North Maharashtra University, Jalgaon

(NAAC Reaccredited ‘A’ Grade University)

FACULTY OF COMMERCE & MANAGEMENT

Syllabus: M.B.A. w.e.f. AY 2018-19

SEMESTER: IV

Paper: 403 Indian Commercial Law

60 + 40 Pattern: External Marks 60 +Internal Marks 40 = Maximum Total Marks: 100

Required Lectures: 60

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Objectives:

mer.

1. The Consumer protection Act, 1986 (12)

1.1. Definition: Appropriate laboratory, complainant, complaint, consumer, consumer dispute.

1.2. Who is consumer

1.3. who can make a complaint

1.4. Unfair Trade practices

1.5. Restrictive Trade Practices

1.6. Medical services and the consumer protection Act, 1986

1.7. Consumer Protection Councils

1.8. Consumer Dispute Redressal Agencies

2. The Company Law – Companies Act 2013 (12)

2.1. Definition, characteristics , & types of company

2.2. Setting up of a company

2.2.1.Incorporation of company: Promoter & Pre incorporation contract

2.2.2.Prospectus & public offer

2.2.3.Shares, share capital , debentures

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2.3. Management & Administration

2.3.1.Directors: - Types, Duties & Liability, Responsibilities

2.3.2.Corporate Social Responsibility

2.4. MOA & AOA: - Meaning & Content

2.5. Winding up of the company & its types

3. Cyber laws – Information Technology Act 2000 (12)

3.1. Objectives & scheme of the IT Act 2000

3.2. Digital signature – i) meaning ii) Authentication of electronic records – Asymmetric Crypto system ,
Electronic records , Key pair , Private key , Public Key

3.3. Electronic Governance –

3.3.1.Legal recognition of electronic records & digital signature

3.3.2.Use of electronic records & digital signature in Government & its signature

3.3.3.Retention of Electronic Records

3.3.4.Powers to make rules by central government in respect of digital signature

3.3.5.Definitions of – Information , electronic form , Computer , Computer network , Computerresources

, Computer system , Data & functions.

3.3.6.meaning of certifying authority under the act

4. Right to Information Act 2005 (6)

4.1. Important theme w.r.t. Citizen, information & public authority

4.2. Enforcement and Penalty under act

4.3. Right of Third Party

5. Arbitration (6)

5.1. What is Arbitration & Conciliation

5.2. Arbitration Agreement

5.3. Appointment of Arbitrator

5.4. Arbitration Proceedings

5.5. Arbitral Tribunal

5.6. Arbitral Award

5.7. New York convention Awards

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5.8. Geneva Convention Awards

REFERENCE BOOKS

1. Mercantile & Commercial Laws by Rohini Aggrawal – Taxman Publication

2. Legal Aspects of Business – Albuquerque – Oxford University Press

3. Legal Aspects of Business by Akhileshwar Pathak – Tata McGraw Hill

4. Business Regulatory Framework by Das – Oxford University Press

5. Legal Aspects of Business by R.R.Ramtirthkar – Himalaya Publishing House

6. Elements of Merchantile Laws by N.D. Kapoor – Sultan Chand & Sons

7. Business law – Bulchandani ‐ Himalaya

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 1. The Consumer protection Act, 1986
Introduction.
Tremendous growth and increase in production of goods and commodities leads to decline in
quality. As the products of inferior quality do not serve the purpose , the consumer resorts to
approach the court for relief.
In order to protect the interest of the consumers from the spurious goods, The Indian Parliament
passed a legislation entitled “The Consumer Protection Act,1986”.
The Consumer Protection Act,1986 is a progressive and social welfare legislation specially
designed to protect the interests of the customers. It contains 31 section divided into 4 chapters.
Chapter I: Preliminary aspects (sec 1 to 3)
Chapter II: Constitution of the central and state consumer protection council.(Sec 4 – 8)
Chapter III: Establishment of Consumer Dispute Redressal Agencies, their powers, penalties and
appeals.(sec 9 -27)
Chapter IV: Miscellaneous provisions

CHAPTER I: PRELIMINARY
1. Short title, extent, commencement and applications
(1) This Act may be called the Consumer Protection Act, 1986.
(2) It extends to the whole of India except the State of Jammu and Kashmir.
(3) It shall come into force on such date as the Central Government may, by notification, appoint
and different dates may be appointed for different States and for different provisions of this Act.
(4) Save as otherwise expressly provided by the Central Government by notifications, this Act
shall apply to all goods and services.

1.1. Definition: Appropriate laboratory, complainant, complaint,

consumer, consumer dispute.
i. Appropriate Laboratory: sec2(a)
"appropriate laboratory" means a laboratory or organisation-
(i) recognised by the Central Government;
(ii) recognised by a State Government, subject to such guidelines as may be prescribed by the
Central Government in this behalf; or

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(iii) any such laboratory or organisation established by or under any law for the time being in
force, which is maintained, financed or aided by the Central Government or a State Government
for carrying out analysis or test of any goods with a view to determining whether such goods
suffer from any defect; ]
Meaning:
Whenever a consumer of goods/services is doubtful as to the quality and purity, he may get them
tested in a laboratory equipped for the purpose. It must be recognized by the appropriate govt.
It may be a private organization.

ii. Complainant: sec 2(b)

"complainant" means-
(i) a consumer; or
(ii) any voluntary consumer association registered under the Companies Act,1956 or
under any other law for the time being in force; or
(iii) the Central Government or any State Government; .
(iv) one or more consumers, where there are numerous consumers having the same
interest;]
(v) in case of death of a consumer, his legal heir or representative; who or which makes
a complaint;

To seek relief, the complainant is required to approach appropriate forum/commission.

The burden of proof lies on the complainant.
Meaning:
A complainant is one who enters a legal complaint against another. Generally a person whose
legal rights are affected has a right to move to court, he may approach the court by filing a
complaint which contains an allegation in written.

Complaint: Sec 2(C)

"complaint" means any allegation in writing made by a complainant that
[(i) an unfair trade practice or a restrictive trade practice has been adopted by any trader;]
(ii) the goods bought by him or agreed to be bought by him] suffer from one or more defect;
(iii) the services hired or availed of or agreed to be hired or availed of by him] suffer from
deficiency in any respect;
(iv) a trader has charged for the goods mentioned in the complaint a price in excess of the price
fixed by or under any law for the time being in force or displayed on the goods or any package
containing such goods;

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(v) goods which will be hazardous to life and safety when used, are being offered for sale to the
public in contravention of the provisions of any law for the time being in force requiring traders
to display information in regard to the contents, manner and effect of use of such goods, with a
view to obtaining any relief provided by or under this Act;
Meaning:
It is a written accusation containing the name, description of the complaint and the opposite
party to seek relief by furnishing the facts supporting the documents, if any.

Consumer dispute
"consumer dispute" means a dispute where the person against whom a complaint has been
made, denies or disputes the allegations contained in the complaint;

1.2. Who is Consumer

Consumer means any person who
(a) buys any goods for a consideration which has been paid or promised or partly paid and partly
promised, or under any system of deferred payment and includes any user of such goods other
than the person who buys such goods for consideration paid or promised or partly paid or partly
promised, or under any system of deferred payment when such use is made with the approval of
such person, but does not include a person who obtains such goods for resale or for any
commercial purpose; or
(b) hires or avails of any services for a consideration which has been paid or promised or partly
paid and partly promised, or under any system of deferred payment and includes any beneficiary
of such services other than the person who hires or avails of the services for consideration paid
or promised, or partly paid and partly promised, or under any system of deferred payment, when
such services are availed of with the approval of the first mentioned.
According to the above definition the following persons are consumers-
1. a person who buys goods for a consideration which has been paid or promised or partly paid
or partly promised.
2. a person who uses such goods with permission of the buyer other than who buys such goods
of a consideration paid or promised or partly paid or partly promised.
3. a person who, hires or avails of any services for consideration which has been paid or promised
or partly paid and partly promised.
4. a person who is a beneficiary of such services with the approval of the buyer.
Exceptions:

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1. Obtain goods for commercial purposes – Sec2(d) a person who obtains goods for resale or for
resale or for any commercial purpose.
2. Services free of charge – in respect to services rendered free of charge or under contract of
personal service.
Examples in notes

1.3. Who can make a Complaint?

According to sec2(6) of the Consumer protection Act, 1986, the following persons can make a
complaint;
1. a consumer
2. any voluntary consumer registered under the Companies Act, 1956;
3. the central or state government.
4. one or more consumers, where there are numerous consumers having the same interest.

1.4. Unfair Trade practices

The complaint relating to must be the unfair trade practice of a trader as a result of which the
complainant suffered loss or damage.
Section 2(1)(r) in the Consumer Protection Act, 1986
“unfair trade practice” means a trade practice which, for the purpose of promoting the sale, use
or supply of any goods or for the provision of any service, adopts any unfair method or unfair or
deceptive practice including any of the following practices, namely:—
(1) the practice of making any statement, whether orally or in writing or by visible representation
which,—
(i) falsely represents that the goods are of a particular standard, quality, quantity, grade,
composition, style or model;
(ii) falsely represents that the services are of a particular standard, quality or grade;
(iii) falsely represents any re-built, second-hand, renovated, reconditioned or old goods as new
goods;
(iv) represents that the goods or services have sponsorship, approval, performance,
characteristics, accessories, uses or benefits which such goods or services do not have;
(v) represents that the seller or the supplier has a sponsorship or approval or affiliation which
such seller or supplier does not have;

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(vi) makes a false or misleading representation concerning the need for, or the usefulness of, any
goods or services;
For the above clauses, any statement made via expression by sellers on the wrapper or container
of the item can qualify for unfair trade practice. The information of the product is also placed
inside the item, attached to the product, or accompanying it.
(vii) gives to the public any warranty or guarantee of the performance, efficacy or length of life
of a product or of any goods that is not based on an adequate or proper test thereof:
Provided that where a defense is raised to the effect that such warranty or guarantee is based
on adequate or proper test and the burden of proof lies on person raising such defense.
2. An advertisement published in any newspaper or other means of communication to the
general public may also result in unfair trade practice if the price communicated is misleading or
a bargain price. This means that an unfair trade practice would be when a rational individual on
reading, hearing or seeing the advertisement would think to be a bargain price as compared to
the product’s ordinary sale price.
3. Wrongful or deceitful permissions or expressions like:
– Offering gifts, prizes and so on without any intention of actually fulfilling the expression.
– Putting across a product as free of charge when it is actually not as the cost is being covered
partly or wholly in the transaction amount.
– Conducting games of chance or skill like the lottery in order to promote a particular product
directly or indirectly.
– Not granting participants of a scheme their prize by closing the information about the final
results of the scheme.
4. Allowing the sale of products, having the knowledge or reason to believe that the product is
not up to the standards of a competent authority. This could be in terms of design, contents,
packaging, etc.
5. Permitting the hoarding or destruction of products with the intention of raising the prices of
the goods.

