EXcellency Company Law

PART I: BASICS OF A COMPANY
Definition of a "Company"
Company is an association of persons who come together to carry out business.
Section 3 of the companies act, 1956 defines a company as “any company registered under the act, or an
existing company.”
A Company is
 An artificial person created by law
 a voluntary association of persons formed for the purpose of doing business
 having a distinct name, legal rights and obligations the same way a natural person has
 with independent legal existence for perpetuity
The Corporate Personality
The corporate personality or the independent legal existence of a company is a creation of law, and
recognized in both England and India.
A company is an artificial person enjoying certain rights and having certain obligations/duties
This Juristic personality of corporations pre-supposes the existence of three conditions.
1. There must be a group or body of human beings associated for a certain purpose.
2. There must be organs through which the corporation functions, and
3. The company is attributed will (animus) by legal fiction.
Characteristics of a Company
Key Ingredients of Corporate Personality
Advantages of Registration as a Company
1. DISTINCT LEGAL ENTITY
A company is separate from the members / shareholders who own it. It ‘s distinct legal personality allow
it to sue and be sued in its own name
Nayab Naseer COMPANY LAW

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Salomon v. A Salomon & Co. Ltd (1897): Mr. Solomon had the business of shoe and boots manufacture. He
incorporated a company with seven subscribers-Himself, his wife, a daughter and four sons. All
shareholders held shares of one pound each. The company purchased the 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, with liability
exceeding the claim of shareholders. 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; liability of the members are limited to
the capital invested by them. Court held that company is a separate person, and hence Solomon could
claim priority over the assets to secure his debentures, over the debts owed to unsecured creditors.
Salmon was thus not liable to the debtors
Lee v Lee: The company formed by Mr lee appointed Lee himself as the chief pilot. He died in a plane
crash. Lee’s wife claimed workmen’s compensation. The court allowed it.
People’s Pleasure Park v/s Rehelder: The Article contained a prohibition that title to land should never pass
to a coloured person. The land was sold to a corporation all the members of which were Negroes. It was
held that the corporation was distinct from its members and that the transfer was valid.
2 PERPETUAL SUCCESSION
A company does not come to an end even of all its shareholders die.
Members and directors come and go, but company remains. F Pollock says that a company is like the River
Thames. It remains the same river for eternity even though parts which compose the river change every
instant.
In public company, members can transfer, sell and purchase shares freely.
3. LIMITED LIABILITY
A shareholder can only lose what he or she has contributed as shares to the corporate entity and nothing
more (unless it is a company with unlimited liability)
4. PROPERTY RIGHTS
A company can acquire, own, enjoy and dispose property in its own name
Bacha F Guzdar v Commissioner of Income Tax (1955): Commissioner of Income Tax assessed dividend
receive from company to income tax. Petitioner claimed that the company was involved in agricultural
operations, and claimed exemption. Disallowed, as company is separate, and only company can claim
exemption under agricultural income.
5. DOCTRINE OF ULTRA VIRES

A company cannot go beyond the object clause mentioned in the memorandum of Association
A company which owes its incorporation to statutory authority cannot effectively do anything beyond the
powers expressly or impliedly conferred upon it by its statute or memorandum of association even if
agreed by all the members.
An action outside the memorandum is ultra vires the company.
The purpose of these restriction is

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1.to protect investors in the company so that they may know the objects in which their money is to be
employed
2. to protect creditors by ensuring that the company’s funds, to which they must look for payment, are not
dissipated in unauthorized activities.
Thus the Doctrine of Ultra-vires ensures that an investor in a gold mining company did not find himself
holding shares in a fried-fish shop, and it gave those who allowed credit to a limited company some
assurance that its assets would not be dissipated in unauthorized enterprises.
The doctrine of Ultra vires was first applied by the House of Lords in Ashbury Railway Carriage and Iron co.
Ltd. V. Riche. The memorandum of association of a company defined its objects as lending on hire railway
carriage and wagons….” The company entered into a contract with Riche, a firm of railway contractors, to
finance the construction of a railway line in Belgium. The company, however, repudiated the contract as
one ultra vires. Riche brought an action for damages for breach of contract. His contentions were that the
contract in question came well within the powers of the company, and, secondly, that the contract was
ratified by a majority of the shareholders. But the House of Lords held that the contract was ultra vires
and, therefore, null and void.
In india, the SC affirmed the doctrine in A Lakshmanaswami Mudaliar V. LIC. The directors of a company
were authorised “to make payments towards any charitable or any benevolent object, or for any general
public, general or useful object”. In accordance with a shareholders’ resolution the directors paid two lakh
rupees to a trust formed for the purpose of promoting technical and business knowledge. The payment
was held to be ultra vires. The court said that the directors could not spend the company’s money on any
charitable or general object which they might choose. They could spend for the promotion of only such
charitable objects as would be useful for the attainment of the company’s own objects.
Cotman V. Brougham: The House of Lords had to consider a memorandum which contained an objects
clause with thirty sub-clauses enabling the company to carry on almost every kind of business which a
company could adopt. Such an objects clause naturally defeats the very purpose for which it is there. In a
bid to control this tendency the courts adopted the “main objects rule” of construction. The rule owes its
origin to the decision in the Ashbury case where it was held that the words “general contractors” must be
read in connection with the company’s main business.
Consequences of ultra vires transactions:
Whenever a company gets involved in an ultra vires transaction it becomes susceptible to:
1. Injunction: Whenever an ultra vires act has been or is about to be undertaken, any member of the
company can get an injunction to restrain it from proceeding with it.
2. Personal liability of directors: It is one of the duties of directors to see that the corporate capital is used
only for the legitimate business of the company. If any part of it has been diverted to purposes foreign to
the company’s memorandum, the directors will be personally liable to replace it.
3. Breach of warranty of authority: It is the duty of an agent to act within the scope of his authority. For if
he goes beyond he will be personally liable to the third party for breach of warranty of authority. The
directors of a company are its agents. As much it is their duty to keep within the limits of the company’s
powers.

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4. Ultra vires acquired property remains: If a company’s money has been spent ultra vires in purchasing
some property, the company’s right over that property is secure. For, that asset, though wrongly acquired,
represents the corporate capital.
5. Ultra Vires Contracts is void: A contract of a corporation which is ultra vires, that is to say outside the
objects as defined by its memorandum is wholly void and of no legal effect.
6. Ultra Vires Torts & crimes – company liable: A company may be liable for torts or crimes committed in
pursuance of its stated objects but it is not be liable for acts entirely outside its objects. In other words, if
the objects of the company are restricted to running a tramway it will be liable for anything which its
officers do within the actual or usual scope of their authority in connection with running trams, but will not
liable either civilly or criminally for anything which its officer do in connection with some entirely different
business.
Theories of Corporate Personality
1. Fiction Theory
Propounded by Savigny and backed by Salmond and Holland.
As per the fiction theory, a corporation exists only as an outcome of fiction and metaphor. So the
personality that is attached to these corporations is done purely by legal fiction.
2. Concession Theory
Propounded by: Salmond, Savigny and Dicey
Ssimilar to the fiction theory. However, it states that the legal entity has been given a corporate
personality or a legal existence by the functions of the State. So only the State can endow legal
personalities, not the law.
Legal personality is conferred only by law. Corporate personality is nothing but a concession given to group
or body of individuals by law to act as one body.
3. Realist Theory
Propounded by: Gierke, Sir Fredrick Pollock, Geldart, Maitland
As per the realist theory, there is really no distinction between a natural person and an artificial person. So
a corporate entity is as much a person as a natural person. So the corporation does not owe its existence
to the state or the law. It just exists in reality.
A corporation is a real but mysterious entity. Every group comes to have personality of its own whether
that group is social or political one.
4. Bracket Theory (Symbolist Theory)

Propounded by: Ihering
The most famous and feasible theories of corporate personality. It states that a corporation is created only
by its members and its agents. So the people who represent the corporation make up the corporation. The
members of a corporation are the bearers of the rights and duties which are given to the corporation for
the sake of convenience. The law only puts a bracket around them for convenience purposes. The

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weakness of this theory lies in the fact that it is not able to indicate when the bracket may be removed and
the mask lifted for the purpose of taking note of the members constituting the corporation.
Legal Status of a Company
Though a company is a legal person, it is not a citizen under the constitutional law of India or the
Citizenship Act, 1955.
State Trading Corporation of India v. Commercial Tax Officer: Since a company is not treated as a citizen, it
cannot claim protection of such fundamental rights guaranteed to citizens. However, a company can claim
the protection of fundamental rights as are guaranteed to all persons whether citizens or not.
Tata Engineering Company v. State of Bihar: In case of residence of a company, it has been held that for
the purposes of income tax law, a company resides where its real business is carried on and the real
business of a company shall be deemed to be carried on where its Central management and control is
actually located.
LIFTING THE CORPORATE VEIL
A company or corporation can only act through human agents that compose it. There are two main ways
through which a company becomes liable in company law:
1. through direct liability (for direct infringement)
2. through secondary liability (for acts of its human agents acting in the course of their employment).
The “Corporate Veil” is the 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.
The company has always been regarded as a separate legal entity distinct from its members. But in course
of time, this doctrine of distinct legal personality has been subjected to certain exceptions.
At times the directors or owners of the company uses the distinct corporate personality of the company to
commit frauds or illegal acts. Since an artificial person is not capable of doing anything illegal or
fraudulent, the façade of corporate veil will have to be removed to identify the guilty persons. This is
known as ‘lifting of corporate veil’.
Lifting the corporate veil refers to the situation where a shareholder is held liable for his company’s
debts or action despite the rule of limited liability and/or separate personality. It 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 not liable
There are two existing theories for the lifting of the corporate veil.
1. The alter-ego theory: Considers if there is in distinctive nature of the boundaries between the
corporation and its shareholders.
2. The instrumentality theory: 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.

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The courts may lift the corporate veil under the following circumstances:
1. If the company is set up to defeat public convenience
United States v. Milwaukee Refrigerator Transit Company– 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.”
2. To determine the character of the company, such as if the company is an enemy alien
Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (Great Britain) Ltd: A German company. set up a
subsidiary company in Britain and entered into a contract with Continental Tyre and Rubber Co. (Great
Britain) Ltd. for the supply of tyres. During the time of war, the British company refused to pay as trading
with an alien company was 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. To determine if the company is a sham, set up to avoid contractual obligations
Gilford Motor Co. v. Horne: An employee entered into an agreement with his employer to not enter into a
competing business or solicit customers by setting up his own business, after his tenure of employment
ends. After the defendant’s service was terminated, he set up a company of the same business. His wife
and another employee were the main shareholders and the directors of the company. The Court held that
the formation of the new company was a mere cloak or sham to enable him to breach the agreement with
the plaintiff.
Re, FG (Films) Ltd: 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.
4. To prevent fraud such as defrauding creditors, avoiding specific performance etc
Jones v. Lipman: The seller of a piece of land sought to evade the specific performance of a contract for the
sale of the land by conveying the land to a company which he formed for the purpose. He attempted to
avoid completing the sale of his house to the plaintiff. The court declared the company as a sham and
ordered both the defendant and his company specifically to perform the contract with the plaintiff.
Singer India v. Chander Mohan Chadha: The concept of corporate entity was evolved to encourage and
promote trade and commerce but not to commit illegalities or to defraud the people. Where therefore the
corporate charter is employed for the purpose of committing illegality or for defrauding others, the court
would ignore the corporate character and will look at the reality behind the corporate veil so as to enable
it to pass appropriate orders to do justice between the parties concerned.

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5. To protect revenue / prevent tax evasion
Re: Sir Dinshaw Patil (1927): The court foiled the attempt by Dinshaw Patil to consolidate his income into a
holding company, and borrow from that company, and thereby evade taxes.
Subhra Mukherjee v. Bharat Coking Coal Ltd; A private coal company sold its immovable property to the
wives of directors, prior to nationalization of the company. The Court pierced the veil of this transfer to
know the real parties to the sale.
The principle of Salomon v. A. Salomon & Co. Ltd (company is a distinct legal entity) is still the rule and the
instances of piercing the veil are the exceptions to this rule.
A company also has the right to life and personal liberty as a person. This was laid down in the case of
Chiranjitlal Chaudhary v. Union of India when the Supreme Court held that fundamental rights guaranteed
by the constitution are available to corporate bodies also except where the language of the provision or
the nature of right compels the inference that they are applicable only to natural persons.
COMPANY v PARTNERSHIP
COMPANY PARTNERSHIP
A company can be created only by certain A partnership is created by the express or implied
prescribed methods - most commonly by agreement of the parties, and requires no formalities
registration under the Companies Act 1985
A company is an artificial legal person distinct from Partnership is much more limited in its scope as a
its members distinct legal personality
A company can have as little as one member and A partnership must have at least two members and
there is no upper limit on membership (public has an upper limit of 50
companies).
Shares in a public company are freely transferable A partner cannot transfer his share of the partnership
without the consent of all the other partners.
Members of a company are not entitled to take Every partner is entitled to take part in the
part in the management of the company unless management of the partnership business unless the
they are also directors of it partnership agreement provides otherwise.
A member of a company who is not also a director A partner in a firm is an agent of the firm, which will
is not regarded as an agent of the company, and be bound by his acts.
cannot bind the company by his actions.
The liability of a member of a company for the A partner in an ordinary partnership can be made
debts and obligations of the company may be liable without limit for the debts and obligations of
limited. the firm.
The powers and duties of a company, and those Partners have more freedom to alter the nature of
who run it, are closely regulated by the Companies their business by agreement and without formality,
Acts and by its own constitution as contained in and to make their own arrangements as to the
the Memorandum and Articles of Association. manner in which the firm will be run.
A company must comply with formalities regarding These formalities do not apply to partnerships
the keeping of registers, the auditing of accounts
and filing of accounts
A company cannot normally be wound up on the A partnership (unless entered into for a fixed period)
will of a single member, and the death, bankruptcy can be dissolved by any partner, and is automatically
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or insanity of a member will not result in its being dissolved by the death or bankruptcy of a partner,
wound up. unless the agreement provides otherwise.
TYPES OF COMPANY
A company can be formed in a number of ways:
ON THE BASIS OF INCORPORATION

1. Chartered Companies
2. Statutory Companies
3. Registered Companies
ON THE BASIS OF LIABILITY
3.1 Unlimited Liability Company
3.2 Limited Liability Company
3.2.1 Liability by guarantee
3.2.2 Limited by Shares
ON THE BASIS OF NUMBER OF MEMBERS
3.2.2.1 Public Company
3.2.2.2. Private Limited Company
3.2.2.3 One-Person Company
4. ON THE BASIS OF CHARACTER

4.1 Government Company
4.2 Foreign Company
4.3 Multinational Company
Companies formed by Royal Charter (Chartered Companies)
Formed by grant of a charter by the Crown.

Promoters of the company petition the Privy Council attaching draft of proposed charter to the
petition.
Still used to incorporate learned societies and professional bodies.
No longer used to incorporate trading companies.
Companies formed by Act of Parliament (Statutory Companies)
A statutory company is brought into existence under the act passed by the legislature of the country or
state.
Powers, responsibilities, liabilities, objects, scope etc. of such a company are clearly defined under the
provisions of the Act which brings it into existence.
Usually, such companies are established to run the enterprises of social or national importance.
Such companies do not have memorandum and articles, since they are governed by the Act which has
brought them into existence. Their working report is placed before the parliament or state legislature
concerned
Formerly used to incorporate public utilities such as gas, electricity and railways.
Example:-Reserve Bank of India, The life Insurance corporation of India, FCI, MPFC, MPSIDC etc.

