Theories of Corporate Personalities

Fiction Theory

As per the fiction theory, a corporation exists only as an outcome of fiction and metaphor.
So, the personality that is attached to these corporations is done purely by legal fiction.

Concession Theory

This is likefiction theory. However, it states that the legal entity has been given a corporate
personality or a legal existence by the functions of the State. So as per this theory, only
the State can endow legal personalities, not the law. It says that any legal personality can
take birth from law itself. It is concession or grant from the side of law that legal
personality is created and recognized.

Realist Theory

As per the realist theory, there is really no distinction between a natural person and an
artificial person. So, a corporate entity is as much a person as a natural person. So, the
corporation does not owe its existence to the state or the law. It just exists. This is not a
very practical theory as it does not apply in the real world. This theory says that
corporations have a real personality, not fictitious. Gierke was the exponent of this theory
and tried to criticize the fiction theory. His opinion was that corporate has a real &
recognized personality and it is not created by law. This theory is also known as
sociological theory because in corporate aggregate there is a collective will of different
members and individual will is different from collective will.

Bracket Theory

This is one of the more famous and feasible theories of corporate personality. The bracket
theory is also known as the symbolist theory which states that a corporation is created
only by its members and its agents.

The Ownership Theory: -

This is another theory of corporate personality. This theory states that human beings are
subjected to legal rights not corporations. Furthermore, it says that a juristic person or
corporation is not a person anyway. These are subject less property which is a creation of
law, and this fictitious personality are there only for possessing property in common. Such
personalities are only a form of ownership.
Formation and Incorporation of
a Company
The formation and incorporation of a company are very much similar to the
birth of a human like it also goes through various stages of formation of its body
parts during the womb stage. Various groundwork is carried out to bring a
company into existence. The process of an idea converting into a company
includes various stages, these crucial stages of the pre-incorporation and
formation stages are discussed in detail as below.

Promotion
As the name suggests this stage of incorporation deals with the promotions of
the yet to be incorporated Company. It is the stage where the Promoter walks
in the market of the potential investors to collect the investment towards an
idea which might be his own brainchild or of someone else.

The Promoter induces confidence on the idea, over the investors and tries to
build upon the investment so as to be able to incorporate the company.
Promoter has been defined under Section 2(69) of the Companies Act, 2013.
Technically a promoter is a person so named in the prospectus of the Company.
The Company shall also name their promoter in the annual return made
under Section 96 of the Companies Act, 2013.

A Promoter is to a company, as Parents is to a child. The Promoter, a-*long with

convincing investors towards the idea of the company also brings together the
physical capital of the labor, raw materials, managerial ability, machinery etc.

The Promoter, although is passionate towards the company’s ideas, has to

SWOT analyze the idea with respect to the prospects and feasibility with respect
to the societal dynamics.

The idea of promoter can be seen with having 3 different perspectives:

• promoter is identified in the prospectus of the company or is

mentioned as a promoter in the annual returns of the company,
and/or
 • promoter is a person who has the power to appoint majority of
members of board of directors or person having authority over making
policies or making decisions for the company, and/or
• A promoter is a person on whose advice board of directors are
accustomed to act.

Functions of a Promoter

(i) Spotting a Business Demand in the Market

The promoter before promoting a company idea first identifies a potential
business opportunity. The potential opportunity may be any new product or a
new service or may even be the production or manufacture of an already
established product by new means.

(ii) The practicality of the Idea

The promoter must evaluate the idea of the new potential company under the
magnifying glass of technical and financial feasibility. Therefore, it is but
important that the promoters undertake detailed studies regarding all aspects of
the business idea by using various tools such as the economic studies of the
market, taking opinions of the technical experts of such products, opinions of
the chartered accountants, economists etc. The idea which the promoter intends
to use for perpetrating the market. The feasibility of the idea can be evaluated
using the below mentioned three tests.

• Technical conceivability: the ideas of the business may be good but

sometimes they may be technically difficult to conceive into reality
given such hurdles regarding the raw material acquisition, the difficulty
of making a product with limited funds, etc.
• Budgetary feasibility: Sometimes it may not be possible to gather
the large funds required for the business being under the sword of
limited means and sometimes stipulated time. Also, financial
institutions may be hesitant to give huge loans to new ventures.
• Monetary feasibility: A business idea may be technically and
financially feasible but not monetarily appreciable. It may not be
gainful or may not return enough profits. In such a case, the
promoters refrain from promoting the idea of business.
(iii) Name of the Company
The Promoter after fixing the launch of the idea intends to get a name to the
Company. The promoter applies to the registrar of companies of that jurisdiction
wherever the promoter intends to make the registered head office of the
Company. Application to registrar contains three names “X or Y or Z” in the
sequence of priority and Promoter adheres to Section 8 of the Companies
(Incorporation) Rules, 2014.

(iv) Finalizing Signatories to MOA

The promoters decide who all will be the members signing the Memorandum of
Association of the Company which is to be formed. Generally, the signatories of
the MOA are the first Directors of the Company. The written consent of the
signatories of the memorandum is essential to become Directors of the
company.

(v) Hiring Professionals

Promoters are required to appoint certain professionals such as mercantile
bankers, auditors, lawyers, etc. These professionals aid the promoter in the
preparation of necessary documents that are to be filed with the Registrar of
Companies during the registration of the Company.

(vi) Preparation of Necessary Documents

The promoters are the ones who are responsible for collecting documents that
are submitted to the Registrar of the Companies for getting the company
registered. These documents are a return of allotment, Memorandum of
Association, Articles of Association, consent of Directors and statutory
declaration.

Duties of the Promoter

The relation of promoter with the company cannot be described as a principal-
agent relation as during the pre-incorporation stage, the company has not even
come into existence. Various judicial interpretations towards understanding the
nature of relation between the promoter and the company has taken place in
the common law Courts as well as Indian Courts and it has been decided that
the relation between the promoter and the company is fiduciary in nature.
Duties of the Promoter shall be discussed herewith:
1. Duty to disclose secret profit
As mentioned earlier the promoters stand in a fiduciary relationship with the
company which will be incorporated. The duty of a promoter is to disclose the
secret profit made by him if any to the company. The Promoter has a right to
claim expenses if any made during the incorporation stage from the company.

2. Duty to keep the company informed about the

transactions
A promoter may intend to sell, lease or rent any property of the company. But if
such a transaction is made without informing the company, the company may
repudiate such contract of sale, lease or rent, the company may even claim the
profit made by the promoter from the transaction by allowing such a contract
made by the promoter.

3. Fiduciary duty towards the future Shareholders

The promoter is bound by a fiduciary relationship with the company, signatories
of memorandum of association and show the future allottees of share of the
company. The relation of trust between promoter and future shareholders goes
to show that the promoter shall uphold all the values expected of him by the
Company.

4. Duty to disclose profits gained during promotion

The promoter during the promotion of the company may certain times be
subjected to certain private arrangements leading to his personal profit, given
the promoter stands in fiduciary relationship with the company he must disclose
the profits gain during promotion as explained about to the company.

5. Duty to pay the company whatever received as trustee

The promoter stands in a fiduciary relationship with the company, and it is the
duty of the promoter to make good to the company whatever he has obtained
as the Trustee of the company.
Liabilities of the Promoter
A Promoter is subjected to liabilities under the various provisions of
the Companies Act, 2013. The liabilities of the promoter are:

1. Liability to justify the transactions to the company

The promoter stands in a fiduciary relationship with the company; therefore the
company has all rights to enquire into the transactions made by the promoter
without the consent of the company. The company while dealing with such a
transaction may either repudiate such an agreement made by the promoter
with the third party or may even sue the promoter to recover the money along
with profits so made by him behind the back of the company.

2. Liability against the misstatement made in the

prospectus
Section 26 of the Companies Act, 2013 lists down the matters that are to be
stated in the prospectus. The promoter may be held liable for not having
complied with the provision. Section 63 of the Companies Act, 1956 also
provided criminal liability for misstatement in prospectus and Promoter maybe
made liable under this section. Section 63 prescribed imprisonment that may be
extended to two years and fine that may be extended to 5000 Rs. for making
untrue statements in the prospectus.

Under Section 34 and Section 35 of the Companies Act, 2013 promoter maybe
held liable for any untrue statement made in the prospectus because of which a
person subscribed for shares and debentures believing the prospectus
statements to be true. However, the liability of the promoter is capped towards
only the original allottees of the shares and not the subsequent ones.

3. Personal liability towards the contracts

All the contracts entered upon by the promoter during pre-incorporation stage
of the Company, the promoter may be held personally liable for the
aforementioned contracts till it’s discharged according to contract terms or
when the company takes up the liability from the promoter after it is
incorporated.
4. Liability of the promoter during the winding-up process
of the company
In the process of winding up, the official liquidator under Section 340 of
the Companies Act, 2013 may by application request the court to make the
promoter liable for the misfeasance or breach of trust towards the Company.
Also under Section 300 of Companies Act, 2013 promoter may be liable to
examination, if it is alleged by the liquidator that there is fraud in the promotion
or the formation of the company.

Registration/Incorporation of the Company

The Registration of the Company is legal recognition given to the body
corporate under the Company Law. The procedure of registration has been
clearly stated in Section 7 of the Companies Act, 2013. This provision clearly
lays down the requirements for the incorporation of the company. The details of
the documents namely:

• Memorandum of association, which is the constitution of the company

wherein the signatories in case of a public company have been fixed to
a minimum number of 7 and for a private company a minimum number
of 2 this document is duly stamped.
• Articles of Association, this is the document filed along with the MOA.
• List of directors, wherein the details regarding their names, occupation
and address arementioned.
• Written consent of the directors, the consent of the directors is to be
submitted to the registrar of the companies.
• Verification document, wherein such document is to be digitally signed
by any recognized chartered accountant, Company secretary,
Advocate.

Certificate of Incorporation
The registration of the memorandum of the association, the article of
association and other documents are filed with the registrar. After getting
satisfied with the application & documents submitted, the registrar will consider
issuing the certificate of incorporation’. A certificate of incorporation is the
ultimate proof of the existence of a company.
Effect of the Certificate of Incorporation
1. Certificate of incorporation is the conclusive evidence of the legal
existence or presence of the Company as per Section 35 of Companies
Act, 1956.
2. Even if there are formal deficiencies in the documents submitted for
the incorporation of the company, once the certificate of incorporation
is issued, the certificate becomes conclusive evidence regarding the
legal existence of the company from the date mentioned in the
incorporation certificate.
3. If the certificate of incorporation was received on 24th but the
certificate reflects the date 22nd then the company shall be taken to
have come into existence from 22nd as reflected by the certificate of
incorporation and this will also authenticate the transactions made by
such company on 22nd and 23rd in the eyes of law.

Overview of Features, Types

and Incorporation of a
Company under the Companies
Act 2013
Company is an association of person who takes their meals together. The term
is derived from the Latin word (“com” meaning “with” or “together”;
“panis” that is “bread”) Section 2(20) of Companies Act, 2013 states that a
company means any association of person registered under the present or the
previous companies act. It is called a “body corporate” because the persons
composing it are made into one body by incorporating it according to the law
and clothing it with legal personality.

Under common law, a company is defined as a ‘legal person’ or ‘legal entity’

separate from its member and capable of being surviving beyond the lives of its
members. Whereas it is not merely legal, it is rather a legal device for
attainment of any social or economic end and to a large extent publicly and
socially responsible. It is, therefore, a combined political, social, economic and
legal institution.
Features and advantages of the corporate
form

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-

• 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.

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 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.

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.

Procedure for Registration and

incorporation of a company

Formation procedure
Starting from section 3 of the Companies Act, which states provision regarding
the formation of a company. A public company may be formed by seven or
more person, whereas, a private company can be formulated by two or more
people and one person company can be incorporated by one person only. By
subscribing their names to a memorandum company and complying with the
procedure for registration prescribed under the Act company can be formulated
according to the provisions of law.

There is an exception for the incorporation of one person company is that

its memorandum must indicate the name of another person with his prior
consent, consent should be in writing which is to be filed with the registrar
along with its memorandum at the time of incorporation that should be done
according to the procedure of law.

The person named then shall become a member of the company in case of
subscriber’s death or his incapacity to contract. The named person can
withdraw his consent or the at any time can change the name of the other
person according by giving notice in such a manner prescribed by law.

It becomes the duty of the member to indicate the change made to the
company via indicating it in the memorandum or in any other prescribed
manner and the company shall imply the same to the registrar. Such change of
name will not be considered as amendments in the memorandum as this
change is not affecting any terms and conditions of the company.
Registration procedure under Companies Act
2013
As per section 7 of companies Act,2013, the incorporation of the
company shall be filed with the Registrar within whose jurisdiction
the registered office of the company is to be situated. Required documents
are as follows.

1. Memorandum of association(herein referred to as MOA) and Article

of Association (herein referred to as AOA) which is to be signed by all
the subscribers to the memorandum in the prescribed form.
2. A declaration is to be made in the prescribed manner by an
advocate, a chartered accountant, cost accountant or company
secretary who is a part of formation of the company and also by a
person named in the article as director, manager or secretary of the
company that all the requirements of the act and rules for registration
of an association are fulfilled.
3. An affidavit of each of the subscribers to the memorandum and
person named as first directors in the article declaring that they have
not indulged in any criminal activity during promotion, formation or
management of the company neither be found guilty of any fraud or
misrepresentation or any breach of duty of any company under present
company law or any previous 5 year company law.
4. The affidavit must also state that all the documents given to
the Registrar for registration of the company are true to his
knowledge that contains all the correct information. If any of such
information found wrong, the person shall be liable for action
under section 447 of the Act.
5. Correspondence address of company till its registration must be
established.
6. All the particulars(name, address, surname, nationality, etc.) of each
subscriber to the MOA and person mention as first directors in the AOA
of the company along with identity proof and for directors Director
Identification Number must be prescribed in case any subscriber is a
company then such details should be prescribed.
7. Particulars relating to the interest of the first directors of the company
in other firms or body corporate along with their consent to as a
director must also be provided.
After collecting all the information and documents, the registrar shall register all
the documents and information given to him and issue a certificate in a
prescribed form to ratify the company proposed is incorporated under this
act.

Company will also be provided with a distinct identity in the form of Corporate
Identification Number that must also be included in the certificate issued by
the Registrar after incorporation is completed.

Company shall keep all the copies of the documents and information provided
during registration at its registered of till its dissolution.

Section -8 of the companies act, 2013 deals with the formation of charitable
companies whose objectives are charitable in nature. Such companies must be
registered under this act as a limited company.

What are its effects(with respect to section 9)?

All the subscribers to MOA will become members of the company and are
capable of performing all the functions of an incorporated company under this
act from the date of its incorporation specified in the certificate issued as a
proof of such incorporation.

Every alteration that is to be made either in MOA or AOA shall be done through
special resolution and after complying with the procedure specified under the
act. Such alteration will have no effect without the approval of the Central
Government in writing. Such approval is not required for AOA alterations or any
alteration in regards to the name of the company is deleted therefrom or
addition thereto, of the word.

Difference between the company and

partnership firm
Making a distinction between a company and a partnership firm as both are
formed by no of members agreeing to for either of them.

• Companies are incorporated under the companies act whereas

partnership firms are created on a mutual agreement between the
partners.
 • Companies are governed Indian Companies Act, 2013 whereas for
managing and controlling partnership firms there is Indian
Partnership Act, 1932.
• Registration of partnership firms is voluntary unlike of a company
which is obligatory under the Companies Act to be recognized as a
separate legal entity before the law.
• Number of partners required for incorporation of partnership firm is 2
max can be 100 and for incorporation of company minimum number
of members that are required is 2 in case of private company and
maximum can be 200, but in public company it has to be a minimum
of 7 persons that can last to unlimited as no fixed number is specified,
also one person company can be incorporated by one member.
• Company is a separate legal entity whereas the partnership firm
isn’t.
• A company has a contractual capacity of suing and being sued in its
own name whereas a partnership firm can’t.

Classification of companies
Following are the grounds for making the classification of companies.

On the basis of incorporation

There are two types of companies which are as follows.

• Statutory Companies
Companies incorporation under a special act of parliament or state
legislature not under any of the companies act and provisions of the same do
not apply to such companies. Example are- RBI, SBI, Employees State
Insurance Corporation etc.

• Registered Companies
Companies which are incorporated under section 7 of the companies act
2013 or any other previous companies law. For example- Tata, Reliance,
Infosys etc.
On the basis of the number of members
There are three forms of companies classified on the basis of the number of
members required for its incorporation.

• One person company

Section 2(62) of companies act 2013 defines one person company as a
company that is to be incorporated with one person as a member.
Whereas section-3 companies act specifies certain exceptions that are to be
followed for making registration of a one person company. For example-
AVV AD Avenue (OPC) Pvt. Ltd. company, etc.

• Private companies
According to section 2(68), a private company except in the case of one person
company limits the number of its members to two hundred, minimum paid-up
capital is as may be prescribed. Such companies prevent any public invitation
to subscribe to any of its securities.

• Public companies
Public companies defined under section 2(71), as not a private company, whose
shares are exchanged in an open trade market. It issues its shares via
an initial public offering and the same can be bought by the general public. A
minimum number of members required to form a public company is at
least seven and may extend to unlimited. There is no restriction on the
transferability of its shares.

On the basis of control

There are three categories of companies identified on the basis of control is as
follows.

• Holding companies
Section 2(46) of the Act states that when one company is having control over
the composition of the board and the company holds the majority of shares in
the other company is known as holding the company of that other company.
 • Subsidiary companies
A company whose control and composition is regulated by the other
company known to be its holding company are called subsidiary companies. Its
composition of the board of directors are being controlled by its holding
company and more than half of its shares are in possession of that
company. Section 2(87) of the act define a subsidiary company.

• Associate companies
Company in which the other company has significant influence but the company
is not a subsidiary of the company having such influence(control of at least
20% of total share capital) is called an associate company according
to Section 2(6). These type of companies include joint venture company

On the basis of Liability

1. Limited companies
Liability of its members is either limited to the share bought by them or limited
to the amount each member consented to contribute to the assets of the
company at it’s winding up.

• Limited by share
Liability of members is limited to the number of shares bought by them in a
company limited by share. A company having the liability of its
members limited by the memorandum to the amount, if any, due on shares
held by them respectively is called company limited by shares according
to section 2(22)

• Limited by guarantee
Limited by guarantee is one whose members liability is limited by the
memorandum. This liability will be limited to such amount as members
respectively undertake to contribute to the assets of the company in the process
of it’s winding up. Liability of the members is limited to the fixed sum specified
in the memorandum agreed by the members to contribute.
2. Unlimited companies
Limited liability is a desirable option by the members but is not a necessary
adjunct to incorporation. According to section 2(92) of the Act, any
company not havings limit on the liability of its members is termed as
an unlimited company. These types of companies are rarely formed now. AOA
is must for such companies stating the number of members with which the
company is registered and amount of capital share if it has. Liability of the
member is like partners of a firm for all trade debt without any limit.

On the basis of the manner of access to capital

• Listed company
According to section 2(56), any company whose securities are listed on any
recognized stock exchange for public trading is termed as a listed
company.it is also known as a quoted company.

• Unlisted company
These companies are privately owned companies as they are not listed on
any stock exchange. Hence, they do not find any opportunity to raise funds.

Doctrine of lifting the corporate veil

It has often been assumed that it is a veil covered on the personality of a
company beyond which a court can’t see, which is not actually true. It can be
said that this doctrine is an exception to the natural personal identity of a
company.

In Charanjit Lal v Union of India case, the Supreme Court did not allow a
shareholder to sue for the violation of the fundamental rights of a
company.

A company before the eyes of law is a legal person but in reality, it is an

association of person incorporated under the Act to be called a company. There
are certain exceptions when the curtain of corporate personality can be lifted by
the court. In the question of property and capacity of acts done and rights
acquired or, liability assumed thereby the personality of the company
corporators are being ignored. Whereas, when the members enjoying the
benefits on the name of a company or when the court wishes so can lift such a
veil. Specific grounds on which a court can lift the corporate veil are as follows.

• In case of determining the character of a company- To see whether a

company is an “enemy”. In such cases, the court may in its discretion
examine the nature of persons in real control of the corporate affairs.
• For the benefits of revenue-The court can cancel the registration of a
company if it is used for tax evasion purposes” this statement is held by
the Supreme Court in JuggilalKamlapat v CIT case under income tax
act, agricultural income is exempted from tax.
• In Bacha F Guzdar v CIT [AIR 1955 SC 74] Court observed that the
income of a tea company was exempted upto 60% as agricultural income
and 40% is taxed income. Plaintiff is an employee of such company and
demand exemption of 60% in dividend income as to be regarded as
agricultural income. Therefore, it was held by the court that though the
income of the company is partly agricultural, therefore income, when
received by the shareholders as dividends, could not be regarded as
agricultural income.
• In case of fraud or improper conduct-The court can refuse to uphold
the separate existence of a company where it is formulated to
overcome law, to defraud creditors or to avoid legal obligations.
Simply stating that whenever a company is incorporated with an
intention to defraud its creditors or to avoid legal duties, in such cases
the court has the power to lift the veil of the corporation.
• There can be many other possible grounds on which court can lift the
veil of a corporation to get to know the true picture of working of any
company.

The Law Relating to Companies

A company is an association of a number of persons, formed for some common
purpose and registered according to the law relating to companies. Section 3(1) (i) of
the Companies Act, 1956 states that a company means, “A company formed and
registered under this Act or an existing company”.

According to Lord Justice Lindley, “By a company is meant an association of many

persons who contribute money or money’s worth to a common stock and employ it for
a common purpose. The common stock so contributed is denoted in money and is the
capital of the company. The people who contribute it or to whom it belongs are
members. The proportion of capital to which each member is entitled is his share”.
A company, formed and registered under the Company Act, is regarded by law as a
single person, having specified rights and obligations. The law confers on a company a
distinct legal personality, with perpetual succession and a common seal.

As per Companies Act, 2013, the private company is referred to as a business entity
that defies the fundamental of the transferability of the shares. It also means that
members of the private limited company are not allowed to issue shares and
debentures to the general public.

Also, the same act set out the provision on the number of members that can exist in
such a business model. As of now, private limited companies are only allowed to
retain a maximum of 200 members. Moreover, the privately-held business is liable to
include the term “private limited” at the end of their company’s name.

Overview Of Public Limited Company

The Companies Act, 2013 defines a ‘public company’ which stick to the limited
liability and may offer shares to the “general public” by Initial Public Offer (IPO). An
individual can also acquire the shares of such a company where the company is listed
via the stock market. A public limited company is often referred to as a joint-stock
company. Such a business model is regulated by the provisions of the Indian
Companies Act, 2013.

A public limited company can be set up by the group of volunteers (irrespective of

their numbers). Unlike private business entities, this business model doesn’t impose
any limitation on the transferability of the shares. It means that the company can send
an invitation to the general public for the issuance of shares and debentures.

The Essential Steps For Formation Of A Company

Before a company can be formed the following steps must be taken:

1. The Memo and the Article must be prepared. These two documents must be filed when
the application is made for the registration and incorporation of the company. The
 Companies Act lays down rules regarding the preparation of the memorandum.
Schedule I to the Act of 1956 contains four model forms for use in different cases.
2. If it is proposed to have a paid up capital of more than Rs 3 crores, sanction of the
central Government must be obtained under the capital issue (Control) Act, 1956.
3. If the company to be formed intends to participate in an industry which is included in the
scheduled annexed to the industries (Development and Regulation) Act, 1951, a license
must be obtained under the Act.
4. The company must be registered in accordance with the provision of the companies Act,
1956 and a certificate of incorporation must be obtained.
5. The prospectus or the statement in lieu of prospectus must be issued and registered with
the registrar.
6. The minimum subscription must be raised and therefore the allotment of shares must be
made.
7. The certificate for the commencement of business must be obtained from the Registrar.

Registration Procedure
For the registration of a company, the following documents, together with the necessary
fees, must be submitted to the registrar of companies of the state in which the
registered office of the company will be situated-Sec 33.

1. Memorandum of Association, prepared in accordance with provision of the Companies

Act, and signed by the least 7 persons in the case of public companies and 2 persons in
the case of private companies.
2. The Articles of Association, in case of unlimited companies, companies limited by
guarantee and private companies limited by shares.
3. A declaration by any of the following persons, stating that all the requirements of the act
have been compiled with an advocate, an attorney a pleader, a chartered accountant, or
a person named in the articles as director, manager, or secretary of the company.
4. The duly signed list of persons have consented to be directors of the company, their
consent in writing and the signed agreement with every such director to take the
number of shares required to qualify as directors of the company. These are not required
in the case of private companies and the companies not having a share capital.
5. The registration fees of a company are fixed on the graduated scale on the amount of
nominal capital or the number of members. There is also a filing fee per document.

If the Registrar is satisfied that all the required documents of the act have been
compiled with, he will register the company and issue a certificate called the Certificate
of Incorporation.

Memorandum Of Association
Is the constitution or charter of the company and contains the powers of the company.
No company can be registered under the Companies Act, 1956 without the
memorandum of association. Under Section 2(28) of the Companies Act, 1956 the
memorandum means the memorandum of association of the company as originally
framed or as altered from time to time in pursuance with any of the previous
companies’ law or the Companies Act, 1956.

The memorandum of association should be in any of the one form specified in the
tables B, C, D and E of Schedule 1 to the Companies Act, 1956. Form in Table B is
applicable in case of companies limited by the shares, form in Table C is applicable to
the companies limited by guarantee and not having share capital, and form in Table D is
applicable to company limited by guarantee and having a share capital whereas form in
table E is applicable to unlimited companies.

Proceedings Of The Board Of Directors

Meeting Of Directors
The Directors may meet together as a Board for the dispatch of business from time to
time and shall so meet at least once in every three calendar months and at least four
such meetings shall be held in every year. The Directors may adjourn and otherwise
regulate their meetings as they may think fit.

Notice Of Board Meetings

Notice of every meeting of the Board shall be given in writing to every Director for the
time being in India and at his address in India to every other Director.

Quorum
Subject to Section 287 of the Act, the quorum for a meeting of the Board shall be one-
third of its total strength

(excluding Directors, if any, whose places may be vacant at the time. and any fraction
contained in that one-third being rounded off as one), or two Directors whichever is
higher. Provided that where at any time the number of interested Directors exceeds or is
equal to two- thirds of the total strength, the number of the remaining Directors, that is
to say, the number of the Directors who are not interested present at the meeting being
not less than two, shall be the quorum during such meeting.

Powers Of Directors
The business of the Company shall be managed by the Board of Directors, who may
exercise all such powers of the Company and do all such acts and things as are not, by
the Act, or any other Act or by the Memorandum or by the Articles of the Company
required to be exercised by the Company in General Meeting, subject nevertheless to
the Regulations of these Articles to the provisions of the Act, or any other Act and to
such Regulations being not inconsistent with the aforesaid Regulations or provisions as
may be prescribed by the Company in General Meeting but no Regulation made by the
Company in General Meeting shall invalidate any prior act of the Board which would
have been valid if that Regulation had not been made.

Division Of Profits
The profits of the Company, subject to any special rights relating thereto created or
authorised to be created by these Articles, shall be divisible among the Members in
proportion to the amount of capital paid-up or credited as paid-up and to the period
during the year for which the capital is paid-up on the shares held by them respectively.

The Company In General Meeting May Declare Dividends

Subject to the provisions of Section 205 of the Companies Act, 1956 the Company in
General Meeting may declare dividends, to be paid to its Members according to their
respective rights but no dividends shall exceed the amount recommended by the Board,
but the Company in General Meeting may declare a smaller dividend.

Interim Dividend
The Board may, from time to time, pay to the members such interim dividend as in their
judgement the position of the Company justifies.

Capital Paid-Up In Advance Carrying Interest Not To Earn Dividend

Where capital is paid in advance of calls, such capital may carry interest but shall not be
in respect thereof confer a right to dividend or participate in profits.

Dividend To Be Paid Pro-Rata

Subject to the rights of persons, if any, entitled to shares with special rights as to
dividends, all dividends shall be declared and paid according to the amounts paid or
credited as paid on the shares in respect whereof dividend is paid.

Retention Of Dividends Until Completion Of Transfer Under Article

62
The Board may retain the dividends payable upon shares in respect of which any person
is, under Article 62 entitled to become a Member, which any person under that Article is
entitled to transfer, until such person shall become a member in respect of such shares
or shall duly transfer the same.

Board Report
There shall be attached to every such balance sheet a report of the Board as to the state
of the Company’s affairs and as to the amounts, if any, which it proposes to carry to any
reserves in such balance sheet and the amount, if any, which it recommends should be
paid by way of dividend; and material changes and commitments, if any, affecting the
financial position of the Company which have occurred between the end of the financial
year of the company to which the balance sheet relates and the date of the report. The
Board’s report shall so far as is material for the appreciation of the state of the
Company’s affairs by its members and will not in the Board’s opinion be harmful to the
business of the company or any of its subsidiaries, deal with any changes which have
occurred during the financial year in the nature of the Company’s business, in the
Company’s subsidiaries or in the nature of the business carried on by them and
generally in the classes of business in which the company has an interest and any other
information as may be required by Section 217 of the Act. The Board shall also give the
fullest information and explanations in its report aforesaid or in an addendum to that
report, on every reservation, qualification or adverse remark contained in the auditor’s
report. The Board’s report and any addendum thereto shall be signed by its Chairman if
he is authorized in that behalf by the Board; and when he is not so authorised, shall be
signed by not less than two Directors.

Winding Up
Distribution Of Assets
The Liquidator on any winding up (whether voluntary and supervision or compulsory)
may with the sanction of a Special Resolution, but subject to the rights attached to any
preference share capital, divide among the contributories in specie any part of the assets
of the Company and may, with the like sanction, vest any part of the assets of the
Company in trustees upon such trusts for the benefit of the contributors, as the
liquidator, with the like sanction shall think fit.

Articles Of Association
The Articles of Association (AA) contain the rules and regulations of the internal
management of the company. The AA is nothing but a contract between the company
and its members and also between the members themselves that they shall abide by the
rules and regulations of internal management of the company specified in the AA. It
specifies the rights and duties of the members and directors.
The provisions of the AA must not be in conflict with the provisions of the MA. In case
such a conflict arises, the MA will prevail.

Normally, every company has its own AA. However, if a company does not have its own
AA, the model AA specified in Schedule I – Table A will apply. A company may adopt any
of the model forms of AA, with or without modifications. The articles of association
should be in any of the one form specified in the tables B, C, D and E of Schedule 1 to
the Companies Act, 1956. Form in Table B is applicable in case of companies limited by
the shares, form in Table C is applicable to the companies limited by guarantee and not
having share capital, and form in Table D is applicable to company limited by guarantee
and having a share capital whereas form in table E is applicable to unlimited companies.
However, a private company must have its own AA.

The Important Items Covered By The AA Include:-

Powers, duties, rights and liabilities of Directors

Powers, duties, rights and liabilities of members

Rules for Meetings of the Company

Dividends

Borrowing powers of the company

Calls on shares

Transfer & transmission of shares

Forfeiture of shares

Voting powers of members, etc

Alteration Of Articles Of Association:

A company can alter any of the provisions of its AA, subject to provisions of the
Companies Act and subject to the conditions contained in the Memorandum of
association of the company. A company, by special resolution at a general meeting of
members, alter its articles provided that such alteration does not have the effect of
converting a public limited company into a private company unless it has been
approved by the Central Government.
The articles must be printed, divided into paragraphs and numbered consequently and
must be signed by each subscriber to the Memorandum of Association who shall add
his address, description and occupation in presence of at least one witness who must
attest the signature and likewise add his address, description and occupation. The
articles of association of the company when registered bind the company and the
members thereof to the same extent as if it was signed by the company and by each
member.

Stamping, Digitally Signing And E-Filing Of Various Documents With The Registrar.

Registration Of The Company

Once the documents have been prepared, vetted, stamped and signed, they must be
filed with the Registrar of Companies for incorporating the Company. The following
documents must be filed in this connection:-

1. The MA & AA
2. An agreement, if any, which the company proposes to enter into with any individual for
appointment as its managing director or whole-time director or manager.
3. A statutory declaration in Form 1 by an advocate, attorney or pleader entitled to appear
before the High Court or a company secretary or Chartered Accountant in whole – time
practice in India who is engaged in the formation of the company or by a person who is
named as a director or manager or secretary of the company that the requirements of
the Companies Act have been complied with in respect of the registration of the
company and matters precedent and incidental thereto.
4. In addition to the above, in case of a public company, the following documents must
also be filed :-
1. Written consent of directors in Form 29 to agree to act as directors
2. The complete address of the registered office of the company in Form 18
3. Details of the directors, managing director and manager of the company in Form
32(except for section 25 company).

1. # A printed copy each of the Memorandum and Articles of Association of the proposed
company filed along with the declaration duly stamped with the requisite value of
adhesive stamps from the State/ Union Territory Treasury (For value of stamps to be
affixed see Schedule printed in Part III Chapter 23). Below the subscription clause the
subscribers to the Memorandum should write in his own handwriting his full name and
father’s, or husband’s full name in block letters, full address, occupation, e.g.,’ business
executive, engineer, housewife, etc. and number of equity shares taken and then put his
or her signatures in the column meant for signature. Similarly at the end of the Articles
Of Association the subscriber should write in his own handwriting: his full name and
father’s full name in block letters, full address, occupation. The signatures of the
subscribers to the Memorandum and the Article of Association should be witnessed by
 one person preferably by the person representing the subscribers, for registration of the
proposed company before the Registrar of Companies. Under column ‘Total number of
equity shares’ write the total of the shares taken by the subscribers e.g., 20 (Twenty) only.
Mention date e.g. 5th day of August, 1996. Place-e.g., ‘New Delhi’.
2. With the stamped copy, one spare copy each of the Memorandum and Articles of
Association of the proposed company.
3. Original copy of the letter of the Registrar of Companies intimating the availability of
name.