1.5. Restrictive Trade Practices

A restrictive trade practice is defined under Section 2(1)(nnn) of the Consumer Protection Act,
1986. The section covers all the price related deceit that the traders may indulge in to maximise
their profits.

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Restrictive trade practices are targeted at the consumers who are burdened with restriction
and unjustified costs through the practices of the trader. The trader manipulates the price or
the conditions of delivery of the product which results in restrictive trade practice. This affects
the supply of goods and services in the market and includes:
– A likely or definite rise in the price of a commodity due to the delay of the trader to provide
the good or service.
– A compulsion to purchase, hire or avail any good or service in order to obtain any other good
or service.
Under this definition those cases will be dealt with where a trader sells those goods which are
not in much demand in the market by trying to sell goods or services which are not in great
demand. Such cases will be decided by consumer redressal authorities. For example, where a
dealer in cooking gas may require as a condition precedent to buy a stove before he releases a
gas connection.

1.6. Medical services and the consumer protection Act, 1986

Medical services are covered under the definition of services. Doctors and hospitals fall within
the scope of summary jurisdiction of the Act.
In Indian Medical Association vs. V>P> Shanta`s Case: the Apex court has held that where the
person suffering any loss on account of negligence or deficiency in such service.
Services including rendering of consultation diagonis and treatment both medical and surgical
professional men should possess certain degree of competence and they should exercise
reasonable care in discharge of their duties. Medical practioners do not enjoy any immumity
and they can be sued in contract or tort on the ground that they have failed to exercise
reasonable skill and care.
Service rendered at a govt hospital, health centre or dispensary where no charge whatsoever is
made from any person availing the services and all patients are given free service is excluded
from the purview of the CPA.

1.7. Consumer Protection Councils

Chapter Ii containing sec 4 to sec 8 of the consumer protection Act, 1986, lays down the
provisions relating to constitution, procedure and objects of the Central and State Consumer
protection councils.
The Consumer Protection Council.
Sec 4. (1) The Central Government may, by notification establish a Central Consumer Protection
Council by notification in the official gazzate with such powers provided under the Act.

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(2) The Central Council shall consist of the following members, namely :—
(a) the Minister Incharge of 1[consumer affairs] in the Central Government, who shall be its
Chairman, and
(b) Such number of other official or non-official members representing such interests as may be
prescribed.
Procedure for meetings of the Central Council.
Sec 5 . (1) The Central Council shall meet as and when necessary, but 2[at least one meeting] of
the Council shall be held every year.
(2) The Central Council shall meet at such time and place as the Chairman may thinks fit and shall
observe such procedure in regard to the transaction of its business as may be prescribed.
Objects of the Central Council.
6. The objects of the Central Council shall be to promote and protect the rights of the consumer
such as,—
(a) the right to be protected against the marketing of goods 3[and services] which are hazardous
to life and property;
(b) the right to be informed about the quality, quantity, potency, purity, standard and price of
goods 3[or services, as the case may be,] so as to protect the consumer against unfair trade
practices;
(c) the right to be assured, wherever possible, access to a variety of goods 3[and services] at
competitive prices;
(d) the right to be heard and to be assured that consumers’ interests will receive due
consideration at appropriate forums;
(e) the right to seek redressal against unfair trade practices 3[or restrictive trade practices] or
unscrupulous exploitation of consumers; and
(f) The right to consumer education.
The State Consumer Protection Councils.
Sec 7. (1) of the Act empowers the State Government to establish the State Consumer Protection
Council by notification in the official gazzate.
(2) The State Council shall consist of the following members, namely :—
(a) the Minister in-charge of consumer affairs in the State Government who shall be its Chairman;

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(b) such number of other official or non-official members representing such interests as may be
prescribed bythe State Government.
(3) The State Council shall meet as and when necessary but not less than two meetings shall be
held every year.
(4) The State Council shall meet at such time and place as the Chairman may think fit and shall
observe such procedure in regard to the transaction of its business as may be prescribed by the
State Government.]
Objects of the State Council.
Sec 8. The objects of every State Council shall be to promote and protect within the State the
rights of the consumers laid down in clauses (a) to (f) of section 6.

1.8. Consumer Dispute Redressal Agencies

For speedy and inexpensive redressal of consumer grievances the Act provides for 3 tier
grievance redressal mechanism section 9 of the Act provides for the establishment of the 3 tier
consumer disputes redressal agencies as follows.
Three Tier Consumer Grievances Machinery under the Consumer Protection Act!

1. District Forum:

District forum consists of a president and two other members. The president can be a retired or

working judge of District Court. They are appointed by state government. The complaints for
goods or services worth Rs 20 lakhs or less can be filed in this agency.

The agency sends the goods for testing in laboratory if required and gives decisions on the basis

of facts and laboratory report. If the aggrieved party is not satisfied by the jurisdiction of the

district forum then they can file an appeal against the judgment in State Commission within 30
days by depositing Rs 25000 or 50% of the penalty amount whichever is less.]

2. State Commission:

It consists of a president and two other members. The president must be a retired or working

judge of high court. They all are appointed by state government. The complaints for the goods
worth more than Rs 20 lakhs and less than Rs 1 crore can be filed in State Commission on

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receiving complaint the State commission contacts the party against whom the complaint is filed
and sends the goods for testing in laboratory if required.

In case the aggrieved party is not satisfied with the judgment then they can file an appeal in

National Commission within 30 days by depositing Rs 35000 or 50% of penalty amount whichever
is less.

3. National Commission:

The national commission consists of a president and four members one of whom shall be a

woman. They are appointed by Central Government. The complaint can be filed in National

Commission if the value of goods exceeds Rs 1 crore. On receiving the complaint the National

Commission informs the party against whom complaint is filed and sends the goods for testing if
required and gives judgment?

If aggrieved party is not satisfied with the judgment then they can file a complaint in Supreme
Court within 30 days.

Basis District State Commision National Commision

Composition It consists of a It consists of a It consists of a
president and two president and two president and four
other members. other members. other members.
Who can be a A working or retired A working or retired A working or retired
President judge of District judge of High Court. judge of Supreme
Court. Court.
Appointment of The president is The president is The president is
President appointed by the appointed by the appointed by the
state government on state government central government
the recommendation after consultation after consultation
of the selection with the chief justice with the chief justice
committee. of the High Court. of India,
Jurisdiction In 1986, it had In 1986, it had In 1986, it had
jurisdiction to jurisdiction to jurisdiction to
entertain complaints entertain complaints entertain complaints
where the value of when the value of where the value of
goods or services goods or services goods or services
does not exceed Rs 5, exceeds Rs 5,00,000 exceeds Rs 20 lakhs

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 00,000 but now the and does not exceed but now the limit is
limit is raised to 20 Rs 20,00,000 but now raised and it
lakhs. it is raised to more entertains the
than Rs 20,00,000 complaints of goods
and up to Rs1 crore. or services where the
value exceeds Rs 1
crore.
Appeal against orders Any person who is Any person who is Any person who is
aggrieved by the aggrieved by the aggrieved by the
order of District order of State order of the National
Forum can appeal Commission can Commission can
against such order to appeal against such appeal against such
State Commission order to National order to Supreme
within 30 days and by Commission within Court within 30 days
depositing Rs 25000 30 days and by and by depositing
or 50% of the penalty depositing Rs 35000 50% of penalty
amount whichever is or 50% of penalty amount but only
less. amount whichever is cases where value of
less. goods or services
exceeds Rs 1 crore
can file appeal in
Supreme Court.

Chapter Ends!
Happy Learning!

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2. The Company Law – Companies Act 2013
2.1. Definition, characteristics, & types of company

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SECTION 1: SHORT TITLE, EXTENT, COMMENCEMENT AND APPLICATION:
An Act made to consolidate and amend the law relating to the companies may be called as the
Companies Act, 2013. It extends to the whole of India and came into existence at once from the
date of notification in the Official Gazette i.e., from 30th August, 2013, however, the provisions
of the Act shall come into force on such date as the Central Government may, by notification in
the Official Gazette, appoint and different dates may be appointed for different provisions of this

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Act and any reference in any provision to the commencement of this Act shall be taken as a
reference to the coming into force of that provision.
1. The provisions of the Act shall apply to- Companies incorporated under this Act or under
any previous company law Insurance companies(except where the provisions of the said
Act are inconsistent with the provisions of the Insurance Act ,1938 or the IRDA Act,1949)
2. Banking companies(except where the provisions of the said Act are inconsistent with the
provisions of the Banking Regulation Act,1949)
3. Companies engaged in the generation or supply of electricity(except where the provisions
of the above Act are inconsistent with the provisions of the Electricity Act, 2003)
4. Any other company governed by any special Act for the time being in force.
5. Such body corporate which are incorporated by any Act for time being in force, as the
Central Government may by notification specify in this behalf.
6. This section has been made flexible with respect to enforceability of various sections on
different dates and makes position clear as to application of this Act.