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Government Company
The legal status of the company does not change by being a government company, there are no special
privileges given to them.
A Got company is where 51% of the paid up share capital is held by the government.
The share can be held by the central government or state government, partly by central and partly by two
or more governments.
Key Features
 The govt appoints directors for the shares it holds. There can be independent directors if private
parties hold a stake (eg CIAL)
 The auditor shall be appointed by the government, and he shall give a copy of audit report to
Comptroller and Auditor General
 The Comptroller and Auditor General shall have power to comment on audit report, and direct the
manner of company’s accounts. The comments shall be placed in AGM
 For central govt companies, annual report and audit report shall be placed in both houses of
parliament. For state govt companies these reports shall be placed in the state legislature
Foreign Company
A foreign company is any company or body corporate incorporated outside India which, has a place of
business in India by itself or through an agent, physically or through electronic mode; and. conducts any
business activity in India in any other manner
Foreign company is a company incorporated outside India, but having a place of business in India.
Before 2013 amendment, if a company did not have a place of business in India but only has agents in
India it was not considered to be foreign company. But after 2013 amendment, a foreign company is one
which
1. has a place of business in India whether by itself or through an agent, physically or through
electronic mode; and
2. conducts any business activity in India in any other manner. (Sn 2(42) of the Companies Act)
Foreign companies can issue prospectus offering shares and debentures even if it has no place of business
in India
Obligations of foreign company
 A foreign company operating in India should be registered in India. They have to apply to RoC of
the principal place of business and also RoC at new Delhi within 30 days with the required
documents:
o A certified copy of the charter, memorandum and articles
o Full address of registered or principal office of the company
o Full address of the principal office and place of business in India
o Name and full address of directors
o Name and full address of authorised person in India to accept any notices served

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 Exhibit in English and local language the place of business in India and country of incorporation in
every premises of business
 Make out balance sheet and profit-and-loss accounts every calendar year, and deliver 3 copies of
same to RoC
 Comply with the provisions of Foreign Exchange Management Act (FEMA) when making
investments
 Comply with Indian tax laws (such as GST) when selling goods or providing services.
 Give notice of cessation of business in India to the RoC
Fine for non-compliance of above provisions is one lakh – 3 lakh rupees, plus 50,000/- fopr each day of
default
Officer of such foreign company may be imprisoned up to six months and/or fined 25,000/- to 5 Lakhs
Multinational company
Multinational or transnational companies are companies having business in more than one country
Example:-Cipla, Pepsi
There is no legal recognition for MNC’s in Indian laws. If the MNC has its headquarters outside India, it is
treated as a foreign company.
REGISTERED COMPANIES
Formed by registration under the Companies Act 2013 or one of the preceding Companies Acts.
Registration is the most commonly used means of forming a company and virtually the only method
now used to form a trading company.
Sn 3(2) of Companies Act categories companies on the basis of liability
Unlimited Companies
Members have unlimited liability (If company is being wound up, members can be made to contribute
to the company’s assets without limit to enable it to pay its debts.)
There is no limit on the liability of the members. The liability in such cases would extend to the whole
amount of the company’s debts and liabilities
The members cannot be directly sued by the creditors.
Rather, when the company is wound up, the official liquidator will call upon the members to discharge the
liability.
The details of the number of members with which the company is registered and the amount of share
capital has to be stated in the Articles of Association (AOA).
Limited Liability Company
When the liability of the members of a company is limited to the extent of the nominal value of shares
held by them, such companies are known as ‘Limited liability companies
Limited liability companies may be limited by shares or by guarantee

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Companies Limited by Guarantee
Members agree to contribute a specified amount to the company’s assets in the event of the
company being wound up. (Total amount payable by all members is called the "guarantee fund")
 Companies limited by Guarantee not having share capital: The memorandum of Association (MOA)
limits the members’ liability. Each member gives his undertaking in MOA of their contribution in
case of a winding up.
 Companies limited by guarantee having share capital: The liability would be based on the MOA
towards the guaranteed amount and the remaining would be from the unpaid sums of the shares
held by the person concerned.
Members do not have to pay anything as long as company is a going concern.

Companies limited by guarantee are not usually formed for business ventures.
Prior to 1980, a company could be registered as a company limited by guarantee, but also have a share
capital - these are called "hybrid companies". This is not possible now.
Companies Limited by Shares
The liability of the members of a company is limited by the Memorandum of Association to the amount
which remains unpaid on the shares. In case of winding up of the company the members cannot be asked
to pay more than the amount unpaid on the shares held by them.
Key characteristics
 The most common kind of registered company.
 Members of the company take shares issued by the company. Each share is assigned a nominal
value – or the amount that must be paid to the company for the share. Members may also agree to
pay an extra amount - called a premium.
 When the company is registered, its memorandum must state the total nominal value of all the
shares it is going to issue (called the registered capital, or nominal capital or authorised share
capital).
 The memorandum must also states the number of shares to be issued: e.g. 10,000 shares of Rs 10
each = registered capital of 100,000.
 Liability of a member (shareholder), when the company is wound up is limited to the amount, if
any, of the nominal value of his shares which has not been paid. (The shareholder is also
contractually bound to pay any premium which has not been paid).
 Shares are normally partly or fully paid for when issued, so company will have a contributed
capital.
Companies Limited by Shares may be

 Public Limited Company
 Private Limited Company
 One Person Company

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CONDITIONS Public Company Private Company One-Person Company
Section 2(71) 2(68)
Word “limited” should The word “private The word “One Person
be suffixed to the limited” should be Company” should be
company name suffixed to be company mentioned along with
name the name
Minimum paid up To be prescribed by To be prescribed by the To be prescribed by the
capital govt (prior to 2013, govt govt. Currently 1 Lakh
minimum paid up
capital was 5 lakh)
Minimum Number of Seven Two One
members (subscribers
to the memorandum)
Maximum number of Unlimited 200 (excluding past and One
members present employee
members)
Transfer of shares Articles of Association Articles of Association Articles of Association
should NOT RESTRICT should IMPOSE should PROHIBIT
right of members to restriction on members transfer of shares
transfer shares to transfer shares
Invitation Articles of Association Articles of Association Articles of Association
should not prohibit should limited max no Should PROHIBIT
making an invitation to of members to 200 invitation to public to
public to subscribe to subscribe shares
securities
No of Directors Must have at least Must have at least two Should have only one
three directors on the directors on the board director
Board (Sn 149) (Sn 149)
Foreigners Foreigners can trade Non-Resident Indians Only natural-born
shares directly on the (NRIs) and foreigners citizens of India eligible
Indian stock market but are allowed to establish to from OPC
have to open an or invest in private
account as an FPI limited companies in
(Foreign Portfolio India
Investor)
Remuneration payable Limited to 11% of net No restriction No restriction
to Managers and profits in ay financial
Directors year
Quorum for general Five Two No compulsion to hold
meeting AGM
Listing To be listed in stock Cannot be listed in Cannot be listed in
exchange stock exchange stock exchanged
Regulation Regulated very strictly It can commence Same as private limited
business immediately company except the
after obtaining number of member
certificate of
incorporation. It need
not issue prospectus or

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statement in lieu of
prospectus.
Holding (parent) company and subsidiary company
The classification is based on control.

A company shall be deemed to be the holding company of a subsidiary company if it
 controls the composition of its Board of Directors
 holds more than half in nominal value of its equity share capital or more than half of total voting
power of such company
 is a subsidiary of such a company which is itself subsidiary of any other company
Key features of a holding company
A holding company and its subsidiaries are separate entities. Parent companies and their shareholders
are not liable for the debts or actions of their subsidiaries, except for the value of shares held by them.
The subsidiary may operate to broaden existing services, or it may also engage in new lines of business. As
such, the subsidiary’s products or services may be entirely different and unrelated to its parent company.
The parent company may choose to manage or withdraw from managing day-to-day operations of the
subsidiary company. The extent of autonomy and independence given to the subsidiary company depends
on the decision of the holding company.
A subsidiary company shall not hold shares in its holding company (Sn 19(1) of companies act). The
exceptions are if subsidiary company hold the shares as legal representatives of a deceased member / as a
trustee / or if the shares were held before the company bcome a subsidiary company
The parent company typically maintains financial control of the subsidiary.
Reasons for setting up subsidiary companies

 To expand business operations or try out a new line of business
 To expand into new geographical areas which may require different management approaches.
 To create a corporate structure that spreads assets amongst affiliates, reducing the risk of a
creditor reaching all of the parent corporation’s assets. The court may however pierce the
corporate veil to fix liability.
CONVERSION OF COMPANIES
Sn 18 of Companies Act allows conversion of

 Private company to public company or vice versa  by altering the Memorandum and articles
 One person company into a public company or private company  by altering the Memorandum
and articles, after minimum period of two years post incorporation. Number of directors to be
increased to two for private or three for public (and min 7 members)
If turnover is > 2 crores or paid up capital exceeds 50 lakhs, the one person company has to
compulsorily convert itself into private company within 6 months. Noptice to be given to RoC within
60 days of exceeding the threshold.
 Private company to one person company  by passing special resolution. NOC from creditors and
members required. Turnover should be < 2 crores and paid up capital < 50 lakhs.
Following documents to be attached with application
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o Affidavit from directors stating all creditors have given consent for conversion
o Full list of members and creditors
o Latest audited balance sheet, and profit-loss account
o NOC from secured creditors
Application for conversion to be made to RoC. If the entity complies with all the formalities required for a
new registration, the RoC shall close former registration and issue new registration certificate.
Conversion does not change the debts, liabilities, obligations or contracts that exist as part of old structure
PART II: STEPS IN FORMATION OF A COMPANY

1. Promotion
2. Preparation of Memorandum and Articles
3. Incorporation (Registration)
4. Subscription of Capital
a. Prospectus
b. Private Placement
c. Bonus or rights issue (only for public companies)
5. Commencement of Business
Only first three steps are required for the formation of a Private and a Public Ltd. Company not having any
shares
All the five stages are required to be fulfilled by a public ltd company having a share capital
PROMOTION
The term ‘promotion’ refers to the aggregate of activities designed to bring into being an enterprise to
operate a business.
Promotion starts with the conception of the idea from which the business is to evolve and continues down
to the point at which the business is full, ready to begin operations in a going concern.
“Just as a potmaker is the creator of pots, the promoter is the creator of the company” - Gower
It includes
 Discovery of an idea. (possibility of starting a new business)
 Detailed investigation.( commercial feasibility of an idea)
 Assembling. (Projecting the fundamental idea, securing all needed property/finance etc.)
 Financing the proposition (Deciding about the capital structure of a company)
Promoters
Before a company can be formed there must be some persons who has the intention to form a company,
and who take the necessary steps to carry that intention to carry that intention into operation. Such
persons are called promoters.
Who is a promoter?
The old companies act did not specifically define “promoter.”

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Sn 2(69) of Companies Act defines “promoter” as
 Someone who is identified as such in the prospectus or in the annual return
 Who has control over affairs of the company, directly or indirectly, as a shareholder, director or
otherwise
 A person in whose advise the directors may act
Whether someone is acting as promoter of a company is a question of fact rather than a question of law.
A person cannot become a promoter merely because he signs the memorandum as a subscriber for one
or more shares.
A person who acts in a professional capacity is not a promoter. Thus a solicitor, who prepares on behalf
of the promoters the primary documents of the proposed company, an accountant or a valuer are not
promoters. But any such person may become a promoter if he helps the formation of the company by
doing an act outside the scope of his professional duty.
A person may become a promoter even after the formation of the company, for example, by becoming
party to the share issues or to procuring subscriptions.
The promoters are not an agent or trustee of the company. But they stand in a fiduciary position
Role/Duties of a promoter
The promoters are the ones “who create and mould the company”.
A promoter is a person who brings about the incorporation and organization of a company. He
1. brings together the persons who become interested in the enterprise,
2. settles the companies name
3. arranges the registered office
4. opens bank accounts
5. determines the nomination of directors, auditors and secretary
6. settles details of Memorandum and Articles, and arranges printing of the same
7. aids in procuring subscriptions,
8. sets in motion and machinery which leads to commencement of operations.
9. Enter into pre-incorporation contracts. A company has no contractual capacity prior to
incorporation - so contracts cannot be made on its behalf. The company cannot be bound to
the contract because it had no contractual capacity, and cannot ratify the contract because it
was not in existence at the time the contract was made.
The promoters usually act as nominees or as the first directors of the company
In India promoters generally secure the management of the company that is formed and have a
controlling interest in the company’s management.
Kelnar v Baxter (1866): Company formed subsequent to preliminary contract cannot ratify the contract.
In this case, a supplier of wine who supplied to a hotel based on contract with promoter was not paid as
company went into liquidation soon. The court held that liquidator of the company is not liable to pay,
and promoter is personally liable. This is the position in English common law.
However, in India, the Specific Relief Act caters to enforcement of contracts when
 such contract is warranted by the terms of incorporation.
 The company has accepted the contracts and communicated the same o the other party

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A promoter’s duties do not come to an end on the incorporation of the company, or even when a Board
of directors in appointed. They continue until the company has acquired the property or business which it
was formed to manage and has raised its initial share capital and the Board of directors has taken over
the management of the company’s affairs from the promoters. When these things have been done, the
promoter’s fiduciary and contractual duties cease.
Rights of Promoters
Promoters can be remunerated for their services, but they have to enter into a contract before the
incorporation of the company through a pre incorporation of the company. A company cannot enter into
a contract before incorporation - so a promoter has no legal claim against the company for fees and
expenses.
Duties of Promoters
1. Duty to Disclose Secret profits

In the 19th century, it was common for promoters to sell their own property to a newly formed company
at an inflated price, or to acquire assets for the company and receive a commission from the seller. The
courts then began to impose a fiduciary duty on promoters similar to that imposed on agents. A promoter
must disclose any profit or potential conflict of interest to either:
(i) an independent board of directors, or
(ii) existing or intended shareholders.
A promoter cannot make profit at the expense of the company, which they have promoted without the
knowledge and consent of the company. They cannot sell their property to the company at a profit unless
all the material facts are disclosed at the independent board of directors or the shareholders of the
company. If they do so, the company may repudiate the contract of sale or confirm the sale after
recovering the profit made by the promoter.
Gluckstein v Barnes: Promoters should disclose secret profits and are bound to pay it to the
company. A syndicate of persons raised funds to buy a property and resell it to a company. They first
bought up some of the charges upon the property for sums below the amount which the charges
afterwards realized, and thereby made a profit of £ 20,000. They next formed company, issued a
prospectus inviting application for shares and disclosed the two prices of £ 1,40,000 and £ 1,80,000
but not the profit of £ 20,000. Shares were issued but the company afterwards went into liquidation.
It was held that the promoters ought to have disclosed to the company the profit of £ 20,000.
2. Duty to disclose any interest in property sold to company

Promoter has a duty to disclose any interest in the property he sells to the company.
Erlanger V. New Sombrero Phosphate Co (1878): A group of persons headed by E purchased an island
containing phosphate mines for £ 55,000. A company was then incorporated to take over the island and to
work the mines. E named five persons as directors. Two were abroad. Of the three others, two were
persons entirely under E’s control. These three directors purchased the island for the company at a price
of £ 1,10,000. A prospectus was then issued. Many persons took shares. The purchase of the island was
adopted by the shareholders at their first meeting; but the real circumstances were not disclosed to them.
The company failed and the liquidator sued the promoter for refund of the profit. The only material
contention urged on behalf of the promoters was that the company’s board of directors had full
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knowledge of the facts. Rejecting this the court said that if they propose to sell their property to the
company, it is incumbent upon them to take care that they provide the company with an executive body
who shall both be aware that the property which they are asked to purchase it the promoter’s property
and who shall be competent and impartial judges as to whether the purchase ought or ought not be made.
3. Duty to disclose full facts in prospectus
Promoters have a duty to make full disclosure in any prospectus issued by him. The prospectus should be
free of any misrepresentation or misleading statements.
Section 26 of the Companies Act, 2013 lay down matters to be stated in a prospectus. A promoter may be
held liable for non-compliance of the provisions of the section.
Liability of promoters
A promoter is liable for

 deceit or breach of duty (sn 340) when the promoter misapplies or retains any property of
the company
 breach of trust in relation to any at done on behalf of the company
 making any any untrue statement in the prospectus (Sn 34). However, the liability of the
promoter is limited to the original allottee of shares and does not extend to the subsequent
allotters.
 examination like any other director or officer of the company if the court so directs on a
liquidator’s report alleging fraud in the promotion or formation of the company.(Sn 300)
When promoters who fail in their fiduciary duties, the board could
 set aside shares allocated to them as remuneration

 exercise option to recissise any contract entered with him
 Sue them for damages and compensation
When a promoter negligently allows the company to purchase property, including his own,
for more than its worth, he is liable to the company for the loss it suffers.
 Initiate criminal proceedings for fraud and misrepresentation
Sn 62 of the Companies Act provides for the liability of a promoter for misrepresentation in
prospectus. A promoter who is responsible for making misrepresentations in a prospectus
may be held guilty of fraud under section 17, of the Indian Contract Act and consequently
liable for damages under section 19 of the Act.
Remuneration to Promoters
A promoter is entitled to reasonable remuneration for his services, through the following ways
1. Sale of his property to the company for a profit, with full disclosure of the profit
2. Commission for shares sold
3. Option to buy shares of the company at par
4. payment of lumpsum amount
Prabir Kumar Misra v. Ramani Ramaswamy [2010]: Madras HC held that to fix liability on a promoter, it is
not necessary that he should be either a signatory to the Memorandum/Articles of Association or a

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shareholder or a director of the company. Promoter’s civil liability to the company and also to third parties
remain in respect of his conduct and contract entered into by him during pre-incorporation stage as agent
or trustee of the company.
MEMORANDUM OF ASSOCIATION
The memorandum of association contains the fundamental clauses which lists the conditions of the
company’s incorporation
It is the constitution of the company
It is an essential requirement to register the company
It lays down the scope of the companies activities. Any act done outside such scope is ultra-vires.
It defines the extent and limits of the company’s powers and objectives
A registered memorandum and articles binds the company and members. Any money payable to anyone
under memorandum shall be a debt due from the company.
The memorandum shall be printed, numbered in paragraphs and signed by 7/2/1 subscribers
(public/private/one-person company)
CONTENTS OF THE MEMORANDUM
1. Name Clause
The first clause of the memorandum is required to state the name of the proposed company.
A company, being a legal person, must have a name to establish its identity.
 The name of the company should not be identical with or should not too nearly resemble, the
name of another registered company.
o The other company can also apply for an injunction to restrain the newcomer from having
an identical name.
 The name should not be undesirable from the point of view of the central govt.
o The name must not suggest connection with an unlawful activity or be offensive in form. Eg:
Two women forming a company for their personalized services were not allowed the name
“Prostitutes Ltd.”
 If the liability of the members is limited, the last word of the name must be “Limited”, and in the
case of a private company “Private Limited”.
 The name should comply with the Emblem and Name (Prevention of Improper Use) Act 1950. This
act prevents using the name of United Nations, central Government and State Government
 A company may change its name by passing a special resolution and with the approval of the RoC in
writing. (Sn 13)
 Company may rectify its name resultant from inadvertent errors, or if directed by RoC owing to
similarity in name with other company, through ordinary resolution (Sn 16 (1)).
Asiatic Govt Security Life Insurance Co Ltd v New Asiatic Insurance Co Ltd: Court held two names were not
identical and dismissed the suit
Ewing v Buttercup Margarine Co: Plaintiff, running business under name of Buttercup margarine Company,
obtained an injunction against defendant.
2. Registered Office
The second clause of the memorandum must specify the State in which the registered office of the
company is to be situated.