Document evidencing payment of fee

Memorandum and Articles of Association

Copy of agreement if any, which the proposed company wishes to enter into with any
individual for appointment as its managing or whole-time director or manager

Form18

#Form 29 (only in case of public companies)

Power of Attorney from subscribers

Letter from Registrar of Companies making names available

No objection letters from directors/promoters

Requisite fees either in cash or demand draft

Memorandum of Association
Introduction
A company is formed when a number of people come together for achieving a
specific purpose. This purpose is usually commercial in nature. Companies are
generally formed to earn profit from business activities. To incorporate a
company, an application has to be filed with the Registrar of Companies (ROC).
This application is required to be submitted with a number of documents. One of
the fundamental documents that are required to be submitted with the application
for incorporation is the Memorandum of Association.
Definition of Memorandum of Association
Section 2(56) of the Companies Act, 2013 defines Memorandum of Association.
It states that a “memorandum” means two things:

• Memorandum of Association as originally framed;

Memorandum as originally framed refers to the memorandum as it was during
the incorporation of the company.

• Memorandum as altered from time to time;

This means that all the alterations that are made in the memorandum from time
to time will also be a part of Memorandum of Association.

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

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

Meaning of Memorandum of Association

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

It is mandatory for every company to have a Memorandum of Association which

defines the scope of its operations. Once prepared, the company cannot operate
beyond the scope of the document. If the company goes beyond the scope, then
the action will be considered ultra vires and hence will be void.

It is a foundation on which the company is made. The entire structure of the

company is detailed in the Memorandum of Association.

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

Object of registering a Memorandum of

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

1. In case of a public company, seven or more people are required;

2. In case of a private company, two or more people are required;
3. In case of a one person company, only one person is required.
In all the above cases, the concerned people should first subscribe to a
memorandum before registering the company with Registrar.

Thus, Memorandum of Association is essential for registration of a company.

Section 7(1)(a) of the Act states that for incorporation of a company,
Memorandum of Association and Articles of Association of the company should be
duly signed by the subscribers and filed with the Registrar. In addition to this, a
memorandum has other objects as well. These are,

1. It allows the shareholders to know about the company before buying it

shares. This helps the shareholders determine how much capital will they
invest in the company.
2. It provides information to all the stakeholders who are willing to
associate with the company in any way.

Format of Memorandum of Association

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

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

Table B – It is applicable to a company limited by guarantee and not having a
share capital.

Table C – It is applicable to a company limited by guarantee and having a share

capital.

Table D – It is applicable to an unlimited company not having a share capital.

Table E – It is applicable to an unlimited company having a share capital.

The memorandum should be printed, numbered and divided into paragraphs. It

should also be signed by the subscribers of the company.

Sample of Memorandum of a Company Limited by Shares

XYZ Private Limited, a company, situated in Punjab, is engaged in the business
of manufacturing security devices. It wants to register with the Registrar of
Companies. For registration, the company has to first subscribe to a
memorandum.

The Memorandum of Association of XYZ Private Limited will look like this:

(Since XYZ Private Limited is a company limited by shares, the form given in
Table A will be applicable to it.)

The Companies Act, 2013

Company Limited by Shares

Memorandum of Association

Of

XYZ Private Limited

1. The name of the company is XYZ Private Limited. (Name Clause)

2. The registered office of the company will be situated in the state of
Punjab. (Registered Office Clause)
3. The object for which the company is established are (Object Clause):
(a) The objects to be pursued by the company on its incorporation are:
 I. To carry on business of manufacturing, converting, altering, designing,
producing security systems.
II. To trade, buy, sell or act as agents to import or export all security related
devices.
III. To carry on the business and act as buyers, sellers, traders, agents and
dealers for obtaining the above objects.
(b) Matters which are necessary for the furtherance of the objects specified in
clause 3A are:

1. To manufacture and deal in packaging materials, boxes, grading,

branding, weighting, and marketing for all kinds of security devices and
other electronic components associated with it.
2. To draw, make, accept, endorse, discount, execute, issue, negotiate,
assign and otherwise deal with cheques, drafts, bills of exchange,
promissory notes, hundies, debentures, bonds, bills of lading, railway
receipts, warrants and all other negotiable or transferable instruments.
3. To amalgamate with any other company or companies.
4. To acquire or merge with any other company.
5. To start a joint venture with any other company.
6. To distribute any of the property of the Company amongst the members
in specie or kind subject to the provisions of the Companies Act in the
event of winding up.
7. To apply for, tender, purchase, or otherwise acquire any contracts,
subcontracts licences and concessions for or in relation to the objects or
business herein mentioned or any of them, and to undertake, execute,
carry out, dispose of or otherwise turn to account the same.

• The liability of the member(s) is limited and this liability is limited to the
amount unpaid, if any, on the shares held by them. (Liability Clause)

• The share capital of the company is 70,00,000 rupees, divided into 2000
shares of 3500 rupees each. (Capital Clause)
• We, the several persons, whose names and addresses are subscribed,
are desirous of being formed into a company in pursuance of this
memorandum of association, and we respectively agree to take the
number of shares in the capital of the company set against our
respective names:
 Names, addresses,
No. of shares Signature, names, addresses,
descriptions and Signature of
taken by each descriptions and occupations
occupations of subscriber
subscriber of witnesses
subscribers

Signed before me:

A.B. of…Merchant …………..
Signature………………….

Signed before me:

C.D. of…Merchant …………..
Signature………………….

Signed before me:

E.F. of. ..Merchant …………..
Signature………………….

Signed before me:

G.H. of…Merchant …………..
Signature………………….

Signed before me:

I.J. of…Merchant …………..
Signature………………….

Signed before me:

K.L. of…Merchant …………..
Signature………………….

Signed before me:

M.N. of…Merchant …………..
Signature………………….

________________

Total shares taken: 1400

7. I, whose name and address are given below, am desirous of forming a

company in pursuance of this memorandum of association and agree to
take all the shares in the capital of the company (Applicable in case of
one person company):
 Name, address, description Signature of Signature, name, address, description
and occupation of subscriber subscriber and occupation of witness

Signed before me:

A.B. ……..Merchant
Signature………………….

8. Shri/Smt_____________, son/daughter of ____________, resident

of_____________ aged____________ years shall be the nominee in the event
of death of the sole member (Applicable in case of one person company)

Dated____________ the day of________________

Content of Memorandum of Association

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

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

Section 4(1)(a) states:

1. If a company is a public company, then the word ‘Limited’ should be

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

What are Section 8 companies?

Section 8 Company is named after Section 8 of the Companies Act,2013. It
describes companies which are established to promote commerce, art, sports,
education, research, social welfare, religion etc. Section 8 companies are similar
to Trust and Societies but they have a better recognition and legal standing than
Trust and Societies.

What kind of names are not allowed?

The name stated in the memorandum shall not be,

1. Identical to the name of another company;

2. Too nearly resembling the name of an existing company.
According to Rule 8 of the Company (Incorporation) Rules,2014.

• If a company adds ‘Limited’, ‘Private Limited’, ‘LLP’, ‘Company’,

‘Corporation’, ‘Corp’, ‘inc’ and any other kind of designation to its name
to differentiate it from the name of the other company, the name would
still not be accepted.
Illustration:Precious Technology Limited is same as Precious Technology
Company.

• If plural or singular forms are added to differentiate between names.

Illustrations: Greentech Solution is same as GreenTech Solutions.
Colors Technology is same as Color Technology.

• If type, and case of letters, or punctuation marks are added.

Illustration: Wework is same as We.work.

• Different tenses are used in names.

Illustration: Ascend Solution is same as Ascended Solutions.

• If there is an intentional spelling mistake in the name or phonetic

changes in the name.
Illustrations: Greentech is same as Greentek.

DQ is same as DeeQew.

• Internet related designations are used like .org, .com, etc.

Illustration: Greentech Solution Ltd. is same as Greentech Solutions.com Ltd.

Exception: The name will not be disregarded if the existing company by a board
of resolution allows it.
 • Change in order of combination of words.
Illustration: Shah Builders and Contractors is same as Shah Contractors and
Builders.

Exception: The name will not be disregarded if the existing company by a board
of resolution allows it.

• Addition of a definite or indefinite article.

Illustration: Greentech Solutions Ltd is same as The Greentech Solutions Ltd.

Exception: The name will not be disregarded if the existing company by a board
of resolution allows it.

• Slight variation in spelling of two names, including a grammatical

variation.
Illustration: Colours TV Channel is same as Colors TV Channel.

• Translation of a name, from one language to another.

Illustration: Om Electricity Corporation is same as Om Vidyut Nigam.

• Addition of the name of a place to the name.

Illustration: Greentech Solutions Ltd. Is same as Greentech Mumbai Solutions
Ltd.

Exception: The name will not be disregarded if the existing company by a board
of resolution allows it.

• Addition, deletion or modification of numericals in the name.

Illustration: Greentech Solutions Ltd. Is same as 5 Greentech Solutions Ltd.

Exception: The name will not be disregarded if the existing company by a board
of resolution allows it.

In addition to this, an undesirable name will also not be allowed to be chosen.

Undesirable names are those names which in the opinion of the Central
Government are:

1. Prohibited under the Provisions of Section 3 of Emblems and Names

(Prevention and Improper Use) Act, 1950.
2. Names which resemble each other, which are chosen to deceive.
 3. The name includes a registered trademark.
4. The name includes any word or words which are offensive to a section
of people.
5. Name which is identical to or too nearly resembles the name of an
existing Limited Liability Partnership.
Furthermore, statutory names such as the UN, Red Cross, World Bank, Amnesty
International etc. are also not allowed to be chosen.

Names which in any way indicate that the company is working for the government
are also not allowed.

Reservation of a Name
Section 4(5)(i) of the Act states that for formation of the Company, the Registrar
on receiving the required documents can reserve a name for 20 days. If the
application is made by an existing company, then once the application is
accepted, the name will be reserved for 60 days from the date of application. The
company should get incorporated with the reserved name in these 60 days.

If after making the reservation of a name, it is found that some wrong information
is given. Then two cases arise.

1. In case the company has not been incorporated. In this case, the
Registrar can cancel the reservation of the name and impose a fine of
Rupees 1,00,000.
2. In case the company has been incorporated. In this case, after hearing
the reasons of the company, the Registrar has 3 options. These are,

• On being satisfied, he can give 3 months time to the company to change

the name by passing an ordinary resolution.
• He can strike off the name from the Register of Companies.
• He can file a petition of winding up of the company.
Rule 8 and 9 of the Company (Incorporation) Rules, 2014 state that the
application for reservation of name under section 4(4) should be filed on Form
INC – 1.
Registered Office Clause
The Registered Office of a company determines its nationality and jurisdiction of
courts. It is a place of residence and is used for the purpose of all communications
with the company.

Section 12 of the Companies Act, 2013 talks about Registered Office of the
company.

Before incorporation of the company, it is sufficient to mention only the name of

the state where the company is located. But after incorporation, the company has
to specify the exact location of the registered office. The company has to then get
the location verified as well, within 30 days of incorporation.

It is mandatory for every company to fix its name and address of its registered
office on the outside of every office in which the business of the company takes
place. If the company is a one-person company, then “One-person Company”
should be written in brackets below the affixed name of the company.

Change in place of Registered Office should be notified to the Registrar within the
prescribed time period.

Object Clause
Section 4(c) of the Act, details the object clause.The Object Clause is the most
important clause of Memorandum of Association. It states the purpose for which
the company is formed. The object clause contains both, the main objects and
matters which are necessary for achieving the stated objects also known as
incidental or ancillary objects. The stated objects must be well defined and lawful
according to Section 6(b) of the Companies Act, 2013.

By limiting the scope of powers of the company. The object clause provides
protection to:

Shareholders – The object clause clearly states what operations will the company
perform. This helps the shareholders know their investment in the company will
be used for what purpose.

Creditors – It ensures the creditors that capital is not at risk and the company is
working within the limits as stated in the clause.
Public Interest – The object clause limits the number of matters the company can
deal with thus, prohibiting diversification of activities of the company.

Doctrine of Ultra Vires

If the company operates beyond the scope of the powers stated in the object
clause, then the action of the company will be ultra vires and thus void.

Consequences of Ultra Vires

1. Liability of Directors: The directors of the company have a duty to ensure
that company’s capital is used for the right purpose only. If the capital
is diverted for another purpose not stated in the memorandum, then the
directors will be held personally liable.
2. Ultra Vires Borrowing by the Company: If a bank lends to the company
for the purpose not stated in the object clause, then the borrowing would
be Ultra Vires and the bank will not be able to recover the amount.
3. Ultra Vires Lending by the Company: If the company lends money for an
ultra vires purpose, then the lending would be ultra vires.
4. Void ab initio – Ultra Vires acts of the company are considered void from
the beginning.
5. Injunction – Any member of the company can use the remedy of
injunction to prevent the company from doing ultra vires acts.

Liability Clause
The Liability Clause provides legal protection to the shareholders by protecting
them from being held personally liable for the loss of the company.

There are two kinds of limited liabilities:

Limited By Shares – Section 2(22) of the Companies Act, 2013 defines a company
limited by shares. In a company limited by shares, the shareholders only have to
pay the price of the shares they have subscribed to. If for some reason they have
not paid the full amount for the shares and the company winds up then their
liability will only be limited to the unpaid amount.

Limited By Guarantee – It is defined in Section 2(21) of the Companies Act,

2013.A company limited by guarantee has members instead of shareholders.
These members undertake to contribute to the assets of the company at the time
of winding up. The members give guarantee of a fixed amount that they will be
liable for.

Non-profit Organizations and other charities usually have a structure of

companies limited by guarantee.

Capital Clause
It states the total amount of share capital in the company and how it is divided
into shares. The way the amount of capital is divided into what kind of shares.
The shares can be equity shares or preference shares.

Illustration: The share capital of the company is 80,00,000 rupees, divided into
3000 shares of 4000 rupees each.

Subscription Clause
The Subscription Clause states who are signing the memorandum. Each
subscriber must state the number of shares he is subscribing to. The subscribers
have to sign the memorandum in the presence of two witnesses. Each subscriber
must subscribe to at least one share.

Association Clause
In this clause, the subscribers to the memorandum make a declaration that they
want to associate themselves to the company and form an association.

Memorandum of Association for One-

Person-Company
A one-person company is called so because it can be formed by one person. The
minimum capital required to form a one-person company is 1,00,000 Rupees.

It is a new concept which has been introduced to promote entrepreneurship. All

the laws which are applicable on private companies will be applicable on one-
person company.
Section 2(62) of the Companies Act, 2013 defines one-person company.

A one-person company is a separate legal entity from its owner. It is mandatory

for the company to be converted into a private limited company in case its annual
turnover crosses the 2 Crore mark.

In case of one-person-company, in addition to all the other clauses, the

Memorandum of Association contains a clause called the Nomination Clause. This
clause mentions the name of an individual who will become the member in case
the subscriber dies or becomes incapacitated. The nominee must be an Indian
citizen and resident of India i. e. he must have been living in India for at least
182 days in the preceding year. A minor cannot be a nominee.

The individual whose name is mentioned should give his consent in written form
and it is required to be filed with the Registrar of Companies at the time of
incorporation.

If the nominee wants to withdraw, he shall give it in writing and the owner of the
company will have to nominate a new person within 15 days.

What’s the use of Memorandum of

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

Subscription of Memorandum of Association

Subscribers are the first shareholders of the company. They are the people who
agreed to come together and form the company. The name of each subscriber
along with their particulars are mentioned in the memorandum.

Different kinds of companies require different number of subscribers for

incorporation.

1. Private Company: In case of a private company, the minimum number

of subscribers required are 2.
2. Public Company: In case of a public company, 7 or more subscribers are
required.
3. One-Person-Company: In case of one-person-company, only one person
is required.

Who can Subscribe?

Rule 13 of the Companies (Incorporation) Rules, 2014 describes the provisions of
subscribing to the memorandum.

There are specific kinds of persons (natural or artificial) who can subscribe to the
memorandum. These are:

1. Individuals – An individual or a group of individuals can subscribe to the

memorandum.
2. Foreign citizens and Non Resident Indians – Rule 13(5) of the Companies
(Incorporation) Rules, states that for a foreign citizen to subscribe to a
company in India, his signature, address and proof of identity will need
to be notarized.
The foreign national must have visited India and should have a Business Visa.

For a Non Resident Indian, the photograph, address and identity proof should be
attested at the Embassy with a certified copy of a passport. There is no
requirement of Business Visa.

1. Minor – A minor can only be a subscriber through his guardian.

2. Company incorporated under the Companies Act – The company can be
a subscriber to the memorandum. The Director, officer or employee of
the company or any other person authorized by the board of resolution.
 3. Company incorporated outside India – Foreign Company is defined in
Section 2(42) of the act, it states that a foreign company is a company
incorporated outside India. A company registered outside India can also
subscribe to the memorandum by fulfilling the additional formalities.
4. Society registered under the Societies Registration Act, 1860.
5. Limited Liability Partnership – A partner of a limited liability partnership
can sign the memorandum with the agreement of all the other partners.
6. Body corporate incorporated under an Act of Parliament or State
Legislature can also be a subscriber to the memorandum.

Subscription to Memorandum of Association

Every subscriber should sign the memorandum in presence of at least one
witness. The following particulars of the witness should also be mentioned.

1. Name of the witness

2. Address
3. Description
4. Occupation
If the signature is in any other language then, then an affidavit is required that
declares that the signature is the actual signature of the person.

According to Circular No. 8/15/8, dated 1-9-1958. The subscriber can also
authorize another person to affix the signature by granting a power of attorney
to the person. Department Circular No. 1/95, dated 16th February 1995 states
that only one power of attorney is required.

The person who is granted the power of attorney may be known as an agent.

He should also state the following particulars in the memorandum:

1. Name of the agent

2. Address
3. Description
4. Occupation
Particulars to be Mentioned in Memorandum
of Association
Rule 16 of the Companies (Incorporation) Rules, 2014 details the particulars that
are to be mentioned in the memorandum.

Every Subscriber’s following details should be mentioned.

1. Name (includes last name and family name), a photograph should be

affixed and scanned with the memorandum.
2. Father’s Name and Mother’s Name
3. Nationality
4. Date of Birth
5. Place of Birth
6. Qualifications
7. Occupation
8. Permanent Account Number
9. Permanent and Current Address
10. Contact Number
11. Fax Number (Optional)
12. 2 Identity Proofs in which Permanent Account Number is mandatory.
13. Residential Proof (not older than 2 months)
14. Proof of nationality, if subscriber is a foreign national
15. If the subscriber is a current director or promoter, then his
designation along with Name and Company Identity Number
If a body corporate is subscribing to the memorandum then the following
particulars should be mentioned.

1. Corporate identity number of the company or registration number of the

body corporate.
2. Global location number, which is used to identify the location of the legal
entity. (Optional)
3. The name of the body corporate.
4. The registered address of the business.
 5. Email address.
In case the body corporate is a company, then a certified copy of Board resolution
which authorizes the subscription to the memorandum. The particulars required
in this case are,

1. Number of shares to be subscribed by a body corporate.

2. Name, designation and address of the authorized person.
In case the body corporate is a limited liability partnership. The particulars
required are,

1. A certified copy of the resolution.

2. The number of shares that the firm is subscribing to.
3. The name of the authorized partner.
In case the body corporate is registered outside the country. The particulars
required are,

1. The copy of certificate of incorporation.

2. The address of the registered office.

Printing and Signing of Memorandum of

Association
Section 7(1)(a) states that the memorandum should be duly signed by all the
subscribers and should be in a manner prescribed by the Act.

Rule 13 of the Company (Incorporation) Rules, 2014 describes the manner in

which the memorandum should be signed.

1. The Memorandum of Association should be signed by each subscriber to

the memorandum. The subscriber shall mention his name, address,
occupation and the number of shares he is subscribing to. The
documents should be signed in the presence of at least one witness. The
witness would also mention his name, address, and occupation. By
signing the memorandum, the witness states that, “I witness to
subscriber/subscriber(s)who has/have subscribed and signed in my
presence (date and place to be given); further I have verified his or their
Identity Details (ID) for their identification and satisfied myself of
his/her/their identification particulars as filled in.”
2. If the person subscribing to the document is illiterate, he can either
authorize an agent to sign the document through Power of Attorney or
 he can put his thumb impression on the column for signatures. The
person’s name, address, occupation and the number of shares he is
subscribing to should be written by a person who has been allowed to
write for him. The person who is writing for the illiterate person should
read and explain the contents of the document to an illiterate person.
3. Where the person subscribing to the memorandum is an artificial person
i. e. a body corporate the memorandum shall be signed by the employee,
officer or any person authorized by the Board of Resolution.
4. Where the person subscribing to the memorandum is a foreign national
who does not reside in India but in a country,

• in any part of the Commonwealth, his signatures and address on the

memorandum and proof of identity shall be notarized by a Notary
(Public) in that part of the Commonwealth.
• in a country which is a signatory to the Hague Apostille Convention,
1961, his signature and proof of identity and address on the
memorandum shall be notarized before the Notary (Public) of the
country of his origin and be duly approved in accordance with the said
Hague Convention.
• in a country outside the Commonwealth and which is not a party to the
Hague Apostille Convention, 1961, his signatures and address on the
memorandum and proof of identity, shall be notarized before the Notary
(Public) of such country and the certificate of the Notary (Public) shall
be authenticated by a Diplomatic or Consular Officer empowered in this
behalf under section 3 of the Diplomatic and Consular Officers (Oaths
and Fees) Act, 1948 (40 of 1948).
Section 3 of the Diplomatic and Consular Officers states that, every Diplomat or
any officer in a foreign country can perform the functions of a notary public.

1. Where there is no Diplomatic or Consular officer by any of the officials

mentioned in section 6 of the Commissioners of Oaths Act, 1889.
2. If the foreign national visited India and intended to incorporate a
company, in such a case the incorporation shall be allowed if, he is
having a valid Business Visa.
Section 15 of the Companies Act, 2013 states that the memorandum should be
in printed form.

The Ministry of Corporate Affairs has clarified that a document printed in form
laser printers will be considered valid provided it is legible and fulfills other
requirements as well.
The submission of xerox copies is not allowed. The xerox copies can be submitted
to the members of the company.

Alteration, Amendment & Change in

Memorandum of Association under
Companies Act, 2013.
The term “alter” or “alteration” is defined in Section 2(3) of the Act, as any
additions, omissions or substitutions. A company can alter the memorandum only
to the extent as permitted by the Act. According to Section 13, the company can
alter the clauses in the memorandum by passing a special resolution.

A resolution is a formal decision taken in a meeting. There are two kinds of

resolutions, ordinary and special. A special resolution is one which requires at
least 2/3rd majority to be effective. The alteration to the clauses also require the
approval of the Central Government in writing.

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

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

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

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

1. Alteration to the Name Clause: To alter the name of the company, a

special resolution is required. After the resolution is passed, the copy is
sent to the registrar. For changing the name, the application needs to
be filed in Form INC- 24 with the prescribed fees. After the name is
changed, a new certificate of incorporation is issued.
2. Alteration to the Registered Office Clause: The application for changing
the place for Registered Office of the company shall be filed with the
Central Government in Form INC- 23 with the prescribed fees.
If the company is changing its Registered Office from one to another, then the
approval of the Central Government is required. The Central Government is
required to dispose off the matter within 60 days and should ensure that the
change of place has the consent of all the stakeholders of the company.

• Alteration to the Object Clause: To alter the object clause, a special

resolution is required to be passed. The changes must be confirmed by
the authority. The document which confirms the changes by authority
with a printed copy of the altered memorandum should be filed with the
Registrar.
If the company is a public company, then the alteration should be published in
the newspaper where the Registered Office of the company is located. The
changes to the object clause must also mentioned on the company’s website.

• Alteration to the Liability Clause: The Liability clause of the

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

The company can,

1. Increase its authorised share capital;

2. Convert the shares into stock;
3. Consolidate and divide all of its shares;
4. Cancel the shares which have not been subscribed to;
5. Diminish the share capital of the shares cancelled.
The altered Memorandum of Association should be submitted to the Registrar
within 30 days of passing the resolution.

Difference between Memorandum of

Association and Articles of Association
While Memorandum of Association is a document that governs a company’s
relationship with the outside world. The Articles of association governs a
company’s internal affairs and management. The directors and all other officers
of the company should perform the functions in accordance with the Articles of
Association. The Articles of Association are subordinate to the memorandum.
Thus, while framing the Articles of Association it is very important to keep in mind
that the Articles do not, in any way contradict or exceed the scope of the
memorandum.

The Articles of Association form a contract,

1. Between members of the company;

2. Between the company and its members.
The Articles of Association are important for a company because,

1. They bind the company with its members.

2. They bind the members with each other.
3. They are not concerned with the outside world, they only deal with the
internal affairs of the company which are essential for the smooth
functioning of the business.

Content of the Articles of Association

There is no specific clause that the Articles should contain, they can be drafted
as per the requirements of the company.The Articles may contain the following:

1. Rights of shareholders.
2. Liabilities, duties and powers of the directors.
3. Accounts and audits.
4. Minutes of meetings.
5. Rules regarding use of common seal.
6. Procedure for winding up of the company.
7. Borrowing powers of the company.
8. Procedure for transfer of shares.
9. Procedure for alteration of the share capital of the company.
10. Manner in which notices are given for General Meetings.
11. Minimum attendance for a General Meeting.
12. State the agenda of Annual General Meetings.
 13. Procedure for maintaining the financial records of the company.
14. Determine the Accounting period.
15. Determine the procedure for passing a resolution.
Memorandum of Association Articles of Association

It details the relationship of a company with It regulates the internal affairs of the
the outside world. company.

It is defined in section 2(56) of the Companies It is defined in section 2(5) of the

Act, 2013. Companies Act, 2013.

It contains all the rules of the

It contains the objects of the company.
company.

Approval of the Central Government is Approval of the Central Government is

required for alteration. not required for alteration.

Forms of Memorandum of Association are in Forms of Articles of Association are in

Tables A,B,C,D,E of Schedule 1. Tables F,G,H,I,J of Schedule 1.

Acts ultra vires to the memorandum are void Acts ultra vires to the Articles can be
and cannot be made legitimate by ratification made legitimate by ratification of
of shareholders. shareholders.

The memorandum should not be in

The articles should not be in
contravention to the provisions of the
contravention to the memorandum.
Companies Act, 2013.

Both Memorandum of Association and Articles of Association are essential

documents which describe the procedure for companies to deal with the outside
world and manage its internal affairs.

Conclusion
Thus, Memorandum of Association is a fundamental document for the formation
of a company. It is a charter of the company. Without memorandum, a company
cannot be incorporated. The memorandum together with Articles of Association
form the constitution of the company.
Articles of Association
Introduction
The Companies Act, 2013 defines ‘articles’ as the “articles of association of a
company originally framed, or as altered from time to time in pursuance of any
previous company laws or of the present.” The Articles of Association of a
company are that which prescribe the rules, regulations and the bye-laws for the
internal management of the company, the conduct of its business, and is a
document of paramount significance in the life of a company. The Articles of a
company have often been compared to a rule book of the company’s working,
that regulates the management and powers of the company and its officers. It
prescribes several details of the company’s inner workings such as the manner of
making calls, director’s/employees qualifications, powers and duties of auditors,
forfeiture of shares etc.

In fact, the articles of association also establish a contract between the members
and between the members and the company. This contract is established, governs
the ordinary rights and obligations that are incidental to having membership in
the company.

It must be noted, however, that the articles of association, are subordinate to the
memorandum of association of a company, which is the dominant, fundamental
constitutional document of the company. Further, as laid down in Shyam Chand
v. Calcutta Stock Exchange, any and all articles that go beyond the
memorandum of association will be deemed ultra vires. Therefore, there should
not be any provisions in the articles that go beyond the memorandum. In the
event of a conflict between the memorandum and the articles, the provisions in
the memorandum will prevail. In case of any ambiguity or uncertainty regarding
details in the memorandum, it should be read along with the articles.

Introduction
The Companies Act, 2013 defines ‘articles’ as the “articles of association of a
company originally framed, or as altered from time to time in pursuance of any
previous company laws or of the present.” The Articles of Association of a
company are that which prescribe the rules, regulations and the bye-laws for the
internal management of the company, the conduct of its business, and is a
document of paramount significance in the life of a company. The Articles of a
company have often been compared to a rule book of the company’s working,
that regulates the management and powers of the company and its officers. It
prescribes several details of the company’s inner workings such as the manner of
making calls, director’s/employees qualifications, powers and duties of auditors,
forfeiture of shares etc.

In fact, the articles of association also establish a contract between the members
and between the members and the company. This contract is established, governs
the ordinary rights and obligations that are incidental to having membership in
the company.

It must be noted, however, that the articles of association, are subordinate to the
memorandum of association of a company, which is the dominant, fundamental
constitutional document of the company. Further, as laid down in Shyam Chand
v. Calcutta Stock Exchange, any and all articles that go beyond the
memorandum of association will be deemed ultra vires. Therefore, there should
not be any provisions in the articles that go beyond the memorandum. In the
event of a conflict between the memorandum and the articles, the provisions in
the memorandum will prevail. In case of any ambiguity or uncertainty regarding
details in the memorandum, it should be read along with the articles.

Introduction
The Companies Act, 2013 defines ‘articles’ as the “articles of association of a
company originally framed, or as altered from time to time in pursuance of any
previous company laws or of the present.” The Articles of Association of a
company are that which prescribe the rules, regulations and the bye-laws for the
internal management of the company, the conduct of its business, and is a
document of paramount significance in the life of a company. The Articles of a
company have often been compared to a rule book of the company’s working,
that regulates the management and powers of the company and its officers. It
prescribes several details of the company’s inner workings such as the manner of
making calls, director’s/employees qualifications, powers and duties of auditors,
forfeiture of shares etc.

In fact, the articles of association also establish a contract between the members
and between the members and the company. This contract is established, governs
the ordinary rights and obligations that are incidental to having membership in
the company.
It must be noted, however, that the articles of association, are subordinate to the
memorandum of association of a company, which is the dominant, fundamental
constitutional document of the company. Further, as laid down in Shyam Chand
v. Calcutta Stock Exchange, any and all articles that go beyond the
memorandum of association will be deemed ultra vires. Therefore, there should
not be any provisions in the articles that go beyond the memorandum. In the
event of a conflict between the memorandum and the articles, the provisions in
the memorandum will prevail. In case of any ambiguity or uncertainty regarding
details in the memorandum, it should be read along with the articles.

Distinction Between Memorandum and

Articles of Association
The pivotal differences between memorandum and articles of association are as
follows:

S.No. Memorandum of Association Articles of Association

Contains fundamental conditions upon Contain the provisions for internal

1
which the company is incorporated. regulations of the company.

Regulate the relationship between

Meant for the benefit and clarity of the
the company and its members, as
2 public and the creditors, and the
well amongst the members
shareholders.
themselves.

Lays down the area beyond which the Articles establish the regulations
3
company’s conduct cannot go. for working within that area.

Memorandum lays down the parameters Articles prescribe details within

4
for the articles to function. those parameters.

Articles can be altered a lot more

Can only be altered under specific
5 easily, by passing a special
circumstances and only as per the
resolution.
provisions of the Companies Act, 2013.
 Permission of the Central Government is
also required in certain cases.

Articles cannot include provisions

Memorandum cannot include provisions
contrary to the memorandum.
contrary to the Companies Act.
6 Articles are subsidiary to both the
Memorandum is only subsidiary to the
Companies Act and the
Companies Act.
Memorandum.

Acts done beyond the Articles can

Acts done beyond the memorandum
be ratified by the shareholders as
7 are ultra vires and cannot be ratified even
long as the act is not beyond the
by the shareholders.
memorandum.

Nature and Content of Articles of Association

As per the Companies Act, 2013, the articles of association of different companies
are supposed to be framed in the prescribed form, since the model form of articles
is different for companies limited by shares, companies limited by guarantee
having share capital, companies limited by guarantee not having share capital,
an unlimited company having share capital and an unlimited company not having
share capital.

The signing of the Articles of Association

The Companies (Incorporation) Rules, 2014 prescribes that both the
Memorandum and the Articles of a company are to be signed in a specific manner.

• Memorandum and Articles of a company, are both required to be signed

by all subscribers, who are further required to add their names,
addresses and occupation, in the presence of at least one witness, who
must attest the signatures with his own signature and details.
• Where a subscriber is illiterate, he must affix a thumb impression in place
of his signature, and appoint a person to authenticate the impression
with his signature and details. This appointed person should also read
out the content of the documents to the illiterate subscriber for his
understanding.
• Where a subscriber is a body corporate, the memorandum and articles
must be signed by any director of the body corporate who is duly
 authorised to sign on behalf of the body corporate, by a passing a
resolution of the board of directors of the body corporate.
• Where the subscriber is a Limited Liability Partnership, the partner of the
LLP who is duly authorised to sign on the behalf of the LLP by a resolution
of all the partners shall sign.

Provisions for Entrenchment

The concept of Entrenchment was introduced in the Companies Act, 2013 in
Section 5(3) which implies that certain provisions within the Articles of Association
will not be alterable by merely passing a special resolution, and will require a
much more lengthy and elaborate process. The literal definition of the word
“entrench” means to establish an attitude, habit, or belief so firmly that bringing
about a change is unlikely. Thus, an entrenchment clause included in the Articles
is one which makes certain changes or amendments either impossible or difficult.