Characteristics of Corporate Entity

a) Separate Legal Entity
The outstanding feature of a company is its independent corporate existence. A company before
the law is a person. It is regarded as an entity separate from its members. By incorporation under
the Act, the company is vested with a corporate personality which is distinct from the members
who compose it. No one can say that he is the owner of the company. Now the business belongs
to an institution. Thus a company continues to exist even if the members go on changing from
time to time.

In the landmark decision of Salomon v Salomon (1897) AC 22, it was held that a company has
a corporate personality which is distinct from its members or subscribers. A single shareholder
may virtually hold the entire share capital of the company; even in such a case, the company does
not lose its identity. It was declared that the business belonged to the company and not to a
single shareholder or number of shareholders and neither of them is liable to indemnify the
company for its debts.

In case of Tata Engineering & Locomotive Co. Ltd. v State of Bihar, the Supreme Court described
the legal status of a company as “An incorporated association” before law is equal to a natural
person and has a legal identification of its own. It has its own-

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  Separate seal
 Separate assets from that of its members
 Can sue and be sued exclusively for its own purpose

Its creditors cannot obtain satisfaction from the assets of its member’s liability of the
shareholders and members is limited to the amount invested by them in the company; similarly,
creditors have no to the assets of the corporation. This position of a corporation is similar since
the decision of the Salomon case.

The law recognises the existence of the company quite irrespective of its motives, intention,
schemes, or conduct of the individual shareholders.

b) Perpetual succession

An incorporated company never dies, as it is an entity with perpetual succession. For

understanding this point more clearly let’s assume M, N, and O are the only members of a
company, holding all its shares. Their shares may be transferred to or inherited by P, Q, or R who
may, therefore, become the new members and members of the company as they are now the
shareholders of the company. But the company will remain the same entity, with same name,
privileges and immunities, property and assets.

Hence in the case of Punjab National Bank v Lakshmi Industrial & Trading co ltd. it was held by
the Allahabad High court that perpetual succession means that membership of a company may
keep on changing from time to time, but that does not affect the companies continuity. A
company has a perpetual existence i.e it has no soul to be saved or body to be kicked.

Since a company has no physical existence, it must act through its agents and all such contracts
entered into by its agents should be under the company’s seal.

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c) Common Seal

A Company becomes a legal entity by perpetual succession and also by a common seal. In fact, a
common seal of a company is a symbol of its incorporation. It is considered as the official
signature of a company. But now by the virtue of 2015 amendment to the Companies Act, a
company may or may not have a common seal. As per section 21 of Companies
Act, authentication of documents, proceedings and contracts on behalf of a company, signed by
any key managerial personnel or an officer of the company duly authorised by the board in this
behalf.

According to section 22, a company may, under its common seal can authorise any person
generally or in respect of any specified matters, to act as an attorney to execute other deeds on
behalf of the company, such deeds can be in or outside India. Such signed deeds by its attorney
on behalf of the company binds the company. Provided that in case if a company does not have
its common seal as per the amendment of 2015, the authorisation shall be made by two
directors or by director and company secretary.

d) Limited Liability of Members

A company having its separate legal entity is the owner of its own assets and bound by its
liabilities. Members are neither the owner nor liable for its debts. All the debts of a company are
to be paid by itself rather than by its members. Members liability becomes limited or restricted
to the nominal value of the shares taken by them in a company limited by shares or the amount
guaranteed by them in a company limited by guarantee. Limited liability is a principal advantage
of doing business under a corporate form of organisation.

Exceptions to the principle of limited liability

 Incorporation by furnishing false information

According to section 7(7), (b) of the Act, tribunal may on an application made to it in regards to
any fraudulent or false information being furnished by a company during its incorporation and

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on being satisfied with the same, direct that liability of the members of such company shall be
unlimited.

 Fraudulent conduct of business

Under section 339(1), during the course of winding up a company if it appears that any business
of a company is carried on with the intent to defraud creditors of the company or any other
persons, the tribunal may on the application of the Official Liquidator or the Company
Liquidator or any other creditor on being satisfied declare that any person who is or has been a
director, manager or officer of the company or any other person knowing part of aforesaid
business shall be personally responsible, without any limitation of liability.

 Unlimited company

When the company is incorporated under section 3(2)(c) of the Act as an unlimited company.
Then as the name clearly suggests that the liability of its members will be unlimited.

 Misleading prospectus

As per section 35(3) companies act, where it is proved that a prospectus is issued with an
intention to defraud or mislead an applicant for securities of a company or any other person for
any fraudulent purpose, then every person who was a director at the time of issuance of such
prospectus or has been named as director in the prospectus shall be personally responsible
without any limitation of liability for all and any of the losses or damages.

 Acceptance of deposit with a fraudulent intention

As per section 75(1), when a company fails to repay the deposit or part thereof or any interest
referred under section 74 within specified time and it is proved that deposit is accepted with the
intent to defraud the depositors or for any fraudulent purpose, every officer of the company
who was responsible acceptance of those deposits shall be liable of all or any of the losses or
damages that may have been incurred by depositors.

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e) Transferability of shares

Section 44 companies act of the Act, declares that “the shares or debentures or any other interest
of any member in a company shall be a movable property that can be transferred in the manner
provided in the article of the company.” Thus incorporation of a company allows its member to
sell their shares in an open market and to get back his investment without any hassle of
withdrawing money from the company. This unique feature of incorporation provides liquidity to
the investor and stability to the company because on the other hand in a partnership firm
partners can’t sell their share in an open market except with unanimous consent of all the
partners.

f) Capacity to sue and be sued

Being a body corporate company possesses individual capacity being sued and suing others in its
own name. A company’s right to sue arises when some loss is caused to the company i.e. to
property or personality of the company. A company also has a right to sue whenever any
defamatory material published about it that may affect its business.

The criminal complaint can be filed by a company but it must be represented by a natural person.
Not necessarily be represented throughout by the same person but the absence of such
representative may result in dismissal of the complaint. Similarly, any default on the part of the
company can be sued by the victim on the name of the company only.

g) Company, not a citizen

According to Citizenship Act 1955, only a natural person can be a citizen of India, not a juristic
person will be considered as citizen same stated by the Supreme Court in case of The State
Trading Corporation Of India Ltd. vs The Commercial Tax Officer. Even though the company does
not get the citizenship status of a country, it still can get a residential status.

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Types of a Company

• Classification of Companies by Mode of Incorporation

1. Royal Chartered Companies

These are incorporated under a special charter by a monarch. The East India Company and The
Bank of England are examples of chartered incorporated in England. The powers and nature of
business of a chartered company are defined by the charter which incorporates it. A chartered
company has wide powers. It can deal with its property and bind itself to any contracts that any
ordinary person can. In case the company deviates from its business as prescribed by the charted,
the Sovereign can annul the latter and close the company. Such companies do not exist in India.

2. Statutory Companies
These companies are incorporated by a Special Act passed by the Central or State legislature.
Reserve Bank of India, State Bank of India, Industrial Finance Corporation, Unit Trust of India,

21 Compiled By Barkha Makheja.

State Trading corporation and Life Insurance Corporation are some of the examples of statutory
companies. Such companies do not have any memorandum or articles of association. They derive
their powers from the Acts constituting them and enjoy certain powers that companies
incorporated under the Companies Act have.
Alternations in the powers of such companies can be brought about by legislative amendments.
(13)
The provisions of the Companies Act shall apply to these companies also except in so far as
provisions of the Act are inconsistent with those of such Special Acts [Sec 616 (d)] These
companies are generally formed to meet social needs and not for the purpose of earning profits.

3. Registered or Incorporated Companies

These companies are formed/incorporated under the companies act passed by the government.
These companies come into existence only after these are registered under the act and the
certificate of incorporation is passed by the Registrar of companies.

• Classification of Companies based on the liability of the members

The registered companies can be classified into the following categories based on the liabilities
of members:
1. Companies Limited By Shares
These types of companies have a share capital and the liability of each member or the company
is limited by the Memorandum to the extent of face value of share subscribed by him. In other
words, during the existence of the company or in the event of winding up, a member can be
called upon to pay the amount remaining unpaid on the shares subscribed by him. Such a
company is called company limited by shares. A company limited by shares may be a public
company or a private company. These are the most popular types of companies.

2. Companies Limited By Guarantee

These types of companies may or may not have a share capital. Each member promises to pay a
fixed sum of money specified in the Memorandum in the event of liquidation of the company for
payment of the debts and liabilities of the company [Sec 13(3)] This amount promised by him is
called (14) ‘Guarantee’. The Articles of Association of the company state the number of member
with which the company is to be registered [Sec 27 (2)]. Such a company is called a company
limited by guarantee.
Such companies depend for their existence on entrance and subscription fees. They may or may
not have a share capital. The liability of the member is limited to the extent of the guarantee and

22 Compiled By Barkha Makheja.

the face value of the shares subscribed by them, if the company has a share capital. If it has a
share capital, it may be a public company or a private company.
The amount of guarantee of each member is in the nature of reserve capital. This amount cannot
be called upon except in the event of winding up of a company. Nontrading or non-profit
companies formed to promote culture, art, science, religion, commerce, charity, sports etc. are
generally formed as companies limited by guarantee.

3. Unlimited Companies
Section 12 gives choice to the promoters to form a company with or without limited liability. A
company not having any limit on the liability of its members is called an ‘unlimited company’ [Sec
12(c)]. An unlimited company may or may not have a share capital. If it has a share capital it may
be a public company or a private company. If the company has a share capital, the article shall
state the amount of share capital with which the company is to be registered [Sec 27 (1)] The
articles of an unlimited company shall state the number of member with which the company is
to be registered.