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 Within thirty days of incorporation or commencement of business, whichever is earlier, -the exact
place where the registered office is to be located must be decided and notice given to the RoC. All
communication to the company must be addressed to its registered office.
 Change of Registered Office: A company can shift its registered office from one place to another
within the same city, town or village.
 Change of registered office from one city to another within the same State, requires a special
resolution. A notice of such change must be given to the Registrar within 15 days of the change.
 If the shifting of the registered office has the effect of taking the office from the jurisdiction of one
RoC to another RoC the same State, permission of the Regional Director must be taken. Regional
director should decide within 30 days
 Shifting of the registered office from one State to another involves alteration of the memorandum
itself. The alteration of the memorandum for this purpose is subject Section 17 which requires,
o a special resolution of the company
o confirmation by the Central Government. The Central Government can confirm the
alteration only if the shifting of the registered office from one State to another is necessary
for any of the purposes detailed in Section 17(1).
o considering the objections of a “person or class of persons whose interest will, in the
opinion of the Central Government, be affected by the alteration”.
o Orient Paper Mills Ltd. V. State: shifting of the registered offices to places outside Orissa
was opposed by the State on grounds of loss of revenue and employment opportunities.
The Court declined confirmation in both cases.
3. Objects and Powers Clause:

In the third clause, the memorandum must state the objects for which the proposed company is to be
established. The objects clause must be divided into three sub-clauses, namely:
(i) Main Objects:- The main objects to be pursued by the company on its incorporation and
objects incidental or ancillary to the attainment of the main objects.
(ii) Other Objects:- other objects which are not included in the above clause.
(iii) States to which objects extend:- In the case of non-trading companies, whose objects are
not confined to one State, this sub-clause has to mention the States to whose territories the
objects extend.
Choice of objects lies with the subscribers to the memorandum and their freedom in this respect is almost
unrestricted. The only obvious restriction are that the objects should not go against the law of the land
and the provisions of the Companies Act.
Ashbury Railway Carriage v Richie (1857): Memorandum is the charter, and defines the limits and powers
of the company.
Cotman v Brougham (1917): The purpose of memorandum is to make shareholders aware which field their
money will be invested, and the objective of the company.
Importance of Object Clause

1. The ownership of the corporate capital is vested in the company itself. But in reality that capital has
been contributed by the shareholders and is held by the company as though in trust for them. Such
fund must obviously be dedicated to some defined objects so that the contributors may know the
purpose to which it can be lawfully applied. The statement of objects, therefore, gives a very important
protection to the shareholders by ensuring that the funds raised for one undertaking are not going to
be risked in another

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2. The object clause affords a certain degree of protection to the creditors also. The fact that the
corporate capital cannot be spend on any project not directly within the terms of the company’s
objects gives the creditors a feeling of security. Public financial institutions providing loans to
companies have to object-wise because they have their own list of priorities. The object clause is their
only guidance in this respect.
3. By confining the corporate activities within a defined field, the statement of objects serves the public
interest. It prevents diversification of a company’s activities in direction not closely connected with the
business for which the company may have been initially established.
Section 17 allows alteration of objects through a special resolution. The Company Law Board had the
discretion to refuse to confirm the alteration
Change of objective requires a special resolution – Sn 13(8).

Notice of resolution seeking change requires the following particulars
1. Total money received
2. Total money utilized for the stated purposes
3. Unutilized money
4. Particulars of the proposed changes
5. Justification for such alteration
6. Amount proposed for the new objects
7. Estimated financial impact of the changes
8. Other relevant particulars
Notice shall be given to shareholders and also published in one English and one vernacular newspaper
each
Dissenting shareholders shall be given option to exit by shareholders in control
RoC shall issued revised registration within 30 days of application
4. Liability Clause
The fourth clause has to state the nature of liability that the members incur.
If the company is to be incorporated with the limited liability, the clause must state that “the liability of
the members shall be limited by shares”. This means that no member can be called upon to pay anything
more than the nominal value of the shares held by him, or so much thereof as remains unpaid; and if his
shares be fully paid up his liability is nil.
If it is proposed to register the company limited by guarantee, this clause will state the amount which
every member undertakes to contribute to the assets of the company in the event of its winding up.
5. Capital Clause
The last clause states the amount of the nominal capital of the company and the number and value of the
shares into which it is divided.
6. Subscription:
The memorandum concludes with the subscribers’ declaration.
Each subscriber must sign the document and must write opposite his name the number of shares he takes.
No subscriber shall take less than one share.
After incorporation no subscriber can withdraw his name on any ground whatsoever.
ARTICLES OF ASSOCIATION

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The articles of the association is a bundle of rules and regulations made for the internal management of a
company.
AOA establishes a contract between the company and the members and between the members inter se
AoA are subordinate to MoA and help out in carrying out the objects set out in the memorandum.
The articles
 define the duties, rights and powers of board of directors and the members of the company.
 provides the mode and form in which the affairs of the company is to be carried, including rules on
conduct of general meetings
 the manner in which the internal management of the company is to be carried out, such as
adoption of preliminary contracts etc.
 Details of Share capital, lien on shares, calls on shares, transfer and transmission of shares,
forfeiture of the shares, surrender of the shares
 Alteration of share capital, issue of dividends, reserves
 Provisions related to account and audit
 Provisions regarding borrowing funds
 Provisions regarding winding up
The content of the AOA may differ from company to company as the Act has not specified any specific
provisions
Flexibility is allowed to the persons who form the company to adopt the AOA within the requirements of
the company law
Public companies can either prepare its own article or can adopt table A of the companies act having a
model AoA.
Pvt. Ltd. Co., Companies limited by guarantee and unlimited companies should prepare their own AoA
Anything done beyond the AOA will be considered to be irregular and may be ratified by the shareholders.
Alteration of Articles
Articles of Association may be altered by a special resolution (Sn 14). Alternation cannot contradict
memorandum of association or provisions of Companies Act.
Alternation should not increase liability of shareholders
Any alteration which converts a public company into a private company requires permission of Tribunal.
Copy of changes to be filed with RoC with 15 days.
Stipulation that Articles cannot be amended is against the provisions) of Companies Act, and hence void.
Mathrubhoomi Printing v Vardhavamar Publishing (1992): Power to alter articles should not be abused by
majority shareholders to oppress the minority shareholders. Alternation should be bonafide and for the
benefit of the company.
Berown v British Abrasive Wheel (1919): Provision that 98% majority sharehodlers would infuse more
capital if remaining 2% would sell their shares struck down as oppression of minority shareholders and not
in bonafide interest of company.
Constructive Notice
Registered memorandum and articles serve as constructive notice to anyone dealing with the company.
The memorandum and articles of association of every company are registered with the Registrar of
Companies. The office of the Registrar is a public office and consequently the memorandum and articles
become public documents. They are open and accessible to all. It is, therefore, the duty of every person

21
dealing with a company to inspect its public documents and make sure that his contract is in conformity
with their provisions.
Whether a person actually reads them or not, the law assumes “he is to be in the same position as if he
had read them”. He will be presumed to know the contents of those documents.
This kind of presumption notice is called constructive notice.
There is constructive notice not merely of the memorandum and articles, but also of all the documents,
such as special resolutions and particulars of charges which are required by the Act to be registered with
the Registrar.
Kotla Venkataswamy V. Rammurthy: The articles of association of a company required that all deeds etc.,
should be signed by the managing director, the secretary and a working director on behalf of the company.
The plaintiff accepted a deed of mortgage executed by the secretary and a working director only. It was
held that the plaintiff could not claim under this deed. The court observed: “If the plaintiff had consulted
the articles she would have discovered that a deed such as she took required execution by three specified
officers of the company and she would have refrained from accepting a deed inadequately signed.
Notwithstanding, therefore, she may have acted in good faith and her money may have been applied to
the purpose of the company, the bond is nevertheless invalid.
Constructive notice is more or less an unreal doctrine. It does not take notice of the realities of business
life.
Doctrine of Indoor Management (Turquand Rule):

The role of the doctrine of indoor management is opposed to that of the rule of constructive notice. The
latter seeks to protect the company against the outsider, the former operates to protect outsiders against
the company.
It follows that there is no notice as to how the company’s internal machinery is handled by its officers. If
the contract is consistent with the public documents, the person contracting will not be prejudiced by
irregularities that may beset the indoor working of the company.
The rule had its genesis in Royal British Bank V. Turquand.

The directors of a company borrowed a sum of money from the plaintiff. The company’s articles provided
that the directors might borrow on bonds such sums as may from time to time be authorised by a
resolution passed at a general meeting of the company. The shareholders claimed that there has been no
such resolution authorizing the loan and, therefore, it was taken without their authority. The company
was, however, held bound by the loan. Once it was found that the directors could borrow subject to a
resolution, the plaintiff had the right to infer that the necessary resolution must have been passed.
In Premier Industrial Bank case, it was stated that if the directors have power and authority to bind the
company, but certain preliminaries are required to be gone through on the part of the company before
that power can be duly exercised, then the person contracting with the directors is not bound to see that
all these preliminaries have been observed. He is entitled to presume that the directors are acting lawfully
in what they do.
The rule is based upon obvious reasons of business convenience in relations. The Memorandum of
association and article of association are public documents, open to public inspection. But the details of
internal procedure are not thus open to public inspection. Hence an outsider is presumed to know the

22
constitution of a company; but not what may or may not have taken place within the doors that are closed
to him.
Exceptions:
The Turquand rule is subject to the following exceptions.
1. Knowledge of irregularity:-
The rule has no application where the party affected by an irregularity had actual notice of it. Knowledge
of an irregularity may arise from the fact that the person contracting was himself a party to the inside
procedure.
Howard V. Patent Ivory Manufacturing Co: the directors could not defend the issue of debentures of
themselves because they should have known that the extent to which they were lending money to the
company required the assent of the general meeting which they had not obtained.
2. Suspicion of irregularity:-
The protection of the “the Turquand rule” is also not available where the circumstances surrounding the
contract are suspicious and, therefore, invite inquiry.
Anand Bihari Lal V. Dinshaw & Co.: The plaintiff accepted a transfer of a company’s property from its
accountants, the transfer was held void. The plaintiff could not have supposed, in the absence of a power
of attorney, that the accountant had authority to effect transfer of the company’s property.
3. Forgery:-
The Forgery may in circumstances exclude the Turquand rule.
Ruben V. Great Fingall Consolidated: The plaintiff was the transferee of a share certificate issued under the
seal of the defendant company. The certificate was issued by the company’s secretary, who had affixed
the seal of the company and forged the signatures of two directors. The plaintiff contended that whether
the signature were genuine or forged was a part of the internal management and, therefore, the company
should be estopped from denying the genuiness of the document. But it was held that the rule has never
been extended to cover such a complete forgery.
4. Representation through Articles:-

Articles of Association generally contains what is called the “power of delegation”. The effect of a
delegation clause is that a person who contracts with an individual director of a company, knowing that
the board has power to delegate its authority to such an individual, may assume that the power of
delegation has been exercised. If the act is one which is ordinarily within the powers of such an officer,
then the company cannot dispute the officer’s authority to do the act, whether the director have or have
not actually invested him with authority to do it.
5. Acts outside apparent authority:
If the act of an officer of a company is one which would ordinarily be beyond the powers of such an officer,
the plaintiff cannot claim the protection of the Turquand rule simply because under the articles power to
do the act could have been delegated to him.
Anand Behari Lal V. Dinshah & Co. The plaintiff accepted a transfer of a company’s property from its
accountant. Since such a transaction is apparently beyond the scope of an accountant’s authority, it was
void. Not even a ‘delegation clause’ in the articles could have validated it, unless he was, in fact,
authorised.
INCORPORATION
1. Ascertaining Availability of Name

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The first step in the incorporation of any company is to choose an appropriate name.
To check whether the chosen name is available for adoption, the promoters have to write an application to
the Registrar of Companies of the State, with RS 500/- application fees. The Registrar then allows the
company to adopt the name given they fulfill all legal documentation formalities within a period of three
months.
2. Preparation and submission of Memorandum of Association and Articles of Association
3. Documents to be Filed with the Registrar of Companies

The application for registration has to be made with the RoC in whose jurisdiction the registered office of
the company will be situated. The procedure is detailed in Companies (Incorporation) Rules. The form is
INC- for one person companies, and INC-7 for other companies.
The documents to be filed with the application form are:
1. Copy of memorandum and articles
1. e-Form No.32 – Consent of directors
2. e-Form No.18 – Notice of Registered Address
3. e-Form No.32. – Particulars of Directors
4. A declaration in INC-8 stating that ‘all the requirements of the Companies Act and the rules
thereunder have been compiled with. The declaration should be signed by an advocate, CA, or
company secretary, and a person named as director, secretary or manager in the articles.
5. Particulars of every subscriber to the memorandum along with proof of address
6. Particulars of first directors named in memorandum, and their inetrest
7. Address for correspondence till registered office is established
8. Affidavit by each subscriber to the memorandum that they are
a. not convicted of any offence
b. not found guilty of fraud or misfeasance
c. detailed filed are true and correct
4. Payment of Registration Fees

A prescribed fee is to be paid to the Registrar of Companies during the course of incorporation. It depends
on the nominal capital of the companies which also have share capital.
If all the paperwork is in order and the formalities complied with, the RoC shall issue a certificate of
incorporation.-
PUNISHMENT FOR FRAUD
Any person guilty of furnishing false or incorrect particulars shall be punished with imprisonment (6
months to 10 years) and/or fine (min amount of fraud and max three times the amount of fraud) – Sn 447.
A company registered on the basis of furnishing false and incorrect information shall be referred to the
Company Law Tribunal. The tribunal may pass orders to:
1. Remove name of the company from register
2. wind up the company
3. make liability of directors unlimited
4. regulate management of the company in public interest
PROSPECTUS

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Prospectus is a document containing detailed information about the company and an invitation to the
public for subscribing to the share capital and debentures issued by the company.
The Companies Act defines Prospectus as “any document described or issued as a prospects and includes
any notice, circular, advertisement or other document inviting deposits from the public or inviting offers
from the public for the subscriptions or purchase of any shares in or debentures of a body corporate”
A Prospectus may be an advertisement, a circular or even a notice. A document shall be called a

Prospectus if it
i. It invites subscription to purchase of shares, debentures or any other security
ii. Makes the aforesaid invitation is made to the public.
Ratan Singh v. Managing Director, Moga Transport Co. Ltd.: The offerings of shares to the kith and kin of a
Director is not an invitation to the public to buy shares.
When is a Prospectus issued?