Provisions for entrenchment can only be introduced in the articles of a company

during its incorporation, or an amendment to the articles brought about by a
special resolution in case of a public company, and an agreement between all the
members in case of a private company.

Alteration of Articles of Association

Section 14 of the Companies Act, 2013, permits a company to alter its articles,
subject to the conditions contained in the memorandum of association, by passing
a special resolution. This power is extremely important for the functioning of the
company. The company may alter its articles to the effect that would turn:

A public company into a private company

For a company wanting to convert itself from public to a private company simply
passing a special resolution is not enough. The company will have to acquire the
consent and approval of the Tribunal. Further, a copy of the special resolution
must be filed with the Registrar of Companies within 30 days of passing it.
Further, a company must then file a copy of the altered, new articles of
association, as well as the approval order of the Tribunal with the Registrar of
Companies within 15 days of the order being received.

A private company into a public company

For a company wanting to convert from its private status to public, it may do so
by removing/omitting the three clauses as per section 2(68) which defines the
requisites of a private company. Similar to the conversion of the public to a
private company, a copy of the resolution and the altered articles are to be filed
with the Registrar within the stipulated period of time.

Limitations on power to alter articles

• The alteration must not contravene provisions of the memorandum,
since the memorandum supersedes the articles, and the memorandum
will prevail in the event of a conflict.
• The alteration cannot contravene the provisions of the Companies Act,
or any other company law since it supersedes both the memorandum
and the articles of the company.
• Cannot contravene the rules, alterations or suggestions of the Tribunal.
• The alteration cannot be illegal or in contravention with public policy.
Further, it must be for the bona fide benefit and interest of the company.
The alterations cannot be an effort to constitute a fraud on the minority
and must be for the benefit of the company as a whole.
• Any alteration made to convert a public company into a private
company, cannot be made until the requisite approval is obtained from
the Tribunal.
• A company may not use the alteration to cover up or rectify a breach of
contract with third parties or use it to escape contractual liability.
• A company cannot alter its articles for the purpose of expelling a member
of the board of directors is against company jurisprudence and hence
cannot occur.

Binding effect of Memorandum and Articles

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

Binding the company to its members

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

It should be noted, however, that only a shareholder/member, and only in his

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

Members bound to the company

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

Binding between members

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

No binding in relation to outsiders

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

The doctrine of Constructive Notice

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

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

Therefore, it is the duty of every person that deals with the company to inspect
these public documents and ensure in his own capacity that the workings of the
company are in conformity with the documents. Irrespective of whether a person
has actually read the documents or not, it is assumed that he familiar with the
contents of these documents, and that he has understood them in their proper
meaning. The memorandum and articles of association are thus deemed as
notices to the public, hence a ‘constructive notice’.
Illustration: If the articles of Company A, provided that any bill of exchange
must be signed by a minimum of two directors, and the payee receives a bill of
exchange signed only by one, he will not have the right to claim the amount.

The doctrine of Indoor Management

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

The directors of a particular company were authorised in its articles to engage in

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

However, the judgement, in this case, was not fully accepted into in law until it
was accepted and endorsed by the House of Lords in the case of Mahony v East
Holyford Mining Co.

Therefore the primary role of the doctrine of indoor management is completely

opposed to that of constructive notice. Quite simply, while constructive notice
seeks to protect the company from an outsider, indoor management seeks to
protect outsiders from the company. The doctrine of constructive notice is
restricted to the external and outside position of the company and, hence, follows
that there is no notice regarding how the internal mechanism of the company is
operated by its officers, directors and employees. If the contract has been
consistent with the documents on public record, the person so contracting shall
not be prejudiced by any and all irregularities that may beset the inside, or
“indoor” operation of the company.

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

Exceptions to the Doctrine of Indoor

Management
1. Where the outsider had knowledge of the irregularity— Although people
are not expected to know about internal irregularities within a company,
a person who did, in fact, have knowledge, or even implied notice of the
lack of authority, and went ahead with the transaction regardless, shall
not have the protection of this doctrine. Illustration: In Howard v.
Patent Ivory Co. (38 Ch. D 156), the articles of a company only allowed
the directors to borrow a maximum amount of one thousand pounds,
however, they could exceed this amount by obtaining the consent of the
company in a general meeting. However, in this case, without obtaining
this requisite consent, the directors borrowed a sum of 3,500 Pounds
from one of the directors in exchange for debentures. The company then
refused to pay the amount. It was eventually held that the debentures
were only good to the extent of one thousand pounds since the director
had full knowledge and notice of the irregularity since he was a director
himself involved in the internal working of the company.
2. Lack of knowledge of the articles— Naturally, this doctrine cannot and
will not protect someone who has not acquainted himself with the articles
or the memorandum of the company for example in the case of Rama
Corporation v. Proved Tin & General Investment Co. wherein the
officers of Rama Corporation had not read the articles of the investment
company that they were undertaking a transaction with.
3. Negligence— This doctrine does not offer protection to those who have
dealt with a company negligently. For example, if an officer of a company
very evidently takes an action which is not within his powers, the person
contracting should undertake due diligence to ensure that the officer is
duly authorized to take that action. If not, this doctrine cannot help the
person so contracting, such as in the case of Al Underwood v. Bank of
Liverpool.
4. Forgery— Any transaction which involves forgery or is illegal or void ab
initio, implies the lack of free will while entering into the transaction, and
hence does not invoke the doctrine of indoor management. For example,
in the case of Ruben v. Great Fingal Consolidated, the secretary of a
company illegally forged the signatres of two directors on a share
certificate so as to issue shares without the appropriate authority. Since
the directors had no knowledge of this forgery, they could not be held
liable. The share certificate was held to be in nullity and hence, the
 doctrine of indoor management could not be applied. The wrongful an
unauthorized use of the company’s seal is also included within this
exception.
Further, this doctrine cannot include situations where there was third agency
involved or existent. For example, in the case of Varkey Souriar v. Keraleeya
Banking Co. Ltd. this doctrine could not be applied where there was any scope
of power exercised by an agent of the company. The doctrine cannot be implied
even in cases of Oppression.

Conclusion
Therefore, it is to be understood that in the sphere of corporate governance, the
articles of a company is a crucial document which, along with the memorandum
from the company’s core constitution and rule book, and hence defines the
responsibilities of its directors, kinds of business es to be undertaken by the
company, and the various means by which the shareholders may exert their
control over the directors, and the company itself. While the memorandum lays
down the objectives of the company, the articles lay down the rules by which
these objectives are to be achieved. In cases of conflict, the Memorandum
supersedes the Articles and the Companies Act further, supersedes both
Memorandum and Articles.

These articles may be altered as per Section 14 of the Companies Act, 2013. The
entrenchment provisions in the Articles of a company protect the interests of all
the minority shareholders by ensuring that amendment in the article can only
occur after obtaining the requisite prior approval of the shareholders. The Articles
of a company bind the company to its members and bind the members to the
company and further also bind the members to each other, they constitute a
contract amongst themselves and therefore, its members with respect to their
rights and liabilities as members of the company.

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

1. The document should invite the subscription to public share or

debentures, or it should invite deposits.
2. Such an invitation should be made to the public.
3. The invitation should be made by the company or on the behalf
company.
4. The invitation should relate to shares, debentures or such other
instruments.

Statement in lieu of prospectus

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

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

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.

• Red Herring Prospectus

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

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

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

The prospectus shall prescribe the validity period of the prospectus and it should
be not be exceeding one year. This period commences from the opening date of
the first offer of the securities. For any second or further offer, no separate
prospectus is required.

While filing for a shelf prospectus, a company is required to file an information

memorandum along with it.

Information Memorandum [Section 31(2)]

The company which is filing a shelf prospectus is required to file the information
memorandum. It should contain all the facts regarding the new charges created,
what changes have undergone in the financial position of the company since the
first offer of the security or between the two offers.

It should be filed with the registrar within three months before the issue of the
second or subsequent offer made under the shelf prospectus as given under Rule
4CCA of section 60A(3) under the Companies (Central Government’s)
General Rules and Forms, 1956.

When any company or a person has received an application for the allotment of
securities with advance payment of subscription before any changes have been
made, then he must be informed about the changes. If he desires to withdraw
the application within 15 days then the money must be refunded to them.
After the information memorandum has been filed, if any offer or securities is
made, the memorandum along with the shelf prospectus is considered as a
prospectus.

Red herring prospectus

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

This type of prospectus needs to be filed with the registrar at least three days
prior to the opening of the subscription list or the offer. The obligations carried
by a red herring prospectus are same as a prospectus. If there is any variation
between a red herring prospectus and a prospectus then it should be highlighted
in the prospectus as variations.

When the offer of securities closes then the prospectus has to state the total
capital raised either raised by the way of debt or share capital. It also has to state
the closing price of the securities. Any other details which have not been included
in the prospectus need to be registered with the registrar and SEBI.

The applicant or subscriber has right under Section60B(7) to withdraw the

application on any intimation of variation within 7 days of such intimation and the
withdrawal should be communicated in writing.

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

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

It contains all the useful and materialistic information so that the investor can
take a rational decision and it also reduces the cost of public issue of the capital
as it is a short form of a prospectus.
Deemed Prospectus
A deemed prospectus has been stated under section 25(1) of the Companies
Act, 2013.

When any company to offer securities for sale to the public, allots or agrees to
allot securities, the document will be considered as a deemed prospectus through
which the offer is made to the public for sale. The document is deemed to be a
prospectus of a company for all purposes and all the provision of content and
liabilities of a prospectus will be applied upon it.

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

Process for filing and issuing a prospectus

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

The exceptions to this rule are:

• When an application form is issued as an invitation to a person to enter

into underwriting agreement regarding securities.
• Application issued for the securities not offered to the public.

Contents
For filing and issuing the prospectus of a public company, it must be signed and
dated and contain all the necessary information as stated under section 26 of
the Companies Act,2013:
 1. Name and registered address of the office, its secretary, auditor, legal
advisor, bankers, trustees, etc.
2. Date of the opening and closing of the issue.
3. Statements of the Board of Directors about separate bank accounts
where receipts of issues are to be kept.
4. Statement of the Board of Directors about the details of utilization and
non-utilisation of receipts of previous issues.
5. Consent of the directors, auditors, bankers to the issue, expert opinions.
6. Authority for the issue and details of the resolution passed for it.
7. Procedure and time scheduled for the allotment and issue of securities.
8. The capital structure of the in the manner which may be prescribed.
9. The objective of a public offer.
10. The objective of the business and its location.
11. Particulars related to risk factors of the specific project, gestation
period of the project, any pending legal action and other important
details related to the project.
12. Minimum subscription and what amount is payable on the premium.
13. Details of directors, their remuneration and extent of their interest in
the company.
14. Reports for the purpose of financial information such as auditor’s
report, report of profit and loss of the five financial years, business and
transaction reports, statement of compliance with the provisions of the
Act and any other report.

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:

1. It fulfils the requirements of this section, i.e., section 26 of the

Companies Act, 2013; and
2. It contains the consent of all the persons named in the prospectus in
writing.

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.

Share
What is a share?
Shares represent a shareholder’s ownership stake in a business. According to
section 2(84) of the Companies Act, 2013 (hence referred to as the Act), a
“share” refers to a share in the share capital of a company and includes
stock. It indicates a shareholder’s interest in the business, calculated for the
goals of dividend and liability. It ties together several rights and liabilities.
Public limited corporations can finance their operations by issuing stocks. These
shares come with a variety of entitlements in addition to ownership rights.
Some shares come with voting rights, a priority dividend right, a share of the
company’s surplus earnings, a share of the company’s losses, etc.

The entitlement to a dividend, which a business pays out of profit, is a

characteristic of all share variations.
Why do businesses issue shares
Companies issue shares to attract capital from investors who frequently make
investments. Companies use this money to further develop and expand their
enterprises.

What is a stock
A stock, usually referred to as equity, is a type of security that denotes a tiny
portion of a company’s ownership. A share is a small portion you possess when
you buy stock from a corporation; you become a shareholder when you do so.

Classes of Share Capital

According to Section 43 of the Companies Act, the share capital of a company
limited by shares shall be of two kinds, namely Equity Share Capital and
Preference Share Capital, unless otherwise specified in the Memorandum of
Association or Articles of Association of a private company.

Preferred Share Capital

What does preferred share capital mean?

Preference shares, also known as preferred stock, are shares of a company’s
stock that pay dividends to shareholders ahead of dividends on regular stock.
Preference shareholders may get the dividend as a set amount. Preference
shareholders are given “priority” over equity owners when it comes to receiving
dividends. Preference shareholders are entitled to receive payment from
corporate assets before common stockholders and the company’s preference
shares have a fixed dividend, whereas common equity often does not. In
contrast to common shareholders, preferred stockholders normally do not have
voting rights. The only resolutions that the preference shareholders can vote on
are those that directly affect their rights as preference shares and those that
call for the liquidation of the business or the repayment.
Types of Preference Shares

Convertible Preference Shares

Shares of convertible preferred stock are those that are easily convertible into
equity shares.

Non-Convertible Preference Shares

Preference shares with a non-convertible conversion feature cannot be
converted into equity shares.

Redeemable Preference Shares

The shares that the issuing business can buy back or redeem at a set price and
time are known as redeemable preference shares. These shares benefit the
business by acting as a cushion against inflation.

Non Redeemable Preference Shares

Non-redeemable preference shares are ones that the issuing corporation cannot
redeem or repurchase at a certain date. Non-redeemable preference shares are
a lifesaver for businesses during inflationary periods.

Participating Preference Shares

When the company is liquidated and dividends have been distributed to other
shareholders, participating preference shares enable shareholders to seek a
portion of the leftover profit.

However, along with equity shareholders, these shareholders also receive set
dividends and a share of the company’s surplus profits.

Non-Participating Preference Shares

These shares do not provide shareholders with the additional option of receiving
dividends from the firm’s excess profits; instead, they get the fixed dividends
that the company offers.
Cumulative Preference Shares
Shares known as cumulative preference shares allow shareholders the right to
receive cumulative dividend payments from the company even while they are
losing money.

When the company is not making a profit, these dividends are recorded as
arrears and paid out cumulatively the following year when the company is
profitable.

Non-Cumulative Preference Shares

Non-Cumulative Preference Dividends are not paid in arrears to shares. These
shares’ dividend payments are made out of the company’s current-year profits.

Adjustable Preference Shares

The dividend rate for adjustable preference shares is variable and affected by
current market rates.

Characteristics of Preference Shares

Preference shares offer a number of advantages that have allowed regular
investors to outperform them even during slow economic development periods.
The following list of preference share benefits is most appealing:

They are transformed into common stock

It is simple to convert preference shares into ordinary stock. A shareholder’s
shares are changed into a set number of preferred stocks if they wish to modify
their holding position.

Investors are informed that certain preference shares may be converted at any
time after a certain date, while other shares may need the board of directors’
consent in order to be converted.

Dividend Payouts
With preference shares, shareholders can receive dividend payments when
other stockholders would not or may receive dividends later.
Dividend Priority
Preference shareholders, as opposed to equity and other shareholders, have the
significant advantage of getting dividends first.

In the event of unusual circumstances, stockholders with the Voting Rights

Preference have the ability to vote. However, this is hardly an occasional
occurrence. Normally, buying shares in a firm does not grant you voting
privileges in the management of the company.

Voting rights
In the event of extraordinary occurrences, preference shareholders are entitled
to the opportunity to vote. However, this hardly occasionally occurs. Normally,
buying shares in a firm does not grant you voting privileges in the management
of the company.

Asset Preference
Preference shareholders are given precedence over non-preferential
shareholders when discussing a company’s assets in the event of liquidation.

Equity Share Capital

A common investment choice for investors is equity shares. A portion of the
corporation is available as equity shares. As a result, equity stockholders are
regarded as a part of the ownership group. Initiation Public Offerings (IPOs) are
used to first issue equity shares to the general public (IPO). Equity shares start
trading after they are listed. The characteristics and forms of equity shares are
thoroughly discussed in this article.

Equity shares
To obtain funds at the expense of diluting its ownership, a corporation issues
equity shares. To acquire a portion of the company, investors can buy equity
share units. Investors who purchase equity shares do so in order to become
shareholders of the company and to contribute to its overall capital.

By virtue of the shares they own, equity stockholders effectively own the
corporation. Investors gain from capital growth and dividends through stock
investments. In addition to financial rewards, stockholders have voting rights in
important corporate decisions.

Raising money for expansion and growth is the main reason equity shares are
issued.

Through an Initial Public Offering, the company issues equity shares to the
general public (IPO). A primary market offering is an IPO. By subscribing to the
IPO, you can subscribe for the share. As soon as the stocks are allocated and
listed on the stock exchange, you can easily trade them. Popular stock
exchanges in India include the National Stock Exchange (NSE) and the Bombay
Stock Exchange (BSE).

Profits are distributed to equity stockholders. The majority of well-known, large-

cap corporations reward their shareholders with dividends and bonuses.

The face value, or book value ,of an equity share determines its worth. The
price of a company’s shares will increase as more individuals purchase
them. However, prices will decrease if more individuals are selling. When the
shares begin trading on the exchange, the prices are set by supply and demand.

Investors want to invest in a firm to gain from capital appreciation if its growth
prospects appear strong. Similar to this, investors would want to sell their
positions if the business was doing poorly. They sell their assets as a result.

Equity share types

The many types of equity shares are as follows:

Common Shares
The shares a firm issues in order to raise money to cover long-term expenses
are known as ordinary shares. Investors receive a portion of the company. The
amount corresponds to the number of shares held at that time. Voting privileges
will be available to common shareholders.

Preference Shares
Preference equity shares guarantee that investors will receive cumulative
dividends before common shareholders. Preference shareholders, on the other
hand, don’t have the same membership and voting privileges as regular
shareholders.
There are two types of preference shares: participating and non-participating.
Investors who purchase participation preference shares are entitled to a
predetermined profit margin as well as bonus returns. These rewards are
dependent on the company’s performance during a particular fiscal year. Equity
stockholders who do not participate do not receive this benefit.

Furthermore, when a corporation dissolves or winds up operations, preference

owners receive their capital back.

Bonus Stock
A sort of equity share issued by a corporation from its retained earnings is
called a bonus share. In other words, a corporation issues bonus shares as a
way to distribute its earnings. However, unlike other stock shares, this does not
raise the company’s market capitalization.

Shares of Rights
Not everyone is a good fit for rights shares. The corporation only issues these
shares to certain high-end investors. The equity stake of such holders
consequently rises. The rights issue is completed at a reduced cost. The goal is
to raise money to meet the needs of funding.

Sweat Equity
Sweat equity shares are given to a company’s directors and employees. For
their good work in supplying the company with intellectual property rights,
know-how, or value improvements, they receive the shares at a discount.

Employee Stock Options (ESOPs)

ESOPs are provided by a corporation to its employees as a retention strategy
and reward. Under the rules of an ESOP, employees are offered the choice to
buy shares at a predetermined price at a later period.

Characteristics of Equity Shares

These are the main characteristics of equity shares:
Perpetual shares
Equity shares are perpetual in nature. Shares are a company’s long-term
assets and only get returned when the business shuts down.

Significant profits
Equity shares have the potential to provide stockholders with significant returns.
These are dangerous investments possibilities, though. Equity shares are
therefore very volatile. Price changes can be abrupt and are influenced by a
variety of internal and external factors. Investors who have a reasonable level
of risk tolerance should only think about investing in these.

Dividends
An equity shareholder receives a portion of a company’s profits. In other words,
a business can use its yearly profits to pay dividends to its shareholders.
However, a business is not required to pay dividends. A corporation can decide
not to pay dividends to its shareholders if it doesn’t produce good profits and
doesn’t have excess cash flow.

Voting Rights
Voting rights are often available to equity shareholders. They can choose who
will run the business because of this. By selecting competent managers, the
business can increase its yearly turnover. Investors should therefore expect to
see higher average dividend income.

Additional Earnings
Any additional profits a corporation makes are distributable to equity
shareholders. As a result, the investor’s wealth rises.

Liquidity
Equity shares are extremely liquid investments. On stock exchanges, shares are
traded. You can, therefore, purchase and sell the shares at any moment during
market hours. Consequently, one need not be concerned about selling their
stock.
Limited Liability
Ordinary shareholders are not impacted by a company’s losses. In other words,
the shareholders are not responsible for the debt obligations of the business.
The price of equities is down, and that’s the only effect. The return on
investment for a shareholder will be impacted by this.

Share Capital: What is it?

Share capital, which includes both common and preferred stocks, is the sum of
money that a business can legitimately raise through the sale of shares. The
majority of the time, fresh public offerings are used to raise the share capital.

The maximum amount a corporation can raise in a public offering is its

authorised share capital, though it can raise more money by making more
shares available. These sales’ revenues are accounted for as “added paid-in
capital.” The sum above represents the actual price paid for the shares.

The two most popular types of share capital are registered and authorised,
though there are numerous other varieties as well.

Types of Share Capital

The many types of share capital are as follows:

Authorized Share Capital

All businesses must state in their memorandum of association how much capital
they intend to register. The registered, approved, or notional capital is the sum
thus specified. It is the sum of money that a business can raise through a public
subscription, to put it simply.

Issued Share Capital

The percentage of the nominal capital that can be subscribed for by the general
public as shares is known as the Issued Share Capital. An organisation need
not, however, issue all of its registered capital at once. They might also seek
out additional problems. As a result, it is dependent upon the company’s
financial needs.
Under no circumstances may issued capital exceed allowed capital. It generally
refers to every share that the signatories of the memorandum of association,
members of the public, vendors, etc., own.

Unissued Share Capital

The percentage of the authorised capital that has not yet been issued is known
as unissued share capital. It is the discrepancy between the authorised share
capital and the issued share capital, to put it another way.

Subscribed Share Capital

The general public does not always subscribe to the total issued capital. Only a
portion of the issued capital that the general public subscribes to is subscribed
capital. As a result, the subscribed capital and the issued capital are not
necessarily the same.

Called-up Capital
Shareholders generally make instalment payments for the cost of their shares.
For instance, application distribution, first call, last call, etc. As a result, called
up capital refers to the portion of subscribed capital that the company asks for
or requires from the shareholders.

Uncalled Capital
The fraction of the issued capital that has not yet been paid but will be regarded
as subscribed capital upon receipt is known as uncalled capital. These shares, to
put it simply, are those that have been issued but have not yet been claimed.
These shares won’t be included in the subscribed capital until you receive
payments against them.

Paid- Up Capital
A portion of called-up capital is paid-up capital. When a firm issues a call, it
refers to the amount of money that shareholders pay in response. The typical
method for determining a company’s paid-up capital is to subtract called-up
capital from outstanding calls.
Fixed Capital
The fixed capital includes the company’s current assets. For instance,
structures, land, furnishings, equipment, intellectual property rights, plants, etc.

Reserve Capital
Until a corporation is liquidating or winding up, it cannot access the reserve
money. A corporation may only establish reserve capital by a special resolution
approved by 3/4 of the shareholders. The reserve liability cannot be made
available at any time after the Articles of Association have been formed. The
corporation is also prohibited from using such funds as loan collateral.

It also needs a court order to be converted to ordinary capital, and creditors can
only access it in cases of a business closure.

Circulating Capital
One component of a company’s subscribed capital is circulating capital. The
circulating capital includes assets used in operations such as accounts
receivable, book debts, bank reserves, etc. It is also the capital that the
business uses for its core operations.

The fundamental necessity of issuing shares, as well as their significance in a

corporation, is summed up in this article. For its operations, any corporate
organisation needs money. It has the option of raising money internally or from
outside sources. The issuance of shares and the raising of cash can be further
inferred as being an essential component of any business or firm. It aids the
organisation in reinvesting in itself as well as attracting investment from
investors and shareholders. It is evident that when a business is in good
condition, it can take care of its directors, shareholders, and employees while
also inspiring them to work harder.

Rights and Duties of

Shareholders of a Company
Introduction
A shareholder, commonly referred to as a stockholder, is any person, company,
or institution that owns at least one share of a company’s stock. Because
shareholders are a company’s owners, they reap the benefits of the company’s
successes in the form of increased stock valuation. Shareholders play an
important role in the framing and profits of the company. Shareholders are the
owner of the company. They are the main stakeholders in the company. There
are two types of shareholders:

• Equity Shareholders
Equity shareholders are the main stakeholders in a company and when
the time of dividend distribution comes the preference shareholders
would get the first.

• Preference shareholders
Preference shareholders generally have no voting rights because of
their preferred status. They receive fixed dividends, generally larger
than those paid to common stockholders, and their dividends are paid
before common shareholders.

The number of shareholders in a company depends upon the type of company

which they are opening.

• For a one-person company, one person is required.

• For a private limited company, two persons are needed.
• For a public limited company, a minimum of seven persons are
required.

Shareholders’ Rights
There are various rights available to a shareholder. Different type of rights has
been discussed below:

1. Appointment of directors
Shareholders play an important role in the appointment of directors. An
ordinary resolution is required to be passed by the shareholders for the
appointment. Apart from this, shareholders can also appoint various types of
directors. They are:

• An additional director who will hold the office until the next general
body meeting;
• An alternate director who will act as an alternate director for a
period of 3 months;
• A nominee director;
• Director appointed in the case of a casual vacancy in the office of any
director appointed in a general meeting in a public company.
Apart from this shareholder also can challenge any resolution passed for the
appointment of a director in the general body meeting.

2. Legal action against directors

Shareholders also can bring legal action against director by the rules laid down
in the Companies Act 2013. They are:

• Any act done by the director in any manner which is prejudicial against
the affairs of the company.
• Any act done which is beyond the law or against the constitution.
• Fraud.
• When the assets of the company are being transferred at an
undervalued rate.
• When there is a diversion of funds of the company.
• Any act done in a mala fide manner.

3. Appointment of company auditors

Shareholders also have a right to appoint the company auditors. Under
Companies Act 2013, the first auditor of the company is to be appointed by the
board of directors. Further the shareholders at the annual general body meeting
at the recommendation of directors and audit committee. The appointment is
generally done for five years and further can be ratified by passing a resolution
in the annual general body meeting.
 4.
Voting rights
Shareholders also have the right to attend and vote at the annual general body
meeting. Every company registered in India should comply with the provisions
of the Companies Act 2013. It is mandatory for every Indian company to hold
an annual general meeting once in every year. The meeting can be held
anywhere at the head office of the company or any other place as given by the
company. At the meeting, there are various mandatory agendas which are to be
discussed. These include the adoption of financial statements, appointment or
ratification of directors and auditors etc.

When a resolution is brought by members of a company then according to

companies act 2013 it can be passed only by the means of voting by the
shareholders. Companies Act 2013 recognizes following types of voting:

• Voting by the showing of hands – Every member present in the

meeting has one vote. So, in this type of voting shareholders vote just
by showing of hands.
• Voting done by polling – In this type of voting the chairman or the
shareholders’ demand for a poll. However, in case of differential rights
as to voting, a particular class of equity shares may also have weighted
voting rights.
• Voting done by electronic means– every company who has more
than 1000 shareholders has to put up a facility of voting through online
means. Every member should be provided with the means of voting of
online.
• Voting by means of postal ballot– any resolution in the meeting can
also be passed by means of a postal ballot.
A shareholder also has a right to appoint proxy on his behalf when he is unable
to attend the meeting. Though the proxy is not allowed to be included in the
quorum of the meeting in case of voting, it is allowed by following a procedure
mentioned in the Companies Act 2013.

5. Right to call for general meetings

Shareholders have the right to call a general meeting. They have a right to
direct the director of a company to can all extraordinary general meeting. They
also can approach the Company Law Board for the conduction of general body
meeting, if it is not done according to the statutory requirements.
 6. Right to inspect registers and books
As shareholders are the main stakeholders in a company, they have the right to
inspect the accounts register and also the books of the firm and can ask
questions about the same if they feel so.

7. Right to get copies of financial statements

Shareholders have the right to get copies of financial statements. It is the duty
of the company to send the financial statements of the company to all its
shareholders either in a quarterly or annual statement.

8. Winding up of the company

Before the company is wound up the company has to inform all the
shareholders about the same and also all the credit has to be given to all the
shareholders.

Other Shareholders’ Rights

• When the sale of any material of any company is done then the
shareholders should get the amount which they are entitled to receive;
• When a company is converted into another company then it requires
prior approval of shareholders. Also, all the appointment has to be
done according to all the procedures and also auditors and directors
have to be done;
• Right to approach the court in case of insolvency.

Shareholders’ Duties
There are also responsibilities and duties of shareholders which they should
perform. Besides several rights which they have, there exists several duties.
They are:

• Shareholders should participate in the general body meetings so that

they can see and also can advise on the matters which they feel is not
going good.
• Shareholders should consult on the matters of finance and other topics.
 • Shareholders should be in touch with other members of the company
so that they can see the work progress of the company.

Conclusion
Shareholders thereby play an important role in the functioning of a company.
They have various rights which include the appointment of the company’s
director, auditor etc., to voting rights and having a say when the company goes
insolvent. With every right, comes a corresponding responsibility which the
shareholder must carry out diligently.

Share Capital
Share means a share in the share capital of a company and includes stock. It can
also be said that share is just part of securities.

Why is Shares Issued?

Shares are issued by companies to raise money from investors who tend to invest
their money. This money is then used by companies for the development and
growth of their business.

What is Stock?
Stock is set of same category of shares put together which have same value. It
is an aggregate of fully paid up shares.

Kinds of Share Capital

Section 43 of the Companies Act, 2013 defines Kinds of Share Capital.

The share capital of a company limited by shares shall be of two kinds, namely:
Equity Share Capital
Equity share capital with reference to any company limited by shares means all
share capital which is not preference share capital. It refers to the portion of the
company’s money which is raised in exchange for a share of ownership in the
company.

Preference Share Capital

Preference shares are one of the special types of share capital having fixed rate
of dividend and they carry preferential rights over ordinary equity shares in
sharing of profits and also claims over assets of the firm People who buy
preferential share capital gets priority in dividend declaration and at the time of
winding up they are the first people to receive money. They have right to vote
only when the matter directly or indirectly affects them.

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:

1. Payment of dividend, either as a fixed amount or an amount calculated

at a fixed rate, which may either be free of or subject to income-tax;
and
2. 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 been paid-up,
whether or not, there is a preferential right to the payment of any fixed
premium or premium on any fixed scale, specified in the memorandum
or articles of the company.

Kinds of Raising Capital

There are shares which are used to raise the capital of the company. Those shares
are:

• Sweat Equity Shares;

• Employees Stock Option Scheme;
• Bonus Issue;
 • Rights Issue.

Sweat Equity Shares: Section 2(88) & Section

54
These are the shares issued by company to the directors (except independent
directors) or employees of the company at discount for consideration other than
cash in order to encourage them to work better.

It is issued for the purpose of:

• For the know-how of the company.

• Contribution to intellect of the company.
• Value addition to the employees.
Compliances to be made by the company to issue those shares:

• Class of shares already issued.

• Special resolution should be passed by the members and the proposal
of issuing such shares comes from Board of Directors.
• Class of shares/ Number of shares/ to whom such shares would be
issued.
• Price would be decided by Board of Directors.
• For issuing such shares the company should have at least commenced
business for 1 year.
• Maximum of 15% of paid up share capital or 5crore whichever is higher.
• Only sweat equity shares can be issued.
• Notice to share holders before the issuing of sweat equity shares.

Employees Stock Option Scheme: Section 2(37)

& Section 62(1)(b)
These shares are available to Employee and Directors of the company. They have
an option/right to purchase these shares at a predetermined price. These are for
the advantage of employees and directors. These shares cannot be equated for
remuneration of the employee or directors.

Requirements:

• Special Resolution by the members.

• Not entitled to voting rights and dividends until one buy these shares.

Bonus Issue: Section 63

It is a fully paid-up share capital. It is the additional shares given to current
shareholder. No money is charged from the shareholders as these shares are
provided as bonus. It is issued when company has a lot of accumulated profits
and they want to capitalize their reserve & surplus cash. It is determined by the
debt-equity ratio which should not go below 2:1 because the debt should never
be twice than the assets of the company. There should be no liabilities on the
company. Bonus share is considered a good sign for the company because that
way company is able to serve a large equity base and at the same time the net
worth of the company stays intact.

Conditions:

• It should be mentioned in the AOA (Articles of Association) of the

company that bonus be allowed to shareholders if in case it is not
mentioned in the AOA (Article of Association), it is altered by special
majority.
• Special resolution is passed by B.O.D (Board of Directors), Managers are
& top level management where they see if there is profit made by the
company. If there is lot of accumulated profit in that case the resolution
is passed and bonus is issued to all shareholders.
• There should be no previous defaults in the payments of interest to the
debenture holder and of dividend.
• There should be no pending salaries or Provident funds of any employee,
etc.
Sources of Bonus Issue:

• Free reserves: The accounts in which the dividend is saved.

 • Capital Reserve Redemption Accounts (CRRA): When the money of
redeemable preference shares is to be redeemed, it can be redeemed
through CRRA (the amount which is invested).
• Securities Premium Account (SPA): it is an account in which the
premium amount of shares is deposited. (Premium amount- it is the
higher amount at which the shares are issued)
Restriction on Issuing Bonus Share:

As mentioned in sweat equity share there is a class of shares. A company can’t

issue bonus shares if they have outstanding fully or partly convertible debt
instrument at the time of issuing bonus share. Unless there is reservation made
of equity shares of the same class in favor of such holders of convertible debt
instrument on the same terms and proportion to the convertible part.

The equity shares reserved for the holder of the fully or partly convertible debt
instrument shall be issued at the time of conversion of such convertible debt
instrument on the same term or proportion on which the bonus shares were
issued.