• Classification of Companies based on the basis of control

1. Holding Companies: [Sec. 4(4)].
A company is known as the holding company of another company if it has control over the other
company. According to Sec 4(4) a company is deemed to be the holding company of another if,
but only if that other is its subsidiary. A company may become a holding company of another
company in either of the following three ways :-
a) by holding more than fifty per cent of the normal value of issued equity capital of the company;
or
b) By holding more than fifty per cent of its voting rights; or
c) by securing to itself the right to appoint, the majority of the directors of the other company ,
directly or indirectly.
The other company in such a case is known as a “Subsidiary company”. Though the two
companies remain separate legal entities, yet the affairs of both the companies are managed and
controlled by the holding company. A holding company may have any number of subsidiaries.
The annual accounts of the holding company are required to disclose full information about the
subsidiaries.

23 Compiled By Barkha Makheja.

2. Subsidiary Companies: [Sec. 4 (I)].
A company is know as a subsidiary of another company when its control is exercised by the latter
(called holding company) over the (25) former called a subsidiary company. Where a company
(company S) is subsidiary of another company (say Company H), the former (Company S)
becomes the subsidiary of the controlling company (company H).

• Classification of Companies based on the basis of transferability of shares.

1. Private Companies:
According to Sec. 3(1) (iii) of the Indian Companies Act, 1956, a private company is that company
which by its articles of association:
i) limits the number of its members to fifty, excluding employees who are members or ex-
employees who were and continue to be members;
ii) restricts the right of transfer of shares, if any;
iii) prohibits any invitation to the public to subscribe for any shares or debentures of the
company.
Where two or more persons hold share jointly, they are treated as a single member. According
to Sec 12 of the Companies Act, the minimum number of members to form a private company is
two. A private company must use the word “Pvt” after its name.

2. Public Companies:
According to Section 2(71) (1) of Indian Companies Act. 2013 “A public company which is not a
Private Company”, If we explain the definition of Indian Companies Act. 1956 in regard to the
public company, we note the following :
i) The articles do not restrict the transfer of shares of the company
ii) It imposes no restriction no restriction on the maximum number of the members on the
company.
iii) It invites the general public to purchase the shares and debentures of the companies

• Other Companies:
1. Domestic and Foreign Companies:

24 Compiled By Barkha Makheja.

a) Indian/ Domestic Companies : These companies are registered in India under the Companies
Act. 1956 and have their registered office in India. Nationality of the members in their case is
immaterial.
b) Foreign Companies : It means any company incorporated outside India which has an
established place of business in India [Sec. 591 (I)]. A company has an (26) established place of
business in India if it has a specified place at which it carries on business such as an office, store
house or other premises with some visible indication premises. Section 592 to 602 of Companies
Act, 1956 contain provisions applicable to foreign companies functioning in India.
2. One person Company:
Section 2(62) of Companies Act defines a one-person company as a company that has only one
person as to its member. Furthermore, members of a company are nothing but subscribers to its
memorandum of association, or its shareholders. So, an OPC is effectively a company that has
only one shareholder as its member.
3. Company Not for profit:
Companies formed for the purpose of NGOs and not from profit earning motive can be registered
under the Act and work as per the provisions of section 8 of Companies Act 2013

2.2. Setting up of a company

2.2.1.Incorporation of company: Promoter & Pre incorporation
contract

Steps to incorporate the Company

 “Promoter” means a person—
(a) who has been named as such in a prospectus or is identified by the company in the annual
return referred to in section 92; or
(b) who has control over the affairs of the company, directly or indirectly whether as a
shareholder, director or otherwise; or
(c) in accordance with whose advice, directions or instructions the Board of Directors of the
company is accustomed to act:
Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a
professional capacity.

 “Member”, in relation to a company, means—

25 Compiled By Barkha Makheja.

 (i) the subscriber to the memorandum of the company who shall be deemed to have agreed to
become member of the company, and on its registration, shall be entered as member in its
register of members;
(ii) every other person who agrees in writing to become a member of the company and whose
name is entered in the register of members of the company;
(iii) every person holding shares of the company and whose name is entered as a beneficial
owner in the records of a depository;
The Companies Act, 2013 provides for the kinds of companies that can be promoted and
registered under the Act.
Pre-Incorporation Contracts
Companies Act, 2013 does not contain any provisions about Promoter’s Contract. The promoters
of a company usually enter into contracts to acquire some property or right for the company
which is yet to be incorporated, such contracts are called preliminary or pre-incorporation
contracts. The promoters. generally enter into such contracts as agents for the company about
to be formed. The legal position is that since presence of two consenting parties is necessary for
a contract, and the company before incorporation is a non-entity, the promoters cannot act as
agents for the company, which has yet to come into existence. As such, the company is not liable
for the acts of the promoters done before its incorporation.
When the company comes into existence, it is not bound by the pre-incorporation contracts even
when it takes the benefit of the work done on its behalf. However, specific performance of a
contract between a third party and the promoters may be successfully claimed by the third party
against the company, when the company enters into possession of the property on the faith of
the promoters’ contract.
Similarly, the company, after incorporation, cannot enforce any contract made before its
incorporation, which means the company cannot sue the other party to the contract if the other
party fails to carry out the contract.

 Formation of Company
Section 3(1) of the Companies Act 2013 states that a company may be formed for any lawful
purpose by—
(a) seven or more persons, where the company to be formed is to be a public company;
(b) two or more persons, where the company to be formed is to be a private company; or

26 Compiled By Barkha Makheja.

 (c) one person, where the company to be formed is to be One Person Company that is to say, a
private company, by subscribing their names or his name to a memorandum and complying with
the requirements of this Act in respect of registration
A company formed under Section 3(1) may be either—
(a) a company limited by shares; or
(b) a company limited by guarantee; or
(c) an unlimited company

 Incorporation of a Company
Section 7(1) provides that at the time of incorporation of a company there shall be filed with the
Registrar within whose jurisdiction the registered office of a company is proposed to be situated,
the following documents and information for registration, namely:—
(a) the memorandum and articles of the company duly signed by all the subscribers to the
memorandum in such manner as may be prescribed;
(b) a declaration in the prescribed form by an advocate, a chartered accountant, cost accountant
or company secretary in practice, who is engaged in the formation of the company, and by a
person named in the articles as a director, manager or secretary of the company, that all the
requirements of this Act and the rules made thereunder in respect of registration and matters
precedent or incidental thereto have been complied with;
(c) an affidavit from each of the subscribers to the memorandum and from persons named as
the first directors, if any, in the articles that he is not convicted of any offence in connection with
the promotion, formation or management of any company, or that he has not been found guilty
of any fraud or misfeasance or of any breach of duty to any company under this Act or any
previous company law during the preceding five years and that all the documents filed with
(d) the address for correspondence till its registered office is established;
(e) the particulars of name, including surname or family name, residential address, nationality
and such other particulars of every subscriber to the memorandum along with proof of identity,
as may be prescribed, and in the case of a subscriber being a body corporate, such particulars as
may be prescribed;
(f) the particulars of the persons mentioned in the articles as the first directors of he company,
their names, including surnames or family names, the Director Identification Number, residential
address, nationality and such other particulars including proof of identity as may be prescribed;
and

27 Compiled By Barkha Makheja.

(g) the particulars of the interests of the persons mentioned in the articles as the first directors
of the company in other firms or bodies corporate along with their consent to act as directors of
the company in such form and manner as may be prescribed.
Section 7 (2) The Registrar on the basis of documents and information filed under sub-section (1)
shall register all the documents and information referred to in that subsection in the register and
issue a certificate of incorporation in the prescribed form to the effect that the proposed
company is incorporated under this Act.
Section 7 (3) On and from the date mentioned in the certificate of incorporation issued under
sub-section (2), the Registrar shall allot to the company a corporate identity number, which shall
be a distinct identity for the company and which shall also be included in the certificate.
Section 7 (4) The company shall maintain and preserve at its registered office copies of all
documents and information as originally filed under subsection (1) till its dissolution under this
Act.
Section 7 (5) If any person furnishes any false or incorrect particulars of any information or
suppresses any material information, of which he is aware in any of the documents filed with the
Registrar in relation to the registration of a company, he shall be liable for action under section
Section 7 (6) Without prejudice to the provisions of sub-section (5) where, at any time after the
incorporation of a company, it is proved that the company has been got incorporated by
furnishing any false or incorrect information or representation or by suppressing any material
fact or information in any of the documents or declaration filed or made for incorporating such
company, or by any fraudulent action, the promoters, the persons named as the first directors of
the company and the persons making declaration under clause (b) of subsection (1) Shall each be
liable for action under section 447.

2.2.2.Prospectus & public offer

Prospectus meaning
Prospectus is any document described to be one, which includes advertisement, circular or notice
inviting offers from public to purchase or subscribe to shares or debenture of the company.
Prospectus is a document through which investors get to know about the company. This
information helps the investors to decide whether to invest or not. It contains detailed
information about the company, its directors, promoters, capital structure, details of the project,
terms and particulars of the issues.

Prospectus Definition
The prospectus is a legal document for market participants and investors to pursue, detailing the
features, prospects, and promise of a financial product.

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It is mandated by the law to be supplied to prospective customers.

Statement in lieu of prospectus

Every public company either issue a prospectus or file a statement in lieu of prospectus. This is
not mandatory for a private company. But when a private company converts from private to
public company, it must have to either file a prospectus if earlier issued or it has to file a
statement in lieu of prospectus.
The provisions regarding the statement in lieu of prospectus have been stated under section 70
of the Companies Act 2013.

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

 Abridged Prospectus
The abridged prospectus is a summary of a prospectus filed before the registrar. It contains all
the features of a prospectus. An abridged prospectus contains all the information of the
prospectus in brief so that it should be convenient and quick for an investor to know all the useful
information in short.
Section33(1) of the Companies Act, 2013 also states that when any form for the purchase of
securities of a company is issued, it must be accompanied by an abridged prospectus.
It contains all the useful and materialistic information so that the investor can take a rational
decision and it also reduces the cost of public issue of the capital as it is a short form of a
prospectus.