After having obtained the certificate of incorporation, the promoters of a public company will have to take
steps to raise the necessary capital for the company. A public company may invite the public to subscribe
to its shares or debentures. For this purpose a documents known as Prospectus has to be issued.
Public company which can manage its own capital privately need not to issue prospectus. But in such a
case, a statement in lieu of prospectus must be filed with the Registrar.
A private company is not allowed to issue a prospectus since it cannot invite general public to subscribe to
its shares or debentures.
Objects of prospectus
To bring to the notice of the public that a new company has been formed.
To preserve an authentic record of the terms and allotment on which the public have been invited to buy
its shares or debentures.
To secure that the directors of the company accept responsibility of the statement in the prospectus.
Contents of a prospectus
- Name and address of the registered office of the Company, CS, auditors, etc.
- Dates of the opening and closing of issue (made by the Board).
- Statement by the Board of Directors about separate bank account.
- Disclosure of the details of money.
- Details about underwriting of the issue.
- Consent of auditors, Directors, bankers, etc.
- Details of the resolution passed.
- Procedure and time schedule for allotment and issue of security.
- Capital structure of the Company.
- Details of the Directors, including their appointment and remuneration.
- Particulars such as:
* Present business and location
* Object of the issue
* Purpose of funds
* Schedule of implementation
* Funding plan
* Summary of project
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* Interim use of funds
- Particulars relating to:
* Management
* Litigation or legal matter
* Gestation period
* Extent of progress
* Deadlines for completion of project
Reports to be Set Out in the Prospectus:
i. Reports by the auditors of the Company with respect to its profits, losses, assets and liabilities.
ii. Reports made in the prescribed manner by the auditors upon the profits and losses for each of the 5
financial years immediately preceeding the financial year of issue of Prospectus, including reports of
subsidiary.
iii. Reports made in the prescribed manner by the auditors upon the profits and losses of the business of
the Company for each of the 5 fnancial years immediately preceding the issue and assets and liabilities of
the business.
iv. Reports about the business or transactions to which the proceeds of the securities are to be applied
directly or indirectly.
Declaration:
There shall be included a declaration about the compliance of the provisions of this Act and a statement to
the effect that nothing in the Prospectus is contrary to the provisions of this Act, the SCRA, 1956 and the
SEBI, 1992 and rules and regulations made thereunder.
Statement of an Expert included in a Prospectus:

A Prospectus must contain a statement purporting to be made by an expert. Expert includes an engineer, a
valuer, a CA, a CS, a CMA and any other person who has the power to issue a certificate in pursuance of
the law.
Major requirements
 The prospectus must be issued after incorporation
 Every prospectus must be dated. The date of publication and the date of issue must be specifically
stated in the prospectus.
 Prospectus must be registered by RoC
 The golden rule of the prospectus is that every detail has to be given in strict and scrupulous
accuracy. The material facts given in the prospectus are presumed to be true.
 Consequences of applying for shares in fictitious names to be prominently displayed
Golden Rule of Prospectus
The 'Golden Rule' for framing of a prospectus was laid down by Justice Kindersley in New Brunswick &
Canada Rly. & Land Co. v. Muggeridge (1860).
The rule holds that It is the duty of those who issue the prospectus to be truthful in all respects.
The public is invited to take shares on the faith of the representation contained in the prospectus. The
public is at the mercy of company promoters. Everything must, therefore, be stated with strict and
scrupulous accuracy. Nothing should be stated as fact which is not so and no fact should be omitted the

26
existence of which might in any degree affect the nature or quality of the principles and advantages which
the prospectus holds out as inducement to take shares. In a word, the true nature of the company’s
venture should be disclosed.
In Rex v. Kylsant (1932), the prospectus stated that dividends of 5 to 8 per cent had been regularly paid
over a long period. The truth was that the company had been incurring substantial losses during the seven
years preceding the date of the Prospectus and dividends had been paid out of the realised capital profit.
Held, the prospectus was false and misleading. The statement though true in itself was rendered false in
the context in which it was stated.
A half-truth, for instance, represented as a whole truth may tantamount to a false statement (Lord
Halsbury in Aarons Reefs v. Twisa).
Consequences of misrepresentation
In case of any untrue statement in the prospectus, the liability will be on the director of the company
during the time of issue
A person who purchases shares based on mis-statement in prospectus may

1. apply to court for recission of the contract: only when there is misrepresentation relating to the material
facts. The rescission has to be done within a reasonable time
Handerson v Lacon: Prospectus stated directors and friends had subscribed to a large portion when
actually they had subscribed to just 10 shares. Court allowed recession.
Rex v Lord Kylston: Company falsely claimed paying dividends when it was actually running at loss. Court
allowed recession of contract.
2. claim damages for deceit
3. file a suit against directors for deceit
4. claim compensation from directors, promoters or other persons who has authorized their name to be
written during the issue of the prospectus (Sn 35)
The penalty for non-compliance of these provisions is a minimum fine of Rs. 50, 000 not exceeding Rs. 3,
00, 000 or with imprisonment for up to 3 years or with both.
Rule in Derry v Peak (1889)
In the prospectus released by the defendant company, it was stated that the company was permitted to
use trams that were powered by steam, rather than by horses. In reality, the company did not possess
such a right as this had to be approved by a Board of Trade. Gaining the approval for such a claim from the
Board was considered a formality in such circumstances and the claim was put forward in the prospectus
with this information in mind. However, the claim of the company for this right was later refused by the
Board. The individuals who had purchased a stake in the business, upon reliance on the statement,
brought a claim for deceit against the defendant’s business after it became liquidated.
The claim of the shareholders was rejected by the House of Lords. The court held that it was not proven by
the shareholders that the director of the company was dishonest in his belief. The court defined fraudulent
misrepresentation as a statement known to be false or a statement made recklessly or carelessly as to the
truth of the statement.

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It is important to note that the law regarding false misrepresentation was still developing when the rule of
Derry v Peak was delivered.
Deemed Prospectus
In general, the provisions of the companies act are restricted to cases where the invitation is made by or
on behalf of the company for subscription of its shares. As such, it was possible at for a company to evade
the statutory provisions relating to prospectus by allotting shares or debentures to an issuing house and
inviting the public to purchase shares or debentures through them, with no document or prospectus
issued by the company.
As per Sn 64, such a document is also treated as a prospectus issued by the company.
Under section 64(2) it will be presumed, unless the contrary is proved, that an allotment of shares or
debentures was made with a view to their being offered for sale to the public if:
 The offer to the public by the issue house was made within 6 months of allotment or agreement to
allot (to the issue house); or
 The whole consideration was not received by the company at the time when the offer was made by
the issue house.
Shelf Prospectus:
Prospectus is normally issued by financial institution or bank for one or more issues of the securities
mentioned in the prospectus. With approval of RoC a company can file a prospectus which will be valid for
all issues of shares for a period of one year.
A shelf Prospectus may be issued by any class or classes of Companies as the SEBI may provide by
regulations in this behalf.
Any Company filing a shelf Prospectus with the Registrar shall not be required to file the Prospectus afresh
at every stage of the offer of securities by it within the period of its validity which cannot be more than 1
year.
A company with shelf prospectus has to file an information memorandum on material facts relating to new
changes and financial position at time of second or subsequent offer. The shelf prospectus along with
information memorandum shall be deemed to be the prospectus
An information memorandum shall be issued to the public along with the shelf Prospectus filed at the
stage of the first offer of securities.
Red Herring Prospectus
A red herring is a preliminary prospectus filed by a company with SEBI, usually in connection with the
company's IPO.
A red herring prospectus contains most of the information pertaining to the company's operations and
prospects but does not include key details of the security issue, such as its price and the number of shares
offered.
The term "red herring" is derived from the bold disclaimer in red on its cover page that the information
contained in the prospectus is incomplete and may be changed.

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A Company proposing to make an offer of securities may issue a red-herring Prospectus prior to the issue
of Prospectus.(Sn 32) The company proposing to issue a red-herring Prospectus shall file it with the
Registrar at least 3 days prior to the opening of the subscription list and the offer.
Red-herring Prospectus shall carry the same obligations as are applicable in the case of a Prospectus.
Any variation between the red-herring Prospectus and a Prospectus shall be highlighted as variations in
the Prospectus.
Upon the closing of the offer of securities, the full Prospectus with the following information has to be
filed before the RoC and SEBI
- the total capital raised, whether by way of debt or share capital,
- the closing price of the securities, and
- any other details as are not included in the red-herring Prospectus
The red herring prospectus contains substantial information on the company as well as information
regarding the intended use of proceeds from the offering, market potential for its product or service,
financial statements, details regarding pertinent management personnel and current major shareholders,
pending litigation, and other pertinent details.
Statement in Lieu of Prospectus
Basis for
Prospectus Statement in Lieu of Prospectus
Comparison
Prospectus refers to a legal-document Statement in lieu of prospectus is a
published by the company to invite general document issued by the company when it
Meaning
public for subscribing its shares and does not offer its securities for public
debentures. subscription.
Objective To encourage public subscription. To be filed with the registrar.
Used when Capital is raised from general public. Capital is raised from known sources.
It contains details prescribed by the Indian It contains information similar to a
Content
Companies Act. prospectus but in brief.
Minimum
Required to be stated Not required to be stated
subscription
PART III: SHARES
What is a Share?
A share is the unit of measure for determining a member’s interest in the company.
The memorandum states the nominal value for each share - members must contribute at least this
amount.
Share is defined as “an interest having a money value and made up of diverse rights specified under the
articles of association”.
A share is the interest of a shareholder in a definite portion of the capital, measured by a sum of money,
for the purpose, of liability in the first place and of interest in the second
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A company limited by shares can issue shares
Characteristics of Share
 A share is a personal estate capable of being transferred in the manner laid down by in the Articles
of the company.
 It is incorporeal in nature and it consists merely of a bundle of rights and obligations.
 A share is not a negotiable instrument, but it is a movable property. It is also considered to be
goods under the Sale of Goods Act, 1930
 The company has to issue the share certificate. Every share issued by a company must be
numbered so that one share may be distinguished from another share.
 Shares are subject to stamp duty
 There are different types of shares: preferential share, equity shares, redeemable shares
 The ‘Call’ on Shares is a demand made for payment of price of the shares allotted to the members
by the Board of Directors in accordance with the Articles of Association. The call may be for full
amount or part of it.
Stock
When shares are fully paid-up, they may be converted into stock. Thus Stock is simply a set of shares put
together in a bundle. It is the aggregate of fully paid-up shares legally consolidated.
The aggregate can be split up into fractions of any amount without regard to the original nominal amount
of shares.
Conversion of shares into stock:

A company may, if so authorized by its Articles, convert all or any of its fully paid-up shares into stock, and
recovered that stock into fully paid-up shares of any denomination. The company has to pass a resolution
in the General meeting of shareholders, and inform of conversion to the registrar.
Share Certificate
Share certificate is issued by company as proof of allotment of share
It contains
 Name and address of shareholder
 Distinctive number of shares
 Type of share
 Amount paid per share
 Date of issue
Issue of share certificate creates an estoppel against the company for title and payment.
Share Capital
Share capital is the money raised by issue of shares
Authorised share capital: Provision for maximum capital which the company can collect by issuing shares.
Issued capital: Aggregate value of shares offered to public for subscription
Subscribed capital: part of issued capital taken up by public

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Allotted Share Capital: Value of shares the company has actually allotted to members.
Paid-up Share Capital: Amount that members have paid on their shares, excluding any premium. Shares
may be fully paid up or partly paid up
Called-up Share Capital: Paid-up capital + any amount members have been called on to pay.
Uncalled Capital and Reserve Capital: Uncalled capital is the amount owing on partly paid shares which
members have not yet been called on to pay.
Reserve capital is uncalled capital the company has resolved not to call unless the company is wound
up.
TYPE OF SHARES
Preference Shares
Shares that give preferential right to a dividend of fixed amount or fixed percentage per share - this
dividend is paid before anything is paid to ordinary shareholders. Right to dividend is normally
cumulative.
Preference shares usually give a preferential right to repayment of capital on a winding up.
Preference shareholders normally have restrictions placed on their power to vote at general meetings.
Preference shares can be further classified as

 Participating preferential shares: shareholders entitled to additional dividend from profits apart
from fixed minimum dividends
If the company generates a certain amount of profit, the holder of participating preference shares
will be paid a certain proportion of that profit, in addition to the normal fixed dividend.
If the company is winding up, the participating preference shareholders will be paid a certain
proportion of the net sale price received.
 Non-Participating Preference Shares: holders of non-participating preference shares are entitled
only to a fixed rate of dividend and do not have any share in the surplus profit. The surplus profit of
the company will thus go to the common shareholders.
Preference shares are non-participating in nature unless and until expressly provided in the
memorandum of the article.
 Cumulative preferential shares: unpaid dividends are accumulated and paid from future profits,
before equity shareholders are paid dividend
 Non-Cumulative preferential shares: if a company undergoes a loss in that year, then the
outstanding payment of dividend cannot be claimed in subsequent years
 Redeemable Preference Shares: can be redeemed after a fixed period or after giving a certain
notice
 Irredeemable Preference Shares: cannot be redeemed during the lifetime of the company.
Member only gets dividend, and then proceeds during liquidation/winding up

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 Convertible Preference Shares: holder has the option to convert into the common /equity share of
the company.
 Non-Convertible Preference Shares: Non-convertible preference shares do not carry the right of
conversion into the company’s common shares.
 Preference Shares with a Callable Option: The issuing company has the option to buy back the
share at a prefixed price on or before a pre-determined date.
 Adjustable-Rate Preference Shares: The rate of dividend is not fixed and depends on current
interest rates in the market.
Basis for
Equity Shares Preference Shares
Comparison
Equity shares are the ordinary
Preference shares are the shares that carry
shares of the company representing
Meaning preferential rights on the matters of payment of
the part ownership of the
dividend and repayment of capital.
shareholder in the company.
Payment of The dividend is paid after the Priority in payment of dividend over equity
dividend payment of all liabilities. shareholders.
In the event of winding up of the
Repayment of In the event of winding up of the company,
company, equity shares are repaid
capital preference shares are repaid before equity shares.
at the end.
Rate of
Fluctuating Fixed
dividend
Redemption No Yes
Normally, preference shares do not carry voting
Voting rights Equity shares carry voting rights. rights. However, in special circumstances, they get
voting rights.
Equity shares can never be Preference shares can be converted into equity
Convertibility
converted. shares.
Preference shareholders generally get the arrears of
Equity shareholders have no rights
Arrears of dividend along with the present year's dividend, if
to get arrears of the dividend for the
Dividend not paid in the last previous year, except in the case
previous years.
of non-cumulative preference shares.
Equity Shares
Equity shares are ordinary shares issued to members.

Dividend depends on company profits and there is no automatic right to a dividend.
Dividents are distributed only after dividends to preferential shareholders are distributed
After satisfying the rights of preference shareholders, the equity shareholders shall be entitled to share in
the remaining amount of distributable net profit of the company.
The dividends on equity shares is not fixed It will change according to the available profit
Shares at premium:
The issue price of the shares is higher than their nominal or face value, The difference between issue price
and face value is called premium.
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The premium amount collected may be used to
 Issue fully paid up bonus shares
 Write off expenses, commissions or discounts
 Pay premium on redemption of redeemable preference shares
Shares at discount:
The issue price of the shares is less than their nominal or face value
Equity shares are divided into
1. Equity shares with voting rights
2. Equity hares with differential rights
Equity shares with voting rights are the normal equity shares
Equity shares with differential rights
Equity shares with differential rights are same as ordinary equity shares except these provide additional
voting rights to the holder.
These shares should be authorised by Articles of Association
To become eligible to issue such shares, company should have

 Distributable profit for last 3 years
 Not defaulted in filing financial statements and annual returns for last 3 years
 No default in payment of declared dividend to shareholders
 Not penalised by court or Tribunal for last 3 years
The issue should be through ordinary resolution passed by general body

Max % of equity hares with differential rights is 26% of post-issue paid up equity share
Conversion of existing equity share capital to equity share with differential rights is not allowed.
Sweat Equity Shares

Sweat Equity shares are equity shares issued to employees or directors at a discount, for considerations
other than cash. Eg: Employee stock option plans (ESOP)
Such issue has to be authorised by special resolution in AGM. The resolution should specify the numner of
shares, market price, consideration, and classes of people eligible for such sharwes
Company should be in operation for minimum one year
All rights, limitations, restrictions etc applicable to normal hares apply to sweat equity shares also.
Bonus shares
Bonus Shares are additional shares given to the current shareholders without any consideration.
The new shares given to the existing shareholders in proportion to the number of shares they hold. For
Example if investor holds 100 shares of a company and a company declares 2:1 bonus offer, his holding of
shares will now be 300 instead of 100.
Issue of Bonus Shares increases the total number of shares issued and owned, but it does not increase the
value of the Company. The ratio of number of shares held by each shareholder also remains constant.