Rights Issue: Section 62(1)

When the company thinks of increasing the capital it issues these shares which
are first offered to existing shareholders on priority. The existing shareholders
have right of pre-emption. Although it helps in raising the capital it is not
mandatory to issue rights issue.

Compliance of Rights Issue:

• It has to be mentioned in the articles of association of the company.

• A notice to the share holders regarding the same has to be sent.
• This offer should be available for 15-30 days.
• The existing share holders may renounce or accept this offer.
• Number of shares and price of such share has to be mentioned.
Nature of Shares:

• Part of share capital.

• Exploited by the shareholder (ownership of shares by shareholders).
 • Defines shares as right to participate i.e., through profit when it is a
going concern and through assets when company goes into winding up.

Share Certificate and Warrant

Share Certificate: Section 46

It is a document that certifies the fact that a person or an individual is owner of
certain amount of shares. It is issued under the company’s seal signed by 2
directors, a managing director and a company secretary. It is the prima
facie evidence of title. It acts as estoppels to the title and estoppels as to the
payment.

Share Warrant
It is a bearer document and it is transferable by delivery. It is not dealt in
companies’ act 2013. It is issued only on public company by the permission of
the central government.

Buy-Back: Sections 67, 69 & 70

When a company who issued the shares decides to take back its share from the
market and buys its own share (i.e. the company buys its own shares) by paying
the shareholders the market value per share it is known as/refers to buy-back. A
stock buy-back is a way for a company to re-invest in itself. Liability of a company
decreases when they do the buy-back process. Companies usually buy-back its
share when they have extra surplus cash; a company either invests the surplus
cash in its new venture or by buying back its own share.

Objectives of Buy-Back
1. Surplus cash accountability: Directors are accountable for what they
are doing with the surplus cash to shareholders. The idea behind it is
that money should keep on flowing, excess of surplus cash on balance
sheet is not a good sign. Money should be invested and the flow of
money should keep on rotating.
2. Increase in current share price of the company.
3. Increase in earnings per share.
 4. Discourage the unwelcome takeover bids.

Buy-Back Takes Place Out of

• Free reserve;
• Securities premium account;
• Proceeds of any issue.

Conditions
1. It should be permissible by articles of association.
2. Maximum buyback can be of 25% of paid-up share capital & free reserve.
3. Special resolution has to be passed by the shareholders.
4. Declaration of solvency has to be signed by 2 directors. Out of which 1
has to be managing director. They have to sign a declaration that
company is in a sound position and that after buy back their company
will not be affected and that for 1 year they will be in a strong financial
position and their company will not suffer insolvency.
5. Buy-backs can be from the existing shareholders only.

Prohibition of Buy-Back
1. Company cannot buyback through their Subsidiary Company or
Investment Bankers or Investment Company.
2. No buy -can be made if there is any kind of default in payment of
dividend, loans, or repayment.
3. There should be no liability on the company because buy-back in itself
means that only surplus money can be used which means there should
be no liability on the company.

Failure to Comply
• Fine up to 1-3 hundred thousand on Company.
• Fine up to 1-3 hundred thousand for every independent officer.
 • Imprisonment up to 3 years.

Raising of Capital
1. Private Placement: Company doesn’t offer the share to everyone or to
public. They offer it to particular group or particular people. The limit is
200 shares only. Private company can do the private placement. They
have prohibited public issue. They can only invite 200 people in a
financial year for private placement. Share has to be allotted within 60
days of payment. When a company wants to make private placement
they are prohibited to advertise it in newspaper. They directly contact
the people they want to make shareholders.
2. Offer for Sale: It is a method for raising capital. Here, the company
appoints an issuing house that issues the share on behalf of the
company. Here, the capital provided to issuing house is allotted by the
company and not by issuing house (i.e. capital belongs to company).
3. Rights Issue: (Same as discussed above).
4. Inviting Public through Prospectus: it can be done only by a public
company. There are two ways/mechanisms by which company invite
public through prospectus. The 2 ways are:

• Fixed Price: Here, the price of the share is already fixed from the
beginning.
• Book Building/Price discovery: Here, Red Herring Prospectus is
used.
A Red Herring Prospectus contains most of the information pertaining to the
company’s operations and prospects but does not include key details of the
security issue, such as its price and the number of shares offered. In this type of
IPO, the company involves a financial institution which decides the price range of
the shares.

Position, Appointment &

Powers of Directors under the
Companies Act, 2013
Section 2(34) of the Companies Act, 2013 defines a director.
Position of Directors
The position held by the directors in any corporate enterprise is a tough subject
to explain as held in the case of Ram Chand & Sons Sugar Mills Pvt. Ltd.v.
Kanhayalal Bhargava. The position of a director has been cited by Bowen LJ in
the case of Imperial Hydropathic Hotel Co Blackpool v. Hampson as a
versatile position in a corporate body. Directors are sometimes described as
trustees, sometimes as agents and sometimes as managing partners. These
expressions are from indicating point by which directors are viewed in particular
circumstances.

Are directors servant of the company?

The directors are the professional men of the company who are hired to direct
the affairs of the company. They are the officers of a company and not a servant.
In the case of Moriarty v. Regent’s Garage Co, it was held that a director is
not a servant of the company, but a controller of the affairs of a company.

Directors as agents
In the landmark case of Ferguson v. Wilson, it was clearly recognised that the
directors are the agents of a company in the eyes of law. The company being
an artificial person can act only through the directors. Regarding this, the relation
between the directors and the company is merely like the ordinary relation of
principal and agent.

The relation between the directors and the company is similar to the general
principle of agency. When a director signs on behalf of the company, it is a
company that is held liable and not the director. Also, like agents, they have to
declare any personal interest if they have in a transaction of the company.

One of the important points to be noted is that they are not agents of its individual
members. They are the agents of the institution.

In the case of Indian Overseas Bank v. RM Marketing, it has been held that
the directors of a company could not be made liable merely because he is a
director if he has not given any personal guarantee for a loan taken by the
company,
Directors as Trustees
In a strict sense, the directors are not the trustees, but they are always
considered and treated as trustees of money and properties which comes to their
hand or which is under their control. As observed by the Madras High Court in the
case of Ramaswamy Iyer v. Brahamayya& Co., regarding their power of
applying funds of the company and for the misuse of power, the directors are
liable as trustees and after their death, the cause of action survives against their
legal representative.

Another reason due to which the directors are described as trustees is because
of their nature of the office. Directors are appointed to manage the affairs of the
company for the benefit of shareholders. But, the director of a company is not
exactly a trustee, as a trustee of will or marriage settlement. He is a paid officer
of a company.

As per the principles laid down in the case of Percival v. Wright, directors are
not the trustees of the shareholders. They are trustees of the company. The same
principle was repeated again in the case of Peskin v. Anderson that the
directors are not trustees for shareholders and hold no fiduciary duty to them.

Directors as organs of Corporate body.

In the case of Bath v. Standard Land Co. Ltd., Neville J. stated that the board
of directors are the brain of the company and a company does act only through
them.

A corporation has no mind or body and its action needs to be done by a person
and not merely as an agent or trustee but by someone for whom the company is
liable as his action is the action of the company itself. If we consider a company
as a human body, the directors are the mind and the will of the company and
they control the actions of the company

Appointment of Directors
The appointment of Directors of a company is strictly regulated by the Company’s
Act, 2013.
Company to have Board of Directors
Every company is required to have a Board of directors and it should be consisting
of individuals as directors and not an artificial person. Section 149 lays down
the minimum number of directors required in a company as follows:

1. Public Company– At least 3 directors

2. Private company- At least 2 directors
3. One person company– Minimum 1 director
There can be a maximum of 15 directors. A company may appoint more than 15
directors after passing a special resolution.

The Central Government may prescribe a class or classes of a company have a

minimum one women director. Every company is also required to have a
minimum of one director who has stayed in India in the previous year for a period
of 182 days or more.

Independent Directors
The provisions of Independent Directors has been laid down under section
149(4) of the Companies Act, 2013. This section lays down that at least one-
third of the total number of directors should be independent directors in every
listed company The Central Government may prescribe the minimum number of
independent directors in public companies.

Who is an independent director?

Sub-section (6) of section 149, defines that an independent director stands for a
director other than a managing director, whole-time director or a
nominee director:

1. Who is a person with integrity and has relevant expertise and

experience.
2. Who has not been a promoter of the company, its subsidiary or holding
company either in past or present.
3. Who himself or his relative has no pecuniary relationship with the
company, its holding or subsidiary company, directors or promoters.
 4. Who himself or his relative, do not hold the position in key managerial
personnel, or not an employee of the company.
The independent director has to declare his independence at the first meeting of
the Board and subsequently every year at the first meeting of the Board in the
financial year.

An independent director holds office for a term of five years on the Board. He is
also eligible for being reappointed after passing a special resolution, but no
independent director is to hold the office for more than two consecutive terms.

Election of Independent Directors

The independent directors are to be selected from a data bank which contains
certain information such as name, address and qualifications of persons who are
eligible and willing to act as an independent director. The data bank is maintained
by anybody, institute or association with expertise in the creation and
maintenance of data bank and notified by the Central Government. A company
has to pick up a person with due diligence, as stated in section 150.

The appointment has to be approved by the company in general meeting, and

the manner and procedure for selection of independent directors who fulfil the
qualification stated under section 149 may be prescribed by the Central
Government.

Appointment of directors through election by

small shareholders
A listed company is required to have one director who should be elected by small
shareholders as per section 151 of the Companies Act, 2013. Small
shareholders in this context are referred to shareholders holding shares of the
value of maximum Rs. 20,000.

First Directors
The subscribers of the memorandum appoint the first directors of a company.
They are generally listed in the articles of the company. If the first director is not
appointed, then all the individuals, who are subscribers become directors. The
first director holds the office only up to the date of the first annual general
meeting, and the subsequent director is appointed as per the provisions laid down
under section 152.
Appointment at the general meeting
Section 152 lays down the provision that directors should be appointed by the
company in the General Meetings. The person so appointed is assigned with a
director identification number. He also has to make sure in the meeting that he
is not disqualified from becoming a director.

The individual appointed has also to file his consent to act as a director within 30
days with the registrar.

Annual rotation
The retirement of the directors by annual rotation can be prescribed by the
company in the Articles. If not so, only one-third of the directors can be given a
permanent appointment. The tenure of the rest of them must be determined by
rotation.

At an annual general meeting, one-third of such directors will go out, and the
directors who were appointed first and has been in the office for the longest period
will retire in the first place. When two or more directors have been in the office
for an equal period of time, their retirement will be determined by mutual
agreement, or by a lot.

Reappointment [section 152]

The vacancies created should be filled up at the same general meeting. The
general meeting may also adjourn the reappointment for a week. When the
meeting resembles and no fresh appointment is made neither there is any
resolution for the appointment, then the retiring directors are considered to be
reappointed.

The exception to this practice is that the retired directors will not be
considered to be reappointed when:

1. The appointment of that director was put to the vote but lost.
2. If the director who is retiring has addressed to the company and its board
in writing that he is unwilling to continue.
3. If he is disqualified.
4. When an ordinary or special resolution is required for his appointment.
 5. When a motion for appointment of two or more directors by a single
resolution is void due to being passed without unanimous consent
under section 162.

Fresh Appointment
When it is proposed that a new director should be appointed in the place of retiring
director, then the procedure laid down under section 160 of the Companies
Act, 2013 is followed:

1. A written notice for his appointment as a director should be left at the

office of the company at least 14 days prior to the date of the meeting
along with a deposit of Rs.1,00,000.
2. That amount should be refunded to the person if he is elected as a
director, or
3. He gets more than 25% of the total valid votes cast.

Appointment by nomination
The appointment of Directors can also be made with respect to the Company’s
articles and not only through the general meetings. When an agreement between
the shareholders has been included in the articles that entitles every shareholder
with more than 10% share to be appointed as a director, then they can be
nominated as director.

Also, subject to the articles of the company, the Board can appoint any nominated
person by an institution in pursuance of law, as a director.

Appointment by voting on an individual basis

The appointment of a director is made by voting at the general meeting as laid
down under section 162 of the Companies Act, 2013. The candidates have to
vote individually and the wishes of the shareholders regarding each proposed
director are required.

As held in the case of Raghunath Swarup Mathur v. Raghuraj Bahadur

Mathur, when two or more directors are appointed on the basis of single
resolution and voting then it is considered to be void in the eyes of law.
Appointment by proportional representation
As per section 163 of the Companies Act, 2013, the article of a company can
enable the appointment of directors through the system of voting by proportional
representation. This system of voting is used to make effective minority votes.
This system of proportional representation can be followed by a single
transferable vote or by the system of cumulative voting or other means.

Appointment of Directors by Board

Generally, the appointment of the directors is done in the annual general meeting
of the shareholders but there are two instances when the Board can also
appoint a new director:

1. If the article empowers the Board to appoint additional directors along

with prescribing the maximum number.
2. Section 161 of the Act also authorises the directors to fill casual
vacancies.

Appointment by Tribunal
Under section 242(j) of the Companies act 2013, the Company Law Tribunal
has the power to appoint directors.

Disqualifications
The minimum eligibility requirement for the appointment of directors has been
laid down under section 164 of the Companies Act, 2013. The disqualification
for a person to be appointed as a director are:

1. Unsoundness of mind.
2. If he is an undischarged insolvent.
3. When is applied to be declared as insolvent and such application is
pending.
4. When he is sentenced for imprisonment for an offence involving moral
turpitude for a period of a minimum of 6 months.
 5. If the Tribunal or court has passed an order disqualifying him for being
appointed as a director.
6. If he has not paid his calls in respect to any shares of the company.
7. When he is convicted of an offence which deals with related party
transaction.
8. When he has not complied with the requirements of Director
Identification Number.

Removal of directors
The removal of directors takes place by:

1. Shareholders
2. Company Law Tribunal
3. Resignation

Removal by Shareholders
Section 169 of the Companies Act 2013 provides that a director can be
removed from his office before the expiration of his term of office by an ordinary
resolution. This section does not apply when:

1. The director is appointed by the tribunal in pursuance of section 242.

2. The company has adopted the system of electing two-thirds of his
directors by the method of proportional representation.
To remove a director, special notice is required, and such notice should contain
the intention to remove the director and the notice should be served at least 14
days prior to such meeting.

As soon as the company receives such notice, the copy of such notice is furnished
to the director concerned. Then the concerned director has the right to make a
presentation against the resolution in the general meeting. If a director makes a
representation, then its copy needs to be circulated among the members.

Removal of Directors by Company Law Tribunal

The removal of directors by the Company Law Tribunal can be done
under section 242(2)(h). When an application is made to the tribunal for relief
from oppression or mismanagement, then it may terminate any agreement of the
company which has been made with a director. When the appointment of a
director is terminated then he cannot serve the managerial position of any
company for five years without leave of the Tribunal.

Resignation
Earlier, there was no provision for the resignation that by what procedure a
director can resign. The resignation was recognised under the provisions laid
down under section 318 of the Companies Act, 1956. Under this section, it
was held that when a director resigns his office, he is not entitled to
compensation.

If the articles mention the provisions for resignation then it will be followed. In
the case of Mother Care (India) Pvt. Ltd. v. Ramaswamy P Aiyar, the court
held that the resignation of a director is effective even if he is the only director in
the office.

Now, after the Act of 2013, section 168 lays down the provisions that:

1. The director can resign from his office by giving written notice to the
company.
2. On receiving the notice, the board has to take notice of it.
3. The registrar needs to be informed by the company within the prescribed
time period.
4. The fact of resignation needs to be placed by the company in the
director’s report in the immediately following general meeting.
5. The director has to send his copy of the resignation to the registrar along
with the detailed reasons within 30 days of the resignation.
Even after resignation, the director is held responsible for any wrong associated
with him and which happened during his tenure.

Powers of Directors

General powers vested under section 179

Section 149 of the Companies Act, 2013 empowers the directors with the
general power vested in the Board. The Board of directors is entitled to exercise
all the powers and do all required actions which a company is authorised to
exercise. But, such action is subject to certain restrictions.

The powers of directors are co-extensive with the powers of the company itself.
The director once appointed, they have almost total power over the operations of
the company.

There are two limitations on the exercise of the power of directors which are as
follows.

1. The board of directors are not competent to do the acts which the
shareholders are required to do in general meetings.
2. The powers of directors are to be exercised in accordance with the
memorandum and articles.
The individual directors have powers only as prescribed by memorandum and
articles.

The intervention of shareholders in exceptional

cases
In following exceptional situations the general meeting is competent to act in
matters delegated to the Board:

1. When directors have acted mala fide.

2. When directors have due to some valid reason become incompetent to
act.
3. The shareholders can intervene when directors are unwilling to act or
there is a situation of deadlock.
4. The general meetings of shareholders have residuary powers of a
company.

Restrictions on powers under the statutory

provision
The Companies Act 2013 also lays the manner in which the powers of the
company is to be exercised. There certain powers which can be exercised only
when its resolution has been passed at the Board’s meetings. Those powers such
as the power:

1. To make calls.
2. To borrow money.
3. To issue funds of the company.
4. To grant loans or give guarantees.
5. To approve financial statements.
6. To diversify the business of the company.
7. To apply for amalgamation, merger or reconstruction.
8. To take over a company or to acquire a controlling interest in another
company.
The shareholders in a general meeting may impose restrictions on the exercise of
these powers.

Powers to be exercised with general meeting

approval
Section 180 of the Companies Act 2013 states certain powers which can be
exercised by the Board only when it is approved in the general meeting:

1. To sale, lease or otherwise dispose of the whole or any part of the

company’s undertakings.
2. To invest otherwise in trust securities.
3. To borrow money for the purpose of the company
4. To give time or refrain the director from repayment of any debt.
When the director has breached the restrictions imposed under the sections, the
title of lessee or purchaser is affected unless he has acted in good faith along with
due care and diligence. This section does not apply to the companies whose
ordinary business involves the selling of property or to put a property on lease.

Power to constitute an Audit committee

The board of directors are empowered under section 177 to constitute an audit
committee. It needs to be constituted of at least three directors, including
independent directors. In the committee, the independent directors need to be in
the majority. The chairperson and members of the audit committee should be
persons with the ability to read and understand the financial statements.

The audit committee is required to act in accordance with the terms of reference
specified by the Board in writing.

Power to constitute Nomination and

Remuneration Committees and Stakeholders
Relationship Committee
The Board of directors can constitute the Nomination and Remuneration
Committee and Stakeholders Relationship Committee under section 178. The
Nomination and Remuneration Committee should be consisting of three or more
non-executive directors out of which one half are required to be independent
directors.

The Board can also constitute the Stakeholders Relationship Committee, where
the board of directors consist of more than one thousand shareholders, debenture
holders or any other security holders. The grievances of the shareholders are
required to be considered and resolved by this committee.

Power to make a contribution to charitable or

other funds
The Board of directors of the company is empowered under section 181 to
contribute to the bona fide charitable and other funds. When the aggregate
amount of contribution, in any case, exceeds the 5% of the average net profit of
the company for the immediately preceding financial years, then the prior
permission of the company in a general meeting is required.

Power to make a political contribution

Under section 182 of the Companies Act 2013, the companies can make a
political contribution. The company making a political contribution should be other
than a government company or a company which has been in existence for less
than three years.
Also, the amount of contribution should not exceed 7.5% of the company’s net
profit in the three immediately preceding financial years. The contribution needs
to be sanctioned by a resolution passed by the Board of Directors.

Power to contribute to National Defence Fund

The Board of Directors is empowered to make contributions to the National
Defence Fund or any other fund approved by the Central Government for the
purpose of National defence under section 183 of the Companies Act 2013.
The amount of contribution can be the amount as may be thought fit. This total
amount of contribution made should be disclosed in the profit and loss account
during the financial year which it relates to.

Conclusion
The directors of a company are like its brain. They have a major contribution to
a company’s growth and development and their position is very important for the
company. They are given certain powers under the Companies Act 2013 so that
they can contribute their best to the company. Along with powers, certain
restrictions are also imposed on its exercise to avoid any misuse of such powers.

Meetings
Meaning and definition of company meetings
There is no definition of the term “meeting” per se in the Companies Act, 2013;
in plain language, a company can be defined as two or more individuals coming
together, gathering, or assembling either by prior notice or unanimous decision
for discussing and carrying out some legitimate activities related to business. A
company meeting can be said to be a concurrence or meeting of a quorum of
members to carry out ordinary or special business and take decisions on
important matters of the company.

Why are company meetings held

Before we read about the types of company meetings, let’s take a look at why
exactly company meetings are conducted.
Control management function
Company meetings play a crucial role in controlling the management functions
of a company.

Control the affairs of the company

In a company, the directors are accountable to the shareholders. Directors have
been entrusted with the duty to run the business and manage the day-to-day
affairs of the company. By holding meetings, the affairs of the company are
controlled.

Future policies
Through meetings, the past policies and experiences of a company can be
discussed, and new future policies can be fixed. As stated above, directors are
answerable to shareholders, so via such meetings, the shareholders can learn
about the affairs of the company. The rights of shareholders include:

1. Inquiring regarding the affairs of the company,

2. Criticising the function of the company,
3. Have effective control on the board.

Important definitions of company meetings

In the case of Sharp v. Dawes (1971), a meeting is defined as “an assembly of
people for a lawful purpose” or “the coming together of at least two persons for
any lawful purpose.”

Further, according to P.K. Ghosh, “any gathering, assembly, or coming together

of two or more persons for the transaction of some lawful business of common
concern is called meeting.”

Moreover, according to K. Kishore, “a concurrence or coming together of at

least a quorum of members by previous notice or mutual agreement for
transaction business for a common interest is a meeting.”
Essence in context with the aforementioned definitions
From the above definitions, we can infer the following:

Number of individuals
In a meeting, there must be two or more individuals. The number of members
attending the meeting may be small, large, or extremely large, depending on
the type of meeting. In the case of a committee meeting, the total count of
members may be small, whereas in the case of an annual general meeting of
any public company, the total number may be large, and in the case of public
meetings, the total count may be very huge.

Definite place
There must be a specific place for the meeting. In the case of official meetings,
the meeting must be conducted in the office. Further, in the case of big
meetings that entail a huge involvement of members, like the annual general
meeting of a public company, the meeting can be held in a public hall. Also,
public meetings can be held in public halls, on open grounds, or even on roads,
if required.

Fixed date and time

While conducting a meeting, it is necessary to decide on a date and time. In the
case of official meetings, the date chosen to conduct the meeting is often a
working day, and the time is within office hours; however, there can be
restrictions in matters related to the date and time under the Companies Act.

Discussion
There has to be some discussion while conducting the meeting, meaning the
individuals in the meeting must put forth their viewpoints and opinions on the
agenda of the meeting.

Predetermined topics
Usually, in company meetings, the topics or subject matter of the meeting are
already notified to the participants, so they can come prepared with their
viewpoints on the same.
Decisions
The decisions for the agenda are generally taken in the meeting itself, as
getting to a conclusion is the main objective of conducting the meeting. The
decisions occurring in the meeting are binding on the members of the company,
irrespective of whether they were able to attend the meeting or not, were
present or not, or even if they agree with or oppose the inference thus
reached.

The decisions are taken either through votes or in the form of resolutions. Also,
there are distinct ways of voting. Usually, decisions are not taken at public
meetings, and if they are, they are not binding in any manner whatsoever.

Types
Meetings can be of different types, namely:

1. Private,
2. Public, or
3. International (like U.N.O.)
The types of company meetings, which can be private or public, are discussed in
depth below.

General notes

1. The meeting does not take place automatically. A meeting has to be

called or convened. In simple words, a notice has to be sent to every
individual with the authority to attend the meeting.
2. In the case of a public meeting, general publicity is necessary. Every
type of meeting has its own procedure to be followed.
3. An accidental meeting of two or more individuals will not be referred to
as a meeting.
4. The secretary is responsible for calling and informing the members and
conducting the meeting.

Importance of company meetings

Meetings hold great value in our daily social lives. This is a democratic process
that is quite essential in the decision making of any organisation, be it a
company, a club, or even an association. Further, group discussions play a
major role in:

1. Introducing changes in the company,

2. Decision making, and
3. Improves the relations between an employer and his employee.
The object and methods of conducting different types of meetings are different.
Each of them is discussed in detail in the upcoming passages.

Further, the following are some noteworthy pointers on the importance of

holding company meetings:

1. Meetings are a crucial part of managing a company, as stated under

the Companies Act, 1956.
2. The consent of the members of the company, commonly known as
shareholders, is obtained at the general meetings held by the
company.
3. If any mistake is committed by the board of directors, the shareholders
have the authority to rectify it at the meetings of the company.
4. Shareholder’s meetings are held by the shareholders to give a final say
on their decisions on the measures taken by the board of directors.
5. Meetings help enlighten the shareholders to know about the recent
happenings and procedures of the company and enable them to
deliberate on some matters.
6. There are several criteria that have to be fulfilled in matters relating to
the calling, convening, and conduct of the meetings.

Components of a valid company meeting

A company meeting generally consists of the following:

Participants
The first and foremost requirement of a meeting is to have participants. In the
case of a private meeting, only the individuals having the authority to attend
the meeting, like the members of the organisation, the committee, the sub-
committee and the people who have received an invitation, can participate. At
times, in the event of the non-availability of such a person, he has the right to
send his representative or proxy on their behalf. Whereas, in the case of public
meetings, the general public has the authority to attend them.

Chairman
For a valid company meeting, there has to be a chairman at every meeting who
has the authority and duty to carry on the meeting effectively.

Secretary
The secretary of the organisation, committee, sub-committee etc., is entrusted
with several duties right from the beginning to the very end of the meeting. He
plays a crucial role in carrying out such meetings.

Invitees
Apart from those who have the authority to attend the meeting, there are some
people who are invited, for instance, the press reporters.

Material elements
Another major component of the meeting involves material elements. The
material elements include:

1. The sitting arrangement,

2. The materials for writing, etc.

General provisions to know about conducting

valid company meetings

Proper authority to convene meetings

In order for a meeting to be regarded as valid, it must be called by a proper
authority, like the board of directors. In a valid board meeting, the decision to
convene a general meeting and issue notice in this regard must be taken by
passing a resolution.
Notice
For a meeting to be conducted properly, a proper notice must be issued by the
proper authority. It means that such a notice must be drafted properly
according to the provisions laid down under the Companies Act, 2013. Also,
such a notice must be duly served on all the members who are entitled to
attend and vote at the meeting. Moreover, the valid notice of the company must
specifically mention the place, the day, the time, and the statement of the
business to be transacted at the meeting.

Quorum
A quorum is defined as the minimum number of members that are required to
be present as mentioned under the provisions of a particular meeting. Any
business transaction carried out at a meeting without a quorum shall be
deemed to be invalid. The main object of having a quorum is to avoid taking
decisions by a small minority of members that may not be accepted by the vast
majority. Every company meeting has its own number of quorum, the same has
been discussed under separate headings in the upcoming passages.

Agenda
The agenda can be described as the list of businesses to be transacted while
conducting any meeting. An agenda is important for carrying out a business
meeting in a systematic manner and in a proper, predetermined order. An
agenda, along with a notice of the meeting, is usually sent to all the members
who are entitled to attend a meeting. The discussion in the meeting has to be
conducted in the same manner as stated in the agenda, and changes can be
made in the order only with the proper consent of the members at the meeting.

Minutes
The minutes of the meetings contain a just and accurate summary of the
proceedings of the meeting. Minutes of the meetings have to be prepared and
signed within 30 days of the conclusion of the meeting. Further, the minutes
books must be kept at the registered office of the company or any place where
the board of directors has given their approval.
Proxy
The term ‘proxy’ can be used to refer to a person who is chosen by a
shareholder of a company to represent him at a general meeting of the
company. Further, it also refers to the process through which such an individual
is named and permitted to attend the meeting.

Resolutions
Business transactions in company meetings are carried out in the form of
resolutions. There are two kinds of resolutions, namely:

1. Ordinary resolution, and

2. Special resolution.

Types of company meetings

Company meetings are majorly divided into three categories, and the three
categories are further divided into subcategories, which are again divided into
some categories. Let us have a look at the categories.

1. Meetings of shareholders or members

2. General meeting which is further divided into:

1. Statutory meeting,
2. Annual General Meeting,
3. Extraordinary General Meeting.
4. Class meeting.
5. Meetings of Directors

1. Board of directors meeting,

2. Committee of directors meeting.
3. Other meetings that are categorised as:

1. Debenture holders meeting,

2. Creditors meeting, and
3. Creditors and contributors meeting.
Before we dive deep into the nitty-gritty of each of the categories, here is a
pictorial representation of the types of company meetings for your better
understanding-
Now that we have seen the pictorial representation of company meetings, let us
have a look at each of the meetings in a more detailed manner.
Meetings of shareholders or members
The first main type of meeting is a meeting of shareholders or members of the
company. It is further divided into two categories, namely:

1. General meeting, and

2. Class meeting.
The first category is further divided into three subcategories, each of which is
discussed in detail below.

General meeting
The general meeting is subdivided into three categories. Let us have a look at
the nitty-gritty of each of them.

Statutory meeting
Please note: Before the enactment of the Companies Act, 2013, the
requirements laid down for statutory meetings and reports under
Section 165 were legit. However, after its enactment, the same has
been dropped.

The following is just for the readers’ information.

What is statutory meeting

A statutory meeting is a type of general meeting that must be held by every
company limited by shares and every company limited by guarantee with a
share capital within not less than a month and not more than six months from
the date it was incorporated. Private companies are exempt from conducting a
statutory meeting. In this meeting, a report known as the ‘statutory report’ is
discussed by the directors of the company.

Which companies do not need to conduct a statutory meeting

The following companies do not have any obligation to conduct a statutory
meeting:

1. Private company,
2. Company limited by guarantee having no share capital,
 3. Unlimited liability company,
4. A public company that was registered as a private company earlier,
5. A company that has been deemed as a public company under Sec. 43
A.

What is notice of the meeting

The board of directors of a company is duty-bond to forward a notice of the
meeting to all the shareholders or members of the company. This has to be
done at least 21 days prior to holding the meeting, and an explicit mention of
‘statutory meeting’ of the company has to be made in the notice. If the board of
directors does not name it the ‘statutory meeting’, it will be a breach of the
provision.

What is statutory report

Now that a mention of the statutory report was made above, you might wonder,
what exactly is it? Let’s find out.

The board of directors is obliged to forward a report known as the ‘statutory

report’ at least 21 days before the date of the statutory meeting. A copy of the
report has to be forwarded to the registrar for registration. This report has to be
drafted by the board of directors of the company and certified and amended by
at least two of them.

What are the particulars of a statutory report

Under Section 165(3) of the Companies Act, 1956, a prior mention of the
contents of a statutory report has been made; it says the report must contain:

1. The total number of fully paid-up and partly paid-up shares allotted
2. The sum of the amount of cash received by the company with respect
to the shares;
3. Information on the receipts, distinguishing them on the basis of their
sources and mentioning the amount spent for commission, brokerage,
etc.
4. The names of the directors, auditors, managers and secretaries along
with their address and occupation, and changes of their names and
addresses, if any.
5. The particulars of agreements that are to be presented in the meeting
for approval, with suggested amendments, if any.
 6. The justifications in cases where any underwriting agreement was not
executed.
7. The arrears due on calls from directors and other individuals.
8. The details on the amount of honoraria paid to the directors, managers
and others for selling shares or debentures.

What is the procedure to carry out a statutory meeting

Now that we know about the statutory report and its particulars, you might
wonder what the proper procedure is for conducting a statutory meeting. The
answer is in the below pointers.

The board of directors has to send a statutory report to every member of the
company, as mentioned above. The members who attend this meeting may
carry out discussions on matters relating to the formation of the company or
matters that are incorporated in the statutory report. Below are some of the
points one must note:

1. While conducting the statutory meeting, no resolution can be taken.

2. The main motive of conducting such a meeting is to familiarise all the
members of the company with matters relating to the development and
origination of the company.
3. The shareholders, perhaps, the members of the company, will receive
particulars relating to the following:

1. Shares taken up,

2. Money received,
3. Contracts entered into,
4. Preliminary expenses incurred, etc.

4. The members or shareholders also have the opportunity to carry out a

discussion on several business ideas and ways to prosper the business,
along with the future prospects of the company.
5. Moreover, if a decision is not reached at the statutory meeting, an
adjournment meeting is called.
6. According to Section 433 of the Companies Act, 1956, if the company
errs in submitting the statutory report or in conducting the statutory
meeting within the specified time, it may be subjected to winding up.
7. However, the court, instead of directly winding up the company, has
the authority to instruct the company to submit a statutory report and
 conduct a statutory meeting, along with levying a fine on the
individuals who erred in conducting the meeting.

What will be the effect of non-compliance with the provisions on

conducting a statutory meeting
The following are the repercussions of not complying with the provisions on
conducting a statutory meeting:

1. If there is any mistake in complying with the provision for holding a

statutory meeting under Section 165, the directors or other officers of
the company who are at fault will be liable to pay a fine that is
extendable up to ₹500.
2. Under Section 43(6) of the Companies Act, 1956, in case the company
errs in conducting the statutory meeting or if the statutory report is not
in compliance with the provisions of the Act, the company may be
compulsorily wound up if the court orders the same. However, under
Section 443(3) of the Companies Act, 1956, the court may pass an
order to conduct a statutory meeting or to send the statutory report,
as the case may be, instead of winding up the company.
Before we study the annual general meeting (AGM) and extraordinary general
meeting (EGM), let us have a look at the key differences between them in a
tabular format. This is done for a better understanding of the topics.