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  Shelf Prospectus
Shelf prospectus can be defined as a prospectus that has been issued by any public financial
institution, company or bank for one or more issues of securities or class of securities as
mentioned in the prospectus. When a shelf prospectus is issued then the issuer does not need to
issue a separate prospectus for each offering he can offer or sell securities without issuing any
further prospectus.
The provisions related to shelf prospectus has been discussed under section 31 of the Companies
Act, 2013.
The regulations are to be provided by the Securities and Exchange Board of India for any class or
classes of companies that may file a shelf prospectus at the stage of the first offer of securities to
the registrar.
The prospectus shall prescribe the validity period of the prospectus and it should be not be
exceeding one year. This period commences from the opening date of the first offer of the
securities. For any second or further offer, no separate prospectus is required.
While filing for a shelf prospectus, a company is required to file an information memorandum
along with it.
Information Memorandum [Section 31(2)]
The company which is filing a shelf prospectus is required to file the information memorandum.
It should contain all the facts regarding the new charges created, what changes have undergone
in the financial position of the company since the first offer of the security or between the two
offers.
It should be filed with the registrar within three months before the issue of the second or
subsequent offer made under the shelf prospectus as given under Rule 4CCA of section 60A(3)
under the Companies (Central Government’s) General Rules and Forms, 1956.
When any company or a person has received an application for the allotment of securities with
advance payment of subscription before any changes have been made, then he must be informed
about the changes. If he desires to withdraw the application within 15 days then the money must
be refunded to them.
After the information memorandum has been filed, if any offer or securities is made, the
memorandum along with the shelf prospectus is considered as a prospectus.

 Red herring prospectus

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

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This type of prospectus needs to be filed with the registrar at least three days prior to the opening
of the subscription list or the offer. The obligations carried by a red herring prospectus are same
as a prospectus. If there is any variation between a red herring prospectus and a prospectus then
it should be highlighted in the prospectus as variations.
When the offer of securities closes then the prospectus has to state the total capital raised either
raised by the way of debt or share capital. It also has to state the closing price of the securities.
Any other details which have not been included in the prospectus need to be registered with the
registrar and SEBI.
The applicant or subscriber has right under Section60B(7) to withdraw the application on any
intimation of variation within 7 days of such intimation and the withdrawal should be
communicated in writing.

 Deemed Prospectus
A deemed prospectus has been stated under section 25(1) of the Companies Act, 2013.
When any company to offer securities for sale to the public, allots or agrees to allot securities,
the document will be considered as a deemed prospectus through which the offer is made to the
public for sale. The document is deemed to be a prospectus of a company for all purposes and
all the provision of content and liabilities of a prospectus will be applied upon it.
In the case of SEBI v. Kunnamkulam Paper Mills Ltd., it was held by the court that where a rights
issue is made to the existing members with a right to renounce in the favour of others, it becomes
a deemed prospectus if the number of such others exceeds fifty.

Process for filing and issuing a prospectus

Application forms
As stated under section 33, the application form for the securities is issued only when they are
accompanied by a memorandum with all the features of prospectus referred to as an abridged
prospectus.
The exceptions to this rule are:
When an application form is issued as an invitation to a person to enter into underwriting
agreement regarding securities.
Application issued for the securities not offered to the public.

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

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  Name and registered address of the office, its secretary, auditor, legal advisor, bankers,
trustees, etc.
 Date of the opening and closing of the issue.
 Statements of the Board of Directors about separate bank accounts where receipts of
issues are to be kept.
 Statement of the Board of Directors about the details of utilization and non-utilisation of
receipts of previous issues.
 Consent of the directors, auditors, bankers to the issue, expert opinions.
 Authority for the issue and details of the resolution passed for it.
 Procedure and time scheduled for the allotment and issue of securities.
 The capital structure of the in the manner which may be prescribed.
 The objective of a public offer.
 The objective of the business and its location.
 Particulars related to risk factors of the specific project, gestation period of the project,
any pending legal action and other important details related to the project.
 Minimum subscription and what amount is payable on the premium.
 Details of directors, their remuneration and extent of their interest in the company.
 Reports for the purpose of financial information such as auditor’s report, report of profit
and loss of the five financial years, business and transaction reports, statement of
compliance with the provisions of the Act and any other report.

Filing of copy with the registrar

As stated under sub-section 4 of section26 of the Companies Act, 2013, the prospectus is not to
be issued by a company or on its behalf unless on or before the date of publication, a copy of the
prospectus is delivered to the registrar for registration.
The copy should be signed by every person whose name has been mentioned in the prospectus
as a director or proposed director or the assigned attorney on his behalf.

Delivery of copy of the prospectus to the registrar

As per section26(6) of the Companies Act 2013, the prospectus should mention that its copy has
been delivered to the registrar on its face. The statement should also mention the document
submitted to the registrar along with the copy of the prospectus.

Registration of prospectus
Section26(7) states about the registration of a prospectus by the registrar. According to this
section, when the registrar can register a prospectus when:
It fulfils the requirements of this section, i.e., section 26 of the Companies Act, 2013; and
It contains the consent of all the persons named in the prospectus in writing.

32 Compiled By Barkha Makheja.

Issue of prospectus after registration
If a prospectus is not issued before 90 days from the date from which a copy was delivered before
the registrar, then it is considered to be invalid.

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

Conclusion
A prospectus is basically a formal and legal document issued by a body corporate which acts for
inviting offers from the public for subscription or purchase of any securities. Every public
company is entitled to issue the prospectus for its shares or debentures. But, the same is not
required for a private company.
A prospectus for being a valid one it must contain essential requisites and it must be registered.
If any prospectus is not registered, it is considered as an invalid one and with contravention to
provisions laid down for the valid prospectus. Such contravention is punishable under section
26(9).
Whenever the advertisement if the prospectus is made, it must contain the memorandum of the
company. When a company is making a proposal for an offer of securities, then prior to issuing a
prospectus, it may issue a red herring prospectus. A company can also issue a shelf prospectus
when it has to make an offer one or more securities or class of securities and then it does not
have to issue a prospectus before issuing an offer of each security.
So, a prospectus plays an important role for any public company and it must be under the
provisions laid down under the Companies Act 2013.

2.2.3.Shares, share capital , debentures

Definition of Shares:

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Share may be defined as an interest in the company entitling the owner thereof to receive
proportionate part of the profits, if any, and, at the’ same time, proportionate part of the assets
of the company in case of liquidation.
It can also be expressed as certain invisible units of a fixed amount, i.e., the units are known as
‘shares’. It is the interest of a shareholder in the company measured, by a sum of money for the
purpose of liability in the first place, and of interest in the second but also consisting of a series
of mutual covenants entered into-by all the shareholders.
It may be defined as “an interest having a money value and made up of diverse rights specified
under the Articles of Association.” In this context it is needless to mention that it has got certain
rights and liabilities when the company is a going concern or the company is being wound-up.
According to Indian Companies Act, 1956, the shares of a company may be divided into the
following categories:

Share capital
“Share” means a share in the share capital of a company and includes stock. This article talks
about share capital and types of share capital under The Companies Act, 2013.
Share Capital
Share capital thus known as owned capital of the company. It denotes the amount of capital
raised by the issue of shares, by a company. Hence collected through the issue of shares and
remains with the company till its liquidation. Since it is the money of the shareholder and the
shareholder are the owners of the company. The total share capital however divided into small
parts and each part called as share. Share considered the smallest part of the total capital of a
company.
Kinds of Share Capital
The share capital of a company limited by shares shall be of two kinds, namely:—
a. Equity share capital
b. Preference share capital

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Equity share capital
“Equity share capital” with reference to any company limited by shares, means all share capital
which is not preference share capital.
The Equity share capital—
i. with voting rights; or
ii. with differential rights as to dividend, voting or otherwise in accordance with such rules as may
prescribed.
These differential rights may have difference related to dividend, voting or otherwise in
accordance with rules. The term otherwise bring scope for innovation with in limit of rules. It may
because of difference related to managing control, power to appoint director, or power to
appoint proxy and so on.
Preference share capital
“Preference share capital”, with reference to any company limited by shares, means that part of
the issued share capital of the company which carries or would carry a preferential right with
respect to—
a. payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which
may either seem free of or subject to income-tax; and
b. repayment, in the case of a winding up or repayment of capital, of the amount of the share
capital paid-up or deemed to have paid-up, whether or not, there considered as preferential right
to the payment of any fixed premium or premium on any fixed scale, specified in the
memorandum or articles of the company.

Definition of Debenture
In corporate finance, a debenture is a medium- to long-term debt instrument used by large
companies to borrow money, at a fixed rate of interest. The legal term "debenture" originally
referred to a document that either creates a debt or acknowledges it, but in some countries the
term is now used interchangeably with bond, loan stock or note. A debenture is thus like a
certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified
amount with interest. Although the money raised by the debentures becomes a part of the
company's capital structure, it does not become share capital.[1] Senior debentures get paid
before subordinate debentures, and there are varying rates of risk and payoff for these
categories.
Debentures are freely transferable by the debenture holder. Debenture holders have no rights
to vote in the company's general meetings of shareholders, but they may have separate meetings

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or votes e.g. on changes to the rights attached to the debentures. The interest paid to them is a
charge against profit in the company's financial statements.
The term "debenture" is more descriptive than definitive. An exact and all-encompassing
definition for a debenture has proved elusive. The English commercial judge, Lord Lindley,
notably remarked in one case: "Now, what the correct meaning of ‘debenture’ is I do not know.
I do not find anywhere any precise definition of it. We know that there are various kinds of
instruments commonly called debentures."[2]
Below is a breakdown of some of the most common debt security instruments used by entities
to raise capital.