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The Companies Act, 1956 did not deal with issue of bonus shares. Rather the norms were set by SEBI. Sn
63 of the Companies Act 2013 deal with issue of Bonus shares.
The advantage / reasons of bonus share for the investor are

1. It is sign of good health of the Company. It is a signal that Company is in position to service its
larger equity.
2. The Investor does nit have to pay any tax upon receiving the bonus shares.
3. Bonus issue allows the company to conserve cash for reinvesting back into the business.
4. Issue of bonus share increases the number of outstanding shares and participation of smaller
investor in the Company shares and hence enhances the liquidity.
The Source out of which Bonus shares shall be issued
As per section 63(1) of the Companies Act, 2013, the Company may issue fully paid up bonus shares to its
members out of any of the following:
1. Free Reserves of the Company built out of genuine profit of the Company (not revaluation
reserves)
2. The Securities premium Account– For Listed Companies the realizable cash portion of the securities
premium account and for Unlisted companies whether in cash or others
3. The Capital Redemption Reserve Account which may be created from Buy Back of shares or
redemption of preference shares out of profits, may be utilized for issue of bonus shares.
The Company shall not issue bonus shares by capitalizing reserves created by the revaluation of assets.
Conditions for Issue of Bonus shares
A company may issue fully paid bonus shares, subject to the following conditions:
1. The Company must be authorized by Articles of Association of the Company to issue bonus shares
2. The Board of Directors in their meeting has to recommend the issue of Bonus shares.
3. The Company shall authorize bonus issue of shares in its General Meeting.
4. The Company has not defaulted in repayment of the deposits, debt securities, or payment of
statutory dues such as PF, ESI, gratuity etc
Right shares (Rights Issue):
New shares meant for the existing shareholders
Rights issue is fresh shares offered to existing shareholders in proportion to their existing holding in the
share capital of the company.
Pre-emptive right:
It is pre-emptive rights given by the status to existing shareholders.
The pre-emptive right to buy now shares is a statutory right of equity shareholders
Right to Renunciation:
the pre-emptive rights includes the right to renounce, if it is not restricted by the articles. Public and
private companies can have articles either to restrict or prohibit the right to renounce the rights shares. If
permitted, renunciation of issue rights shares can be made fully or partly in favour of any person, who
need not be an existing shareholder of the Company.

34
The AoA should have provision to issue rights issue.
The board of directors has the power to decide the time, price, number of shares, pro-rata and other
terms and conditions of the issue.
Needle Industries case (1981) : The rights issue is not necessarily made at the time of requirement of the
funds. It can be even made to create the desired number of shareholders to enable the company to
exercise its legal powers or to comply with legal requirement.
Sri Hari Rao V Gopal Automative Limited (1999): The minority shareholders can’t approach the court to
stop the rights issue saying they don’t wish to subscribe the same and it would lead to oppression.
Green Infra ltd. Case: Right issues may be offered at a premium. It is the prerogative of the board of
directors of a company to decide the premium amount and it is the wisdom of the shareholders whether
they want to subscribe to shares at such premium or not.
Basis for
Right Shares Bonus Shares
Comparison
Bonus shares refers to the shares issued by
Right shares are the one available to the
the company free of cost to the existing
existing shareholders equivalent to their
Meaning shareholders in the proportion of their
holdings, that can be bought at a fixed
holdings, out of accumulated profits and
price, for a definite period of time.
reserves.
Price to be decided by Board of Directors.
Price It may be issued at discounted prices or Issued free of cost
even charged premium
To bring the market price per share, within a
Objective To raise fresh capital for the firm.
more popular range.
Shareholders may fully or partly renounce
Renunciation No such renunciation
their rights.
Paid up value Either fully or partly paid up. Always fully paid up.
Minimum
Mandatory Not required
subscription
Redeemable Shares
A company can issue redeemable shares if power to do so is given by the articles.

The shares give a temporary membership of the company - the nominal value (and sometimes a premium)
is paid to the shareholder at the end of the period.
When shares are redeemed they must be cancelled by the company. The company must make up its
capital by issuing new shares or transferring funds from the profit and loss account to the capital
redemption reserve account.
Any premium payable on redemption must be paid out of profits.
Private companies can pay for redemption completely out of capital - this needs a special resolution
and a declaration from the directors that the assets will exceed liabilities after the payment is made.

35
Transfer of Shares
Transfer of shares in a public company is statutory right and cannot be prevenmted by the board or AoA
Right to transfer includes right to pledge and hypothecate the shares
Mathrubhoomi Printing v Vardhaman Publisher (1992): Transfer becomes complete only when it is
recorded in the register
Forgery in Transfers
Forged transfers or transfers on basis of forged documents are null and void. Original owner remains the
shareowner.
But if company has issued a share certificate to transferee and transferee has sold it to an innocent buyer,
company is liable to compensate the purchaser. The company can recover the loss from the person who
sold it.
Lien on Shares
The company has first lien on all shares except fully paid up shares. The company may sell such shares
giving 14 day notice to the registered holder
Forfeiture of Shares
If registered owner fails to make payments to a call, company can forfeit the shareholders share. This is
subject to following conditions
1. AoA should allow such forfeiture
2. 14 day notice is to be given to the shareholder to make the payment
3. Directors should pass a resolution of forfriture after 14 days
4. the proceedings should be in good faith
On forfeiture, the person ceases to be a member for the forfeited shares. He is not liable to make future
calls, but remains liable for earlier calls. He has no right to recover amount already paid (for partly paid
shares)
If company is wound up within one year of forfeiture such members are put in List B of contributors
Board of Directors may re-issue forfeited shares with a resolution
Surrender of Shares
If AoA allows, a member may surrender the shares to the company.
In case of fully paid up shares, directors may accept surrender in exchange of new sharesof same nominal
value.
Transmission of Shares
Transmission is the automatic transfer of shares by operation of law. It takes place in a number of
circumstances.
(i) Death of Shareholder: Shares of deceased shareholder transmit to his executor to deal with as directed
by the will or the rules of intestacy.

36
(ii) Insanity of Shareholder: If shareholder becomes a patient under the Mental Health Acts and a public
guardian is appointed, the shares transmit to the public guardian.
(iii) Bankruptcy of Shareholder: Shares held by a bankrupt transmit to his trustee in bankruptcy. Holder of
shares through transmission has the same rights and benefits as a member even if not registered as a
member - but he cannot vote. He can choose to be registered and can then vote.
Shareholder has right of nomination over the shares held by them.
PRIVATE PLACEMENT OF SHARES (Sn 42)
Private Placement is any offer of securities or invitation to subscribe securities to a select group of persons
by a company, other than by way of public offer.
The invitation is through issue of a private placement offer letter which satisfies the conditions specified in
section 42.
The offer to make private placement should be approved by shareholders through a special resolution.
Private placement can be made to persons identified by the board to a maximum of 200 person in a
financial year. Offers may be made to NBFC and HFC outside this 200 cap.
The offer letter shall not have the right of renunciation
The shares can only be subscribed by the person to whom the offer is made.
The offer shall be made either in writing or through electronic mode within 30 days of recording the name
of such person Every identified person willing to subscribe to the offer shall apply along with the
subscription money.
The monies received shall be kept in a separate bank account in a scheduled bank and the amount shall
not be utilized for any purpose
The allotment shall be made within 60 days from the date of receipt of application money. If the company
fails to do so it must refund the money to the subscriber within 15 days
Reduction of Capital
Reduction of Share Capital means reduction of issued, subscribed and paid up share capital of the
company.
A company can reduce its capital if this is authorised by the articles. It also requires alteration of the share
capital as stated in the memorandum - this needs a special resolution.
Company wanting to reduce share capital has to approach the Company Law Tribunal. The Tribunal
will only confirm the reduction if satisfied that the company’s creditors have been paid or have
consented to the reduction.
Reasons for reducing share capital

 eliminate losses
 return surplus capital to shareholders
 assist a buyback or redemption of shares
 distribute assets to shareholders.
 to release a liability to pay up unpaid share capital
37
 Reserve arising from a reduction of capital can increase or create distributable reserves and reduce
or eliminate losses.
Methods of Reduction
Companies limited by shares can reduce their share capital in one of the three ways
1. Extinguish or reduce the liabilities on any of its shares in respect of the share capital not paid up: For
e.g: if the shares are of face value of Rs. 100 each of which Rs. 50 has been paid, the company may reduce
them to Rs. 50 fully paid-up shares and thus relieve the shareholders from liability on the uncalled capital
of Rs. 50 per share.
2. cancel any paid up share capital: Company may reduce share capital by cancelling any shares which are
lost or is unrepresented by available assets. For e.g: if the shares of face value of INR 100 each fully paid-
up is represented by Rs. 75 worth of assets. In such a case, reduction of share capital may be effected by
cancelling Rs. 25 per share and writing off similar amount of assets.
3. Pay off any paid up capital which is in excess of the wants of the company. (Buy-back of shares)
Company may reduce share capital by paying off fully paid up shares which is in excess of the wants of the
company. For e.g: shares of face value of Rs. 100 each fully paid-up can be reduced to face value of Rs. 75
each by paying back Rs. 25 per share.
No reduction of capital would be allowed in case of Arrears in the repayment of Deposits and interest
SHAREHOLDER
The term “shareholder” refers to a person who holds or owns share in a company
The term “member” refers to a person whose name appears on the register of members.
For all the purpose of the word “shareholder” and “member” are used interchangeably and synonymously
In a few exceptional cases where a person may become a member of a company without, being its
shareholder and vice versa. For example, unlimited companies or companies limited by guarantee having
no share capital will have only members but no shareholder.
The holder of a share warrant is a shareholder but not a member as his name is removed from the register
of members immediately after the issue of such share warrant.
A transfers or the legal representative of the deceased person may be a shareholder but he may not be a
member until he gets his name entered in the register of the members.
Who can become shareholders/ members of a company

Law has not prescribed any qualification to become member of the company. Any person who is
competent to contract as per section 11 of the Indian contract Act may become a member of a company.
This is subject to the provisions of the MOA and AOA of the company. Articles of a company may also
provide that certain persons cannot become members of the company.
 Minors:
Mohri Bibi vs. Dhamadas Ghosh (1903) Minors are not competent to become the members of a company
because an agreement with a minor is void.
In England, an infant may become a member of a company unless this is forbidden by the AOA of the
company.
 Firms:

38
A partnership firm cannot become the member of a company because it has no separate legal status from
the partner. The partner of the firm can have the shares as joint holders and become member of the
company.
 Company:
A Company may, if so authorized by its AOA, become a member of another company.
Hindu Undivided Families (HUF):
If the HUF purchases shares of a company in the name of Karta,then only Kartashall be the member of a
company, not the Hindu Undivided Family.
 Insolvent
An insolvent can remain a member until his name appears on the Register of Members. He is also entitled
to vote and attend meetings although his shares pass on the Official Receiver.
 Fictitious person:
A person who takes the shares in the name of a fictitious person becomes liable as a member. However,
such a person shall be imprisoned up to 5 years under section 68 (a).
 Foreigners
Foreigners can become members of companies in India but permission of Reserve Bank of India has to be
obtained for this purpose. The right of the foreigner as a member will be suspended if he becomes an alien
enemy.
Register of Shareholders
Section 150 of the companies Act requires every company to keep a register of its members. The following
particulars are required to be entered in the register:-
1.The name, address and occupation of each member.
2. In case of a company having a share capital, the share held by each member and the amount paid on
each share.
3.The date at which each person was entered in the register as a member.
4.The date at which any person ceased to be a member.
If default is made in maintaining the register of members, the company and every officer of the company,
who is in default, shall be punishable with a fine which may extend to rupees 500 for every day during
which the default continues. {Sec. 150(2)}.
Register of members or that of debenture holders is a prima facie evidence of membership
Rule of Majority (Rule in Foss v Harbottle):
The principle of rule by majority has been made applicable to the management of the affairs of
Companies. The members pass a resolution on various subjects either by simple majority or by 3/4
majority. Once the majority is passed by the requisite members, it becomes binding on all the members of
the Company.
As a resultant corollary, the Court will not ordinarily intervene to protect the minority interest affected by
the resolution, as on becoming a member, each person impliedly consents to submit to the will of the
majority of the members. Thus, if wrong is done to the Company, it is the Company which is the legal
entity having its own personality, and that can only institute a suit against the wrongdoer, and
shareholders individually do not have the right to do so.
Foss v. Harbottle: Two distinct but linked propositions were phrased-

1. The Court will not ordinarily intervene in the cases of an internal irregularity if the matter is one which
the Company can ratify or condone by its own internal procedure.
2. When a wrong has been done to a Company, prima facie, the only proper plaintiff is the Company itself.

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Here action was brought by two shareholders, 'F' and 'T', of a Company against the Directors and Solicitors
of the Company, alleging that Directors were acting in a fraudulent manner and effecting illegal
transaction to cause loss. The Court held that the action could not be brought by the minority
shareholders. The wrong done to the Company was one which could be ratified by the majority of the
members. The Company can only act through the majority shareholders to decide the proceedings against
the Directors.
Rajahmundry Electric Supply Co. v. Nageshwara Rao: Court reaffirmed that company is a separate legal
entity from the members who compose it.
Exception to the Rule in Foss v. Harbottle:
Representative Action:
In certain circumstances an individual member may bring an action to remedy a wrong done to his
Company or to compel his Company to conduct its affairs in accordance with its constitution, even though
no wrong has been done to him personally and even though the majority of his fellow members do not
wish the action to be brought.
When the relief is sought against third parties for the Company's benefit, the action may also be described
as derivative, because the individual member sues to enforce a claim which belongs to the Company, and
his right to sue is derived from it.
In the following cases the rule in Foss v. Harbottle does not apply, i.e., the minority shareholders may bring
an action to protect their interest-
1. Ultra Vires and Illegal Acts:
Edward v. Halliwell The rule in Foss v. Harbottle does not apply where the act complained of is ultra vires
the Company.
2. Breach of Fiduciary Duties:
Satyacharanlal v. Rameshwar Bajoria: A derivative action may be brought against the Directors and
Promoters if they have been guilty of breach of their fiduciary duties to the Company
3. Fraud or Oppression against Minority:
Edward v. Halliwell: Where the majority of a Company's members use their power to defraud or oppress
the minority, their conduct is liable to be impeached even by a single shareholder.
4. Inadequate Notice of a Resolution passed at the Meetings of Members:
If an insufficiently informative notice is given of a resolution to be proposed at a general meeting, any
member who does not attend the meeting, or who votes against the resolution, may bring a
representative action to restrain the Company and its Directors from carrying out the Resolution.
5. Qualified Majority:
Where the act or the articles require a qualified majority for passing of a resolution, the rule in Foss v.
Harbottle cannot be invoked to override these requirements.
6. Where the Personal Rights of an Individual Member have been Infringed:
7. Statutory Exceptions:
anything in violation of Companies Act, SEBI provisions or any other statue in force
Oppression and Mismanagement

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Sn.241 to s.247 of the Companies Act, 2013 lay down the specific provisions whereby both the National
Company Law Tribunal and the Central Government are empowered to interfere in the affairs of the
Company for preventing oppression and mismanagement
Oppression is when the affairs of the Company are being conducted in such a manner that is-
 oppressive to a member/some members,
 prejudicial to public interest.
The following acts are held as oppressive, on the strength of various case laws
 Not calling a general meeting and keeping shareholders in the dark
 Non-maintenance of statutory records
 Not conducting the affairs of the Company in accordance with the Companies Act
 Depriving a member's right to dividend.
 Refusal to register transmission under will
 Voting by interested Director on a resolution.
Various case laws have held the following acts as not oppressive
 An unwise, inefficient or careless conduct of a Director. (Needle Industries case)
 Non-holding of the meeting of the Directors
 Not declaring dividends when Company is making losses.
 Non-filing of records.
Mismanagement is when
 The affairs of the Company are being conducted in such a manner that it is prejudicial to the
interest of the Company, or public interest,
 There is any material change in the management/control of the Company by
 alteration in the Board of Directors/Manager,
 ownership of the Company's shares,
 change in the membership,
 influencing on the conduct of the affairs of the Company in such a manner that it is prejudicial to
public interest or to the interest of the Company.
Acts Held as Mismanagement:

 Serious fight between the Directors resulting in serious prejudice being caused to the Company
 Diversion of the funds of the Company for the benefit of the majority group.
 Bank account operated by unauthorised persons.
 Company doomed to trade unprofitably.
 Collusive sale of assets by lending institutions.
Oppressed minorities can move an application to the Tribunal whenever the affairs of a Company are
conducted in a manner being unjust to the member/s or injuring the public interest.
Power of Tribunal
The Tribunal may dispose off an application by passing the following orders:
 To regulate the conduct of the Company's affairs in the future.