Extraordinary general meeting

Basis Annual general meeting (AGM)
(EGM)

An extraordinary general meeting

An annual general meeting, commonly known as
What is it? (EGM), is a meeting other than an
an AGM, is a regular meeting held annually.
AGM.

Similarly, EGMs are applicable to all

Applicability AGMs are applicable to all the companies.
companies.

Time of holding the An AGM has to be held within six months of the
An EGM can be held at any time.
meeting close of the financial year.

An AGM is held to serve the following purposes:

Whereas, an EGM is to be held for
Electing the directors of the company,Passing of
Purpose any matter for which a proper
annual accounts, Declaring the dividends,
notice is given.
and Appointing auditors.
 The board of directors, along with
Who may call such a The board of directors has the authority to call
requisitionists, have the authority
meeting? such a meeting.
to call such a meeting.

Similarly, the tribunal may call and

Repercussions of The tribunal may call and impose a fine in case a
impose a fine in case a company
default in conducting company defaults in holding an AGM in a
errs in holding an EGM in the
such a meeting requisite manner.
prescribed manner.

Annual General Meeting (AGM)

The annual general meeting is defined under Section 96 of the Companies Act,
2013. As the name suggests, an annual general meeting is one of the general
meetings held once a year. As per Section 96 of the Companies Act, 2013, all
companies have to hold an AGM within the stipulated time. An AGM provides a
chance for the members of the company to review the workings of the company
and express their opinions on the management and workings of the company.

Purpose of conducting an annual general meeting

The main purpose of conducting an AGM is to transact the ordinary

business of the company. Ordinary business includes the following:

1. Consideration of financial statements and reports from the directors

and auditors.
2. Making declarations on dividends.
3. Appointing a replacement of director or directors in place of those who
have retired.
4. Appointing and setting up the amount of remuneration for the auditors
of the company.
5. It also includes annual accounts, crucial reports, and audits.

Importance of conducting an annual general meeting

Under corporate law, an annual general meeting is regarded as one of the most
important institutions for protecting the members of the company. It is at this
meeting— even though it is held only once in a fiscal year- that the members of
the company get the opportunity to question the management on matters
relating to the following:
 1. The affairs of the company,
2. The business of the company, and
3. The accounts of the company.
It is only at this meeting that the members of the company have the chance not
to re-elect those directors in whom they have lost faith or confidence. Further,
as auditors also retire at this meeting, members of the company have another
opportunity to think about the re-election of these auditors.

Last but not least, it is at the AGM that members disclose the amount of
dividend payable by the company. While talking about dividends, it may be
noted that the board of directors makes recommendations on the amount of
dividend, whereas the members at the AGM declare the dividend. Further, the
dividend cannot surpass the recommended amount by the board of directors.

The three rules of conducting an annual general meeting

1. The meeting must be conducted on an annual basis.

2. A maximum duration of 15 months is permitted between holding two
annual general meetings.
3. The meeting must be conducted within six months of preparing the
balance sheet.
If any of these rules are not complied with, the same will be said to be an
offence under the Companies Act, 2013. It has been discussed in the upcoming
passages.

Notice of conducting the annual general meeting

The company has to send a clear 21 days’ notice to its members to conduct the
annual general meeting. The notice must mention the day, date, and location of
the meeting, along with the hour at which it is decided to be held. The notice
should explicitly mention the business to be conducted at the AGM. A company
is obligated to send the AGM notice to the following:

1. All the members of the company, including the legal representatives of

a deceased member and the assignee of an insolvent member.
2. The statutory auditors of the company.
3. All the directors of the company.
The notice can be sent either by speed or registered mail or even through
electronic means like email.
Date, time, and place of conducting an annual general meeting
Usually, an annual general meeting can be conducted at any time, provided it is
during business hours (between 9 am and 6 pm) and the day of the meeting is
not a national holiday. Now, talking about the location of the meeting, it can be
held either at any pre-decided place within the area of the jurisdiction of the
registered office or at the registered office itself.

Below are some of the noteworthy pointers in context to the date, time, and
place of holding an annual general meeting:

1. A public company or a private company that acts as a subsidiary of a

public company may determine the timing of the meeting as per the
articles of association.
2. At a general meeting, a resolution can also be passed for determining
the time of holding subsequent meetings.
3. In the case of private companies, the time and location are determined
by passing a resolution at any of the meetings.
4. For a private company meeting, the location may not be within the
area of jurisdiction of the registered office of the company.
Further, as per Section 101 of the 2013 Act, if any member files an application
in case a company errs in holding an annual general meeting, the time frame
for notice to call for the meeting can be reduced to less than 21 days (21 days
is the time frame to send a notice to call for an annual general meeting) with
the agreement of members who are entitled to vote.

First annual general meeting and relaxations

As per Section 96 of the Companies Act, 2013, a general meeting must be held
annually, as the name suggests. It is mandatory that all companies hold such
meetings at regular intervals. When the annual general meeting is held for the
first time after the company’s incorporation, it has to be held within a period of
nine months from the date of the closing of the financial year of the company,
and in other cases, within six months from the date of the closing of the
financial year. Further, as per Section 96 of the Companies Act, 2013, a
company has no obligation to hold any general meetings until it holds its first
annual general meeting. Such a relaxation is provided so that the company can
set up its final reports for a longer duration. Another provision that is provided
under Section 166(1) is that, with proper authorization from the registrar, the
company can postpone the date of the annual general meeting. The registrar
has the authority to postpone the date for a further three months at the most,
however, such a relaxation does not apply in the case of the company’s first
annual general meeting. Further, a company may not hold an annual general
meeting in a year provided the registrar has consented to it, however, the
justification for such an extension should be reasonable and genuine.

Gaps between two annual general meetings

According to Section 96 of the Companies Act, the gap between two annual
general meetings must not exceed fifteen months. Further, Section 210 of the
Act states that a company must provide a report on the accounts of all the
profits and losses of the company, and if the company does not have any
profits, an income and expenditure report must be submitted.

Furthermore, the following pointers are crucial to note in cases of gaps between
two annual general meetings:

1. When a company presents its report on profits and losses incurred, it

has to mention all the profits and losses endured by the company
right from the day of incorporation.
2. The account shall have an update of at least 9 months from the date of
the last annual general meeting.
3. A balance sheet along with the account report has to be submitted, as
well.
Also, after conducting the first annual general meeting, the next AGM must be
held within 6 months from the end of the financial year. If, due to any
unforeseeable circumstance, the company fails to hold the meeting, the tribunal
may grant an extension of 3 months.

Quorum

Public company
The quorum in the case of a public company shall consist of the following:

1. 5 if the company has less than 1000 members,

2. 15 if the members are between 1000 and 5000, and
3. 30 if the number of members exceeds 5000.

Private company
In the case of a private company, only two members who are present will
constitute the quorum.
Proxy in annual general meetings
Any member of the company who has the authority to vote at a meeting will be
entitled to appoint a proxy, i.e., another person to attend and vote instead of
himself. The appointment of a proxy shall be in Form No. MGT.11. Further, an
individual cannot act as a proxy on behalf of members exceeding a total of 50
and holding in aggregate not more than 10% of total capital with the authority
to vote.

Procedure to be followed after conducting the annual general meeting and

penalty if the company fails
After conducting the annual general meeting, a report in the form of MGT-15
within a period of 30 days has to be filed. Further, under Section 121, the
report will include how the meeting was convened, held, and conducted as per
the provisions of the 2013 Act. If the company errs in doing so, a penalty of ₹1
lakh shall be imposed. Further, on every officer who has erred in following the
procedure of the meeting, a penalty of ₹25,000 minimum shall be imposed, and
in case the issue persists, a penalty of ₹500 for every day after the failure
persists can be imposed, and the same shall be for a maximum of ₹1 lakh.

Penalty for not holding an annual general meeting

If a company errs in holding an annual general meeting in accordance
with Section 99 of the Companies Act, 1956, the act shall be considered a
serious offence in the eyes of the law. Every member of the company who is at
fault shall be deemed to be a defaulter.

Further, a fine extendable to ₹100,000 may be levied on the defaulters.

Moreover, as per Section 99 of the Companies Act, if the defaulters persist with
the same mistakes, and if the provisions under Sections 96 and 97 are not
complied with, a fine of ₹5000 will be imposed on the defaulter until the
problem continues.

Power of NCLT (National Company Law Tribunal)

The National Company Law Tribunal, commonly known as NCLT, has the
authority to call or direct a meeting under Section 97 of the Companies Act,
2013, in case an application is filed by a member in matters relating to the
failure to conduct the meeting.
Extraordinary general meeting (EGM)
In a company, there are certain matters that are so crucial to be discussed that
they need to be addressed immediately to the members, which is where an
extraordinary general meeting comes into play. Such meetings are discussed
under Section 100 of the Companies Act, 2013. An extraordinary general
meeting is any general meeting apart from the statutory meeting, an annual
general meeting, or any adjournment meeting. Such a meeting is held to
discuss special business, especially those businesses that do not fall under the
ordinary business that is discussed at annual general meetings. Such meetings
are usually called for matters that are urgent and for those that cannot be
discussed at annual general meetings. Extraordinary general meetings are
usually called by the following:

1. The directors or the board of directors of the company,

2. The shareholders of the company who hold 1/10th of the paid-up
shares.

Calling of extraordinary general meeting

While dealing with the above heading, one might wonder when and by whom an
extraordinary general meeting can be called. Let’s find out.

An extraordinary general meeting can be called in the following circumstances:

By the board of directors suo moto

In cases when the board of directors has some urgent matters to discuss and
such matters cannot be postponed until the next general meeting, the board of
directors may hold an extraordinary general meeting if need be. The same is
discussed under Section 100 (1) of the 2013 Act.

By the Board on the requisition of members

The board of directors may call an extraordinary general meeting on the
requisition of the following number of members:

1. In case of a company having a share capital

Members who own 1/10th of the paid-up share capital of the company on the
date of receipt of the requisition on the date of exercising the voting rights.

2. In case of a company not having a share capital

Members who own 1/10th of the paid-up share capital of the company on the
date of receipt of the requisition on the date of exercising the voting rights.

By requisitionists
Under Section 100(4) of the Company Act, 2013, if a board does not, within 21
days from the date of receipt of a valid requisition in relation to any matters
thereto, take any steps to call a meeting to consider the matter not later than
forty-five days from the date of receiving such a requisition, then the meeting
may be called upon and conducted by the requisitionists themselves within a
time span of three months from the date of the requisition.

Further, it is important to note the following pointers for a better understanding

of the topic:

• Notice
The notice must specify the date, day, time, and place of holding the meeting,
and must be held in the same city as the registered office and on a working
day.

• Notice to be signed
The notice has to be duly signed by all the requisitionists or on behalf of those
requisitionists who have permission to sign in place of the requisitionists,
provided the permission is in writing. This can also be done via an electronic
request attached to a scanned copy to give such permission.

• No need of an explanatory statement to be attached to the

notice
There is no need for any explanatory statement under Section 102 to be
attached with the notice of an extraordinary general meeting that is convened
by the requisitionists and the requisitionists.

• Serving notice of the meeting

The notice of the meeting has to be served on all those members whose names
are on the list of registered members of the company. It should be served
within three days of the requisitionists depositing a valid request for conducting
an EGM in the company.

• Method of serving the notice

The notice of the meeting can be sent through speed mail, registered mail, or
even electronic means like emails. If there is an issue with serving the notice or
if some member does not receive the notice for any reason, the meeting shall
not be invalidated by any member.
By the tribunal
According to Section 98 of the Companies Act, 2013, if it is not possible to
conduct a meeting in the company, the tribunal may either suo moto or through
an application submitted by any director or member of the company who has
the authority to vote at the meeting-

1. Instruct to hold and conduct a meeting in a manner the tribunal thinks

fit, and
2. Provide ancillary or consequential instructions as the tribunal deems fit,
including any directives thus amending or supplementing in matters
relating to the calling, holding and conducting the meeting, the
operation of the clauses of the Act or articles of the company.
Such instructions may also incorporate any command that a member of the
company present in person or via proxy shall be deemed to compose a meeting.
The meeting held pursuant to such orders shall be referred to as a meeting of
the company that is duly called, held, and conducted.

Place of conducting an extraordinary general meeting

An extraordinary general meeting can be held at the registered office or any
other location in the city where such a registered office is located.

Notice for extraordinary general meeting

The notice of an extraordinary general meeting must be served in writing or
through an electronic mode in at least 21 days of conducting such a meeting.

Penalty for not holding an extraordinary general meeting properly

In cases where an extraordinary general meeting is not conducted properly, a
fine of ₹10,000 within a prescribed time can be levied on the defaulters.
Moreover, in case the issue persists, a fine of ₹1000 per day shall be levied.
Additionally, the maximum fines in cases of erring in conducting an EGM
successfully are:

1. ₹50,000 for a member of the company, and

2. ₹200,000 for the company itself.

Class meeting
Company meetings come under two broad categories, namely:
 1. General meetings, and
2. Class meetings.
We have already talked about the different types of general meetings above,
let’s now discuss what these class meetings are!

Class meetings, as the name suggests, are meetings conducted for shareholders
of the company that hold a particular class of shares. Such a meeting is
conducted to pass a resolution that is binding only on members of the
concerned class. Also, only members belonging to that particular class of shares
have the right to attend and vote at the meeting. Usually, the voting rules are
applicable to class meetings as they govern voting at general meetings.

Such class meetings can be conducted whenever there is a need to alter or

change the rights or privileges of that class as stated in the articles of
association. In order to execute such changes, it is crucial that these
amendments be approved in a separate meeting of the shareholders and
supported by passing a special resolution. Under Section 48 of the Companies
Act, 2013, which talks about variations in shareholders’ rights, class meetings of
the holders of the different classes of shares must be conducted in case there
are any variations. Similarly, under Section 232, which discusses mergers and
amalgamations of companies, where a scheme of arrangement is proposed,
there is a requirement that meetings of several classes of shareholders and
creditors be conducted.

Meetings of directors

Board of directors

Board meetings
As per Section 173 of the Companies Act, 2013, a company has to hold the
meeting of board of directors in the following manner:

1. The first board meeting has to be conducted within a span of thirty

days from the date of incorporation.
2. In addition to the above meeting, every company has to hold a
minimum of four board meetings annually, and there shall not be a gap
of more than one hundred and twenty days between consecutive two
meetings.
Please note: With the issuance of Secretarial Standard 1 (SS-1), a circular by
ICSI, a clarification was given that the board shall conduct a meeting at least
once every six months with a maximum gap of one hundred and twenty days
between two consecutive board meetings. Further, the SS also specified that it
will be sufficient if a company holds one meeting in every renaming calendar
quarter in the year of its incorporation in addition to the first meeting, which is
to be held within thirty days from the date of incorporation.

3. In matters relating to Section 8 of the Companies Act, with an

exemption by MCA dated 5.06.2015, it was held that the sub clause (1)
of Section 173 will be applicable only to the extent that the board of
directors of such companies hold at least one meeting in every six
months.

Purpose of holding a board meeting

Board meetings are held for the following purposes:

1. For issuing shares and debentures.

2. For making calls on shares.
3. For forfeiting the shares.
4. For transferring the shares.
5. For fixing the rate of dividend.
6. For taking loans in addition to debentures.
7. For making an investment in the wealth of the company.
8. For pondering over the difficulties of the company.
9. For making decisions of the policies of the company.

Notice of board meetings

As per Section 173(3) of the Companies Act, 2013-

1. A notice of not less than seven days must be sent to every director at
the address that is registered with the company.
2. Such notice can be sent either via speed post, by hand delivery, or
through any electronic means.
 3. The SS-1 (mentioned above) states that if the company sends the
notice by speed post, or registered post, or by courier, an additional
two days shall be added to the notice served period.
4. In situations when the board meeting is called at shorter notice, it has
to be conducted in the presence of at least one independent director.
5. Further, if the independent director is absent, the decision occurred at
must be circulated to all the directors, and it shall be final only after
ratification of decision by at least one independent director.
6. Moreover, in cases where a company does not have its own
independent director, the decision shall be said to be final only if it is
ratified by a majority of directors, unless a majority of directors gave
their approval at the meeting itself.

Some important pointers on the requirements and procedures for

convening and conducting a valid board meeting
1. Directors can join the meeting-

1. In person,
2. Through video conferencing, or
3. Other audio visual means.

2. Rule 3 of the Companies (Meetings of Board and its Powers) Rules,

2014, has provisions related to the requirements and procedures,
along with the procedures needed for board meetings in person for
matters relating to conveying and conducting board meetings via video
conferencing.
3. While conducting virtual meetings, it is necessary that companies make
proper arrangements to avoid any issues at the last moment.
4. The chairperson and the secretary of the company have to ensure that
they take necessary precautions in matters relating to video
conferencing, like proper security, recording the proceedings and
preparing the minutes of the meeting, having proper audio visual
equipment, etc.
5. The notice for holding the meeting must be in accordance with the
provisions laid under Section 173, subsection 3 of the Act.
6. While beginning the meeting, the chairperson has the duty to roll call
every director participating through video conferencing or other such
means to record the following:
 1. Name of the director;
2. The place from where the director is participating;
3. An affirmation that the director can completely see, listen, and
communicate with the other participants in the meeting;
4. A confirmation that the director has received the agenda and all the
relevant material related to the meeting;
5. A proclamation that no other individual other than the director is
attending or has access to the proceedings of the meeting at the
palace mentioned in pointer (b).

7. After the roll call, the chairperson or the secretary has to inform the
board about the names of the members who are attending the meeting
at the request or with the authorization of the chairman and affirm that
the required quorum is complete.
8. There are some matters that must not be dealt with through video
conferencing or other audiovisual means, namely:

1. An approval of the annual financial statements;

2. An approval of the report of the board;
3. An approval of the prospectus;
4. The audit committee meetings for consideration of statements related
to finance, including a consolidated financial statement, if any, that
needs an approval from the board under subsection (1) of Section 134
of the Act; and
5. An approval on matters related to the amalgamation, merger,
demerger, acquisition, and takeover.

Agenda
The word “agenda” can be described as things to be done. In the case of
company meetings, it can be said to be a statement of the business that must
be transacted at a meeting, along with the order in which the business must be
dealt with. Even though there is no explicit mention or provision in the
Companies Act, 2013, for the secretary to send an agenda or include the same
in the notice of the board meeting, it is necessary by convention for the agenda
to be mentioned with the notice served to conduct the meeting. When an
agenda is attached to the notice, the director is aware of the proposed business
and the objects of conducting the meeting, thus, he can come duly prepared for
the discussion to be held in the meeting.
Quorum
As we know, every company needs to have a proper quorum to conduct a valid
company meeting. Now, the quorum for a board meeting under Section 174 of
the Act is one third of the total strength or two directors, whichever is higher. It
must be noted that, any director participating through video conferencing or
any other audiovisual means must also be considered to determine the
quorum.

Further, if the number of directors is reduced or there is any removal of a

director or directors, the directors who continue may act on behalf of the
missing number of directors to fill the missing gap for the quorum or for
summoning a general meeting of the company; however, they shall not act for
any other purpose. Moreover, in cases where the number of directors interested
surpasses or is equal to two-thirds of the total strength of the board of
directors, the number of directors who are not interested and are there to
attend the meeting, the number not being below two, shall be the quorum at
such times.

It is pertinent to note that the quorum has to be present not only at the time of
commencement of the meeting but also at the time of transacting business with
the company.

Committee of directors
The board of directors has the authority to form committees and delegate
powers to such committees; however, it is crucial that such a committee only
consist of directors and no other members. Further, it is mandatory for such
committees to be authorised by the articles of association of the company and
be in lieu of the provisions set out in the Companies Act. The meetings of all
these committees are held in the same manner as board meetings.

In large companies, the following routine matters are looked after by the sub-
committees of the board of directors:

1. Allotment,
2. Transfer,
3. Finance.
Other meetings

Debenture holders meeting

A company is entitled to issue debentures, and to further implement the same,
a meeting for debenture holders can be called. This meeting is between the
board of directors and the debenture holders. These meetings are usually called
to discuss the rights and responsibilities of debenture holders.

Meetings of debenture holders are conducted in accordance with the provisions

laid down in the debenture trust deed. The rules and regulations mentioned in
the trust deed are related to the following:

1. Notice of the meeting,

2. Appointment of a chairman of the meeting,
3. Passing resolutions,
4. Quorum of the meeting, and
5. Writing and signing of minutes of the meeting.
Debenture holder meetings are generally conducted from time to time to
discuss matters where the interest of debenture holders is involved, like at the
time of:

1. Reconstruction,
2. Reorganisation,
3. Amalgamation, or
4. Winding up of the company.

Creditors meeting
Meetings of creditors is a term used to describe a meeting setup by the
company to conduct a meeting of the company’s creditors. Under the Company
Act, 2013, companies are not only entrusted with the power to negotiate with
creditors but also set up a procedure to do so. Such meetings are always
arranged in matters where a creditor decides to voluntarily wind up.

Moreover, Section 108 of the Companies Act, 2013, discusses the holding of
meetings of creditors. It also states that meetings be held in accordance with
the provisions laid down under the following sections of the said Act:
 1. Section 109 that discusses demand for poll,
2. Section 110 that talks about postal ballot, and
3. Section 111 that has provisions in relation to the circulation of
members’ resolutions.
In the creditors meeting, the creditors can decide to either approve, amend, or
reject the repayment plan. Further, the resolution professional must make sure
that any sort of changes or modifications suggested by the creditors of the
company are approved by the directors of the company before carrying out that
particular change. Furthermore, the resolution professional also has the
authority to adjourn the meeting of the creditors for a period of not more than
seven days at a time.

Notice of meetings of creditors

If a company is voluntarily winding up, a meeting of creditors must be called to
propose a resolution for voluntary winding up. Such a meeting has to be called
either on the day of taking such a decision or the subsequent day, and a
general meeting must be conducted to propose the resolution.

The notice to creditors must either be sent by post along with the notices
regarding the general meeting of the company for winding up. Additionally, with
the notice to the creditors, the company also has to advertise at least once in
the official gazette and once in two newspapers that are circulated in the district
where the company’s registered office or principal place of business is situated.

Procedure for conducting a company meeting

While discussing the procedure for consulting the meeting of the creditors, the
following pointers are noteworthy:

Obligation of the board of directors

While conducting a meeting, the board of directors must submit a statement on
the position of the company’s affairs along with a list of the company’s creditors
and the estimated amount of their claims. The director who is entrusted with
the duty to conduct the meeting of creditors or who is in charge of the same
must attend the meeting and hold it at the same time.
Next course of winding up of the company
Based on the decision that occurred at the meeting of creditors, the company
shall decide its next course of action. The decision could be one of the
following:

1. The company would wind up on a voluntary basis if all the parties

agree to it unanimously.
2. In case the company is not able to repay all the debts from the assets
sold in the voluntary winding up of the company, then a resolution can
be passed from winding up the company by involving the tribunal.

Passing the notice of resolution

When a notice of resolution is passed in the meeting of creditors, the same
must be filed with the registrar within 10 days of passing such a resolution. If
the company does not adhere to the set provisions of company law under the
Companies Act, 2013, a penalty with a fine that will not be less than fifty
thousand rupees and extendable up to two lakh rupees shall be imposed.
Further, the director of the company who errs in following the procedure, will
also be penalised with an imprisonment for a term extendable to six months or
with a fine not less than fifty thousand rupees and extendable up to two lakh
rupees.

Quorum of creditors
A meeting cannot be commenced unless the creditors of the company, known
as quorum attend the meeting. The requisite quorum is as follows:

Quorum in case of creditors

In the case of creditors, at least one creditor entitled to vote must be in the
quorum.

Creditors and contributors meeting

Creditor and contributor meetings are usually conducted when the company has
gone into liquidation to calculate the total amount due by the company to its
creditors. The main motive of holding such meetings is to seek the approval of
the contributors to the scheme of compromise or rearrangement to save the
company from economic difficulties.
At times, even a court can pass an order to conduct such a meeting. It should
be noted that the term “contributory” encompasses every individual who is
accountable for making contributions to the assets of the company at the time
of winding up.

Quorum in case of contributors

In the case of a meeting of contributors, at least one creditor is entitled to vote,
or all the contributors if their number does not exceed two.

Requisites of a valid company meeting

If the business carried on in a company is valid and legally binding, it is
necessary that the meeting called to conduct such business also be held in a
valid manner. To understand the same, there are some pointers one must
understand to consider a meeting valid. The following are the requisites for
conducting a valid company meeting:

1. The meeting is convened by proper authority.

2. The announcement of holding the meeting is served through a proper
notice. The same has been discussed under Section 101 and 102 of the
Companies Act, 2013.
3. While holding the meeting, it is crucial that a proper quorum is
present.
4. To conduct the meeting, it is important that it must be presided over
by a proper chairman.
5. At the meeting, business must be validly transacted.
6. It is crucial that proper minutes of the meeting must be prepared.

Relevance of different company meetings

Every company has its own importance. Let’s quickly take a look at each of the
company law meetings’ relevance.

Annual general meeting (AGM)

An AGM is conducted to transact the ordinary business of the company.
Ordinary business includes the following:
 1. Consideration of financial statements and reports from the directors
and auditors.
2. Making declarations on dividends.
3. Appointing a replacement of directors in place of those who have
retired.
4. Appointing and setting up the amount of remuneration for auditors of
the company.
5. It also includes annual accounts, crucial reports, audits.

Extraordinary general meeting (EGM)

An EGM is conducted to discuss special businesses, usually those that do not fall
under the category of ordinary businesses, which are discussed at AGMs. These
meetings are generally called only in cases of urgent matters or for those
matters that are not discussed at AGMs.

Class meetings
Class meetings are conducted for shareholders belonging to a particular class.
These meetings are held to gain approval via a special resolution of all such
members belonging to the particular class to seek their approval on important
matters or amends in any field related to their interests.

Board of directors meeting

A board of directors is held for several purposes, namely, for making calls on
shares, issuing shares and debentures, forfeiting the shares, for discussing the
difficulties of the company, etc.

Committee of directors meeting

A committee of directors meeting can be held for issues relating to the
allotment or transfer of any share or asset of the company, or even for any
issues relating to the finances of the company.
Debenture holders meeting
Debenture holders meetings are conducted to decide upon matters relating to
the reconstruction, reorganisation, amalgamation, or winding up of the
company.

Creditors meeting
Creditors meetings are usually conducted for the creditors to either approve,
change, or deny the repayment plans of a company when it decides to wind up
voluntarily.

Creditors and contributors meeting

Similar to the aforementioned meeting, a contributors meeting is conducted for
the calculation of the total amount due by the company to repay creditors or
contributors when the company has gone into liquidation.

What happens if there is a breach in

conducting company law meetings
As discussed under each heading (wherever relevant), in case a company errs
in conducting a meeting, a penalty in the form of fine, is imposed by the
tribunal. The penalty is either imposed on the company or its members, or both.
The penalty keeps recurring up to a certain amount in case of continuation of
the blunder.

Judicial pronouncements on company

meetings and relevant provisions
There are several cases where the matters relating to company law meetings
were approached in the court of law. Below is an amalgamation of a few of
them. A point must be noted that an attempt is made to segregate each case
law on the basis of the type of company meeting or relevant provisions. Each
judicial pronouncement has been added under separate subheadings then.
Annual general meeting (AGM)

T.V. Mathew v. NadukkaraAgro Processing Co. Ltd. (2002)

In this case, the Kerala High Court opined that there is no provision in the law
which states that holding the first AGM of the company can go beyond the set
time period, i.e., nine months from the forest financial year of the company.

Sikkim Bank Ltd. v. R. S. Chowdhury (2000)

In this case, the Calcutta High Court held that any meeting or business
conducted at a location other than the one mentioned in the notice of the
meeting will be declared to be prima facie void. If such an issue arises, a notice
declaring the change of location has to be served to each and every member
having the authority to attend the meeting.

M/S. Harinagar Sugar Mills Ltd. v. Shyam Sundar

Jhunjhunwala (1961)
In the case of M/S. Harinagar Sugar Mills Ltd. v. Shyam Sundar Jhunjhunwala
(1961), the Hon’ble Supreme Court held that if a managing director of a
company had repeatedly called upon other directors of the company to hold an
AGM, but the efforts are in vain, the managing director could not be considered
to be an “officer in default”.

Re. Brahmanbaria Loan Co. Ltd. (1934)

In Re. Brahmanbaria Loan Co. Ltd. (1934), the Calcutta High Court held that it
is no defence for a company to plead that it was not able to conduct an annual
general meeting just because a criminal case was filed against the secretary of
the company and important books of the company had been exhibited in the
court for carrying out the proceedings.

Kastoor Mal Banthiya v. State (1951)

In this case, the Court had a lenient view when a company that had only two
members who were brothers, had to approach the Court for justice. Here, one
of the brothers was seriously ill, and hence the company erred in conducting the
meeting. The Court stated that the non-performance of holding the AGM was
not a deliberate, willful defect, and hence no charges were filed against them.

Extraordinary general meeting (EGM)

Life Insurance Corporation v. Escorts Ltd. &Ors. (1986)

The Hon’ble Supreme Court in the case of Life Insurance Corporation v. Escorts
Ltd. &Ors. (1985) stated that every individual holding shares of a company has
the right to call/requisition an extraordinary general meeting subject to the
provisions of the Act. Further, the Court said that once the requisition is made
in compliance with the provisions of the Act, the shareholder cannot be
restricted from calling any such meeting. Simply put, the Apex Court stated that
an institutional shareholder like that of LIC, too, has the same right to
requisition an EGM as any other shareholder.

Moreover, the Supreme Court in this case made another interesting

observation. It said, if an EGM is filed for the purpose of removing some of the
existing directors of the company, one cannot say that the requisition is invalid
just because the reason for their removal was not mentioned.

Ball v. Metal Industries Ltd. (1957)

In Ball v. Metal Industries Ltd. (1957), the Court of Session in Scotland said
that the requisition to hold an EGM must set out the matters for calling such a
meeting, that is, apart from the agenda for the meeting, no other discussion
can be carried out in these meetings. For instance, if an EGM is being conducted
for the appointment of three new directors, the chairman cannot add a new
item for the removal of one of the existing directors of the company to the
agenda.

B. Sivaraman v. Egmore Benefit Society Ltd. (1992)

In the case of B. Sivaraman v. Egmore Benefit Society Ltd. (1992), the Madras
High Court held that an extra annual general meeting cannot be requisitioned
for a declaration that the directors appointed at the last meetings were not
justifiably elected and that the requisitionists should be appointed on their
behalf.
Anantha R. Hedge v. Capt. T.S. Gopala Krishna (1996)
In the case of Anantha R. Hedge v. Capt. T.S. Gopala Krishna (1996), the
Karnataka High Court opined that just because a director refused to conduct an
extraordinary general meeting when requisitioned, it would not amount to an
offence under the 2013 Act.

B. Mohandas v. A. K. M. N. Cylinders Pvt. Ltd. (1998)

In the case of B. Mohandas v. A. K. M. N. Cylinders Pvt. Ltd. (1998), the
Company Law Board opined that the requisitionists cannot approach the tribunal
directly, i.e., when the requisitionists have not made an attempt to call the
meeting themselves as stated under the law, they cannot approach the tribunal
for an order directing the EGM.

Amit Kaur Puri v. Kapurthala Flour, Oil and General Mills C.

PVt. Ltd. (1982)
In this case, the High Court of Punjab-Haryana held that when a company has
no duly constituted board of directors, it is not feasible to hold a meeting.

Indian Spinning Mills Ltd. v. His Excellency (1953)

In the case of Indian Spinning Mills Ltd. v. His Excellency (1953), an individual
who did not possess a qualifying share was assigned to be the chairman of the
company. Later, some directors transferred their shares to him to fulfil the
requisite necessities of the articles of the company. However, a group of
members objected to this action and filed a suit, claiming such an action to be
invalid. Here, the Calcutta High Court held that when such a situation arises, it
is quite impractical to conduct a meeting.

Re. Ruttonjee and Company Ltd. v. Unknown (1968)

In the case of Re. Ruttonjee and Company Ltd. v. Unknown (1968), the
Calcutta High Court cautioned the Tribunal, stating that it should interfere only
if it is fully convinced that the application made is filed with bona fide intentions
in the larger interest of the company.

The High Court issued a note of caution against the misuse of application under
the Act and stated that, “the power should be used sparingly and with caution
so that the court does not become either a share-holder or a director of the
company trying to participate in the internecine squabbles of the company.”

Board meeting

Sanjiv Kothari v. Vasant Kumar Chordia (2004)

In the case of Sanjiv Kothari v. Vasant Kumar Chordia (2004), an observation
was made that in case a meeting is convened by the managing director on
requisition by the director on the same date to have a discussion on the same
matter that was highlighted by the director, the director has to attend the
meeting and should not have any other arrangement for attending a meeting on
the same date at some other place.

Dankha Devi Agarwal v. Tara Properties Private Limited

In Dankha Devi Agarwal v. Tara Properties Private Limited (2006), the Hon’ble
Supreme Court concluded that if a decision is reached without due notice of
such a meeting for the removal or induction of any individual, such an act would
constitute oppression and mismanagement. It further stated that at least two
directors or one-third of the total strength, whichever is higher, will constitute a
quorum for a board meeting. Also, directors who are attending the meeting in
person or through any audio-visual means would be counted for the purposes of
quorum.

Notice of the meeting

Smith v. Darley (1848)

In this case, the Queen’s Bench Division of Ireland held that an accidental
omission to give notice to, or the non-receipt of, such notice by any individual
who is entitled to receive it does not invalidate the proceedings of the meeting;
however, if such a notice is deliberately commissioned to be served, it will
definitely result in invalidation.