 Municipal Bonds
Municipal bonds are a type of debt security instrument issued by agencies of the U.S. government
for the purpose of funding infrastructure projects. Municipal bond security investors are
primarily institutional investors such as mutual funds.

 Corporate Bonds
Corporate bonds are a type of debt security an entity can structure to raise capital from the entire
investing public. Institutional mutual fund investors are usually some of the most prominent
corporate bond investors but individuals with brokerage access may also have the opportunity
to invest in corporate bond issuance as well. Corporate bonds also have an active secondary
market which is utilized by both individual and institutional investors.
Companies structure corporate bonds with different maturities. The maturity structuring of a
corporate bond is an influencing factor in the interest rate offered by the bond.

 Alternative Structured Debt Security Products

There are also a variety of alternative structured debt security products in the market, primarily
used as debt security instruments by financial institutions. These offerings include a bundle of
assets issued as a debt security. Financial institutions or financial agencies may choose to bundle
products from their balance sheet into a single debt security instrument offering. As a security
instrument, the offering raises capital for the institution while also segregating the bundled
assets.

2.3. Management & Administration

2.3.1.Directors: - Types, Duties & Liability, Responsibilities
Definition:-
As per Section 2(34) of Companies Act 2013 Director means a director appointed to the Board
of a Company.

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POSITION
Directors are the professional men who are hired by the company. The position that the
directors occupy in a corporate enterprise is not easy to explain.[v] Directors are not the
servant of the company rather they are the officers of a company who directs the affairs of the
company.[vi] However, a director may work as an employee in a different capacity.[vii]
As far as the definition of directors is concerned then the Companies Act, 1956 defines as
“directors include person occupying the position of a director, by whatever name called” but if
we see the Nigerian Act then it defines director as “persons duly appointed by the company to
direct and manage the business of a company”,[viii] which is far much suitable.

TYPES OF DIRECTORS
In a company, there are different types of directors. They have a different role, work and
different duties. This paper will deal each one of them.
“The Companies Act refers to the following two specific categories of Directors:
A Managing Director is a Director who has substantial powers of management of the affairs of
the company subject to the superintendence, control and direction of the Board in question.
A Whole-time Director includes a Director who is in the whole-time employment of the
company, devotes his whole-time of working hours to the company in question and has a
significant personal interest in the company as his source of income”.
Every public company and a private company, which is a subsidiary of a public company, having
a share capital of more than Five Crore rupees (Rs. 5,00,00,000/-) must have a Managing or
Whole-time Director or a Manager.

FURTHER CLASSIFICATION OF DIRECTORS

Based on the circumstances surrounding their appointment, the Companies Act recognizes the
following further types of Directors
Small shareholder: A company may have a director elected by small shareholders, for this
purpose small shareholder means a shareholder holding shares of nominal value of not more
than Rs. 20000 or such as may be prescribed. [ix]
Women Director: “Section 149 of the Companies Act, 2013 read with Rule 3 of the Companies
(Appointment and Qualification of Directors) Rules, 2014 prescribes for every listed company
and every public company having paid-up share capital of not less than Rupees one hundred
crore or turnover of Rupees three hundred crore or more to appoint at least one woman
director”.[x] “There is no prohibition for appointment of a female relative of a director on the
board of a company. Further, there is no proposal to prescribe any such restriction”.[xi]

37 Compiled By Barkha Makheja.

Nominee Directors: Explanation of Sub-section 7 of the section 149 of the Act defines it as “A
director nominated by any financial institution in pursuance of the provisions of any law for the
time being in force, or of any agreement, or appointed by any Government, or any other person
to represent its interests”.[xii] As far their appointment is concerned it is mentioned in the
subs-section 3 of section 161 of the act.[xiii]
First Directors: A person who is appointed by the subscribers of the memorandum of the
company. They are generally listed in the articles of Association. They shall be deemed to be a
director till the directors are appointed in the annual general meeting.[xiv]
Casual vacancies: Where a Director appointed at the AGM vacates office before his or her term
of office expires in the normal course, the resulting vacancy may, subject to the Articles, be
filled by the Board. Such person so appointed shall hold office up to the time which the Director
who vacated office would have held office if he or she had not so vacated such office.[xv]
Additional Directors: Directors who are appointed by the Board if the need arises and the
power has been provided under Articles of Association and also one thing to remember that
the total strength must not exceed the number provided in the Articles[xvi]. They are appointed
when the strength fell down below the legal minimum then appointment is valid.[xvii]
Alternate Director: They are appointed, “if so authorized by the Articles or by a resolution
passed by the company in general meeting, the Board may appoint an Alternate Director to act
for a Director, who is absent for whatever reason for a minimum period of three months from
the State in which the meetings of the Board are ordinarily held”. “He will hold his office until
such period that the Original Director would have held the office”. However, “any provision for
automatic re-appointment of retiring Directors does not apply to the Alternate Director”.[xviii]
‘Shadow’ Director: A person, who is not appointed to the Board, but on whose directions the
Board is accustomed to act, is liable as a Director of the company, unless he or she is giving
advice in his or her professional capacity. Thus, such a ‘shadow’ Director may be treated as an
‘officer in default’ under the Companies Act.
De facto Director: “Where a person who is not actually appointed as a Director, but acts as a
Director and is held out by the company as such, such person is considered as a de
factoDirector”.
Unlike “a ‘shadow’ Director, a de facto Director purports to act, and is seen to the outside world
as acting, as a Director of the company”. They are liable as a Director under the Companies Act.

ON THE BASIS OF LISTING AGREEMENT

Independent director: A listed public company to have atleast 1/3 of the total number of
directors as independent directors. The minimum numbers of the independent directors are
decided by the Central Government for the class or classes of public companies. The subsection
6 of section 149 of the Act explains who the independent directors are.[xix] It is important to

38 Compiled By Barkha Makheja.

 keep in mind that they have to declare their independence in the first meeting of the board
which he attends and also the first meeting of the board every financial year.[xx] The company
and independent directors have to abide with the Schedule IV[xxi]. They hold office for 5 years
and can reappoint by passing special resolution and they cannot have more than 2 consecutive
terms on the Board. They are not entitled to any stocks. In Brirji Gopal Daga Case,[xxii] it was
held they can be held liable only for the acts which occurred with their knowledge and
consent.[xxiii]
Executive and non-executive Directors: “An Executive Director can be either a Whole-time
Director of the company or a Managing Director. In contrast, a non-executive Director is a
Director who is neither a Whole-time Director nor a Managing Director”. Clause 49 of the
Agreement states that the Board should have a combination of both with not less than fifty
percent (50%) of the Board comprising non-executive Directors. Further, it is necessary to
remember that “where the Chairman of the Board is a non-executive Director, at least one-
third of the Board should comprise independent Directors and if he is an Executive Director, at
least half of the Board should comprise independent Directors. Where the non-executive
Chairman is a promoter of the company or is related to any promoter or person occupying
management positions at the Board level or at one level below the Board, at least one-half of
the Board of the company shall consist of independent Directors”.

DUTIES OF DIRECTORS
 Director to act in accordance with AOA.
 A director of a company shall act in good faith in order to promote the objects of the company
for the benefit of its members as a whole, and in the best interests of the company, its employees,
the shareholders, the community and for the protection of environment.
 A director of a company shall exercise his duties with due and reasonable care, skill and diligence
and shall exercise independent judgment.
 A director of a company shall not involve in a situation in which he may have a direct or indirect
interest that conflicts, or possibly may conflict, with the interest of the company.
 A director of a company shall not achieve or attempt to achieve any undue gain or advantage
either to himself or to his relatives, partners, or associates
 A director of a company shall not assign his office and any assignment so made shall be void.

LIABILITIES OF DIRECTORS

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Liability of non-executive / Independent Directors
An independent director and a non-executive director not being promoter or key managerial
personnel, shall be held liable, only in respect of such acts of omission or commission by a
company which had occurred with his knowledge, attributable through Board processes, and
with his consent or connivance or where he had not acted diligently.

Liability as “Officer”
Section 66 (Reduction of Capital)
If any officer of the company—
(a) knowingly conceals the name of any creditor entitled to object to the reduction;
(b) knowingly misrepresents the nature or amount of the debt or claim of any creditor; or
(c) abets or is privy to any such concealment or misrepresentation as aforesaid, he shall be
liable under section 447.
Liability as “Officer in Default”
Directors are liable as officers in default under all sections where specific penalty is provided for
each officer in default.
Where no specific penalty is provided under the Act, they are liable under Section 450.
Liability for “Fraud”

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“Fraud” in relation to affairs of a company or any body corporate, includes any act, omission,
concealment of any fact or abuse of position committed by any person or any other person with
the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure
the interests of, the company or its shareholders or its creditors or any other person, whether or
not there is any wrongful gain or wrongful loss;
Any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term
which shall not be less than six months but which may extend to ten years and shall also be liable
to fine which shall not be less than the amount involved in the fraud, but which may extend to
three times the amount involved in the fraud.
Personal Liability
Directors can be made personally liable if
 When the directors enter into contract in their own name.
 When they enter into contracts on behalf of company but fails to use “LTD. Or PVT LTD.”
 When directors exceeds their powers
 The BOD should act an agent of company, not of a single director. Therefore a single
director cannot enter into a contract on behalf of company unless the BOD authorises.

ROLE OF DIRECTORS IN A COMPANY

A Director is part of a collective body of Directors called the Board, responsible for the
superintendence, control and direction of the affairs of the Company.
LEGAL POSITION OF DIRECTOR

a) Directors as Agents b) Directors as c) Directors as officers

:A company as an employeesWhen the director Director treated as officers of
artificial person, acts is appointed as whole time an company.
through directors who employee of the company  They are liable to certain
are elected then that particular directors penalties if the provisions of
representatives of the shall be considered as the companies act are not
shareholders and who employee director or whole strictly complied with.
execute decision making time director Director as trustees:
for the benefit of  Director is treated as trustees
shareholders of the company, money and
property: and of the powers
entrusted to and vested in
them only as trustee.
Director as “Officer”
“officer” includes any director, manager or key managerial personnel or any person in
accordance with whose directions or instructions the Board of Directors or any one or more of
the directors is or are accustomed to act.