 To purchase the shares or interest of any member/s by the other members thereof by the
Company.
 Reduction of its share capital, where it has been ordered to purchase the shares.
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 To terminate, set aside or modify any agreement made between the Company and Directors, or the
Manager on equitable and just terms
Powers and Role of Central Government
The Central Government is vested with the powers to prevent oppression or mismanagement. It can
exercise these powers on an order given by the Tribunal.
 The Government may appoint Additional Directors to safeguard the interest of the
Company/shareholders/public interest.
 Directors so appointed by the Central Government are not required to hold any qualification shares
nor is there retirement from their office by rotation.
 On appointing Directors or Additional Directors, the Central Governemnt may issue directions in
regard to the company’s affairs.
Rights of Members / Shareholders:
The principle of Foss v. Harbottle only applies where a corporate right of a member is infringed. The rule
does not apply where an individual right of a member is denied.
Statutory rights cannot be taken away or modified by any provisions in the MOA or the Articles
Such rights include:
Personal Rights
Right to:
 have name and shareholding entered on the register of members to prevent unauthorised
additions or alterations.
 attend and vote at meetings of members
 receive duly declared dividends (participate in distribution of profits)
 exercise pre-emption rights over other members' shares. Right of priority to have shares offered in
case of increase of capital (Sn 81)
 restrain the Company from doing ultra vires acts
 speak at meetings
 transfer shares (Sn 82)
 share in the assets of the company after distribution to creditors etc, when the company is wound
up. (sec.511 and 475) A company cannot return capital to the members. This provision operates to
protect creditors.
 apply to Tribunal or central Government for relief in cases of oppression and mismanagement
(sec.397&398)
2. Rights mentioned in the Companies Act, 2013

Right to:
 inspect various documents of registers
 have a share certificate (Sn 113)
 appoint a proxy
 receive notice to move resolution, to vote at meetings, to demand a poll etc.
3. Any other rights given by the MOA (Documentary rights)
Collective Rights:
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Members also enjoy some collective rights, which cannot be exercise in their individual capacity
Right Who can exercise Relevant
section
To require the directors to convene an extra- Member holding 1/10thof the paid up capital Sn 169
ordinary general meeting and to hold a or those representing 1/10th voting power
meeting on their refusal
To demand a poll Five member in case of a public company and Sn 179
one member in case of a private company.
Right to apply to the central Government to Sn 235
investigate the affairs of the company.
Right to appoint auditors and to fix their Majority of members at AGM Sn 224
remuneration.
Right to appoint directors at the AGM. Majority of members at AGM 225,226
& 227
Right to remove directors Majority of members at voting Sn 284
Liability of members
1. Liability to Pay up Share Capital
Liability to make the payment for the whole amount of shares held by them. In case of company limited by
guarantee, a member is liable to the extent of his guarantee and in an unlimited company to an unlimited
extent.
The amount of shares may not be paid all at once, but from time to time as and when the company makes
calls on the shareholders. (partly paid up shares)
All moneys payable by any member to the company under the Memorandum or articles of the company
shall be a debt due from him to the company. {sec. 36}
2.Liability to pay debts

In case of reduction of members below 7 in a public company and 2 in a private company, members
become liable to pay whole debts of the company. {sec. 45}.
DIVIDENDS
Dividends is
 sharing of profits in the going concerns and
 distribution of the assets after the winding up.
Dividends are distributed among the shares holders

Both equity shareholders and preferential shareholders can get the dividends. Preferential shareholders
get the first right, as per the specified amount. Equity shareholders get the residue in proportion of their
holdings.
The dividends can be declared and paid out of:

 Current profits,
 Reserves,
 Money provided by the government
 Depreciation as provided by the companies.
It is paid after presenting the balance sheet and profit and loss account in the AGM
Dividends are to be only in cash, if otherwise specified in the AOA.

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DEBENTURES
Debenture is most important instrument and method of raising the loan capital by the company.
Debenture is stock, bonds or any other instrument of a company evidencing a debt. Such debt may or may
not constituting a charge on the assets of the company: Sn 2(30)
When the company issues a debenture, it becomes liable to pay a specified amount with interest to the
debenture-holder, at the specified date.
Although the money raised by the debentures becomes a part of the company's capital structure, it does
not become share capital.
Debenture holders do not have any voting rights
A company shall pay interest and redeem the debentures in accordance with the terms and conditions of
their issue.
A company may also issue debentures with an option to convert such debentures into shares, either
wholly or partly at the time of redemption. Sn 179(3)
The issue of debentures with an option to convert such debentures into shares shall be approved by a
special resolution passed by the shareholders in the general body meeting.
Company can issue secured and unsecured debentures.

The company shall create a debenture redemption reserve account out of the profits of the company
available for payment of dividend. The amount credited to such account shall not be utilized by the
company except for the redemption of debentures (Sn 71)
Companies issuing secured debentures have to comply with the following conditions:-
 Date of redemption shall not exceed ten years from the date of issue. Companies engaged in the
setting up of infrastructure projects may issue secured debentures for a period exceeding ten years
but not exceeding thirty years;
 The debentures shall be secured by creating a charge on the properties or assets of the company,
having value sufficient for the due repayment of the amount of debentures and interest
 The company shall appoint a debenture trustee before the issue of prospectus or letter of offer for
subscription of its debentures. The company shall also execute a debenture trust deed within 60
days of allotment
Debenture Trustees:
Company cannot issue a prospectus or make an offer or invitation to the public or to its members
exceeding five hundred for the subscription of its debentures, unless it has appointed one or more
debenture trustees.
A debenture trustee shall take steps to protect the interests of the debenture holders and redress their
grievances in accordance with the prescribed rules
Where at any time the debenture trustee comes to a conclusion that the assets of the company are
insufficient or will become insufficient to discharge the principal amount, the debenture trustee may file a
petition before the Tribunal. The Tribunal may impose restrictions on the incurring any further liabilities by
the company.
Penalty for Default:

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Where a company fails to redeem the debentures on the date of their maturity or fails to pay interest on
the debentures when due, the Tribunal may direct the company to redeem the debentures. If the
company defaults, every officer of the company who is in default shall be punishable with imprisonment
for max three years and/or fine between Rs 2 Lakhs and 5 Lakhs
A contract with the company to take up and pay for any debentures of the company may be enforced by a
decree for specific performance.
PART IV: DIRECTORS

The director occupies the position of a Trustee or an agent in relation to the company
The qualifications of a director is laid down in Articles of Association

Acts of a director before being disqualified are considered valid
The 1956 Act provided that the limit for maximum number of directors be based on its articles or twelve
whichever is lower. The 2013 Act provides that the company shall have a maximum of fifteen directors.
Appointing more than fifteen directors would require approval of shareholders through a special
resolution.
Appointment of Directors
Directors by Election
The articles of a company may list the names of the first directors in its articles of association
If no names are mentioned in the articles, the subscribers of the memorandum become the first directors.
The AGM appoints subsequent directors
At least one-third of the directors should retire at every AGM. The AoA can stipulate all; directors to retire
at AGM (Sn 255). Retiring directors may be re-appointed
If any person other than the retiring director wishes to stand for directorship or any member proposes a
person for directorship, he must give 14 days’ notice to the company before the AGM and make a deposit
of Rs 500/-.
The company must inform the members at least seven days before the AGM
Directors Nominated by the Board

The Board of directors can exercise the power to appoint directors in the following three cases :
1. Additional Directors (Section 260)
2. Filling up the Casual Vacancy (Section 262)
3. Alternate Directors (Section 313).

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Additional Directors
If the Articles authorise, the Board may appoint additional directors.
Such additional director together with the directors constituting the Board should not exceed the
maximum number fixed by the articles.
Additional directors are entitled to hold office only up to the date of the next annual general meeting of
the company (Section 260),
P. Natarajan V. Central Government : The provision for an additional director is one which is meant to
enable the companies to have the benefit of the services of a person whose presence In the board is
desirable in the interests of the company
Casual Vacancies
A casual vacancy may arise if the director dies or vacates office before his term of office expires. If the AoA
allows the Board of Directors may fill this position at their discretion
Alternate Director (Sn 313)

The alternate director fills a temporary vacancy in the office of a director
The Board, if authorised by AoA appoint an alternate director to act for a director during his absence for a
period of not less than three months
Appointment of an alternate director is not considered as an increase in the strength of the Board of
directors. Likewise, alternate directorship held by a person cannot be counted towards maximum number
of directorships which a person can hold.
An alternate director is not required to hold any qualification shares. However, the alternate director is
subject to the same liability and supposed to perform the same duties as any other director.
Appointment directors by proportional representation [Section 265]
Ordinarily, directors are appointed by simple majority vote. As a result majority shareholders controlling
51 per cent or more votes may elect all directors.
In order to enable the minority shareholders to have a proportionate representation on the Board, section
265 of the Companies Act gives an option to companies to appoint directors through a system of
proportional representation.
A company may provide in its Articles for the appointment of not less than 2/3rd of the total directors
according to the principle of proportional representation by single transferable vote or some system of
cumulative voting or otherwise.
Such appointment shall be made once in every three years
Appointment of directors by the Central Government( Section 408)
The Central Government can appoint directors on orders passed by the Company Law Board .
The CLB may order such appointments when it finds that the affairs of the Company have been
 conducted in a manner oppressive to any member of the company
 in a manner prejudicial to the interests of the company or
 is against public interest
A minimum of 100 members of members holding not less than 1/10th of the total voting power of a
company may file a petition to CLB to make such an order

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In lieu of passing an order as aforesaid, the CLB may directs the company to amend its article so as to
provide for election of directors by the system of proportional representation.
Appointment of Directors by third parties (Nominee Directors)
At times, directors represent certain third parties in the Board. This usually happens when the
Government, foreign collaborators, holding companies, financial institutions or other lenders, etc,
nominate a director to represent their interest on the Board.
Such nominee directors can be appointed only if a provision to that effect exists in the Memorandum of
Association or Articles of Association of the company.
It should be ensured that the total number of non-rotational directors does not exceed 1/3rd of the total
strength of the Board.
Independent Directors
The 2103 companies act requires every listed public company to have at least one-third of a total number
of directors as independent directors.
Unlisted public companies with certain turnover threshold has to have a minimum of two independent
directors
An Independent Director is
a person of integrity and possesses relevant expertise and experience;
is or was not a promoter of the company or its holding, subsidiary or association company;
does not relate to promoters or directors in the company, its holding, subsidiary or associate company.
Sn 150 of the 2013 Act stipulates manner or procedure for selection of independent directors. The
independent directors is to be taken by a databank maintained by associations.
Woman director on the Board: Sn 149 of 2013 act requires listed companies to appoint at least one woman
director
Independent Director acts as a guide, coach, and mentor to the Company. The role includes improving
corporate credibility and governance standards by working as a watchdog and help in managing risk.
Qualification / Eligibility of Directors
The 1956 Act did not prescribe any academic or professional qualifications for directors.
The 2013 Act provides for number of qualifications

Majority of members of Audit Committee including its Chairperson shall be persons with ability to read
and understand the financial statements.
Appointment of at least one woman director on the Board for some classes of companies
At least one director who has stayed in India for a total period of not less than hundred and eighty two
days in the previous calendar year.
The 1956 Act required that a public company can have one director elected by small shareholders;
however, as per the 2013 Act, this provision is applicable for listed companies only.
Disqualifications
As per the company law, the following persons are disqualified from been appointed as a director
47
 Persons with Unsound mind
 Undischarged insolvents or applied for being insolvent
 Persons convicted by the court
 Member who has not paid for the call on shares
 Persons who are already directors in maximum number of companies as per the provisions of the
Act (10 as per 2018 amendment)
 Persons who has been disqualified by the court for any other reason
Legal Position of Directors / Duties of Directors
Directors as agents
Directors are agents of the company.

Cairns, LJ. observed: “The company itself cannot act in its own person; it can only act through directors,
and the relationship is the same as ordinary case of principal and agent”.
The ordinary rules of agency apply to any contract or transaction made by directors on behalf of the
company.
Where the directors contract in the name and on behalf of the company it is the company which is liable
on it and not the directors.
Kirlampudi Sugar Mills Ltd. v, G, Venkata Rao: Chief executive of company executed promissory note and
borrowed amount for company’s sake. It could not be said that amount was borrowed by him in his
personal capacity
State Electricity Board v. Shivalik Casting (P.) Ltd:Where surety was furnished by directors in their personal
capacities and not for and on behalf of company, company could not be sued for amount of surety
Vineet Kumar Mathur v. Union of India : Directors as agents make the company liable even for contempt of
court
Directors incur personal liability in the following circumstances :
 Where they contract in their own names;

 Where they use the company’s name incorrectly, g., by omitting the word ‘Limited*;
 Where the contract is signed in such a way that it is not clear whether it is the principal (the
company) or the agent who is signing; and
 Where they exceed their authority, g., where they borrow in excess of the limits imposed upon
them – Weeks v. Propert
Directors as trustees
A trustee is a person in whom legal ownership of the assets which he administers for the benefit of
another or other vests.
Directors are regarded as trustees of the company’s assets.

48
They administer those assets and perform duties in the interest company and not for their own personal
advantage.
Almost all the powers of director e.g. allotting share, making call , forfeiting share, accepting or rejecting
transfers etc are powers in trust.
Brahnmyya & Co.: Madras High Court held that for misuse of the power of applying funds, directors could
rendered liable as trustees and on their death the cause of action survives against their legal
representatives.
Dale & Carrington Investment (p j Ltd v. P.K. Prathapan: Directors are liable to make good money which
they have misapplied, upon the same footing as if they were trustees.
Director v/s Employee
Director Employer
A director is elected by the shareholders in An employee appointed by the company
general meeting, under a contract of service
Directors enjoys well-defined rights and Employee is servant of the company.
powers under the Act or the articles. Even the Employer can always control and interfere in
shareholders who elect them cannot interfere his work
with their rights or powers except under
certain circumstances.
Lee Behrens & Co., Re: Directors are elected representatives of the shareholders engaged in directing the
affairs of the company on its behalf. As such directors are agents of the company but they are not
employees or servants of the company.
R.R. Kothandaraman v. CIT (1957): There is nothing in law to prevent a director from accepting
employment under the company under a special contract which he may enter into with the company.
Accordingly, where a director accepts employment under the company under a separate contract of
service, in addition to the directorship, he is also treated as an employee.
Powers of Directors
Statutory powers
(Board of Directors can make these decisions, without prior approval from general body)
Directors have the power to
 make call on shares in respect of unpaid money.
 authorize buy-back of shares / reduce share capital
 issue debentures, whether in or outside india.
 borrow money otherwise than on debentures
 make loans or give guarantee in respect of loans
 invest in funds based on Objectives listed in memorandum
 diversify the business of the company (limited to objectives listed in memorandum)
 approve the financial statement and board’s report

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 approve amalgamation, merger or reconstruction
 take over a company or acquire a company or substantial stake in another company.
 declare interim dividend. ( 123(3))
 recommend the rate of dividend on the shares of the company subjected to approval by
shareholder of the company
The director have the powers to appoint

 the first auditor of the company
 alternate directors. (sec 161)
 additional directors. (sec 161)
 key managerial personnel (KMP) including Managing Director, Manager, Secretary of the company
.
The directors have the following powers, as long as the AGM passes a resolution for the same
 Sell or lease any asset of the company

 borrow money in excess of paid up capital and free reserves
 appoint a sole agent for more than 5 years
 issue bonus shares and for reorganization of share capital
 contribute money for charitable purposes exceeding Rs. 50,000 or 5% of the average profits of 3
years whichever is greater
Managerial powers of Directors

Power to
 contract with the third party
 set terms and conditions for the issue of debentures
 form policy and to issue instructions for the efficient running of the business
 control and supervision of work of subordinates
Duties of Directors
General Duties of Directors

