insolvency Resolution Process -

It is the stage during which financial creditors assess whether the debtor’s business is
viable to continue and the options for its re-organisation and re-structuring are
suggested; and

Liquidation -

In case the insolvency resolution process fails, the liquidation process shall commence
in which the assets of the company are realized to pay off the creditors.

Modes of Dissolution:

Dissolution of a company may be brought about in any of the following ways:

1. Through transfer of a company’s undertaking to another under a scheme of
reconstruction or amalgamation. In such a case, the transfer or company will be
dissolved by an order of the Tribunal without being wound up.

2. Through the winding up of the company, wherein assets of the company are realized
and applied towards the payment of its liabilities. The surplus, if any is distributed to
the members of the company, in accordance with their rights.

Winding Up By the Court

A company may be wound up by an order of the Court. This is called compulsory winding up or
winding up by the Court. Section 433 lays down the following grounds where a company may be
wound up by the Court. A petition for winding up may be presented to the Court on any of the
grounds stated below :

1. Special resolution

A company may be wound up by the Court if it has, by a special resolution, resolved that it be
wound up by the Court. But it is to be noted that the Court is not bound to order for winding up
merely because the company by a special resolution has so resolved. Even in such a case it is the
discretion of the Court to order for winding up or not.

2. Default in filing statutory report or holding statutory meeting

If a company has made a default in delivering the statutory report to the Registrar or in holding
the statutory meeting, a petition for winding up of the company may be presented to the Court. A
petition on this ground may be presented to the Court by a member or Registrar (with the
previous sanction of the Central Government) or a creditor. The power of the Court is
discretionary and generally it does not order for winding up in first instance. The Court may,
instead of making an order for winding up, direct the company to file the statutory report or to
hold the statutory meeting but if the company fails to comply with the order, the Court will wind
up the company.

3. Failure to commence business within one year or suspension of business for a whole year

Where a company does not commence its business within one year from its incorporation or
suspends its business for a whole year, a winding up petition may be presented to the Court.
Even if the business is suspended for a whole year, this by itself does not entitle the petitioner to
get the company wound up as a matter of right but the question whether the company should be
wound up or not in such a circumstances entirely in the discretion of the Court depending upon
the facts and circumstances of each case. Even if the work of all the units of the company has
been suspended then too it will still be open to the Court to examine as to whether it will be
possible for the company to continue its business. Before the order of winding up on this ground
the Court is required to see what are the possibilities of resumption of the business of the
company. The suspension of the business, for this purpose, must be the entire business of the
company and not a part of it.

The Court will not order for winding up on the grounds, if :

(a) suspension of business is due to temporary causes ; and

(b) there are reasonable prospects for starting of business within a reasonable time.

4. Reduction of membership below the minimum

When the number of members is reduced, in the case of a public company, below 7 and in the
case of a private company, below 2, a petition for winding up of the company may be presented
to the Court.
5. Company's inability to pay its debts

A winding up petition may be presented if the company is unable to pay its debt. 'Debt' means
definite sum of money payable immediately or at future date. A company will be deemed to be
unable to pay its loan in the following conditions (Section 434) :

(a) a creditor of more than Rs. 500 has served, on the company at its registered office, a demand
under his hand requiring payment and the company has for three weeks thereafter neglected to
pay or secure or compound the sum to the reasonable satisfaction of the creditor ; or

(b) execution or other process issued on a judgement or order in favour of a creditor of the
company is returned unsatisfied in whole or in part ; or

(c) it is proved to the satisfaction of the Court that the company is unable to pay its debts, taking
into account its contingent and prospective liabilities, i.e. whether its assets are sufficient to meet
its liabilities.

6. Just and Equitable [Sec. 433(f)]

The Court may also order to wind up of a company if it is of opinion that it has just and equitable
that the company should be wound up. What is 'just and equitable' depends on the facts of each
case. The words 'just and equitable' are of wide connotation and it is entirely discretionary on the
part of the Court to order winding up or not on this ground.

Thus the Court itself works out the principles on which the order for winding up under the
section is to be made.