41 Compiled By Barkha Makheja.

Director as “Key Managerial Personnel”
“key managerial personnel”, in relation to a company, means—
(i) the Chief Executive Officer or the managing director or the manager;
(ii) the company secretary;
(iii) the whole-time director;
(iv) the Chief Financial Officer; and
(v) such other officer as may be prescribed;
Director as “Officer in default”
“officer who is in default”, for the purpose of any provision in this Act which enacts that an officer
of the company who is in default shall be liable to any penalty or punishment by way of
imprisonment, fine or otherwise, means any of the following officers of a company, namely:—
(i) whole-time director;
(ii) key managerial personnel;
(iii) where there is no key managerial personnel, such director or directors as specified by the
Board in this behalf and who has or have given his or their consent in writing to the Board to such
specification, or all the directors, if no director is so specified;
(iv) any person who, under the immediate authority of the Board or any key managerial
personnel, is charged with any responsibility including maintenance, filing or distribution of
accounts or records, authorises, actively participates in, knowingly permits, or knowingly fails to
take active steps to prevent, any default;
(v) any person in accordance with whose advice, directions or instructions the Board of Directors
of the company is accustomed to act, other than a person who gives advice to the Board in a
professional capacity;
(vi) every director, in respect of a contravention of any of the provisions of this Act, who is
aware of such contravention by virtue of the receipt by him of any proceedings of the Board or
participation in such proceedings without objecting to the same, or where such contravention
had taken place with his consent or connivance;
(vii) in respect of the issue or transfer of any shares of a company, the share transfer agents,
registrars and merchant bankers to the issue or transfer

42 Compiled By Barkha Makheja.

 2.3.2.Corporate Social Responsibility
Corporate Social Responsibility (CSR) can be defined as a Company’s sense of responsibility
towards the community and environment (both ecological and social) in which it operates.
Companies can fulfil this responsibility through waste and pollution reduction processes, by
contributing educational and social programs, by being environmentally friendly and by
undertaking activities of similar nature. CSR is not charity or mere donations. CSR is a way of
conducting business, by which corporate entities visibly contribute to the social good. Socially
responsible companies do not limit themselves to using resources to engage in activities that
increase only their profits. They use CSR to integrate economic, environmental and social
objectives with the company’s operations and growth. CSR is said to increase reputation of a
company’s brand among its customers and society.
The Companies Act, 2013 has formulated Section 135, Companies (Corporate Social
Responsibility) Rules, 2014 and Schedule VII which prescribes mandatory provisions for
Companies to fulfil their CSR. This article aims to analyse these provisions (including all the
amendments therein).
Applicability of CSR Provisions:
On every Company including its holding or subsidiary having:
 Net worth of Rs. 500 Crore or more, or
 Turnover of Rs. 1000 crore or more, or
 Net Profit of Rs. 5 crore or more
during the immediately preceding financial year
A foreign company having its branch office or project office in India, which fulfills the criteria
specified above
However, if a company ceases to meet the above criteria for 3 consecutive financial years then it
is not required to comply with CSR Provisions till such time it meets the specified criteria.
CSR Committee:
Every Company on which CSR is applicable is required to constitute a CSR Committee of the
Board:
 Consisting of 3 or more directors, out of which at least one director shall be an independent
director. However, if a company is not required to appoint an independent director, then it shall
have in 2 or more directors in the Committee.
 Consisting of 2 directors in case of a private company having only two directors on its Board
 Consisting of at least 2 persons in case of a foreign Company of which one person shall be its
authorised person resident in India and another nominated by the foreign company
Functions of CSR Committee:
The CSR Committee shall—

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 Formulate and recommend to the Board, a CSR Policy which shall indicate the activities to be
undertaken by the Company
 Recommend the amount of expenditure to be incurred on the activities referred to in clause (i)
 Monitor the CSR Policy of the company from time to time
 Institute a transparent monitoring mechanism for implementation of the CSR projects or
programs or activities undertaken by the company.
Responsibility of Board of Directors (BoD):
The BoD of every company on which CSR is applicable shall:
 after considering the recommendations made by the CSR Committee, approve the CSR Policy for
the Company and disclose contents of such Policy in Board report.
 ensure that the activities as are included in CSR Policy of the company are undertaken by the
Company
 shall disclose the composition of the CSR Committee in Board Report
 ensure that the company spends, in every financial year, at least 2% of the average net profits of
the company made during the 3 immediately preceding financial years, in pursuance of its CSR
Policy. The CSR projects/programs/activities undertaken in India only shall amount to CSR
Expenditure.
Note: The Company shall give preference to the local area and areas around it where it operates,
for spending the amount earmarked for CSR activities and shall specify the reasons for not
spending whole of earmarked amount (if it fails to spend some) in Board Report.
CSR Policy
The CSR Policy of the company shall, inter-alia, include the following namely :-
 A list of CSR projects or programs which a company plans to undertake specifying modalities of
execution of such project or programs and implementation schedules for the same
 Monitoring process of such projects or programs
 A clause specifying that the surplus arising out of the CSR projects or programs or activities shall
not form part of the business profit of the company.

CSR Activities
 The CSR activities shall be undertaken by the company, as per its CSR Policy, excluding activities
undertaken in pursuance of its normal course of business.
 The BoD may decide to undertake its CSR activities approved by the CSR Committee, through
 a section 8 company or a registered trust or a registered society, established by the company,
either singly or alongwith any other company, or
 a section 8 company or a registered trust or a registered society, established by the Central
Government or State Government or any entity established under an Act of Parliament or a State
legislature
 a section 8 company or a registered trust or a registered society, other than those specified in
clauses (a) and (b) above, having an established track record of 3 years in undertaking similar
programs or projects;
 collaboration with other companies,

44 Compiled By Barkha Makheja.

 for undertaking projects or programs or CSR activities in such a manner that the CSR Committees
of respective companies are in a position to report separately on such projects or programs.
 The CSR projects or programs or activities not to be considered as CSR Activities:
 Expenses for the benefit of only the employees of the company and their families
 Contribution of any amount directly or indirectly to any political party
Display of CSR Activities on its Website
The BoD shall disclose contents of CSR policy in its report and the same shall be displayed on the
company’s website, if any.
Other Important Points:
 The balance sheet of a foreign company to be filed under section 381(1)(b) of the Act shall contain
an Annexure regarding report on CSR.
 The Board of Directors shall ensure that activities included by a company in its CSR Policy are
related to the areas or subjects specified in Schedule VII (given below) of the Act.

Schedule 7
Activities which may be included by companies in their Corporate Social Responsibility Policies
relating to:
 Eradicating hunger, poverty and malnutrition,promoting health care including preventive health
care and sanitation including contribution to the Swach Bharat Kosh set-up by the Central
Government for the promotion of sanitation and making available safe drinking water.
 Promoting education, including special education and employment enhancing vocation skills
especially among children, women, elderly and the differently abled and livelihood enhancement
projects.
 Promoting gender equality, empowering women, setting up homes and hostels for women and
orphans; setting up old age homes, day care centres and such other facilities for senior citizens
and measures for reducing inequalities faced by socially and economically backward groups.
 Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal
welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and
waterincluding contribution to the Clean Ganga Fund set-up by the Central Government for
rejuvenation of river Ganga.
 Protection of national heritage, art and culture including restoration of buildings and sites of
historical importance and works of art; setting up public libraries; promotion and development
of traditional art and handicrafts;
 Measures for the benefit of armed forces veterans, war widows and their dependents;
 Training to promote rural sports, nationally recognised sports, paralympic sports and olympic
sports
 Contribution to the Prime Minister’s national relief fund or any other fund set up by the central
govt. for socio economic development and relief and welfare of the schedule caste, tribes, other
backward classes, minorities and women;
 Contributions or funds provided to technology incubators located within academic institutions
which are approved by the central govt.

45 Compiled By Barkha Makheja.

 Rural development projects
 Slum area development.

2.4. MOA & AOA: - Meaning & Content

Definition and content of Memorandum of Association

Memorandum of Association is the most important document of a company. It states the objects
for which the company is formed. It contains the rights, privileges and powers of the company.
Hence it is called a charter of the company. It is treated as the constitution of the company. It
determines the relationship between the company and the outsiders.
The whole business of the company is built up according to Memorandum of Association. A
company cannot undertake any business or activity not stated in the Memorandum. It can
exercise only those powers which are clearly stated in the Memorandum.
DEFINITION OF MEMORANDUM OF ASSOCIATION
Lord Cairns:
“The memorandum of association of a company is the charter and defines the limitation of the
power of the company established under the Act”.
Thus, a Memorandum of Association is a document which sets out the constitution of the
company. It clearly displays the company’s relationship with outside world. It also defines the
scope of its activities. MoA enables the shareholders, creditors and people who has dealing with
the company in one form or another to know the range of activities.
According to Sec. 2 (28) of the Companies Act, “Memorandum means the Memorandum of
Association of a company as originally framed or as altered from time to time in pursuance of any
previous companies law or of this act.”
The Memorandum of Association is a document which sets out the constitution of a company
and is therefore the foundation on which the structure of the company is built. It defines the
scope of the company’s activities and its relations with the outside world. The Memorandum of
Association is the charter of a company. It is a document, which amongst other things, defines
the area within which the company can operate. Section 4(1) states that the memorandum of a
company shall state—
CONTENTS OF MEMORANDUM OF ASSOCIATION
According to the Companies Act, the Memorandum of Association of a company must contain
the following clauses:
1. Name Clause of Memorandum of Association