To:
 Form policy and determine objectives of a company
 Delegate power to any committee if the Articles permit
 Issue instructions to subordinates for the implementation of policy
 Review company’s progress
 Appoint their subordinate officer, managing director, Manager, Secretary, other employees
Fiduciary Duties
 To act honestly and with good faith
 Not to use confidential information of the company for their own purpose
 Duty of Care and to act reasonably while acting for the company
 Not achieve any undue gain or advantage
 Not to contract with company, where he/she or his relative has an interest in the contract. When
directors have interest, they need to inform the board or seek prior approval while entering into
contract. Otherwise contract is voidable
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Specific Duties
 Take up qualification shares within 2 months after his appointment
 Decide the minimum subscription and issue prospectus.
 Make sure prospectus does not contain any false or misleading statement
 Ensure full and correct disclosure in prospectus of all matters as required by law.
 Sign the prospectus before it has been delivered to the Registrar.(sec 26)
 Call and attend statutory and annual general meeting on time
Disclosures to be made by Directors

A director must disclose
 their name, address and occupation
 shareholding in a company
 interest in contracts of the company
Liabilities of a Director
The company law imposes personal liability on the directors or members of a company in certain cases
notwithstanding the cardinal principles of 'separate personality' and 'limited liability'
The directors will have to make good for any loss on account of –
 an ultra vires act where the directors have entered into a contract beyond their powers.
 breach of trust where the directors make a secret profit out of the business
 negligence or for not performing his duties honestly and carefully
 For dishonest act to make personal profits with mala-fide intentions
The directors will be personally liable towards the 3rd parties –

 For any mis-statement in the prospectus for acting fraudulently, the directors shall be liable to pay
compensation to every person who subscribe for shares on the faith of such prospectus.
 For failure to repay application money on non- receipt of minimum subscription or on refusal to list
shares by the stock exchange.
 For acting in their own name without mentioning the name of the company
 For acting beyond the powers of the company
 Failure to file returns or give notices to registrar
 Failure to issue share certificate and debenture certificate
 Failure to maintain register of the members and register of debenture holders *
When the liability has been made unlimited by the Memorandum directors are liable for any liability at the
company at the time of winding up
Criminal Liability of Directors

Directors can have civil or criminal liability

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Act Punishment Relevant
section
Issue of Prospectus with untrue or misleading statements 6 months to 10 years imprisonment 34
Issue of shares at a discount Fine – 1 lakh to 5 lakhs, and/or max 6 months 53
imprisonment
Buy back of company shares in default of stipulated Min 3 years imprisonment and/or min one lakh fine 68
provisions under Company law / SEBI
Not appointing debenture-trustee, failure to redeem Max 3 years imprisonment, 2-5 lakh fine 71
debentures on time and failure to obey orders of tribunal in
these regards
Not filing annual returns before RoC. The return needs to be 50,000/- to 5 lakh fine and/or max 6 months 92
filed before the Registrar of Companies(RoC) within 60 imprisonment
(sixty) days from the date of AGM
Not preserving minutes of meetings Max 2 years imprisonment, and/or 25,000 to 1 lakh 118
fine
Not maintaining proper books of accounts, financial 50,000/- to 5 lakh fine and/or max 1 year 128, 129
statements in prescribed form or accounting standards imprisonment
Related party transaction: sale or purchase, or supply of 25,000/- to 5 lakh fine and/or max 1 year 188
goods, an appointment of an agent or a related person to imprisonment
the office of profit in a company without approval of Board
Furnishing false statement, mutilation or destruction of Sn 477: 6 months to 10 years imprisonment, 229
documents, Fraud Minimum fine equal to amount of fraud, max three
times value of fraud
CONSEQUENCES OF UNAUTHORIZED BORROWING
Directors cannot borrow more than the sum specified in articles or authorised by a general body
resolution.
When a company borrow something without the authority or beyond the amount set out in the articles it
is an unauthorised borrowing. These borrowings are void.
The contract of unauthorized borrowing is automatically void and the lender cannot sue the company. The
securities which are given for these unauthorised borrowing are void and inoperative. The director will be
personally liable,
Officer in default
“Officer who is in default”, is the officer of the company who is liable for any penalty or punishment by
way of imprisonment or fine. This is normally key managerial personnel such as MD or CEO. When there
are no key managerial person, it is the director(s) specified by the Board, or all directors if there is no such
specification.
COMPANY MEETINGS
Meeting is “Any gathering, assembling or coming together of two or more persons for the transaction of
some lawful business of common concern” – P K Ghosh
A company meeting may be defined as a concurrence or coming together of at least a quorum of members
in order to transact either ordinary or special business of the company

52
The management of a company is carried on through meetings of shareholders and directors and the
resolutions adopted therein.
All the policy matters of the company are being decided in the meetings of the company
Meeting of Shareholders
Meetings allow shareholder or members of a company, who are the real owners, the opportunity to
discuss the affairs of the company and to exercise their ultimate control over the management of the
company.
Statutory meeting
To be conducted once in life time by the company limited by Shares
To be conducted within one month from the date of commencement of the business or within six months
of incorporation
The purpose of the meeting is to enable members to know all important matters pertaining to the
formation of the company, such as
 Which shares have been taken up
 money received
 contracts entered into
 sums spent on preliminary expenses, etc.
A notice of at least 21 days before the meeting must be given to members
Annual General Body Meeting (AGM)
The first meeting can be held within 18 months of the incorporation. There after subsequent AGM must be
held by the company every year within 6 months of the closing of the financial year
The interval between any two AGM must not be more than 15 months
AGM is conducted based on the provisions given in the Articles or by passing a resolution in one AGM for
the subsequent AGM
The following items are considered at AGM

 Consideration of annual accounts, director’s report and the auditor’s report
 Declaration of dividend
 Appointment of directors in the place of those retiring
 Appointment of and the fixing of the remuneration of the statutory auditors.
In case any other business (special business) has to be discussed and decided upon, an explanatory
statement of the special business must also accompany the notice calling the meeting
Extra ordinary general meeting
Any general meeting which is held between two AGM’S.

It is usually called to discuss any particular matter of urgent importance to the company.
Such meetings are for the consideration of any specific subject, decision of which cannot be postponed to
the next AGM. Some of the reasons are:
 Alteration of any clause of MOA
 Changes in the AOA,
 Scheme of the reduction of share capital etc.
53
Class meetings
Meetings of particular class of a shareholders, such as meeting of preference shareholders

Such a meeting is usually called for the alteration in the rights and privileges of the shareholders and for
the purpose of conversion of one class of shares into another.
The AOA defines the procedure for calling such meetings.
Notice of 21 days should be given to all the concern members regarding the type of meeting and details of
conduct
Meetings of Board of Directors
The directors, in whom the management of the company is vested, must come together periodically to
function as a team and take collective decisions regarding the business policy of the company and to
exercise overall supervision over the management.
in the presence of the members called the shareholders and the company’s management called the Board
of Directors, after following all the procedures as required by the law and the A.O.A. of a company
Board Meetings
The directors of a company exercise most of their powers in a joint meeting called the meetings of the
Board.
Board meetings are called for the following business:

 Share related issues: To issue shares and Debentures, makes calls on shares, forfeit the shares and
transfer the shares
 Financial relate: To fix the rate of dividend, to take loan in addition to debentures and to invest the
wealth of the company
 Administrative matters
A meeting of the Board of Directors must be held at least once in every three months
Minimum four such meetings shall be held in every year (section 285)
Notice of every meeting of the Board of Directors must be given in writing to every director in India and
also to a director who is outside India for the time being (section 286).
The notice should mention the place, time and date of the meeting. The day must be a working day and
time should be during business hours unless agreed otherwise by all the directors.
There is no need to send notice, if the Articles provide for meetings to be held at regular intervals e.g.
monthly, the time and place being fixed.
Quorum
The quorum for the Board meeting should be at least two directors or one third of total strength of the
Board of directors, whichever is more subject to a minimum of two directors. Directors who are interested
in any of the resolution to be passed at the Board meeting shall not be counted for the purpose of quorum
of that resolution.
Meeting of the committees of Directors

54
The Board of Directors may form committees and delegate some of its power to them
Such delegation of powers to such committees is to be authorized by the AOA and should be subject to the
provisions of the companies act.
In large companies routine matters like allotment, transfer, and finance are handled by such sub-
committees of the BOD.
Meetings of creditors
This type of meetings are called when the company proposes to make a scheme for arrangement with its
creditors.
Section 391 to 393 of the companies Act laws down the procedure and give power to the company to
compromise with the creditors.
Meeting of debenture holders:
These meetings are called at the time of reconstruction, reorganization, amalgamation or winding up of
the company, when the interests of debenture holders are involved.
Debenture trust deed contains all rules and regulations related to conduct of meeting and all things
related to it
Essentials of a valid meeting
Proper convening authority.

The resolution to call a general meeting must be passed at a Board meeting
Proper notice
A proper notice to every shareholder, auditor and directors of the company at least 21 days before the
date of the meeting.
Notice to be in writing containing agenda (subject matter) and the date & time of the meeting
Quorum.
Quorum is the minimum number of the members who must be present in a meeting to proceed The object
of the quorum is to avoid decision taken by small majority which may not be acceptable to vast majority of
members.
The AOA of the company lay down the quorum for different meetings of the company
The company Act fixes two as the minimum numbers to complete the quorum in private company and five
in case of a public company
If the quorum does not complete within half an hour of the prescribed time, meeting will be adjourned to
the same time place and day in the next week
Chairman of the meeting (Sn 175)

The chairman of the meeting is the person who presides the meeting.
He is the judge of admissibility and the upholder of order and decorum.
Unless the articles otherwise provide the members present in the meeting shall elect one of them as
Chairman by showing of hands
The responsibility for the smooth conducting of the meeting rests on the chairman of the meeting.
Powers of chairman
55
 To decide the priority in which the members will speak.
 To stop discussion if it has become sufficiently long and endless.
 To order and take a poll
 To get disorderly persons removed from the meeting.
 To use casting vote.
 To exclude any matter from the minutes of the proceedings of the meeting which is irrelevant,
Duties and responsibilities of the chairman
 To conduct the meeting according to the agenda
 To follow strictly the rules of company law and AOA
 To preserve peace and order in the meeting
 To listen to the minority.
 To take correct and valid decisions.
 Correct use of powers of adjournment of the meeting.
 Bonafide use of the casting vote.
 To sign the minutes having seen that they are properly and correctly entered in the minute Book
Proxy (Sn 176)

A proxy is an authorized agent of the member for the purpose of voting.
Any member entitled to attend a general meeting and to vote may send a proxy to attend the meeting and
to vote on his behalf.
A member cannot send more than one proxy unless otherwise provided in the Articles.
A proxy can vote at the meeting only by poll unless otherwise provided in the Articles but he cannot speak.
A member intending to send a proxy shall fill in the proxy form send along with notice of meeting. The
proxy has to be named and the form send it to the company at least forty-eight hours before the meeting.
The proxy sent by a member need not be a member and may be an outsider.
A proxy is normally not counted when quorum is counted.
Directors cannot send proxy to attend a Board meeting on his behalf.
It is a duty of the secretary to collect the proxy forms and prepare a Proxy List.
Resolution
Business transacted at all the meetings of the company is recorded in the form of resolution. Every item
included in the agenda is put before the meeting in the form of written approval, motion for discussion
and decision.
When the motion is approved by the required majority of members present, it becomes a resolution
Types of the resolutions:

Ordinary resolution:
An ordinary resolution is that which is passed by a simple majority at any general meeting of the
shareholders. It may be passed by show of hands or poll
Special resolution
Special Resolution (SR) is a resolution in which the votes cast in favour of the resolution must be three
times higher than the votes cast against it
Extraordinary resolution: no longer applicable

56
Basis for
Ordinary Resolution Special Resolution
Comparison
When at the general meeting, simple When at the general meeting, super
Meaning majority is required to move the resolution, majority is required to pass the resolution, it
it is called as Ordinary Resolution. is known as Special Resolution.
Consent of At least 51% members should be in favor of At least 75% members should be in favor of
members the motion. the motion.
Registration A copy of the resolution should be filed with A copy of special resolution must be filed
with ROC ROC, in certain cases. with ROC.
Business Ordinary business or special business,
Special business.
transacted depending on requirements of the Act.
Alter Memorandum of Association
Adoption of final accounts and statutory Alter Articles of Associations
audit. Change registered office
Declaration of the dividend. Change terms and conditions of prospectus
Examples
Retirement and appointment of Directors. Issue depository receipts
Retirement and appointment of Auditors and Alter shareholders rights
fixing their remuneration Reduce share capital
MINUTES
‘Minutes’ are the official and legal record of the proceedings of a Meeting. It helps in understanding the
deliberations and decisions taken at the Meeting.
Minutes should contain a fair and correct summary of the proceedings of the Meeting and should normally
convey why, how and what conclusions or decisions were arrived at in relation to each business transacted
at the Meeting.
It need not be an exact transcript of the proceedings.
Every company is required to keep Minutes of all Meetings. (Sn 118)
Minutes should include the following details:

 Date/ Time/ Place of the meeting called to order
 Agenda of the meeting
 Whether a quorum is present or not
 Names of every member of the meeting either present or absent
 Corrections and amendments to previous meeting minutes
 Any amends in the agenda of the meeting
 Resolutions/ Motions passed or rejected
 Type of Voting and outcome of the vote
 Steps to be taken after meeting
 Items to be held over or adjourned for some reason
 New business
 Open discussion or public participation
 Next meeting date and time
57
 If Adjourned (Time of adjournment)
Minutes should be recorded in books maintained for that purpose.

A distinct Minutes Book should be maintained for each type of Meeting.
Minutes of the Meeting of the Board should be signed and dated by the Chairperson of the Meeting or the
Chairperson of next Meeting.
Minutes of all Meetings should be preserved permanently in physical or electronic form.
Default in keeping minutes or non complying with Sn 118 attracts penalty of Rs 25,000/- for company and
Rs 5000/- for each officer in default
A person guilty of tampering with the minutes of the proceedings of meeting will be liable for max 2 years
imprisonment and fine between Rs 25,0-00/- and 1 lakh
The court presumes the minutes to be correct. The minutes count as legal evidence
Powers and Duties of Company Auditors
All companies registered in India are required to maintain proper accounts and get the book of accounts
audited by a practicing Chartered Accountant.
The first auditor of the company must be appointed by the company within 30 days of incorporation of the
company.
Once appointed, the Auditor would hold office until the next annual general meeting of the company.
Right to Access Book of Accounts

Statutory auditors of the company appointed by the Board of Directors have the rights to access the book
and accounts and vouchers of the company at all times. Further, auditors are also entitled to require from
the officers of the company any information or documents and explanations as the auditor may think
necessary for the performance of his/her duty as an auditor.
The auditor of a company which is a holding company shall also have the right of access to the records of
all its subsidiaries, for consolidation of its financial statements with that of its subsidiaries.
Right to Receive Notice of General Meetings

Companies Act provides that auditors of a company shall be furnished with copies of all notices of and
other communications relating to any general meeting of the company which any member of the company
is entitled to have sent to him/her.
Right to Attend General Meetings

Unless otherwise exempted by the Company, the auditor of a company is entitled to attend by himself or
through an authorised representative (must be an auditor) any general meeting of the company and be
heard.
Duties of Auditor
In addition to the powers, Auditors also have certain duties that must be mandatorily fulfilled as auditor of
company. The auditor has duty to see;
1. Whether loans and advances made by the company on the basis of security have been properly
secured and whether the terms on which they have been made are prejudicial of the interest of the
company or its members.
2. Whether transactions of the company which are represented merely by book entries are prejudicial
to the interests of the company.
58
3. Whether assets of the company like shares, debentures and other securities have been sold at a
price less than at which it was purchased by the company.
4. Whether loans and advances made by the company have been shown as deposits.
5. Whether personal expenses have been charged to revenue account.
6. In case of shares of the company issued for cash, whether cash has actually been received and if
the position of the book of accounts is correct.=
PART V: WINDING UP
Winding up of a company is the process whereby its life is ended and its property administered for the
benefit of its creditors and members. An administrator, called a liquidator, is appointed and he takes
control of the company, collects its assets, pays its debts and finally distributes any surplus among the
members in accordance with their rights.”
The Companies Act provides for two types of winding up:

1. Compulsory winding up under the order of the Tribunal.
2. voluntary winding up, which itself is of two kinds, namely:
(a) Members voluntary winding up, and
(b) Creditors’ voluntary winding up.
Winding up by Tribunal: (Sn 433)
Section 433 has been recast in Company Law 2013. The power of the court of order winding up has been
vested in the Tribunal.
The cases in which a company may be wound up by tribunal are given in Section 433. They are:
1. Special resolution:
If the company has, by special resolution, resolved that it be wound up by the Tribunal. The Tribunal is,
however, not bound to order winding up similarly because the company has so resolved. The power is
discretionary and may not be exercised where winding up would be opposed to the public or company’s
interests.
2. Default in holding Statutory meeting:

If a company has made a default in delivering the statutory report to the Registrar or in holding the
statutory meeting, it may be ordered to be wound up. The petition for winding up on this ground can be
presented either by the Registrar or by a contributory. If it is brought by any other person e.g., a creditor,
it must be filed before the expiration of fourteen days after the last day on which the statutory meeting
ought to have been held. The power of the Tribunal is discretionary.
3. Failure to commence business:

If a company does not commence its business within a year from its incorporation or has suspended
business for a whole year, it may be ordered to be wound up. Here again the power is discretionary and
will be exercised only when there is a fair indication that there is no intention to carry on business.
Murlidhar V. Bengal Steamship Co. : To carry on its business, a company employed a steamer and two
flats. The flats were acquired by the Government during the First World War and the company was not
able to replace them immediately in view of the rise in prices. This resulted in suspension of business for
59
more than a year. In a petition to wind up the company, it was held that the suspension of business for a
whole year is sufficiently accounted for and does not furnish an indication that there is no intention to
carry on the business.
4. Reduction in Membership:
If the number of members is reduced, in the case of a public company, below seven and in the case of a
private company, below two, the company may be ordered to be wound up.
5. Inability to pay debts:

A company may be ordered to wound up if it is unable to pay its debts. A company shall be deemed to be
unable to pay its debts in the following three cases (Sn 434):
(a) Statutory Notice: If a creditor to whom the company owes a sum exceeding one lakh rupees has served
on the company, a demand for payment and the company has for three weeks neglected to pay or
otherwise satisfy him.
(b) Decreed Debt: Secondly, a company shall be deemed to be unable to pay its debts if execution or order
process issued on a decree or order of any Court in favour of a creditor of the company is returned
unsatisfied in whole or in part.
(c) Commercial Insolvency: If it is proved to the satisfaction of the Tribunal that the company is unable to
pay its debts. In determining this, the court shall take into account the contingent and prospective liability
of the company.
Sreelakhsmi Silks v Remanika Silks (1998): Petitioner filed application for compulsory winding up of
respondent as it owned more than 20 Lakhs to petitioner. Court ordered winding up.
6. Just and Equitable Cause:

The Tribunal can order the winding up of a company when “the Tribunal is of the opinion that it is just and
equitable that the company should be wound up”. This gives the Tribunal a very wide discretionary power
to order winding up whenever it appears to be desirable. It is generally considered just and equitable to
wind up the company in the following circumstances:
(i) Deadlock: When there is a deadlock in the management of a company,
(ii) Loss of Substratum: When its main object has failed to materialize or it has lost its substratum. A good
illustration is German Date Coffee Co. Company was formed for the purpose of manufacturing coffee from
dates under a patent from Germany and also for working other patents of similar kind. The German patent
was never granted and the company embarked upon other patents.
(iii) Losses: When it cannot carry on business except at losses.
(iv) Oppression of Minority: Where the principle shareholders have adopted an aggressive or oppressive or
squeezing policy towards the minority.
(v) Fraudulent Purpose: If the company has been conceived and brought forth in fraud or for illegal
purposes.
Universal Mutual Aid and Poor Houses Association V. Thopa Naidu: Court observed that where the main
object of the company is the conduct of a lottery, the mere fact that some of its objects were philanthropic
will not prevent the company from being ordered to be wound up as being one formed for an illegal
purpose.
NK Prasad v Andhra Bank (1983): Winding up was considered just when shareholders did not agree to start
NBFC when the company’s main banking business was nationalized.
German Date Coffee Company: Winding up was considered just since company could not obtain patent for
the coffee.
Middles Borough Assembly Rooms Company: Mere suspension of business for 3 yaers is not just cause for
winding up. Company intended to recommence oprations when prospects improved. But in Chouchan

60
Brothers, a company which couldn’t commence business for 3 years after incorporation was ordered to be
wound up.
Malabar Iron & Steel v RoC: Power to order winding up for just cause is discretionary. Court looks into
intention of not commencing business.
7. Default in filing Balance Sheet etc.:

If the company has made a default in filing with the Registrar its balance-sheet and profit and loss account
or annual return for any five consecutive financial years.
8. Act of company against Sovereignty and interest of India:
9. Winding up under circumstance of S. 424-G:

A company may be wound up by the order of the Tribunal if it is of the opinion that the company should
be would up under the circumstances specified in Section 424-G as a sick industrial company.
Procedure
Application foe winding up may be made through a petition before Trinunal by
 The company itself in case of special resolution has been passed in the meeting of the company
 the creditors in case company is unable to pay its debts and the same is not time-barred
under the limitation act.
 The contributors in case of
o default by the company in filing any statutory report
o deadlock in the management,
o not commence business in prescribed time
 The Registrar in case of
o default in conducting statutory meeting or sending statutory report,
o failure to commence it business
o if the numbers fall below minimum
o unable to pay its debts
 Any person authorized by central or state Government if the company’s business is being
conducted to defraud the creditors, members or any other person as per investigation made by the
investigator.
The tribunal, after ascertaining the facts may issue winding up order.
The company and the petitioner are bound to file a certified copy of the winding up order with the
Registrar within 30 days of the order.
Voluntary Winding Up
Voluntary winding up means winding up of the company by the members or the creditors without
interference by the Tribunal.
Voluntary winding up may be of two types (Sn 484)

a)Member’s voluntary winding up.(when company is solvent)
b)Creditor’s voluntary winding up .(when company is not solvent)

61
Voluntary winding up may happen is subject to following conditions
1.Expiry of the duration or happening of event. (Fixed by the Articles, provide to dissolve the
company.)
2.By passing special resolution to wound up the company voluntarily.
After passing the resolution for winding up of the company, it must cease to carry on the
business except for the benefit of winding up of company. (sec. 487)
After the commencement of the winding up of company, transfer of shares is restricted.
Members voluntary winding up:

A members voluntary winding up is possible only in case the company is solvent
It must be made within five weeks from the date of passing of resolution for winding up of a company, and
one copy to Registrar must be delivered.
Creditors voluntary winding up:

Such type of winding up takes place when the company is not in a position to pay its debts and
no declaration of solvency is made in it.
A meeting of the creditors is called on the same day or on the next day in which the meeting of the
members has been called regarding the winding up of the company. Information of the meeting must be
given through official Gazette and in two leading newspapers.(sec. 501& 502)
All the statements of affairs are placed in the meeting of creditors. Specifying the name of the
creditors and their claims against the company.{sec.500(3) }
.A copy of the resolution for the winding up of the company must be filed with the Registrar
within 10 days.( sec. 501)
Liquidator is appointed at the time of passing of the resolution
Committee of inspection is consists of maximum five members appointed by the creditors.
Appointment of Liquidator
A meeting of the members is called for the winding up of the company, liquidator is appointed and
his remuneration is also fixed in the same meeting. Very often the secretary of the company is appointed
as liquidator of the company.
The powers of Board cease on appointment of liquidator (sec.491)
If the liquidator dies or resigns, a new liquidator is appointed in the general meeting according to an
agreement made with the creditors. (Sn 492)
Any change to be notified to RoC within 10 days
The liquidator cannot accept shares of the company without the sanction of a special resolution of
the company.
The liquidator must call the every year general meeting of the company and must lay out the
progress of winding up before the members. (sec.4964.
The liquidator calls the last meeting of the company when all the affairs have been completely over. This
meeting is called by giving a notice in the official Gazette and in leading newspapers but the time should
not be less than one month. The object of holding such meeting is to discuss the details of accounts
and explanations
Within one week of such meeting a copy of final account is sent to the Registrar.
The Registrar on receipt of it enters the details and the company is dissolved after three months
from the date of registration. (sec.497)
62
Effect of the winding up
 The effects of a winding up order is
 Termination of powers of Board of Directors .
 The official liquidator by virtue of his office will act as the liquidator of the company and will
assume powers of the board.
 No suit or legal proceeding pending against the company can be proceeded with after the
order of the winding up, without the permission of the Tribunal. The tribunal issuing the winding up
order shall have the right to dispose of any pending or new suit against the company. Any suit
or proceeding lying pending in another Tribunal shall be transferred to the Tribunal which has
issued the winding up order
 Any debts payable at future will be payable immediately on the issue of winding up order.
 The winding up order will be executed in such a way as to favor all the creditors and
contributories of the company as if such an order has been made on their joint petition.
PART VI: AUTHORITIES
COMPANY LAW BOARD
The Company Law Board is an independent quasi-judicial body in India which has powers to overlook the
behaviour of companies within the Company Law.
The main objectives of Company Law Board as per Companies Act 1956 are
 regulate the affairs of the Company according to law
 to protect the interests of the minority shareholders
 to look into complaints
When a complaint or proceedings come up before the CLB, differences between the shareholding groups
every effort is to be taken to ensure that the Company functions smoothly rather resorting to winding-up.
The proceedings before CLB comply with Civil Procedure Code
With the establishment of the National Company Law Tribunal and the National Company Law Appellate
Tribunal, the Company law Board under the Companies Act, 1956 will stand dissolved.
NATIONAL COMPANY LAW TRIBUNAL
The Central Government has constituted National Company Law Tribunal (NCLT) under section 408 of the
Companies Act, 2013. It comes into effect from 1 June 2016
The National Company Law Tribunal NCLT is a quasi-judicial body, exercising equitable jurisdiction, which
was earlier being exercised by the High Court or the Central Government. The Tribunal has powers to
regulate its own procedures.
The establishment of the National Company Law Tribunal (NCLT) consolidates the corporate jurisdiction of
the following authorities:
1. Company Law Board
63
2. Board for Industrial and Financial Reconstruction.
3. The Appellate Authority for Industrial and Financial Reconstruction
4. Jurisdiction and powers relating to winding up restructuring and other such provisions, vested in
the High Courts.
The NCLT has been given wide powers under the Companies Act to adjudicate:
 cases initiated before the Company Law Board (CLB) under the Companies Act, 1956 (Old Act)
 all proceedings pending before any district court or High Court under the Old Act
 references and appeals to BIFR
 fresh proceedings
 cases rlated to new Bankruptcy code
The NCLT will have eleven benches initially, two at New Delhi and one each at Ahmedabad, Allahabad,
Bengaluru, Chandigarh, Chennai, Guwahati, Hyderabad, Kolkata and Mumbai. One at Kochi is under
construction.
The NCLT will comprise a president and judicial and technical members, as necessary.
Powers and Functions of Registrar of Companies
Power to
 incorporate company and issue certificate of incorporation
 issue rectification of name
 accept notices and intimation regards changes to memorandum, articles etc
 call for information, inspect books and conduct inquiries (Sn 206)
 get order from court for search and seizure
 removal of names from register (Sn 248)
The RoC may delete the name of the company from the register, if
 A company has failed to commence its business within one year of its incorporation;
 The subscribers to the memorandum have not paid the subscription money which they had
undertaken to pay within 180 days from the date of incorporation
 The company is not carrying on any business for two immediately preceding financial years and has
not applied under Section 455 for obtaining the status of a dormant company.
The RoC has to send a notice to the company and wat for a representation
At present, there are 22 Registrars of Companies holding offices in the major states of India.
PART VII: MAJOR AMENDMENTS IN COMPANIES ACT 2013

1. Introduction of One Person Company (OPC) – A Private Company having only one Member and
one director. This concept is already prevalent in the Europe, USA, China, Singapore and GCC. Small
businessmen, entrepreneurs, artisans, weavers or traders among others can take advantage of the
‘One Person Company’
2. Exemptions to Small Company: A company, other than a public company, with max paid-up share
capital of fifty lakh rupees or turnover not exceeding Two Crore rupees exempted from certain
requirements relating to board meeting, presentation of cash flow statement and certain merger
process
64
3. Changes in stationery: The letterhead, bills or invoices, quotations, emails, publications &
notifications, letters or other official communications, should bear the full name of contact person,
address of company’s registered office, Corporate Identity Number ( CIN No. a 21 digit number
allotted by Government), Telephone number, fax number, Email id, contact website (if any).
4. Financial Year: The Companies Act 1956 Act provided companies to elect financial year. The
Companies Act 2013 Act eliminates the existing flexibility in having a financial year different than
31 March. The 2013 Act provides that the financial year for all companies should end on 31 March.
5. Eligibility age to become Managing Director or whole time Director: The eligibility criteria for the
age limit has been revised to 21 years as against the existing requirement of 25 years.
6. Number of directorships held by an individual: Section 165 provides that a person cannot have
directorships in more than 20 companies, including ten public companies.
7. Board of Directors and Disqualifications for appointment of director: The 2013 Act requires that
the company shall have a maximum of 15 (fifteen) directors (earlier it was 12) and appointing more
than 15 (fifteen) directors will require special resolution by shareholders.
8. Further, it requires appointment of at least one woman director on the board for prescribed class
of companies. It also requires that company should have at least 1 (one) resident director i.e. who
has stayed in India for a total period of not less than 182 (hundred and eighty two days) in the
previous calendar year.
9. All existing directors must have Directors Identification Number (DIN) allotted by central
government.
10. Independent Directors: The 2013 Act defines the term “Independent Director” . In case of listed
companies, one third of the board of directors should be independent directors. There is a
transition period of 1 (one) year form 01 April 2014 to comply with this requirement. The 2013 Act
also provides additional qualifications/ restrictions for independent directors as compared to the
1956 Act.
11. Corporate Social Responsibility (CSR): The company has to constitute a CSR committee of the
Board and 2% of the average net profits of the last three financial years are to be mandatorily
spent on CSR activities
12. Removal of listing of minimum paid up capital
13. The requirement of common seal made optional

65

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PART I: BASICS OF A COMPANY

Company is an association of persons who come together to carry out business.

The Corporate Personality

1. DISTINCT LEGAL ENTITY

Nayab Naseer COMPANY LAW

5. DOCTRINE OF ULTRA VIRES

The purpose of these restriction is

Consequences of ultra vires transactions:

Nayab Naseer COMPANY LAW

Theories of Corporate Personality

4. Bracket Theory (Symbolist Theory)

Nayab Naseer COMPANY LAW

Legal Status of a Company

LIFTING THE CORPORATE VEIL

Nayab Naseer COMPANY LAW

1. If the company is set up to defeat public convenience

3. To determine if the company is a sham, set up to avoid contractual obligations

4. To prevent fraud such as defrauding creditors, avoiding specific performance etc

Nayab Naseer COMPANY LAW

A company can be formed in a number of ways:

ON THE BASIS OF INCORPORATION

4. ON THE BASIS OF CHARACTER

Companies formed by Royal Charter (Chartered Companies)

Formed by grant of a charter by the Crown.

Companies formed by Act of Parliament (Statutory Companies)

Nayab Naseer COMPANY LAW

Obligations of foreign company

Nayab Naseer COMPANY LAW

Sn 3(2) of Companies Act categories companies on the basis of liability

Limited Liability Company

Limited liability companies may be limited by shares or by guarantee

Nayab Naseer COMPANY LAW

Members do not have to pay anything as long as company is a going concern.

Companies Limited by Shares

Companies Limited by Shares may be

Nayab Naseer COMPANY LAW

Nayab Naseer COMPANY LAW

Holding (parent) company and subsidiary company

The classification is based on control.

Key features of a holding company

Reasons for setting up subsidiary companies

Sn 18 of Companies Act allows conversion of

PART II: STEPS IN FORMATION OF A COMPANY

The old companies act did not specifically define “promoter.”

Nayab Naseer COMPANY LAW

Nayab Naseer COMPANY LAW

1. Duty to Disclose Secret profits

2. Duty to disclose any interest in property sold to company

3. Duty to disclose full facts in prospectus

A promoter is liable for

 set aside shares allocated to them as remuneration

Nayab Naseer COMPANY LAW

CONTENTS OF THE MEMORANDUM

Nayab Naseer COMPANY LAW

3. Objects and Powers Clause:

Importance of Object Clause

Nayab Naseer COMPANY LAW

Change of objective requires a special resolution – Sn 13(8).

Nayab Naseer COMPANY LAW

Nayab Naseer COMPANY LAW