Kaye v. Croydon Tramways Co. (1898)

In this case, there was a provisional agreement for the sale of an undertaking
by one company to that of the other. So, the company sent out a notice stating
that the object of the meeting was to adopt an agreement for the sale of one of
the company’s undertakings to another; however, it failed to reveal the fact that
substantial amounts were payable to the directors of the undertaking that was
to be sold to compensate for the loss of office. Here, the court held that the
notice was invalid as it was not adequate and did not disclose all the facts upon
which the members would be exercising their right to vote.

Parker and Cooper Ltd v. Reading (1926)

In this famous English case, the court observed that when the members had
been served a notice that was not in accordance with the set standards but
were still present at the meeting, the notice could be made good. Further, the
meeting can also be considered valid irrespective of whether the notice served
in the first place was apt or not.

PNC Telecom v. Thomas (2002)

In this case, the Vice-Chancellor of the Chancery Division of England and Wales
held that a notice of a meeting served via fax is a valid notice.

Quorum of the meeting

Sharp v. Dawes (1876)

In the case of Sharp v. Dawes (1876), a company with several members called
a meeting for the purpose of making a call on the members. However, only one
member, who was holding a proxy, was present at the venue of the meeting.
He proceeded to take the chair and pass the necessary resolution for making
the aforementioned call on the members. Furthermore, he even proposed a
vote of thanks. When this issue arrived in court, the Court declared such a
meeting to be invalid. In the words of Lord Coleridge, “the word ‘meeting’ prima
facie means a coming together of two or more than two persons“.

Chairman

Pena v. Dale (2003)

In this case, it was stated that if an individual is informally invited to act as a
chairman of a meeting but no formal resolution is passed in this regard, the
members of the company attending the meeting have the right to raise an
objection contending that there was no valid appointment of a chairman.

Voting

T. H. Vakil v. Bombay Presidency Radio Club (1945)

In a company, business transactions are carried out at meetings in the form of
resolutions. Members are entitled to discuss the contents of a resolution before
it is considered to be put up for voting. Further, amendments that are pertinent
to the proposed resolution may be proposed in the meeting and voted upon. In
case the amendment is passed, the amended resolution will be considered for
voting. In this case, the Bombay High Court held that if the chairman wrongfully
rules out an amendment to a resolution, the next proceedings conducted to
discuss the same resolution will be deemed as invalid.

Conclusion
Under the Companies Act, 2013, it is important that companies conduct
requisite meetings throughout the year as and when necessary. These meetings
play a major role in shaping the company, as major decisions relating to the
company and its future are taken in such meetings.
Private Company Vs Public Company: Differences

The given section will illustrate the list of grounds that differentiate these business
entities:-

Stock Exchange Listing

Public limited companies usually find their way to the popular stock exchange.
Meanwhile, a private limited company, due to regulatory restrictions, doesn’t reap
such a benefit.
Minimum Number Of Members

A public limited company can be set up by a minimum of seven members. On the

contrary, private limited companies can be formed by a minimum of two members.

Minimum Directors

Under a legal obligation, private limited companies are required to appoint two
directors to run the company. On the other hand, the public limited company is
required to be run by at least three directors.

Procurement Of Funds

The Public Limited Company usually raise their funds by issuing an IPO in the
general public. On the contrary, the private company approach to the private
investors for the procurement of the funds.

Disclosure Of The Financial Report

The public company is liable to manifest its financial reports on a quarterly and
annual basis. Meanwhile, the private company is free from such a regulation.

Issuance Of Prospectus

The public limited entities are under the obligation to issue the statement and
prospectus on the periodic basis as per the bylaw. However, the private company
doesn’t have to address such a requirement.
Commencement Certificate

Each and every Public Company seeks a commencement certificate post incorporation
to initiates its operation. Alternatively, a private limited company can commence its
operation after its incorporation.

Transferability Of Shares

The notion of transferability of shares is not applicable to private limited companies.

Meanwhile, in the public limited company, the shareholders can transfer their share
without any legal obligation.

Scope Of Operating

The privately held companies have a limited scope when it comes to the procurement
of funds. Meanwhile, the Public Limited Companies are relatively more versatile and
profitable on this front. The Public Limited Companies are under the constant
pressure of regulatory bodies like SEBI for generating periodic reports and disclosures
for the general public. To serve this purpose, these companies invest a considerable
amount of money every year.

Employment Of Company Secretary

Public companies are liable to employ a company secretary. On the other hand, the
Pvt. Ltd. company under no obligation to follow such a statutory requirement.
However, From 01/04/2020, every listed company, be it public company and private
company having a paid-up share capital of INR ten crore or more shall have a whole-
time/regular company secretary
Ease Of Transferring

The ease of transferring the share is one of the critical reasons for selecting the public
limited company. However, that advantage comes with many compromises, mainly in
the form of privacy loss and powerful compliances. The transferability of shares is
controlled completely in private limited companies, while the shareholders of a public
company can transfer their shares without restraint.

A Note On Conversion

A public limited company can turn into a private limited company if they intend to do
so. To serve this purpose, the entity needs to purchase the entire outstanding shares
from the existing shareholders. As soon as the entity completes such action, it will be
delisted from the stock exchange and eventually transform into a Private Limited
Company.

The latest finance bill encloses a new clause related to the asset’s value held by
private companies. As per the said bill, the entity converted into the private limited
company need to maintain the maximum threshold of asset’s value i.e. Rs 5 Cr. in
their account book only if the transformation was held three years ago.

Conclusion

After enacting the Company Act, 2013[1], most entrepreneurs rush towards a private
limited business model. Since it allows the entities to better exercise better control due
to relaxed provisions and less compliance, it has become an obvious choice for most
of the start-ups in the country. Also, the incorporation of the private limited
companies doesn’t attract any paid-up capital which ultimately helps start-ups to
incorporate the business without financial burden. Public limited companies are good
at maintaining transparency due to consistent exposure to the general public.
Accounts and Audit:

Meaning of Accounts: Section 128 of the Companies Act 2013

Section 128 of Companies act 2013 stated that every company need to maintain its
registered office books of accounts and other relevant papers and books for every
financial year which states the true and fair view of state of affair of company including
its all branches .

According to section 2 [13] of books of account it includes the record which should be
mentioned, they are as follows-

• All the money received by company and matters in respect of which receipts and
expenditure takes place.
• All the purchases and sales of goods by the company.
• All the liabilities and assets of the company.
• All the items of cost given under section 148 in case of company which belongs
to any class of companies given under that section.
As it is mentioned that section 128 requires books of account to be kept , however the
proviso to section 128[1] allows the company to keep its book of account to any other
place in India but it should be decided by board of directors. In this case , company need
to give the notice to registrar in writing within seven days of decision mentioning the
address of other place.

It is required that all the branch offices periodically summarized the returns of company
and sent it to the registered office or any other place referred to section 128[1]. Proviso
of section 128[1] states that company can also maintain the books of account in electronic
mode. In this case Rule 3 of companies accounts rules 2014 says that such book of account
to remain accessible in India. They must be maintain in that manner in which they were
originally generated, sent or received. The information which was received from branch
office need to be original, there will be no alteration. Company should have proper system
where storage, display and other relevant things are there and as considered by audit
board. If the company is using the service of a third party service provider for maintaining
the books and records in the electronic format, the company shall intimate to registrar ,
name of service provider and location of service provider.

There must be an inspection of books of account

Section 128[3] says that During business hours any director can inspect the books of
account and other papers.

Section 206[1] says that registrar can call for books of accounts, papers, explanation by
giving written notice. Registrar shall write his reason in writing for giving the notice under
section 206. In any special circumstances, central government can appoint an inspector
under section 206[5] for an inspection of books of accounts, papers.

It is the duty of officers, directors and employees to produce all the documents,
statements, information which was asked by the registrar or inspector during inspection.

The registrar and inspector can take the copies of books of account as a token of
inspection having been made.

Directors have also the Right of inspection- Section 128 [3] says that director can inspect
the accounts of books. Right of inspection is a statutory right , If a director has been
prevented from this right , he may enforce it from the court. Also this Right is not an
absolute in nature.

Shareholder has no statutory right of inspection books of accounts, he can only inspect
when this right is given through the article which is very rare.

Financial Statements: Section 129 of the Companies act 2013

Section 129 [1] says that every company need to maintain financial statement at the end
of financial year for the purpose of fair view of state of affairs of company. Section 2[ 40 ]
defines the financial statements , according to which financial statements include-

• Balance sheet
• Profit and loss
• Statement of changes in equity
• Cash flow statement
Financial statement should be presented by board of directors before the Annual general
meeting of members, under section 129[2]. Financial statement need to be ready within
six months of close of financial year. Financial statement should be prepared for every
financial year. Section 2[41] says that financial year is 31 st March every year. Also the
income tax act 1961 says that all companies need to submit their income tax returns on
31st March every year.

Reserves and Dividends

It may be cited that the recommendations of the board of directors with regard to the
amount of income to be paid as dividend, and the amount to be transferred to it can also
reserves do no longer lend finality to the matters in these regards. The shareholder are
free to reject the suggestions of the directors as regards the quantity to be declared as
dividend. They cannot, however make bigger the amount of dividend endorsed by using
the directors.

Circulation of financial statements

Section 134[7] says that a signed replica of every financial statements which includes
consolidated monetary statements shall be issued, circulated or published with a
reproduction of any notes annexed to or forming section of such financial statements, the
auditor’s record and the board’s report.

A copy of the financial statement such as consolidated financial statement, auditor’s

document and each and every different report required by way of regulation to be
annexed or connected to the monetary statements which are to be laid before the annual
general meeting of the company, shall be sent not less than 21 days before the meeting
to each and every member of company.

Adoption and filing of financial statement- One of the company to be transacted at an

AGM is consideration and adoption of the monetary statements and the reviews of the
board of directors and auditors consisting of the stability sheet and the profit and loss
account [ section 102[2]. Every AGM other than the first AGM is required to be held within
six months of the close of financial year[ section 96 [1].

It may be additionally referred to that the financial statement are required to be placed
solely at an AGM, and now not at any different customary meeting . The blended studying
of section 96[1] and section 102[2] shows that the financial statements shall be ready for
placing before the AGM within 6 months of close of financial year. In case the monetary
statements are now not geared up for laying at the appropriate annual general meeting,
the company may adjourn the said annual widespread meeting to a subsequent date
when the annual debts are expected to be equipped for laying .

Accounting standards

Section 129[1] says that financial statement shall comply with accounting standards given
under section 133.

Concept of Audit under Companies Act 2013

 Business enterprise carries on commercial enterprise with capital provided by persons
who are now not in control of the use of money supplied by them. They would therefore
like to see that their investment are safe are being used for meant purpose and the annual
account of the company to know the fair view of state of affairs of company. For this
purpose the debt of the company need to be checked and audited by way of duly
qualified and unbiased individual who is neither employed in the organisation nor is in
any way indebted or in any other case obliged to the company. Originally the audit
characteristic was primarily a public function. Its objective was to become aware of fraud
and error. There are some objectives of audit, they are –

• Detection of fraud
• Detection of technical error
• Detection of error of principles.
The ability for success of such an goal was a unique analysis of transactions.

Who can be appointed as an auditor

Section 141[1] says that what are the qualifications and disqualification for being
appointed as company auditor. An Auditor of business enterprise possessing the
qualifications prescribed in section 141 of the act is commonly regarded as the statutory
auditor of the company, as he derives his duties, energy and authority from the statue
that is the companies act. It is mentioned in section 141[1] that ‘ Any person can only be
appointed as auditor if that person is chartered accountant. Section 2[17] defines
Chartered accountant as a CA who holds a valid certificates of exercise under sub section
[1] of section 6 of chartered accountant act 1949.

Accordingly only a chartered accountant holding a certificate of practice is eligible to be

appointed as an auditor of a company. It is further supplied that a firm. Including a
confined liability partnership, whereof majority of the partners practising India are
certified for appointment as auditor , may also be appointed through its company name
be the auditor of a company. In this regard, it might also be referred to that underneath
the chartered accountant act 1949, only a chartered accountants conserving a certificate
of practice can be engaged in the public exercise of accountancy. However the chartered
accountants act 1949 additionally lets in the chartered accountants to enter into
partnership with other professionals. In such a case the section 141[2] of the act states
that if a company[ including a restricted liability partnership] is appointed as an auditor
solely these companions who are chartered accountants are approved to sign on behalf
of the firm.

Appointment of first auditors

 Section 139[6] lays down that the first auditor or auditors of a employer shall be
appointed by using the board of directors within thirty days of the date of registration of
the company. The auditor or auditors so appointed shall keep workplace till the
conclusion of the first annual general meeting . If the board of directors fails to exercising
its power , it shall inform the individuals of the company. In such a case the first auditors
are appointed through the members in an extraordinary general meeting within ninety
days.

Generally it is observed that the first auditors of a company are named in the articles of
association. Such appointment of auditors cannot be held valid because the act grants it
no recognition. The first auditors would validly appointed only by a resolution of the
board of directors or that of company in general meeting.

Auditor’s lien

In the general principles of law, any person having the lawful possession of somebody
else’ property, on which he has worked may retain the property for non payment of the
remaining dues on account of the work that is done on the property. On this premise,
auditor can exercise lien on books and files positioned at his possession by the client for
non price of charges for the work has been done on the related books and documents.
The Institute of chartered accountants in England and Wales also says some similar things
on regard on this following situations-

• Document retained must belong to the client who owes the money.
• Documents need to be in possession of the auditor on the authority which was of
client. It should not been received through any irregular or illegal means. In case
of company client they must be received on the authority of the board of
directors.
• The auditor can retain the documents only if he has done work on the documents
assigned to him.
• Such of the documents can be retained which are connected with the work on
which fees have not been paid.

Limitation of auditor’s duties

No limitation can be placed upon rights or responsibilities of the auditor given under
section 143 either done by any articles of company or done by any other resolution of the
members. Where the articles of company provided:
 • Directors shall have power to form an internal reserve which was once no longer
to be disclosed in the balance sheet and which must be utilised in a way that
directors thought fit.
• Auditors shall have access to accounts to relating to such reserve fund and that it
was once utilised to the functions of the company as mentioned in the special
articles , however that they should no longer disclose any data with regard to the
shareholders or otherwise; such provisions in the articles had been held to be
invalid as being hassle of the statutory responsibilities of the auditors.

Appointment of auditors

In case of a government employer or a company, without delay or not directly owned or

managed by using the central government, state government or partly with the aid of
central government and partly by means of one or greater state government , the first
auditor shall be appointed by using the comptroller and auditor general that is [ CAG ] it
should be done within sixty days from the date in which registration of the company has
been done. If the CAG fails to exercise his powers ,the board is approved to appoint the
first auditors within the subsequent thirty days. In case of a failure by the board , the
contributors have to be knowledgeable who shall appoint the first auditor in an
extraordinary general meeting within the sixty days[ Section 139 [7] ].

The subsequent auditor for the company given under section 139[7] shall also be
appointed with the aid of CAG for every financial year. The auditor so appointed shall
meet the qualification standards laid down by the act. The auditor shall be appointed
within 180 days of the graduation of financial year and shall preserve office till the
conclusion of annual general meeting. The power to fill any casual vacancy in the company
is vested with the CAG. In case of failure by the CAG to fill the casual vacancy within a
period of thirty days, the board of directors is required to fill the same within the next
thirty days.

Joint Audit

The practice of appointing chartered accountant as joint auditors has come to be

widespread, particularly in huge business and corporations. With a view to imparting clear
idea of the professional accountability undertaken by way of the joint auditors, the ICAI
had issued a statement on standard auditing and assurance practices on the responsibility
of joint auditors. According to the statement it would no longer be correct to hold an
auditor responsible for the work of every other and every joint auditor will be accountable
solely for the work dispensed to him. In coming to these conclusions, the council regarded
that the extent of work to be carried out is a matter of expert judgment and that no two
firms, whatever be their standing and competence, will always exercise their judgment in
an same manner so as to function in the identical volume of work in the same manner.
Where joint auditors are appointed, they need to divide the work of audit between them
by mutual discussion. Such division of work would generally be in terms of identifiable
operating gadgets or targeted areas of work and in such a case, it is good practice to
communicate to the client, wherever possible, the genuine division of work.

Cost Audit

It is an audit process for verifying the charges of manufacture or manufacturing of an

article on the basis of accounts as regards utilisation of material or labour or other items
of charges maintained by using the company. Under the provision of section 148[3] of the
Act, such an audit shall be performed by means of a cost accountant in exercise inside
that means of the cost accountant act 1959. The expression cost accountant skill a price
accountant as defined in clause [b] of sub section 1 of section 2 of the cost and works
accountants act 1959 and who holds a valid certificates of practice under sub section 1 of
section 6 of that act. [ section 2[28] ].

Borrowing powers
As per Section 180(1)(c), if a company desires to borrow money and the amount
borrowed, plus the amount to be borrowed, surpasses the company’s paid-up
capital, free reserves and securities premium apart from temporary loans then in
such cases, the company must have shareholder approval.

If a banking company accepts public deposits of money that are payable on

demand and can be collected by cheque, draft, order or otherwise, then such
transactions are not subject to shareholder approval as long as it is done in the
ordinary course of business. As per Companies (Amendment) Act, 2020 housing
finance companies registered under the National Housing Bank Act, 1987 are
also exempt from Section 180.

According to Section 180(4), borrowings made by banking companies or

housing finance companies in their ordinary course of business are exempt from
the restrictions imposed under Section 180(1)(a). This means that before
borrowing money or offering securities or guarantees that exceed the total of
their paid-up share capital, free reserves, and securities premium, banking
companies and housing finance companies are exempt from the requirement to
obtain prior approval from shareholders by way of a special resolution. It is
significant to note that this exemption only applies to the aforementioned types
of businesses and does not extend to any other businesses that are not involved
in the banking, insurance, or housing finance industries. Other corporations are
required to abide by the limitations imposed by Section 180(1)(a) and receive
advance approval from shareholders via a special resolution.

Section 180(2), deals with the total amount up to which the board of directors
can borrow funds, which is determined by each special resolution adopted by
the company’s general meeting. This means that shareholders can limit the
amount of money the company’s directors are permitted to borrow without
consent from shareholders. If the board intends to borrow more than the
agreed limit, it must seek shareholder approval by carrying out a special
resolution.

As per Section 180(5), no debt incurred by the company over the specified limit
shall be valid or effective unless the creditor shows that the loan was made in
good faith and with no prior knowledge that the director had exceeded the
specified limit.

As per Section 180(3), in the event, the company passes a special resolution for
the above transactions as mentioned under Section 180(1)(a), then the
purchaser or other person buys or leases any property in good faith without
knowing that the company has failed to comply with the law, then the
purchaser’s claim against such person’s property is unaffected.

Exceptions under Section 180 of Companies Act, 2013

Section 180 of the Companies Act 2013, makes certain exceptions to the
general rule that the board of directors of a company must obtain prior
shareholder approval before borrowing money, investing funds, or creating a
charge or mortgage on the company’s assets. These exceptions are intended to
give companies more flexibility in their business activities while also protecting
shareholders’ interests. The following are some exceptions to this general rule:

• Ordinary course of business

In the ordinary course of business, the board of directors of a company can

borrow money, invest funds or create a charge or mortgage on the company’s
assets without the prior approval of the shareholders. The term “ordinary course
of business” is not defined in the Companies Act of 2013 and its interpretation
and application are determined by the specific circumstances and facts of each
case.
Example
PQR Ltd. is a manufacturing company that borrows money from banks regularly
to meet its working capital needs. In this particular scenario, the company’s
borrowing of money would be considered a transaction in the ordinary course of
business, thus shareholder approval is not necessary.

• Transactions by wholly-owned subsidiaries

Transactions that are made in the ordinary course of business or with the prior
approval of the board of directors of the holding company, such as wholly-
owned subsidiaries, are exempt from the requirement to obtain the prior
approval of the shareholders.

Example
XYZ Ltd., a wholly owned subsidiary of NMO Ltd. and is in the trading industry.
XYZ borrows money from banks to cover its working capital needs. This is
regarded as a business transaction, so shareholder consent is not needed.

• Prior shareholder approval

The board of directors of a company may engage in particular transactions that

are not in the ordinary course of business but are favourable for the company
with the prior approval of the shareholder. Such transactions include the sale,
lease or disposal of the company’s entire or substantial whole of the
undertaking or where the investment exceeds the limit specified in Section
186 of the Act.

Example
UVW Ltd. is a real estate firm looking to sell its entire operation to a third party.
In this case, UVW directors are exceeding the limits therefore, the company
would need the approval of its shareholders before engaging in such a
transaction.
 • Transactions in compliance with other provisions of the Companies Act,

2013

If the Board of Directors borrows, invests, or creates a charge or mortgage that

does not exceed the aggregate of the company’s paid-up share capital and free
reserves, then prior consent from shareholders is not required. However, if it
exceeds such an aggregate, the shareholders must first approve it. It is
important to note that temporary loans obtained from the company’s bankers in
the ordinary course of business are not considered as borrowing, and this
exemption is subject to compliance with other provisions of the Act, such
as Section 179, which deals with the powers of the Board of Directors, and
Section 186, which deals with a company’s loans and investments. As a result,
when exercising their powers, the Board of Directors has to make sure that they
adhere to all relevant provisions of the Act.

Example
RST Ltd. wishes to create a charge on its assets to secure a bank loan that does
not exceed the aggregate of the company’s paid-up share capital and free
reserves. In this case, the company can create a charge under Section 77 of the
Companies Act 2013, and shareholder approval is not required.

Restrictions on the power of the board of directors under

Section 180 of Companies Act, 2013

Borrowing limitations

The company’s articles of association include a reference to the borrowing cap.

This cap cannot be exceeded by the board of directors without the shareholders’
approval. If the borrowing cap has already been reached, the board cannot
borrow any more money without the shareholders’ approval.
Compliance with law

The board of directors must abide by all applicable laws and rules when
exercising their authority under Section 180. Any non-compliance may lead to
legal and financial repercussions.

Consent of shareholders

Without the approval of the shareholders, the board of directors cannot borrow
money, impose an obligation or charge on the assets of the company, or issue
securities. The shareholder’s approval must be obtained by passing a special
resolution at a company general meeting.

Value of assets

If the value of the assets is less than the amount borrowed or to be borrowed,
the board of directors cannot impose a charge on those assets. This prevents
any negative effects on the company’s financial health and makes sure that the
assets offered as collateral are enough to cover the borrowed amount.

Penalties for violation of Section 180 of Companies Act, 2013

Imposition of fine

If an organisation or any individual violates Section 180 rules, they must pay a
fine. According to Section 451 of the Act, if a company, any officer of the
company contravenes any provision of the Act or the rules and regulations
made thereunder for which no specific penalty is stipulated then such person
shall be punishable with a fine or with imprisonment and if the violation is for
the second time within three periods, then the fine imposed on directors will be
twice and Section 450 of the Act states that if a company violates any provision
of the Act or the rules made thereunder, the company and every officer of the
company who is in default shall be punished with a fine, which may extend to
Rs. 10,000 and if contravention is continuing then with a further fine which may
extend to one thousand rupees for every day after the first during which the
contravention continues.
Imprisonment of directors

In addition to fines, directors found in breach of Section 180 may be punished

for up to two years. The imprisonment can be placed alone along with a fine.
According to Section 188, any director found guilty of violating Section 180 is
punishable by a fine of not less than Rs. 25,00,000/-. It is important to note
that Rs. 25,00,000 is only applicable to listed companies under Section
188(5)(i) earlier it was imprisonment and a fine up-to 5,00,000 but it was
amended by Companies (Amendment) Act, 2020 and for other companies, it is
5,00,000 as per the Amendment Act, 2020. In addition, imprisonment is a
severe penalty that is typically reserved for cases of willful and deliberate
violations. Before imposing an imprisonment penalty, the courts will consider
several factors, including the nature and extent of the violation, the level of
involvement of the director, and the impact of the violation on the company and
its stakeholders.

Disqualification
An infraction of Section 180 may also result in the director’s disqualification
from holding office in any company for a period of up to five years. The
disqualification can have grave repercussions for the director’s professional
reputation and career prospects. Section 164 of the Act contains the provision
that allows directors to be disqualified for violating Section 180 of the
Companies Act, 2013. Section 164 specifies the circumstances in which a
person is ineligible for an appointment as a director of a company or must
resign as a director.

One of the grounds for disqualification specified in Section 164(1)(d) is that a

person shall not be eligible for an appointment as a director if they have been
convicted of a fraud-related offence and five years have not elapsed since the
date of such conviction. A breach of Section 180 can be considered a fraud
offence under Section 447 of the Act. As a result, if a director is found guilty of
infringing on Section 180 and is convicted of a fraud-related offence, they may
be barred from serving as a director of any company for up to five years under
Section 164 of the Act.

Director’s liability
If a company’s board of directors violated the provision of Section 180, the
directors who are responsible for the violation will be held personally liable. The
directors can be sued for breach of fiduciary duty and will be responsible for
compensating the company or its shareholders. The provision holding directors
personally liable for the violation of Section 180 of the Companies Act is not
expressly stated in the Act. However, the director’s liability for breach of
fiduciary duties is well established in company law principles and judicial
precedents. Section 166 of the Companies Act 2013 requires directors to act in
good faith and in the best interests of the company and its shareholders. They
must also exercise due diligence, reasonable care and skill in carrying out their
duties. Any breach of these duties may result in the directors being held
personally liable for the company’s or its stakeholder’s losses or damages.

Case laws

Priyaranjani Fibres Ltd. v. D. Srinivasa

Rao(2018)

Facts
In this given case, the director of Priyaranjani Fibres Ltd. agreed with an
outsider to sell the shares of himself and other shareholders without the
shareholders’ prior approval. The other shareholders filed a petition with the
National Company Law Tribunal (NCLT) alleging the director’s oppression and
mismanagement. The NCLT ruled that the director’s agreement was not binding
on the shareholders because it was made without their prior approval. The
director filed an appeal with the National Company Law Appellate Tribunal
(NCLAT) against the NCLT’s decision.

Issue
If the shareholders will be bound by an agreement a director of a company
makes with a third party to sell shares of himself and other shareholders
without their prior consent?

Judgement
The NCLAT ruled that the director’s agreement to sell shares of himself and
other shareholders without the shareholder’s prior approval was not binding on
the shareholders. The NCLAT observed that the director was obligated to act in
the best interests of the company and its shareholders and could not enter into
a share-sale agreement without the shareholder’s approval.
The NCLAT also ruled that the director had breached his fiduciary duty to the
company and its shareholders by entering into the agreement without their
prior approval, and that such an agreement would be unenforceable against the
shareholders. The NCLAT dismissed the director’s appeal and upheld the NCLT’s
decision.

Observation
The case of Priyaranjani Fibres Ltd. v. D. Srinivasa Rao is of significance
because it emphasises the importance of obtaining shareholder approval before
entering into an agreement to sell a company’s shares. A company’s directors
have a fiduciary duty to the company and its shareholders and are expected to
act in their best interests. Any action taken by a director that is not in the best
interests of the company or its shareholders will almost certainly be scrutinised
and could be declared invalid by the courts.

DEBENTURES
A debenture is one of the financial market tools that help businesses to raise money in the market to
grow their business. The word debenture is derived from the Latin word “debere” meaning to borrow or
borrow money. In the vernacular, a loan can be defined as acknowledging a loan issued by a company to
a third party under a common company logo. Following Section 2 (30) of the Companies Act, 2013,
credit cards include loans issued by a company as proof of debt incurred by that company, either by
creating or not imposing a charge on the company’s assets.

Attributes of Debentures

1. For Cash- As described above, debentures are usually issued to raise company funds. It is
mainly issued for cash. Debts can be deducted by rate, discount, or premium.
2. Debentures as collateral- A collateral security is additional security when a company
receives a loan or overdrafts from a bank or any other financial institution. Debentures
disbursed as such liability are contingent on the company, only if the company does not
repay the loan and the interest from which the debt will arise.
3. Loans that are issued as a non-cash consideration- This is another type of debentures issued.
Sometimes a company needs certain goods or equipment, plants, or large equipment at a
cost. The company does not have to have money at the time of payment. Therefore, instead
of paying in cash, the Company reimburses the seller for a loan against that purchase and
payment terms of consideration other than cash.

Types of Debentures
• Unsecured/Secured Debts
As the name implies, a debenture issue can be secured by a loan or payment on the company premises
and if the same is not secured it is known as an unsecured (nominal collateral) debenture.

• Convertible/Non- Convertible Debentures

Debentures disbursements may be of these two types too, which means that they can be converted into
equity shares on a specified date or for the occurrence of a particular event as determined in the
Debenture Trust Deed. Redeemable/Irredeemable Debentures Redeemable debentures mean that the
debentures will be redeemed at the end of the expiry period and non-redeemable debentures mean
that the company will not be able to repay its loans and only interest will be paid to creditors until the
company wishes to redeem or cancel debts.

Use of debentures
Debentures are issued by a company to raise money in the market. Such funds are then used by the
company to conduct research and development and market growth. Debentures or debt financing is
preferred over the equity of shares for two main reasons namely that the issuance of loans does not
lead to a reduction in corporate ownership and the cost of raising the debt is cheaper compared to the
cost of raising equity.

Debenture redemption
1. Conducting Board Meeting for the redemption of the debenture.

2. Approach creditors regarding the redemption

3. Referral to banks for reimbursement

4. Changes to the debenture register

5. Changes to the credit register, if charge created on debenture In the case of Compulsory
Debenture/Convertible debenture, if at the time of issuing the shareholders’ approval was taking
conversion part and if the loan is redeemed at the company’s expense, the approval of shareholders is
required.

Fixed and Floating Charge

To understand the meaning of charge in simple words, let’s take an example:

The police has charged a person under section 300 of IPC. Here, the
word charge means the creation of some obligation on the person. In the
same way, the Companies Act of 2013 defines a charge as “an interest
created on the company’s property or assets as a security,” according to
section 2(16). It also includes a mortgage.
Now, the question arises as to why the creation of charge is important. Let’s
understand this by way of an example. XYZ Ltd took a loan of rupees 1 crore
from ICICI bank. In return, XYZ Ltd has given its property of Noida office worth
rupees 3 crores as security to the bank. Now, here the bank will create a
charge on the property of XYZ Ltd granted as security of the bank.

But, after creating a charge, it is also important to register that charge. So,
even if the company (XYZ Ltd) tries to sell its Noida property to the general
public by way of fraud, the public will be aware that this property of XYZ Ltd is
already kept as a security with the ICICI bank. Therefore, every charge
created should also be registered with the Registrar of Companies.

Therefore, it is clear that banks require some surety from the company in
return for the loan amount, and thus, they create a charge on assets or
property of the borrower company. This is known as a charge on assets.

A charge is of two types – fixed and floating.

What Is Fixed or Specific Charge

The charge is fixed or specific when the property or assets given as security
are definite and ascertained. The company loses its right to dispose of or
transfer that property from the moment it is given as security to the charge
holder.
As discussed in the above example, the property of the Noida office of XYZ
Ltd was a fixed charge as it is definite and ascertained, and the company
cannot dispose of that property till the time it is kept as security with the bank.

What Is Floating Charge

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

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

Official Liquidator vs Sri Krishna Deo (1958)

As a company’s plant and machinery embedded in the earth or permanently

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

Re Cosslett (Contractors) Ltd

During the construction period, a construction company’s washing machine

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

What’s the Difference Between Fixed and Floating

Charges
There are two types of charges – fixed and floating. Let us compare both and
understand the difference between them:

Fixed Charge: It is a legal charge.

Floating Charge: It is a charge on equity.

Fixed Charge: It is a charge on defined and ascertained assets.

Floating Charge: This charge is of changing nature.

Fixed Charge: It is a charge on present assets.

Floating Charge: It is a charge on future assets.

Fixed Charge: A company cannot deal with the assets given as security.
Floating Charge: A company can still deal with the assets given as security.

Fixed Charge: A fixed charge is given priority over a floating charge.

Floating Charge: It is shifting in character.
Difference between Shareholder And Debenture
Holder

In order to understand the difference between a share holder and a

debenture holder, we must first understand the difference between
a share and a debenture. A share and a debenture can be
distinguished in the following manner:

1. Debentures is a loan while the shares constitute a part of the

capital of a company.
2. Debenture holders can be called the creditors of the company,
while the Shareholders are the owners/members.
3. At times Debentures create a charge on the assets which is not
created while issuing shares.
4. Debentures can be issued at discount, while the shares of a
company cannot.
5. While debentures enjoy an interest even when the company
incurs no profit, dividends can only be issued when the
company incurs profit.
6. It is pertinent to note that the Interest paid on debenture is a
business expense and can be deducted from profits, but the
dividend given on shares is not to be treated as business
expense.
7. Following the aforementioned point, it can also be stated that
the interest on debentures is fixed and the dividend on equity
shares is dependent on the profits and the decision of the
board of directors.
8. The interest paid on debentures is given priority over the
dividend paid on shares.

The differences are as follows-

The difference between a shareholder and a debenture holder is

that of a member and a lender. While a shareholder can be
regarded as a member of the company, a debenture holder is
nothing more than a lender as long as he owns debentures.
2) If you invest in the share market, you must be aware of the fact
that not every company gives dividend on its shares. Certain Indian
Companies that are known to give dividends to their shareholders
are Wipro and ITC. But let us assume, that if one of these
Companies incurs losses in a financial year, would they still give
their shareholders dividend? The answer to this question is no
because dividends can only be issued from profits of the Company.
Moreover, as stated before, not every company gives dividends to
its shareholders even if they incur profits, it’s an optional practice.
While speaking of debentures, the tables turn. Debenture holders
are entitled to a fixed rate of interest irrespective of whether the
company incurs a profit or a loss in that financial year or quarter.
Therefore, we can say that dividend depends on the profits of the
company, while interest on debenture is to given irrespective of
profit or loss.