Winding up by the Court on 'just and equitable' grounds may be ordered in the cases given below
:

(a) When the substratum of the company has gone : In the words of Shah, J. in Seth Moham Lal
v. Grain Chambers Ltd. the "substratum of the company is said to have disappeared when the
object for which it was incorporated has substantially failed, or when it is impossible to carry on
the business of the company except at a loss, or the existing and possible assets are insufficient to
meet the existing liabilities.

The substratum of a company will be deemed to have gone when (i) The object for which it was
incorporated has substantially failed or has become impossible or (ii) it is impossible to carry on
business except at a loss or (iii) the existing and possible assets are insufficient to meet the
existing liabilities of the company.

(b) When there is oppression by the majority shareholders on the minority, or there is
mismanagement.

(c) When the company is formed for fraudulent or illegal objects or when the business of the
company becomes illegal.

(d) When there is a deadlock in the management of the company. When there is a complete
deadlock in the management of the company, it will be wound up even if it is making good
profits. In Re Yenidjee Tobacco Co. Ltd. A and B the only sharehodlers and directors of a
private limited company became so hostile to each other that neither of them would speak to the
other except through the secretary. Held, there was a complete deadlock and consequently the
company be wound up.

(e) When the company is a 'bubble', i.e. it never had any real business.

Powers of the Court

On hearing a winding up petition, the Court may dismiss it or adjourn the hearing or make
interim orders or make an order for winding up the company, with or without costs or any other
order that it thinks fit (Section 443).
Consequences of winding up

1. Where the Court makes an order for winding up of company, the Court must forthwith
cause intimation thereof to be sent to the Official Liquidators and the Registrar (Section
444).
2. On the making of a winding up order it is the duty of the petitioner in the winding up
proceedings and of the company to file with the Registrar a copy of the order of the Court
within 30 days from the date of the making of the order [Section 445(1)].
3. The winding up order is deemed to be notice of discharge to the officers and employees
of the company, except when the business of the company is continued [Section 445(3)].
4. When a winding up order has been made, no suit or other legal proceedings can be
commenced against the company except with the leave of the Court. Suits pending at the
date of the winding up order cannot be further proceeded without the leave of the Court.
According to sub-section (2) of Section 446 the Court which is winding up the company
has jurisdiction to entertain or dispose of (a) any suit or proceeding by or against the
company; (b) any claim made by or against the company; (c) any application made under
Section 391 by or in respect of the company ; (d) any question of priorities or any other
question whatsoever which may relate to or arise in course of the winding up of the
company.
5. An order for winding up operates in favour of all the creditors and of all the
contributories of the company as if it had been made on the joint petition of a creditor and
of a contributory (Section 447).
6. According to Section 536 any disposition of the property (including actionable claims) of
the company, any transfer of shares in the company or alteration in the status of its
members, made after the commencement of the winding up shall be void, unless the
Court otherwise orders. Thus the Court can direct that any such disposition of property or
actionable claims or transfer of shares or alteration of status of the members will be valid.
But unless the Court so directs, such disposition, transfer or alteration will be void.
7. Section 537 declares that any attachment and sale of the estate or effects of the company,
after the commencement of the winding up, will be void. In the case of winding up by the
Court any attachment, distress or execution put in force, without leave of the Court,
against the estate or effects of the company after the commencement of the winding up
will be void. Similarly any sale held , without leave of the Court, of any of the properties
or effects of the company after the commencement of the winding up will be void. With
leave of the Court, attachment and sale of the properties of the company will be valid
even if such attachment and sale are made after the commencement of the winding up of
the company. Besides this section does not apply to any proceedings for the recovery of
any tax imposed or any dues payable to the Government. Thus I.T.O. can commence
assessment proceedings without leave of the Court.
8. It is to be noted that winding up order does not bring the business of the company to an
end. The corporate existence of the company continues through winding up till the
company is dissolved. Thus the company continues to have corporate personality during
winding up. Its corporate existence come to an end only when it is dissolved.
9. An order for winding up operates in favour of all the creditors and of all the
contributories of the company as if it had been made on the joint petition of a creditor and
of contributory.
10. On a winding up order being made in respect of a company, the Official Liquidator, by
virtue of the office, becomes the liquidator of the company (Section 449).