46 Compiled By Barkha Makheja.

The name of the company should be stated in this clause. A company is free to select any name
it likes. But the name should not be identical or similar to that of a company already registered.
It should not also use words like King, Queen, Emperor, Government Bodies and names of World
Bodies like U.N.O., W.H.O., World Bank etc. If it is a Public Limited Company, the name of the
company should end with the word ‘Limited’ and if it is a Private Limited Company, the name
should end with the words ‘Private Limited’.
2. Situation Clause of Memorandum of Association
In this clause, the name of the State where the Company’s registered office is located should be
mentioned. Registered office means a place where the common seal, statutory books etc., of the
company are kept.The company should intimate the location of registered office to the registrar
within thirty days from the date of incorporation or commencement of business.
The registered office of a company can be shifted from one place to another within the town with
a simple intimation to the Registrar. But in some situation, the company may want to shift its
registered office to another town within the state. Under such circumstance, a special resolution
should be passed. Whereas, to shift the registered office to other state, Memorandum should be
altered accordingly.
3. Objects Clause of Memorandum of Association
This clause specifies the objects for which the company is formed. It is difficult to alter the objects
clause later on. Hence, it is necessary that the promoters should draft this clause carefully. This
clause mentions all possible types of business in which a company may engage in future.
The objects clause must contain the important objectives of the company and the other
objectives not included above.
4. Liability Clause of Memorandum of Association
This clause states the liability of the members of the company. The liability may be limited by
shares or by guarantee. This clause may be omitted in case of unlimited liability.
5. Capital Clause of Memorandum of Association
This clause mentions the maximum amount of capital that can be raised by the company. The
division of capital into shares is also mentioned in this clause. The company cannot secure more
capital than mentioned in this clause. If some special rights and privileges are conferred on any
type of shareholders mention may also be made in this clause.
6. Subscription Clause of Memorandum of Association
It contains the names and addresses of the first subscribers. The subscribers to the Memorandum
must take at least one share. The minimum number of members is two in case of a private
company and seven in case of a public company.

47 Compiled By Barkha Makheja.

Thus the Memorandum of Association of the company is the most important document. It is the
foundation of the company.

Definition and content of Articles of Association

Articles of Association (AOA) is the Company’s essential Rule Book which contains the set of
guidelines and regulations necessary for every Company to function. The document is set to
define the Company’s purpose as an organization and the tasks it is supposed to accomplish
internally; ie. handling official financial records; handling company meetings along with defining
the role and the powers of the Directors of the Company. The Articles also manage and maintain
the rights of the shareholders as well as their relationship with the Directors. Companies who
need mandatory Articles of Association are Unlimited Companies, Companies Limited by
Guarantee and Private Companies Limited by Shares.
In terms of section 5(1), the articles of a company shall contain the regulations for management
of the company. The articles of association of a company are its bye-laws or rules and regulations
that govern the management of its internal affairs and the conduct of its business. The articles
play a very important role in the affairs of a company. It deals with the rights of the members of
the company inter se. They are subordinate to and are controlled by the memorandum of
association.
Section 5(2) provides that the articles shall also contain such matters, as may be prescribed.
However, nothing prescribed in this sub-section shall be deemed to prevent a company from
including such additional matters in its articles as may be considered necessary for its
management.
CONTENTS OF ARTICLES OF ASSOCIATION
It is important to pay extra attention to the Contents of the Articles of Association (AOA) at the
initial phase since they are important for the ability of the Company to make profits and keep
their shareholders satisfied. It is also important to make sure that they are as per the Company's
interests because amending the Articles later require a two-thirds majority of the votes at the
general meeting of shareholders.
The following are the contents that a Company's Articles of Association (AOA) usually possesses:
1. DIRECTORS
The AOA defines the guidelines of the Directors' appointment; their qualifications for
appointment; their remuneration once appointed and the powers of the Board of Directors in
the Company meetings.
2. GENERAL MEETINGS
The AOA provides the basic framework of all the General Meetings to be conducted as well as all
the provisions that are related to the functioning of the General Meetings in any manner.

48 Compiled By Barkha Makheja.

 3. ACCOUNTING AND AUDITING
The provisions in AOA will define the guidelines subjected to the Auditing of the accounting of
the Company.
4. SHAREHOLDERS
The AOA streamlines the sub-division of the Share capital of the Company including the rights of
the Shareholders and the relationship of these rights with other elements of the Company. The
shareholders have to pay the whole or part of the remaining unpaid amount on each share
purchased on the Company's demand; i.e Call on Shares.
5. LIEN OF SHARES
The Company is eligible to retain the Shares of any member of the Company in case they fail to
pay the debt to the Company. The member will not be allowed to transfer their shares unless
they pay their debt.
6. TRANSFER AND TRANSMISSION OF SHARES
The AOA defines the procedure during the process of transfer of shares between the transferee
and the shareholders. Transmission of shares comes into effect with death, insolvency, marriage,
succession, etc. It is also a part of AOA despite being involuntary.
7. FORFEITURE AND SURRENDER OF SHARES
The AOA provides for the rules of forfeiture of shares if the member is not able to meet the
purchase payments like paying call money or any allotment on the Shares. Shareholders may
choose to surrender or voluntary return their shares to the Company pertaining to the guidelines
of the AOA.
8. CONVERSION OF SHARES IN STOCK
The Company can pass an ordinary resolution in a General Meeting to convert their shares into
stock. The management of the decision and resolution passed should be in accordance with the
AOA.
9. ISSUING SHARE WARRANT
Public Limited Companies are eligible to issue a share warrant staying within the provisions
mentioned in AOA. A share warrant is a bearer document which is related to the title of shares
issued by the Company.
10. ALTERATION OF CAPITAL
Similar to the conversion of Shares into Stock, AOA provides the rules of the procedure to alter
capital as per the Company's interests. The Company can decide to increase, decrease or
rearrange the Capital.

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 11. VOTING RIGHTS
The AOA notes down the specific Company matters which calls for voting by members as well as
the procedure of voting whether by a poll or through proxies.
12. DIVIDENDS AND RESERVES
The AOA also provides the distribution of dividends among the Shareholders of the Company.
13. WINDING UP
Winding up of the Company means the liquidation of all the assets of the Company to pay its
debt. The remaining monies left after the payment of all debt and expenses are distributed
among the shareholders of the Company. The AOA also provides the provisions and procedure
related to the Winding Up of the Company and has to proceed in accordance with the AOA.

2.5. Winding up of the company & its types

What is Winding up of a company?

Winding up of a company is the process through which life of a company comes to an end and
its property is administered for the benefit of its members & creditors. 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.

What is the law governing the procedure of Winding up in India?

Section 270 of the Companies Act 2013, lays down the procedure for winding up of a company.
It provides two ways of winding up -
By the tribunal
Voluntary

What is the procedure of Winding up of a company by Tribunal?

1. As per Companies Act 2013, a company can be wound up by a Tribunal, if:
2. It is unable to pay its debts.
3. The company has by special resolution resolved that the company be wound up by the
Tribunal.

50 Compiled By Barkha Makheja.

 4. It has acted against the interest of the sovereignty and integrity of India, the security of
the State, friendly relations with foreign states, public order, decency or morality.
5. The Tribunal has ordered the winding up of the company under Chapter XIX.
6. If the company has not filed financial statements or annual returns for the preceding
five consecutive financial years.
7. If the Tribunal is of the opinion that it is just and equitable that be company should be
wound up.
8. If the affairs of the company have been conducted in a fraudulent manner or the
company was formed for fraudulent and unlawful purposes or the persons concerned in
the formation or management of its affairs have been guilty of fraud or misconduct.

What is Voluntary Winding up of a company?

1. The winding up of a company can also be done voluntarily by the members of the
Company, if:
2. If the company passes a special resolution for winding up of the Company.
3. The company in general meeting passes a resolution requiring the company to be
wound up voluntarily as a result of the expiry of the period of its duration, if any, fixed
by its articles of association or on the occurrence of any event in respect of which the
articles of association provide that the company should be dissolved.

What are the procedures involved in Voluntary Winding up of a

Company?
 Step 1 - Conduct a board meeting with 2 Directors and thereby pass a resolution with a
declaration given by directors that they are of the opinion that company has no debt or
it will be able to pay its debt after utilizing all the proceeds from sale of its assets.
 Step 2 - Issues notices in writing for calling of a General Meeting proposing the
resolution along with the explanatory statement.
 Step 3 - In General Meeting pass the ordinary resolution for the purpose of winding up
by ordinary majority or special resolution by 3/4th majority

51 Compiled By Barkha Makheja.

  Step 4 - Conduct a meeting of creditors after passing the resolution, if majority creditors
are of the opinion that winding up of the company is beneficial for all parties then
company can be wound up voluntarily.
 Step 5 - Within 10 days of passing the resolution, file a notice with the registrar for
appointment of liquidator.
 Step 6 - Within 14 days of passing such resolution, give a notice of the resolution in the
official gazette and also advertise in a newspaper.
 Step 7 - Within 30 days of General meeting, file certified copies of ordinary or special
resolution passed in general meeting.
 Step 8 - Wind up the affairs of the company and prepare the liquidators account and get
the same audited.
 Step 9 - Conduct a General Meeting of the company.
 Step 10 - In that General Meeting pass a special resolution for disposal of books and all
necessary documents of the company, when the affairs of the company are totally
wound up and it is about to dissolve.
 Step 11 - Within 15 days of final General Meeting of the company, submit a copy of
accounts and file an application to the tribunal for passing an order for dissolution.
 Step 12 - If the tribunal is of the opinion that the accounts are in order and all the
necessary compliances have been fulfilled, the tribunal shall pass an order for dissolving
the company within 60 days of receiving such application.
 Step 13 - The appointed liquidator would then file a copy of order with the registrar.
 Step 14 - After receiving the order passed by tribunal, the registrar then publish a notice
in the official Gazette declaring that the company is dissolved.

Chapter Ends!
Happy Learning!

52 Compiled By Barkha Makheja.