Following the above mentioned point, we can say that the rate of
interest paid to debenture holders is usually fixed while that amount
of dividend is not certain.

3) The Company can mortgage the property/assets against the

debentures held by the debenture holder but the same cannot be
done in the case of shares.

4) Voting rights are the right possessed by the members of a

company to vote in a meeting of the company or by means of postal
ballot. It is pertinent to note that shareholders possess the right to
vote. A debenture-holder is devoid of such a right. In fact, a
section[ii] of the Companies Act even states that a company is
forbidden from issuing debentures that carry voting rights.

The interest paid on debentures, is a charge against the profits. The

interest is deducted from the revenue. On the other hand, dividends
paid on shares cannot be said to be a charge against profit.

6) In the event of winding-up, shareholders are not given priority

over the outside creditors when it comes to payment. It is seen to it
that the outside creditors are being paid in full. On the contrary,
Debenture-holders are secured lenders, this is because they have
prior claims for repayment unlike shareholders of a company.

7) Unlike shareholders of a Company, debenture holders own no

rights to participate in the decision making process of the company.
Moreover, the board of directors, that have an active say in the
management of affairs of the company, is comprised of certain
shareholders of the company.

8) Redemption of debentures is possible but equity shares cannot

be redeemed.

9) While the value of shares keeps changing depending on various

market conditions and sentiments, the value of debentures is not
fluctuating.

Rights and remedies available to the debenture holder

Rule 18 (1) (c) of the Companies (Share Capital and Debentures) Rules,
2014, specifies that a debenture trustee shall be appointed by the company
before the issue also known as “SEBI SCDR, 2014” of a prospectus or a letter of
offer for subscription of debentures and no later than sixty days after allotment.

Rule 18 (3) of the SEBI SCDR, 2014 defines the duty of the debenture trustee
as follows :-.

(a) To ensure that the letter of offer contains no matter that is inconsistent with
the terms of the issue of the debentures or the trust deed;

(b) Make sure that the trust deed’s covenants do not prejudicially affect
debenture holders’ interests;

(c) Request periodic status or performance reports from the company;

(d) Inform the holders of the debentures promptly if there is a default in the
payment of interest or redemption of the debentures and what action has been
taken by the trustee;
(e) They can appoint a nominee director in the Board of the company in the
event of—any default regarding the redemption of debentures or interest
payments, as well as any action taken by the trustee himself.

1. According to Section 71(8) of the Companies Act, 2013, debenture

holders are entitled to interest and redemption on their debentures by
the terms of their issue.
2. As per Section 71(10) of the Companies Act, 2013 if the company fails
to pay the interest due or redeem debentures on their maturity date,
the Tribunal can, after hearing the parties involved and requesting
relief from the debenture trustee, direct the company to redeem the
debentures.
According to Section 71 Sub-section (12) of the Company Act, 2013 a decree
for specific performance may be used to enforce a contract with a company to
take up and pay for debentures of the company. The Central Government may
prescribe the procedure for securing the issue of debentures, the form of the
debenture trust deed, the procedure for debenture holders to inspect and obtain
copies of the trust deed, quantum of debenture redemption reserve required to
be created, and any other matters.

1. Section 164(2) of the Companies Act, 2013 provides a rule for the
disqualification of directors for a period of one year or more if they fail
to redeem their debentures on the maturity date. The individual who is
responsible for non-compliance shall be barred from serving as a
director of that company or any other company for the next 5 years
from the date on which the company fails to redeem the debentures.
2. According to Section 186(8) of the Companies Act of 2013, companies
who have not repaid deposits or made interest payments are
prohibited from making loans or guaranteeing acquisitions until the
default is resolved.

Majority rule and Minority rights

Majority Rule
According to section 47 of the companies act, 2013, holding any equity shares shall have
a proper to vote in respect of such capital on every decision placed before the company.
Member’s proper to vote is recognized because the proper of assets and the shareholder
can also workout it as he thinks in shape consistent with his interest and preference. A
special resolution requires a majority of 3/4th of these votes at the meeting. consequently,
wherein the act or the articles require a unique resolution for any cause, a 3/4th majority
is important and a simple majority isn’t sufficient. The resolution of a majority of
shareholders handed at a duly convened and held general meeting, upon any question
with which the business enterprise is legally competent to deal, is binding upon the
minority and consequently upon the company.

The Principle of Non-Interference (RULE IN FOSS V. HARBOTTLE)

The principle that the will of the majority should prevail over the will of the minority in
matters of internal administration of the company was founded in the case of Foss v.
Harbottle which is today known as the rule in Foss v. Harbottle.

According to this principle, the courts will not, intervene at the instance of the
shareholders, in the management of a company it’s direct so long as they are acting within
the powers conferred on them by the articles of the company.

In nutshell, the company cannot confirm, Any act which is ultra vires the company or
illegal, Any act which is fraud on the minority, Any act passed with simple majority which
requires special majority, Any wrong act done by those who are in control, Any act
infringes the personal membership rights, Any act which amounts to breach of duty by
directors, Any act which amounts to oppression of minority or mismanagement of the
company.

Rights of Minority
Many provisions of Companies Act, 2013 deals with the situations where minority
shareholders rights have been protected and the same can be divided into various major
heads.

Oppression and Mismanagement

In Companies Act, 1956, the protection for the minority shareholders from oppression
and mismanagement have been provided under section 397 (An Application to be made
to company law board for relief in cases of oppression) and 398 (An Application to be
made to company law board for relief in cases of oppression).

therefore, right to apply to the company board for the oppression and mismanagement
is provided under the section 399, that is, meeting 10% of shareholding or hundred
members or one-fifth members limit. however, relevant government under their
discretionary powers has allowed any numbers of shareholders to apply for the company
board for the relief under Sections 397 and 398. Whereas, on the other hand, under
Companies Act, 2013, the relief from the oppression and mismanagement has been
provided under Section 241-246.
in addition, under the section 245, companies Act, 2013, the new concept of class action
has been introduced which was non-existent in companies Act, 1956 wherein it provides
for class movement suits to be instituted against the company as well as towards the
auditors of the company.

Protection of Minority Shareholders – Steps taken by companies

Piggy Backing – This provision states that if the majority sells their shares then the minority
shareholder right has to be included in the deal.

Prevention of Oppression
and Mismanagement Under
the Companies Act, 2013
Meaning Of Oppression
Oppression is the exercise of authority or power in an unjust manner against the
consent of the other party. In the Black Law Dictionary, the term ‘oppression’ is
defined as ‘the act or an instance of unjustly exercising power.’ It can also be
viewed as an act or instance of oppression and the feeling of being heavily
burdened, mentally or physically, by troubles, adverse conditions, and anxiety.

In the case of Dale and Carrington Investment Pvt Ltd. v P. K. Prathapan, it was
held that increasing the capital of a company with the sole purpose of gaining
control over can be termed as oppression.

Application to Tribunal for relief in cases of Oppression

The aggrieved shareholder may approach the National Company Law Tribunal set
up under the Company legislations.
Application against oppression and
mismanagement
Earlier under the Companies Act, 1956 section 397 dealt with the application
against oppression and mismanagement. The Companies Act, 2013 lays down the
provision to make an application against the oppression under section 241. The
chapter XVI of the Company Act clearly specifies who can raise a complaint and
under which circumstances a complaint may be raised of oppression and
mismanagement.

First let’s consider a situation when a member of the company makes a complaint
regarding the affairs of the company when the affair may seem shady affecting
the interest of the public at large or the company, or when the affairs of the
company is oppressive in nature and against the member making the complaint
or any other member of the company. The member may also make a complaint
regarding the material change in the management or control of the company
which may seem to be prejudicial to the company. The Central government may,
by itself, file the oppression and mismanagement application before the tribunal
against a company if it believes that the affairs of the company are prejudicial in
nature.

Who can file an application against Oppression

and Mismanagement?
The Provision of Section 244 of Companies Act is also crucial as it describes who
has a right to file such an application. The right is broadly divided between the
company and entitlement to one member, to file on behalf of the other members.
In a company, the right may further be differentiated based upon the companies
having a share capital and companies not having a share capital. The share capital
of the member complaining, may be calculated based upon share capital’s number
or its value. When it comes to number, it should be 100 or 1/10 of the total
members and when it comes to the value, it must be the members holding 1/10th
of the share capital value. In companies not having a share capital, 1/5th of the
total members may apply. Coming back to the entitlement to one member, to file
on behalf of the other members, it is posed with only one precondition that the
person doing so must have the consent of others in written form.
Power of Tribunal: Section 242 of the Companies Act, 2013
The tribunal is the special adjudicatory body brought about to deal with the
matters pertaining to the Companies Act in order to get efficient and immediate
relief. Section 242 deals with the powers of the tribunal and the same have been
examined and explained for your kind perusal.

• The first power granted upon it by the legislation is to pass an order.

Such order may be passed if it is of the opinion that the affairs of the
company have been or are being conducted in a prejudicial manner. It
has been mentioned that the winding up of the company will not be
ordered radically, but it is the oppression and mismanagement which is
aimed to be stopped.
• The same provision also confers powers upon the tribunal regarding
three issues which are concerning the 1) shareholders 2) Company and
3) others.
• With respect to shareholders, a tribunal may order to purchase shares
of members by other members or by the company.
• A tribunal may as well order a reduction of the share capital or even
enforce restriction on transfer of shares because oppression and
mismanagement at root cause depends upon the coagulation of shares
at the hands of individual or few members.
• Regarding the management of the company which is a crucial part of a
company, a tribunal may terminate or modify agreements made
between company and management or agreement between the
company and any other person.
• The tribunal in case of management of the company may even remove
the Managing Director, Manager, and Director, the tribunal may recover
undue gains made by such official and also appoint another MD,
manager, and director.
• In certain cases, the tribunal may appoint a person who shall report to
the tribunal regarding the activities of oppression and mismanagement
by the management to curb such oppression from taking place further.
• Lastly, the tribunal has certain other powers such as regulation of the
conduct of the affairs of the company, setting aside the transfers of any
property of the company and the tribunal may even impose costs. The
procedural details are that the tribunal has to send a copy of its order to
the registrar and if the order has not been finalised, it may provide an
interim order to the registrar. Pertaining to changes made in MOA
(Memorandum of Association) and AOA (Article of Association) the
changed documents must be submitted to the registrar. The punishment
 prescribed in abeyance of the law is set at 1 Lakh to 25 Lakh for a
company and 25000 to 1 Lakh for an officer in default and such officer
may also be liable for a term of imprisonment of 6 months.

Oppression of the Minority

The management of a Company is based on the majority rule, but at the same
time, the interests of the minority can’t be completely overlooked. While talking
of majority and minority, we are not talking of numerical majority or minority but
of the majority or minority voting strength. The reason for this distinction is that
a small group of shareholders may hold the majority shareholding whereas the
majority of shareholders may, among them, hold a very small percentage of share
capital. Once they acquire control, the majority can, for all practical purposes, do
whatever they want with the Company with practically no control or supervision,
because even if they are questioned on their acts in the general meeting, they
always come out winners because of their greater voting strength. So, the modern
Companies Acts contain a large number of provisions for the protection of the
interests of minorities in companies.

Appeals against the Orders of the Tribunal and variation of the

Order of the Tribunal
The Award pronounced by the NCLT (National Company Law Tribunal) may be
appealed before the NCLAT (National Company Law Appellate Tribunal). The
procedure and provision granting such right to appeal is Section 421 and the
same is explained below.

• The appeal may be preferred by any person who is aggrieved by the

decision of the tribunal.
• No appeal shall be entertained when the decision is given by the tribunal
based upon the consent of the parties.
• Appeals must be made within a period of forty-five days from the
disputed order passed by the tribunal and the extension may be given
only when sufficient cause for such delayed filing is brought before the
court by such party and such extension shall only be for another 45
days.
• On receiving such appeal, the appellate tribunal must give a reasonable
opportunity to the parties and then pass an order confirming or
modifying or setting aside the order appealed against.
Maintainability of Petitions under Sections 241 & 421
• The validity of a petition must be judged from the facts as they were, at
the time of its presentation, and a petition which was valid when
presented cannot cease to be maintainable by reason of events
subsequent to its presentation.
• For the purposes of the petition under Sections 241 and 421, it was only
necessary that members who were already constructively before the
court should continue the proceedings. The provision under the
Companies Act provides substantive provisions regarding an application
that is to be made when there is complaint of oppression and
mismanagement. It clearly specifies who may complain and when.
• As discussed before, member shareholders may make a complaint when
the company affairs are conducted prejudicial to the company and its
shareholders.
• The central government may even take suo-moto action regarding the
same under the aforementioned provisions. Under the provision Section
421 of Company Act, one could make an appeal from an order of the
tribunal if such a person is aggrieved by the decision.
• The time duration of 45 days has been fixed as maximum period within
which appeal shall lie from the order of company tribunal, but the appeal
may be further extended to a maximum of another 45 days on
convincing court of the sufficient cause of delay.
• Then the appellate tribunal finally gives the appellant a reasonable
opportunity to present their case again, to either uphold or overrule the
previous decision of the tribunal. This appeal provision is based upon the
intrinsic right to appeal, which is provided to the aggrieved party in order
to do complete justice.

Class action
The word class action is defined under Section 245 of Company Act. A class
action is where number of claimants with common grievance against the company
are allowed to file a lawsuit against the company. Claimants can collectively use
their resources such as share attorney’s services and save their litigation costs to
a great extent. The financial scale attached to the class action suit is perceived
as a saving grace for individuals with limited resources.

The funding of a class action suit is usually made from the Investor Education
Protection Fund. This funding is subject to the feasibility of reimbursement from
the IEPF which is usually considered an acid test under the Company Act, 2013.
The application is usually made regarding the conduct of the affairs of the
company being prejudicial to the interest of the company or the members and its
depositors. A class action may even be filed against the directors or auditors of
the company for misleading the members by furnishing misleading reports.

Under the Security Class Action, group of people affected by the changes made
to the MOA/AOA must bring a suit of class action instead of filing application of
class action.

Numbers of members/ depositors who may bring class action suit:

• In case of companies having a share capital, not less than 100 members
of the company may bring a class action suit; or not less than 10% of
the total number of members whichever is less may bring a class action
suit, or any member individually or jointly holding 10% of the share may
bring a class action suit provided, all such shareholder members have
paid up all the share dues.
• If the company is not having a share capital, then not less than 1/5th of
the members can bring a class action.
• For a company having deposit capital, a class action suit may be brought
by not less than 100 depositors of the company or by a minimum of 10%
of the total depositors whichever is less, or a class action suit may also
be brought by any depositor individually or depositors jointly who are
holding 10% of the outstanding deposit of the company.
Allotment of shares
The allotment is the allocation of a portion of shares to an underwriting participant
during Initial Public Offering (IPO). When the shares allotted to the underwriting
form, the remaining shares are allotted to other forms that participate in the same.
The process of appropriation of a certain number of shares and distribution among
those who have submitted the return applications of shares is known as allotment
of shares. Companies Act 2013 incorporated therein forms allotment of shares that
are listed on NSE and BSE or any other stock exchanges in India. Other
regulations that are applicable for subsidiaries of listed companies include the
provision of SEBI Act, 1992 and Securities Contract Regulation Act, 1956.

Allotment of shares is basically creating and issuing a new number of shares by the
company to the new or existing shareholders. The purpose of allotting new shares
is to bring new business partners.

General principles as to allotment of shares

An allotment to be effective has to comply with the requirements of the law of
contract relating to the acceptance of an offer.

• Allotment by proper authority

An allotment should be made by a resolution of the Board of directors. The

Allotment is the primary duty of the directors and this duty cannot be delegated
except in accordance with the provisions of the articles.

• Within reasonable time

allotment should be made within a reasonable period of time otherwise the

application fails. Reasonable time should remain a question of fact in each case.
The interval of six months between application and allotment has been held
unreasonable. If the reasonable time expires Section 6 of the Contract Act applies
and the application must be deemed to be revoked.

• Must be communicated
The allotment should be properly communicated to the applicant. Posting of a
properly addressed and stamped letter of allotment is sufficient communication,
even though the letter is lost or held up.

• Absolute and unconditional

Allotment should be absolute and should be according to the terms and conditions
of the application if any.

Nature of the shares

According to Section 44 of Companies Act, 2013 the shares of a company are
immovable property and according to the articles of the company, are transferable
in the manner specified therein. In the case of Vishwanath v. East India
Distilleries, the nature of share is incorporeal and also has a bundle of rights and
obligations.

Provisions of Companies Act relating to issue and allotment of shares

1. A public company should file a prospectus or declaration in lieu of a

prospectus inviting offers from the public for the purchase of shares.
2. After reading the prospectus, the public applies for the company shares in
printed forms. The company can ask the issue price to be paid in full,
together with the application money or to be paid in instalments as share
application money, share first call, second call, etc. The application
money must be paid at least five percent of the nominal value of the
share.
3. The Allotment of shares cannot be made unless the minimum amount that
is the minimum subscription stated in the prospectus is subscribed or
applied. The minimum subscription should be mentioned in the
prospectus.
4. The share application amount should be deposited in the bank which can
be operated by the company only after the commencement certificate.
5. The company has to return and refund the entire subscription amount
instantly if 90% of the issue amount is not achieved by the company
within 60 days. For further delay, which is beyond 78 days, the company
has to pay 6% interest per annum.
After allotment of shares, the company can call for the full amount or instalments
which are due on shares from the shareholders according to rules mentioned in the
prospectus. Usually, the articles of the company include provisions regarding calls.
If there are no such provisions then the following provisions are applicable:

1. No call should be for more than 25% of the nominal value of each share.
2. The interval between two calls should not be less than a month.
3. At least 14 days should be provided to each member for the call
mentioning the amount, date, and place of payment.
4. Calls should be made on a uniform basis on the entire body of
shareholders falling under the same class.
Procedure of allotment of share
The general procedure that is accepted in the law of contract also applies to the
allotment of shares. These are:

• The resolution of the board of directors must be done prior to allotment.

The directors cannot be delegated this duty and it becomes very important
that a valid resolution is passed by the board for allotment in a valid
meeting. (Portuguese consolidated copper mines 1889)
• According to Section 6 of the Indian contract Act, 1872, it is important
that the allotment of shares is done within a reasonable period of time but
this reasonable time varies from case to case. The refusal to accept the
shares by the applicant is the choice of himself if the allotment is made
after a very long time to him. The same thing happened in the case
of Ramsgate Victoria Hotel Company v. Montefiore 1866, wherein the
allotment of the share was made at an interval of six months between
application and allotment and it was held unreasonable.
• Moreover, the allotment must be unconditional and absolute and must be
allotted on the same terms upon which they were agreed upon during the
acceptance of the application.
• Acceptance is the key to allotment and without acceptance of valid
allotment cannot be made just on an oral request.
Statutory restrictions on the allotment of shares
 • Minimum subscription and application money (S-39) – The first essential
requirement for a valid allotment is that of minimum subscription. The
amount of minimum subscription has to be declared in the prospectus at
the time when shares are offered to the public. Shares cannot be allotted
unless at least so many amounts have been subscribed and the application
money, which must not be less than 5% SEBI may decide the various
percentage of the nominal value of the share, has been received in by
cheque or other instruments. It has been established by various cases that
it is a criterion to valid allotment that the entire application money should
be paid to and received by the company by cheque or other instruments. If
the shares allotments are made without application money being paid it is
invalid. If the minimum subscription has not been received within thirty
days of the issue of the prospectus, or any such period as specified by
SEBI the amount has to be returned within such time and manner as
prescribed. [S-39(4)] Application money can be appropriated towards
allotment or it has to be returned or refunded.

1. Return of allotment [S.39 (4)] – A return of allotment has to be filed with

the registrar in the prescribed manner whenever a company makes an
allotment of shares having a share capital.
2. Penalty for default [S. 39 (5)] – In case of default, the company and its
officer who is in default are liable to a penalty for each default of Rs 1000
for each day during which the default continues or Rs 1,00,000 whichever
is less.

• Shares to be dealt in on stock exchange [S.40] – Every company aiming

to offer shares or debentures to the public by the issue of the prospectus
has to make an application before the issue to any one or more of the
accepted stock exchanges for permission for the shares or debentures to
be dealt with at the exchange. The need is not merely to apply but also to
obtain permission. In the prospectus, the name or names of the stock
exchanges to which the application is made must be stated.
This requirement is precedent for listing that the application money is deposited in
a separate bank account which will be used only for adjustment against allotment
of shares if the shares have the permission to be dealt with in the specified manner
in the prospectus. Hence the money will be used for the repayment to applicants
within the time specified by SEBI if the company has not been able to allot shares
for any other reasons. [S. 40 (3)]. The object of the section is that it will help
shareholders to find a ready market so that they can convert their investment into
cash whenever they like. In the Supreme Court case Union of India v. Allied
International Products Ltd, this objective of the section was explained.

• Over-subscribed prospectus- Where the permission of stock exchange

being granted and the allotment being valid the prospectus gets
oversubscribed, the oversubscribed portion of the money received has to
be returned to the applicants within the same specified period.
Reference case and other important case laws

• The term allotment has not been defined in the Companies Act. The
meaning can be interpreted from various cases that were decided in India
and in England, one such case in the Indian context is:
Shri Gopal Jalan and company v. Calcutta Stock Exchange Association Limited, in
this case, it was held that appropriation of shares to a particular person by any
company is allotment of shares. allotment of shares also includes acceptance which
leads to a contract between the company and the shareholder whereas the
application for shares is an offer.

• There was a case where it was held that the allotment of shares is a
creation and not a transfer of shares. This was held in the case of Khoday
distilleries v. CIT. In this case, the contention that allotment of right and
bonus shares by the company in an inappropriate manner was done
because it was a gift was held outright rejected. The creation of shares by
an appropriation to a particular person out of appropriate share capital is
known as the allotment. It was also held that according to Section 4(1)(a)
of the gift tax Act an allotment is not a transfer and it does not attract this
section. The company which issued the bonus shares was nothing but the
capitalization of the profits of the company.

Procedure for compromises, arrangements and

amalgamation under the Companies Act
Introduction
With the increasing magnitude of the company’s business and the commercial
activities, there had also been an increase in the diversities of the people who deal
with them. Occasions of clashes and conflicts frequently arise which needs to be
resolved amicably. And to resolve such conflicts the companies generally have to
resort to arbitration or compromises to settle such clashes.

Further, value creation, diversification, and for increasing the financial capacity of
the companies or for survival, one company may have to join hands with another
company either by way of amalgamation or by the takeover. So the companies act
provides for the provisions relating to various methods for the reorganization of a
company. Thus is becoming vital to discern the provisions of the Companies Act in
relation to Mergers and Acquisition, and the procedure thereof.

Mergers and Acquisition

Before 2013, Section 391 to 394 of The Companies Act, 1956 dealt with the
Mergers and acquisitions of a company. But after 2013, due to some backdrops in
the old legislation, these provisions were amended by virtue of sections 230-240
of The Companies Act 2013. So now these sections govern any type of
arrangement or mergers and acquisitions. All of these sections were notified on
15th December 2016 except Section 234 which was notified on 13th April 2017.
These provisions were amended to bring more transparency to the laws relating to
M&A. The amendment empowered the Tribunal (NCLT) to sanction the entire
process. The provisions under the Companies Act, 2013 deal with the substantive
part only, while the procedural aspects relating to M&A are given under
the Companies (Compromise, Arrangements, and Amalgamation) Rules, 2016.

Arbitration

Prior to 1960, Section 389 of the Companies Act empowered them to enter into
arbitration as per the provisions of the Arbitration Act, 1940. But the Arbitration
act did not provide for foreign arbitrations as a result of which the Indian
Companies could not enter into an arbitration agreement with foreign companies.
In order to remove this lacuna, the Companies Amendment Act, 1960 dropped
section 389 from the companies act as a result of which the Indian companies were
free to enter into arbitration agreements with foreign companies, provided that
such agreements are allowed by the Memorandum.

Compromise and arrangement distinguished

The word compromise has nowhere been defined in the Companies Act. It
basically connotes the settlement of a conflict by mutual consent and agreement or
through a scheme of compromise. Thus, for a compromise, there has to be some
dispute or conflict. On the other hand, the word arrangement has been defined
under section 230(1) of the companies act. The arrangement has a wider
connotation than compromise. The arrangement means re-organizing the right and
liabilities of the shareholders of the company without the existence of some
dispute. A company may enter into a compromise or arrangement to take itself out
from the winding-up proceedings.

Situations under which a company may call for a scheme of compromise:

1. If in the normal course of business, it becomes impossible to pay all the

creditors in full.
2. Subsidiaries/Units cannot work without incurring losses.
3. Where liquidation of the company may prove harsh for the creditors or
members.
Situation under which a company may enter into arrangements:

1. For the issue of new shares.

2. For any variation in property.
3. Conversion of one class of share to another.
4. For reorganizing the share capital of the company.
Reconstruction
Reconstruction is a situation where a new company is formed and the assets of the
old one are transferred to the newly formed company. Reconstruction is the key
technique used for changing the capital structure of a firm. There are a number of
reasons due to which a company may go for reconstruction. A few of them are:

1. By reconstruction, the company can simplify the capital structure.

2. It can eliminate all the past losses.
3. Helps in raising working capital, adjusting cumulated dividends.
4. May result in a reduction of fix charges.
A reconstruction of a company may be done internally or externally. In external
reconstruction, the old company is dissolved and a new one is incorporated and the
assets of the older one are transferred to the new one. Whereas in internal
restructuring, the old company continues, only its capital structure is changed.

Procedure for compromise and arrangement under the company law

After the enactment of the Companies Act, 2013, the procedure for mergers,
acquisitions, amalgamations and restructuring has been simplified by the new
provisions. The Act of 2013 has removed all the backdrops of the older legislation
and is aimed to bring more transparency. It allowed cross border mergers as well,
increasing the horizons for the industries and making it easier for them to expand.
In order to speed up the process and to bring more transparency the assistance of
tribunal was invoked under the 2013 Act. So below is the stepwise procedure for
the scheme of compromise and arrangement:

1. Preliminary Stage (Preparation of Scheme): This is the first stage, in

which a detailed scheme is prepared by the members of the creditors. This
scheme must contain all the matters that are of substantial interest, it must
also explain or show how the scheme is going to affect the members,
creditors and all the other companies. The scheme must also disclose the
material interest of the director.
2. Application to Tribunal: Any member or a creditor of the company (in
case the company is winding up, its liquidator) can make an application to
the Tribunal i.e. to NCLT proposing the scheme of merger or acquisition
between two or more companies. The tribunal can also make the
application on a suo moto basis.
3. Tribunal looks into the application: Once an application proposing the
scheme is made, the tribunal will take a look as to whether the application
is within the ambit of Section 230-240. It is pertinent to note here that in
this stage the tribunal is not concerned with the merits of the application,
it will only look as to whether the application is within the ambit of the
act or not. It will also see that the application is accompanied by an
explanatory statement.
4. Conveyance of Meeting: Once the tribunal sees the application, it issues
a notice for the conveyance of the meeting of the creditors and the
members of the company within 21 days. It must be noted that, if the
scheme is not going to have any adverse effect on any party, then the
tribunal can also avoid the call for the meeting. If the meeting is conveyed
 then the scheme must be approved by a majority of three fourth members
present and voting.
5. Presentation of the outcome of the Meeting before the Tribunal: Once
the scheme is approved by the members or creditors or the liquidator (in
case of a winding company) in the meeting, the report of the meeting
must be presented before the tribunal within seven days of the meeting.
The report must show the confirmation of the scheme of compromise or
arrangement.
6. Commencement of Hearings: After the submission of the report the
tribunal shall fix a date for hearing. Such data must be notified in the
newspaper through advertisement. Such advertisement must be notified
before 10 days of the hearing.
7. Sanction of Cases: The tribunal shall after hearing all the objections and
concerns of all the parties, if it is deemed fair and reasonable to the
tribunal then the tribunal may sanction the compromise or arrangement.
8. Registration of the Scheme with Registrar: Once the scheme is
sanctioned by the Tribunal, a certified copy of the order shall be filed
with the ROC (Registrar of Company) within 14 days from such sanction
order.

Powers and duties of the tribunal

Before understanding the powers and duties of the tribunal (National Company
Law Tribunal), it must be understood as to why be the sanction of tribunal
important. There are several reasons which necessitate the sanction of the Tribunal;
a few of them are listed below:

1. Once the scheme is approved by the Tribunal, the company is bound to

abide by it, any avoidance or deviance from the same may bring legal
consequences.
2. If the tribunal won’t have interfered, the majority might have suppressed
the minority’s right; so Tribunal ensures adequate representation of the
minority.
3. Tribunal also has supervisory power, so at any time if NCLT is of the
view that the scheme is not in the interest of the member, it may order to
modify the scheme or may order winding-up.
The tribunal is empowered with a wide range of powers by the virtue of Section
231. The tribunal has the sole authority either to approve or to reject the scheme of
compromise or arrangement. If the tribunal approves the compromise or
arrangement, in such a case it further has the following powers:

1. To supervise/monitor the carrying out of the proposed scheme.

2. To modify/amend the scheme to achieve the best result.
3. To order winding up of Company, if it is deemed to the tribunal that the
scheme is not workable in the interest of the Company or its member.
Apart from the above powers, the tribunal is also bound by certain duties: So,
whenever the tribunal sanctions a scheme, it must make sure that the following
factors had been complied with.

1. That the scheme is within the provisions of the Companies Act.

2. The tribunal must make sure that the class of people, who were to be
adversely affected by the scheme, are fairly being represented in the
meeting.
3. The proposed scheme must be reasonable; it should not have any adverse
effect on society.

RECONSTRUCTION
The term reconstruction has not been defined anywhere in the act of 2013. However,
the institution of judiciary has interpreted the term through various ruling hence
in Hooper v. western countries co. in this case reconstruction was defined as
incorporation of a new company which intends to take over the assets of the old
company with the intention that new company shall carry out the same business run
and managed by same person in the similar manner.
Reconstruction connotes reconstituting the financial structure of the company with
or without resorting to the dissolution of the business. Reconstruction is done to
achieve following objective: –

▪ Simplification of capital structure.

▪ Decreasing the fixed charge
▪ Adjusting the arrears in forms of dividend
▪ Increasing the working capital of the company
▪ Elimination of past losses.
Usually reconstruction becomes a necessary recourse in the situation when financial
position of a company degrades. Reconstruction can be both internal as well as
external.
Internal reconstruction implies alteration of share capital without effecting the
transfer of the business whereas external reconstruction occurs when existing
company is dissolved and new company is formed which take-over the business of
existing company.
AMALGAMATION
Though the term has not been defined anywhere in the act but in the context of s232
it means merger of one company with another in order to facilitate the reconstruction
of the company which is amalgamating.
In the case of somayujula v. Hope Prudhome & co. ltd. observed amalgamation
takes place when two or more companies are joined to form a third entity or one is
absorbed in another. In Re. South African Supply Co. the court interpreted
amalgamation to connote “blending of two or more undertakings into one
undertaking, shareholders of each blending company becoming substantially the
shareholders in the company which holds the blended undertaking”.
In Marshall sons & co. v. Income Tax Officer, the supreme court in this case held
that every amalgamation scheme has to provide a date from which it takes effect.
Although tribunal under scheme can provide direction as well as dates from which
it takes effect but when tribunal only provides sanction to scheme & not the date
from which amalgamation takes effect in such case date of effect will become date
specified in scheme and not from the date the scheme was approved by the tribunal.
OBJECTIVE OF AMALGAMATION & RECONSTRUCTION
Provisions for facilitating amalgamation & reconstruction has been given under s232
of the Act of 2013. Usually a company take recourse to such tools during following
scenarios: –

▪ To restructure the capital as per the Act

▪ To diversify the activities which business can undertake
▪ Reorganisation of the share capital

TRANSFER OF UNDERTAKING (SECTION 232)

As per s 232 of the act the tribunal has the power to sanction the scheme of
amalgamation and along with it tribunal can pass any subsequent order for following
matters: –

▪ The transfer to the transferee company of the whole or any part thereof such as
that of property liabilities or undertakings of transferor company.
▪ Allotment of share by transferee company under the terms of contract.
▪ Dissolution without the winding up of the amalgamating company
▪ Provision for the people who dissent from the scheme of amalgamation
▪ Continuation by or against the transferee company of any legal proceedings
pending by or against the amalgamating company.
▪ Or any other matter which it deems necessary for effectuating the scheme of
amalgamation.

S230 makes it obligatory for the tribunal to send in a representation to central govt.
foe every application which is being made under s230 & s232 of the companies act
2013 before sanctioning any scheme of amalgamation.
In cotton agents v. vijay laxmi Trading co.[5] it was held that centre govt. will not
interfere with the valuation in amalgamation unless the govt. suspects fraud or undue
influence which undermines the actual valuation of companies.
NOTICE TO DISSENTING SHAREHOLDERS
Once the transferee company obtains nine- tenth majority of shareholders approval
for amalgamation it gives the company the right to acquire the shares of the
dissenting shareholders. Within two months rhe transferee company should send out
the notice to the dissenting shareholders that company intends to acquire their shares.
The transferee company is entitled to acquire the shares or bound to follow the same
terms of acquisition of share which approving majority of shareholders have agreed
upon.
It should be duly noted that s235 confers wide variety of power upon the tribunal to
disallow the attempt to acquire the shares. The exercise of this power is based on
two paramount principles-

▪ The scheme should be fair & conscionable

▪ The onus to prove unfairness lies upon the dissenting shareholders.

ADEQUATE INFORMATION TO SHAREHOLDERS

With an intention to prevent fraud and malpractices in relation to takeover offers and
acquisition of share of dissenting shareholders under the scheme approved by
majority, s235(3) of act 2013 requires that complete amount of information has to
be disclosed in terms of offers being made to the majority and it is up to dissenting
shareholders to decide whether they want to take it or not because inadequacy of
information can become another ground for the tribunal to withheld the sanction of
scheme of amalgamation and reconstruction.
CONCLUSION
Amalgamation and reconstruction are two facets of same coin. The process itself is
very necessary for any business to flourish and help recuperate at the time of distress
or falling out. They are guided by the principle laid down in s.232 of the act of 2013.
Though it can be argued that there is no adequate relief given to the dissenting
shareholders by the act but to prevent that from happening tribunal has taken up a
proactive role before sanctioning any scheme for amalgamation and reconstruction
it invites objections from the public and sends out any application made under s230
& s232 to central govt before approving any schemes. Hence it can be said tribunals
have tried to strike the balance between the growth of the business activities and
protection of minority shareholders.
Analysing the provisions of winding up and dissolution through the lenses of the
Companies Act, 2013
What is winding up?
Winding up is a process in which the company is dissolved by clearing all the
debts or liabilities, dissolution of its assets is collected, and other important items
are returned to the creditors and if any contributions are made by the members,
they are also returned. Therefore, winding up we can say is a process of putting an
end to the life of a company. If the company has any surplus left then, it is
distributed among the members in accordance with their rights. It is also called
liquidation. “According to Section 2(94A) of the Companies Act,
2013 or Insolvency and Bankruptcy Code, 2016, “Winding up” means winding up
under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016, as
applicable.” Chapter XX Sections 270–378 of the Companies Act, 2013 deals with
winding up and other aspects of it.

Differentiating between the process of winding up and dissolution

The terms winding up and dissolution differ in many ways. The whole strategy for
achieving a legal finish to the existence of an organisation is partitioned into two
phases-

• Winding up, and

• Dissolution.
Winding up is the first stage in the process where the assets are realised, liabilities
are paid off and the surplus is distributed among the members. Dissolution is the
final stage whereby the existence of the company is withdrawn by the law. The
liquidator appointed by the company or court carries out the winding-up
proceedings but the order for dissolution is passed by the court only. Winding up in
all cases doesn’t finish in dissolution, even after paying all the creditors there may,
in any case, be a surplus, the company may acquire benefits or profits during the
course of winding up, there may be a scheme of compromise with the creditors and
at last, the company can go back to the shareholders or old management of the
company. A dissolution is an act of putting the end to the life of a company
lawfully.

Dissolution of an organisation in two ways:

• First in which the organisation is moved to another organisation under the

plan of recreation or combination. In such a case, the exchange of
organisation will be broken down by a request for Tribunal without it
being twisted up.
• In the second situation, the organisation will go through a wrapping-up
measure where the resources of the organisation will be acknowledged
and they will continue utilising it to pay its liabilities. When the
obligations have been settled, the leftover sum, assuming any, will be
circulated among the partners and the Tribunal will pass the request for
the disintegration of the organisation and strike its name off the register of
Registrar of the Companies.
The dissolution of an organisation is decided by the Tribunal and the technique for
ending up of an organisation in India which is absolutely a legal capacity. There is
an outlet that carts away and controls the wrapping-up measure. Subsequent to
ending up, the disintegration cycle happens. The disintegration of an organisation
is recorded by the enlistment centre of organisations. This is a simple regulatory
capacity and doesn’t include any job for the vendor. Disintegration is a
fundamental advance after the ending up of an organisation. Since April 2016, the
arrangements identifying with the mandatory ending up under the Companies Act
2013 have been supplanted with Insolvency and Bankruptcy Code, 2016. From that
point forward there have been different alterations in the law with the late one
being IIBBI (Insolvency Professionals) (Amendment) Regulations, 2018.

Analysing the modes of winding up

A company comes into existence when it gets registered by the Registrar of
companies (ROC) and obtains the certificate of incorporation by the ROC. It will
come into existence even if an appointment is made in the form of a receiver or
manager by the court or debenture holder, or the approval of a scheme of
arrangement by the court. The existence of a company is lost when the company
completes two stages; the first being winding up and the second being Dissolution.
There are only 2 major types or modes of winding up which are:

1. Compulsory winding up
2. Voluntary winding up

Compulsory winding up

Compulsory winding up takes place when a company becomes insolvent or

bankrupt. When the company is ordered to be wound up by the Court or Tribunal,
it is referred to as compulsory winding up of a company. If the company goes into
liquidation, the court of law appoints a liquidator to complete the process of
liquidation. Section 270 of the Companies Act, 2013 deals with winding up by the
Tribunal.

• A wilful wrapping-up happens without the mediation of the court or

council. This mode for the most part happens:

1. When the organisation terminates its prefixed length or, because of the
event of specific occasions whereby the organisation must be
disintegrated, and if the organisation embraces and passes a normal goal
for twisting up.
2. If the company passes a special resolution to wind up the company.

Voluntary winding up

Voluntary winding up is divided into two parts:

 1. Members’ voluntary winding up
2. Creditors’ voluntary winding up

Members’ voluntary winding up

This type of winding up occurs when the company is solvent. The company needs
to declare its solvency at the Board of Directors meeting. This declaration must
satisfy the directors’ opinion that the company has no loans or debts or it will pay
the whole debts within three years of winding up.

A general meeting is conducted wherein a liquidation is appointed and

remuneration is fixed thereby. With his appointment, all the powers of the board,
Managing Director, or Manager ceases to exist, until and unless a General Meeting
sanctions it otherwise. The liquidator must annually call a general meeting to lay
the procedure for winding up and to lay the accounts of his dealings.

Creditors’ voluntary winding up

This type of winding up occurs when there is a declaration of solvency by the

company i.e. when the company is insolvent. Hence, it empowers the creditors of
the company to dominate over the members so that they don’t protest against them.
It requires the company to hold a meeting with the creditors and the board and
make a full statement of the company’s affairs with a detailed list of creditors
including their estimated claims.

Both the creditors and members at their respective meetings appoint a liquidator, if
at all there is a disagreement, then the creditors will appoint the liquidator at their
discretion. The liquidator holds a meeting not only with the members but also with
the creditors to lay the procedure for winding up and to lay the accounts of his
dealings. The liquidator at last calls for a general meeting where he winds up the
company.

Alternative note for winding up

[1. Compulsory Winding up
Winding up a company by an order of the Tribunal is known as compulsory
winding up.
Ground of Compulsory Winding up
As per section 271, Tribunal may order for the winding up of a company on a
petition submitted to it under section 272 on any of the following grounds:
1. Passing of special resolution for the winding up.
When a company has by passing a special resolution resolved to be wound up by
the Tribunal, winding up order may be made by the Tribunal. The resolution may
be passed for any cause whatever. Tribunal may not order for the winding up if it
finds it to be opposed to public interest or the interest of the company as a whole.
2. Inability to pay debts.
As per section 271(2), a company shall be deemed to be unable to pay its debts
under the following circumstances: a) Notice for payment. If a creditor to whom
the company owes a sum exceeding one lakh rupees has served on the company a
demand for payment and the company has for three weeks thereafter neglected to
pay the sum or otherwise satisfy the creditor, it shall be deemed that the company
has become unable to pay its debt. It is essential that the debt is payable presently.
Negligence in paying a debt on demand is omitting to pay without reasonable
cause. Mere omission by itself will not amount to negligence. Further, where a
debt is bonafide disputed, there is no negligence to pay. Failure to pay public
deposits on their due dates amount to inability to pay debts. A dividend 3 when
declared becomes a debt due by the company and the shareholder can also apply
for company’s liquidation if the company is unable to pay his dividend. b)
Decree. If a decree or order issued by a Tribunal/court in favour of a creditor of the
company on execution remains unsatisfied on its execution. c) Commercial
Insolvency. It is proved to the satisfaction of the Tribunal that the company cannot
pay its debts. This implies commercial insolvency (when company’s assets are
insufficient to meet its existing liabilities) of the company as is disclosed by its
balance sheet. The mere fact that the company is incurring losses does not mean
that it is unable to pay its debts, for its assets may be more than its liabilities.
Liabilities for this purpose will include all contingent and prospective liabilities
and even if the debt relied upon in the petition is disputed bona fide, the company
may be wound up if the applicant can prove the insolvency of the company.
However, non-payment of a bona fide disputed claim is no proof of insolvency.
3. Just and equitable.
The Tribunal may order for the winding up of a company if it thinks that there are
just and equitable grounds for doing so. The Tribunal has very large discretionary
power in this case. This power has been given to the Tribunal to safeguard the
interests of the minority and the weaker group of members. Tribunal, before
passing such an order, will take into account the interest of the shareholders,
creditors, employees and also the general public. Tribunal may also refuse to grant
an order for the compulsory winding up of the company if it is of the opinion that
some other remedy is available to the petitioner to redress his grievances and that
the demand for the winding up of the company is unreasonable. A few of the
examples of ‘just and equitable’ grounds on the basis of which the Tribunal may
order for the winding up of the company are given:
(i) Oppression of minority.
In cases where those who control the company abuse their power to such
an extent that it seriously prejudices the interests of minority
shareholders, the Tribunal may order for the winding up of the company.
(ii) Deadlock in management.
Where there is a complete deadlock in the management of the company,
the company may be ordered to be wound up.
(iii) Loss of substratum.
Where the objects for which a company was constituted have either
failed or become substantially impossible to be carried out, i.e.,
‘substratum of the company’ is lost.
(iv) Losses.
When the business of a company cannot be carried on except at a loss,
the company may be wound up by an order of the Tribunal on just and
equitable grounds. But mere apprehension on the part of some
shareholders that the company will not be able to earn profits cannot be
just and equitable ground for the winding up order.
(v) Fraudulent object.
If the business or the objects of the company are fraudulent or illegal, or
have become illegal with the changes in the law, the Tribunal may order
the company to be wound up on just and equitable grounds. However, the
mere fact of having been a fraud in the promotion or fraudulent
misrepresentation in the prospectus will not be sufficient ground for a
winding up order, for the majority of shareholders may waive the fraud.

4. If the company has made a default in filing with the Registrar its
financial statements or annual returns for immediately preceding five
consecutive financial years.
5. If the company has acted against the interests of the sovereignty and
integrity of India, the security of the State, friendly relations with
foreign States, public order, decency or morality.
6. If on an application made by the Registrar or any other person
authorized by the Central Government by notification under this Act,
 the Tribunal is of the opinion that the affairs of the company have
been conducted in a fraudulent manner or the company was formed
for fraudulent and unlawful purpose or the persons concerned in the
formation or management of its affairs have been guilty of fraud,
misfeasance or misconduct in connection therewith and that it is
proper that the company be wound up.
Who may file petition
An application for the winding up of a company has to be made by way of petition
to the Court. A petition may be presented under Section 272 by any of the
following persons:
(a) the company; or
(b) any creditor or creditors;
(c) any contributory or contributories;
(d) all or any of the parties specified above in clauses (a), (b), (c) together
(e) the Registrar;
(f) any person authorized by the Central Government in that behalf;
(g) by the Central Government or State Government in case of company acting
against the interest of the sovereignty and integrity of India.
Section 272 provides that the petition for compulsory winding up of a company
may be filed in the tribunal by any of the following persons:
1. Company.
A company can make a petition to the Tribunal for its winding up by an
order of the Tribunal, when the members of the company have resolved by
passing a special resolution to wind up the affairs of the company. Managing
director or the directors cannot file such a petition on their own account
unless they do it on behalf of the company and with the proper authority of
the members in the general meeting. (Section 272(5)) 5
2. Creditors.
A creditor may make a petition to the Tribunal for the winding up of the
company, when he is able to prove that the company is unable to pay off his
debts exceeding Rs. 1, 00,000 within three weeks of the notice of demand or
where a decree or any other process issued by the Tribunal in favour of a
creditor of a company is returned unsatisfied in whole or in part. Law does
not recognize any difference between the secured and unsecured creditors
 for this purpose. ‘A secured creditor is as much entitled as of right to file a
petition as an unsecured creditor.’ But in case of secured creditor’s petition,
winding up order shall not be made where the security is adequate and no
other creditor supports the petition. A contingent or prospective creditor
can also file a winding up petition if he obtains the prior consent of the
Tribunal. The Tribunal shall grant the permission only when: (i) It is
satisfied that there is a prima facie case for the winding up of the company;
and (ii) The creditor provides such security for costs as the Tribunal thinks
reasonable. The Tribunal may, before passing a winding up order, on a
creditor’s petition, ascertain the wishes of other creditors. If the majority of
the creditors in value oppose, and the Tribunal having regard to the
company’s assets and liabilities considers the opposition reasonable, it may
refuse to pass a winding up order.
3. Contributories.
A contributory shall be entitled to present a petition for the winding up of a
company, notwithstanding that he may be the holder of fully paid-up shares,
or that the company may have no assets at all or may have no surplus assets
left for distribution among the shareholders after the satisfaction of its
liabilities, and shares in respect of which he is a contributory or some of
them were either originally allotted to him or have been held by him, and
registered in his name, for at least six months during the eighteen months
immediately before the commencement of the winding up or have devolved
on him through the death of a former holder. (Section 272(3))
4. Registrar.
Registrar may with the previous sanction of the Central Government make
petition to the Tribunal for the winding up the company only in the
following cases: a) when it appears that the company has become unable to
pay debts from the accounts of the company or from the report of the
inspectors appointed by the Central Government under section 210; or b) If
the company has made a default in filing with the Registrar its financial
statements or annual returns for immediately preceding five consecutive
financial years. c) if the company has acted against the interests of the
sovereignty and integrity of India, the security of the State, friendly relations
with foreign States, public order, decency or morality. d) if on an
application made by the Registrar or any other person authorized by the
Central Government by notification under this Act, the Tribunal is of the
opinion that the affairs of the company have been conducted in a fraudulent
manner or the company was formed for fraudulent and unlawful purpose or
the persons concerned in the formation or management of its affairs have
 been guilty of fraud, misfeasance or misconduct in connection therewith and
that it is proper that the company be wound up. ]

LAW & MULTINATIONAL COMPANIES

A foreign company is a company which is incorporated outside India but having its
place of business (including a share transfer or an office registered with a
regulatory authority) in India. Under the Companies Act 2013, a foreign company
means any company or body corporate incorporated outside India which has a
place of business in India, either of its own or if it conducts business through an
agent, physically / electronically or any other manner. However, all foreign
companies are not required to comply with the Companies Act, it is only
applicable to foreign companies where 50% or more of the paid-up share capital
(calculated by including preference shares) is held by Indian entities.

Foreign companies must comply with the provisions of the Companies Act, 2013
in respect to the business as if it were a company incorporated in India.

Filing and Compliance Requirements

There are 4 major filing and compliance-related requirements that foreign

company needs to comply with:

1)Delivery of documents to Registrar:

Every foreign company has to deliver the following documents to the registrar for
registration within 30 days from the establishment of place of business in India-

i)Instruments constituting and defining the constitution of the company. For

example, a UK incorporated company will have to file its memorandum and
articles (as they exist under UK law) with the RO.

ii) Full address of the principal office of the company;

iii) A list of the directors and secretary of the company.

iv The name and address of the person resident in India who has been authorized
to accept documents on behalf of the company

This is important because a notice or other document shall be deemed to be

sufficiently served on the foreign company if it is addressed to a person whose
name and address has been delivered to the Registrar.

2) Books of account and records of foreign company

Every foreign company must prepare a balance sheet and profit and loss account
and attach necessary documents and file them with the ROC (with suitable
translations in case they are not in English). This must be accompanied by a copy
of the list of all offices or places of business in India.

It must also keep at its principal place of business in India (e.g. Indian head office)
the books of account which reflect receipts and expenditure, details of sales and
purchases and assets and liabilities in connection with Indian operations.

3) Display of name

Name of the company and the country in which it is incorporated shall be exhibit
on the outside of every office and place where it carries on business. It shall also be
stated in all its official publication. Example: business letters, bill heads, notices
etc. It shall be in letters easily legible in English characters, and also in the
characters of the language or one of the languages in general use in the locality in
which the office or place is situated.

Consequences of non-compliance

Non-compliance has the following consequences:

a) The company will be punishable with fine ranging between INR 1 lakh to 3
lakhs. If the violation continues an additional fine of up to INR 50,000 per day can
be levied.

b) Specific officers who are in default shall be punishable with imprisonment of

up to 6 months or fine ranging between INR 25,000 to INR 5,00,000.
c) The company will not be able to institute legal proceedings in connection with
any contracts entered by it. However, the validity of the contracts will not be
affected and the other party can sue on it.

Provisions for raising capital

Typically, foreign companies operating in India do not access Indian capital

markets. They can raise capital privately from Indian investors or banks and
financial institutions in India.

In case they want to access capital publicly, they need to issue a prospectus. There
are certain documents (Refer Rule 11 of Companies (Registration of Foreign
Companies) Rules, 2014)that shall be annexed to the prospects such as consent
required from any person as an expert, a copy of contracts for appointment of
managing director or manager, a copy of any other material contracts, not entered
in the ordinary course of business, but entered within preceding two years, a copy
of underwriting agreement etc.

Typically, securities issued are Indian Depository Receipts (IDRs) and not shares,
because the company is incorporated offshore. Foreign company can make an issue
of Indian Depository Receipts (IDRs) only when such company complies with the
conditions mentioned under Rule 13 of Companies (Registration of Foreign
Companies) Rules, 2014, in addition to the Securities and Exchange Board of India
(Issue of Capital and Disclosure Requirements) Regulations, 2009 and any
directions issued by the Reserve Bank of India. IDRs have not been popular with
only Standard Chartered Bank issuing them since the route has been made
available to foreign companies.

Winding up

A foreign company may be wound up as an unregistered company if it ceases to

carry on business in India, whether the body corporate has been dissolved or
otherwise ceased to exist as per the law under which it was incorporated. (Refer to
section 376 of Companies Act, 2013)

Overview of compliance requirements under foreign exchange laws

An offshore business which has a direct Indian operation in India (and is not
operating through an agent) will be treated as one of Liaison Office (LO), Branch
Office (BO) or Project Office (PO), for which Reserve Bank of India (RBI) under
provisions of the Foreign Exchange Management Act (FEMA) 1999.

Compliance requirements under FEMA are mentioned below:

1.After establishment, all new entities setting up LO/BO/PO shall submit a report
containing information, as per format provided in Annex 3 within five working
days of the LO/BO becoming functional to the Director General of Police (DGP)
of the state concerned in which LO/BO has established its office.

2. Branch Offices / Liaison Offices have to file Annual Activity Certificates (AAC)
(Annex 4) from Chartered Accountants, at the end of March 31, along with the
audited Balance Sheet on or before September 30 of that year.AAC certifies that
the company is undertaking only those activities which are permitted by the
Reserve bank.

At the time of winding up of Branch/Liaison/ Project Office the company has to

approach the designated AD Category – I bank with the documents prescribed.

Collaboration Agreement for Technology Transfer

Technology transfer” is the process by which existing knowledge, facilities or

capabilities are exploited for fulfilling public or private needs.

The technology transfer process can be simple or complex and involves:

1. a technical resource like business or government institute of R&D,

2. an interested user in the technology and,

3. some interface connecting these two. The interface (3) which facilitates the
process is the agreement, used in the sense of making it legally binding, a contract.

“Technology transfer” includes a range of formal and informal cooperation

between developers of technology and seekers or users of technology. In addition,
technology transfer involves intellectual property, the transfer of knowledge,
physical devices/equipment and of course technical knowhow.

Why technology transfer

There are several reasons. Fundamentally growth and civilization became possible
because we learnt to share, transfer and benefit from each other’s experience and
knowledge, were it not for which, each of us were to individually learn that fire
burns by touching it. Put differently we would have continued to remain as
Neanderthals. Some reason for and benefits of technology transfer (TT) are:

• We do not have to rediscover a wheel every time.

• Progress is possible by sharing, cooperating, and coordinating with others
with complementary capabilities out of goodwill or for a consideration.
• New frontiers of science and technology develop by using the
accumulated and available knowledge as stepping stones for greater
utility and application.
• Figuratively our vision and reach increase when we can climb on other’s
willing shoulders – with or without consideration.
• TT provides a basis and platform for intellectual property (IP) holders and
entrepreneurs/businesses to gainfully engage with each other.
• It enables and assists faster growth of the economy and civilization.
• To give a boost to and spread awareness of intellectual property for
philanthropic or commercial reasons as we are in the information age.
About TT agreements
Basically, TT relates to Intellectual Property (IP) or some proprietary details that
need confidentiality. Property is a bundle of rights and with rights come duties and
responsibilities. If rights are transferred without a proper and legally binding
agreement, firstly they are prone to misuse and abuse; secondly the liability for any
wrong doing on the part of the receiver lies with the owner. Since the property is
intellectual, it is different from other types of property and calls for different and
additional rights and obligations to be covered by the agreement.

For want of standards for technology transfer (do refer to discussion under
‘Introduction to Some Legal Aspects’ infra) one is advised to consider the
following steps in reaching an agreement:
 • Initiating the discussions
• LOI (Letter of Intent)
• Signing the NDA (Non-disclosure Agreement)
• Technical discussions
• Terms sheet/MOU (Memorandum of Understanding)
• Negotiations and finalization of:

▪ Technology being transferred (Deliverables)

1. Technical knowhow
2. Providing special tools and machinery
3. Technical assistance as required including training and handholding

▪ Licensing
▪ Royalties
▪ Equity participation if any (Joint ventures)
▪ Exchange and training of personnel
▪ Apportionment of transfer and training and hosting costs
▪ Knowledge transfer of improvements in product during the term of
agreement

• Involving the legal team at appropriate stages to draft the final TT

agreement incorporating the above and including: Term, competent
jurisdictions, applicable laws, dispute resolution, etc. as they deem fit.
• A technology transfer agreement can be between parties within India
(Domestic), or between India and another country (International).

• Businesses that enter a TT Agreement typically have a licensor-licensee

relationship but in India, they additionally enter a collaboration or joint
venture (equity participation) agreement too. For example, L&T Ltd. (India)
and Poclain S.A (France) had a collaboration agreement, while Maruti and
Suzuki (Japan) had a joint venture agreement. There was a time when
attracted by the huge Indian market potential on one hand and restricted by
laws like Conservation Of Foreign Exchange and Prevention Of Smuggling
 Activities (COFEPOSA) Act and FERA (Foreign Exchange Regulation Act)
many foreign companies had joint ventures with Indian businesses. Some
examples were DCM-Toyota, Alwyn-Nissan, Swaraj-Mazda, Hero-Honda,
etc.

• The growth of a country and its economy – particularly developing and

underdeveloped countries – is accelerated by agreements of TT.
Globalization helped the process in a big way. TT agreements result not only
in the mere transfer of technology but also flow of skills, management,
methods, procedures/processes, investments in cash and kind. Consequently,
it ushered in a significant change in the Indian legal regime.

The legal regime in India

The single overarching law in India governing agreements is The Indian Law of
Contract, 1872. This is complemented with laws specific to the nature of
agreement.

In the case of TT Agreements:

• Where IP is involved the related Acts are:

1. The Indian Patent Act, 1970

2. The Copyright Act, 1976
3. The Trademark Act, 1976

Liability of a Company: Tortious, Civil, Vicarious

and Criminal
Tortious Liability of Companies

‘Tort’ is an illegal act or violation of a right leading to legal liability for which
compensation is awarded by civil courts. Torts’ law is an uncodified law founded on
justice, honesty, and good faith.

In most cases, a company will both commit offenses and have offenses committed
against it. As a company is an artificial being, there is also both the need for
humanitarian aid and that of an entity in order for businesses to be held personally
liable. Liability occurs either from a person committing an act or from his or her
unlawful omission. But in such situations, as he allowed the wrongful act or
omission, managers can also be simultaneously responsible.

Only certain activities that are incidental to the fulfillment of the purposes for which
it was set up under the legislation can be performed by a company. All of its activities
must be guided towards its ultimate objective of establishing the company. In its
Memorandum of Association, the intent and objects of a company registered under
the Companies Act, 2013 are contained and the company cannot go beyond the limits
set for it. Anytime beyond that will be considered to be ultra-virus.

Liability in Tort

It is difficult to describe precisely the circumstances under which this can arise. The
courts have therefore attempted to strike a balance between legal concepts, such as

1] An incorporated corporation should be treated as separate from its owners,

directors, and officers and as distinct from its shareholders.

2] For their tortious acts, anyone must be held responsible.

As far as a tort is concerned, a company usually has a degree of responsibility that

must be met, depending on the extent and consequence of the tort, for the tort
committed by its directors and/or workers during the course of their employment.

In the case of Williams and another v Natural Life Health Foods Ltd it
considered whether a business director should be personally held responsible for a
reckless misrepresentation. The House of Lords held that a director would be held
liable in compliance with the rules of common tortuous principles only if the
presumed personal responsibility for the representation had been assumed and the
other party fairly depended on that presumption of liability.

The Williams decision reflects the protective approach adopted by common law to
restrict the situations in which the limited liability corporate shield can be
withdrawn. In order to ensure that the legislation operates in such a way as to
promote business, the House of Lords added more importance to the enterprise
objective and less importance to the personal responsibility objective. If a director
was an essential part of the driving mind or will of the organization, whether he
directly or implicitly confirmed the presumption of personal responsibility, it will
not be presumed to have accepted responsibility that is objectively decided.

In the case of Context Drouzhba v Wiseman that a director who has threatened to
make dishonest misrepresentations would not be able to increase the company’s
limited liability and separate legal personality as a shield when fraud is involved.
While it requires a lesser degree of misfeasance than others, as noted above, in the
sense of tortious liability.

Companies Act- Civil Liability

A civil liability was levied pursuant to Section 35 for the misstatements in the
prospectus. If any person has subscribed to the company’s securities for the issuance
of a prospectus containing mistakes and therefore has sustained any harm or loss, at
the time of the issuance of the prospectus, the director of the company, the promoter
of the company and any person referred to in the prospectus will be liable for
reimbursement to individuals who have suffered any loss due to the loss.

Liability of Director and Shareholders

If the director knowingly engages in the act or authorizes or instructs others to

conduct such an act, a director would be liable for tortious liability. However, it may
not happen that the exact degree of responsibility is apparent. It is usually held that
the company would be held responsible for inflicting damage/loss on the third party
with ordinary expertise and care due to the violation of its general duty.

Attaching personal responsibility for the actions of the company to directors and
shareholders will challenge the corporate veil bestowed on a corporation. However,
by arguing that the actions were performed on behalf of the company, directors and
shareholders will not be covered from tort liability.
Shareholders’ responsibility is much more limited than that of directors and officers.
This is the inevitable consequence of the partnership between shareholders and
managers in which shareholders have selected executives as their agents to
maximize or at least protect their investment.

When a business operates by natural persons, when deciding whether or not a

business violated a duty of care that it owed to someone else, it causes an issue. In
order to decide whether an individual act, such as an agent or employee, is regarded
as an act of the organization, the law has established attribution laws. For most civil
liability purposes, an individual’s activities can be traced to a corporation.

In explaining the director’s tortious liability, there are two main approaches: The
Agency Approach and the Identification Approach.

Identification Approach: The Identity Approach implies that, based on the concept
of limited liability and independent legal entities, when operating in the course of
the operation of the company, the director should be regarded as acting like the
company itself.

Based on this approach, as it is the company that has committed the tort, not the
director, some courts have therefore ruled that such identification would usually
exclude the director from personal responsibility and the company should be
responsible for tortious actions committed by the director instead of the director
himself.

In the most relevant case of Trevor Ivory Ltd v Anderson, decided by the Court of
Appeal of New Zealand, the identification approach was adopted. Hardie Boys J.
stated that “…in appropriate circumstances the directors are to be identified as the
company itself so that their acts are taken in truth the company’s acts. Indeed, it is
considered that the nature of corporate personality requires that identification should
be the basic premise…”

While the Hon’ble Judge acknowledged that, based on the “assumption of personal
liability test,” personal liability can still be placed on a director. However, it can
rightly be said that under this test, directors can most of the time avoid their
obligation in most circumstances.

Agency Approach: According to the Agency Approach, the director is merely an

employee of a corporation which is a different body and cannot be personally
responsible for his or her own misconduct. Since the director is seen as an employee
of the organization, the director would usually be responsible for all the tortious
actions performed by him or her in compliance with the rules of agency law.

In essence, the Agency Approach means that the court should strictly adopt the well-
developed tort law concept for persons to the companies and their directors in
determining the responsibility of the director in tort without any change made by the
rules of company law.

This approach is generally taken to be a creature of the theory of tort law. In essence,
the Corporation Solution involves the direct responsibility of the director in tort
without any change rendered by the rules of company law. Nowadays, the approach
of agencies appears to be more preferable than the approach of identification.

Vicarious Liability

The corporation is an artificial entity with no brain or body of its own, but it will be
held responsible during the course of its employment for the unlawful actions
committed by its agents or servants. This liability is founded on the vicarious liability
principle. n Therefore, the company is responsible for the wrongs of its workers and
agents just like a master is held liable for the wrongful and negligence of his servants.

In the case of Citizen’s Life Assurance Company v. Brown, Lord Lindley noted
that a corporation may be held accountable for fraudulent acts such as defamation.
In this situation, a letter containing some claims against a former employee of the
company was sent by the superintendent of the business to its policyholders. For
defamation, the ex-employee sued the firm. Because of the theory of agency, Lord
Lindley held the corporation liable and liable for slander, and because of the alleged
tort committed in the course of the company’s employment, it does not claim
immunity.

Criminal Liability

A corporate entity can be held vicariously responsible for the wrongs committed by
its employee, just as the principal’s responsibility applies to his agent’s unlawful
actions.

Even if a corporation is believed to have an imaginary will, just as legal fiction

assigns an imaginary life, the only actions that can emanate from the so-called will
are those that the Memorandum of Association requires it to do, i.e., which are intra-
vires of the company. Therefore, since a criminal act or unlawful act would
obviously be ultra vires its Memorandum of Association, a company should not
commit a crime. However, this common view has now been abandoned and a
company can be found criminally responsible for its members’ illegal actions.

In D.P.P. v. Kant & Sussex Contractors Ltd, in order to receive fuel coupons, the
manager of a transport firm submitted fake returns. The Division Court held that,
through its manager, the corporation had committed fraud and was thus responsible
for that crime.

Companies Act- Criminal Liability

Under Section 34, if a prospectus has been issued by a corporation and is circulated
and distributed among the general public or creditors and contains such omissions
or false statements, in such a case, any person who has approved the issuance of the
prospectus shall be liable for fraud in accordance with Section 447.

Section 447 specifies that any person found guilty of fraud within the management
of the company shall face imprisonment for up to 10 years and be liable for a fine
that may be three times the amount involved.

Relief under Section 242 Companies Act

As if reflecting the democratic sentiment of the nation, corporate democracy

swerves to the wills of the majority. Sections 241 and 242 of Companies Act, 2013
intends to act as a fulcrum to balance the interests of minority shareholders with
those of majority shareholders in the corporate democracy.
Section 241 allows any member of a company to file a petition before the National
Company Law Tribunal (NCLT) if the company’s affairs are being conducted in a
manner that is prejudicial, oppressive or such that it amounts to mismanagement.
Likewise, Section 242 confers wide powers upon the NCLT to deal with
applications made under Section 241 and to grant specific reliefs with a view to
bring an end to disputes.
As per Section 242(1)(a), in order to avail any remedy under Section 242, it is not
sufficient to prove that the alleged wrongdoing is an act of oppression,
mismanagement or unfair prejudice under the former provision; the applicant has
to additionally establish that the wrongdoing is of a nature that it is ‘just and
equitable’ to wind up the company and that the only reason the Tribunal should not
wind up is that it would unfairly prejudice the company’ or members or a part of
them. This burden of proof is on the petitioning minority shareholder and the
authors believe that the standard of proof is indeed a high one to meet.
Another limitation on the Tribunal’s exercise of powers, as observed in Shanti
Prasad v. Union of India, is that there must exist a nexus between the order that
may be passed by the Tribunal and the object sought to be achieved by the passing
an order for relief, whereby such objective is to bring to an end the matter
complained of.
Another restriction is that the relief that a Tribunal can grant should be within the
boundary of what is permitted by other laws, such as contract law.
This point was reaffirmed in TATA-Mistry. The Court, whilst overturning the
NCLAT ruling and allowing for the reinstatement of Cyrus Mistry as a director,
clarified that such an order of reinstatement would violate other law such as the
Specific Relief Act, 1963 (SRA). This is because the contract of employment as
director is a contract dependent on personal qualifications and such a contract of
personal services is not specifically enforceable under Section 14 of SRA.
Another restriction is that the Tribunal can grant relief under Section 242 only with
respect to the violation of corporate membership rights and not individual
membership rights.
Individual membership rights pertain to such rights which a member can assert in
their own capacity without the sanction of the majority or without impleading the
company as a co-plaintiff or defendant under Sections 241-242. Corporate
membership rights refer to such rights which the shareholder can assert only in
conformity with the decision of the majority of the shareholders, and is subject to
the will of the majority.
The Supreme Court in Usha Ananthasubramanian v. Union of India has held that
the powers of the Tribunal under §241-242 can only be exercised in relation to the
company whose affairs are the subject matter of the proceedings, and not in
relation to the affairs of another company. Hence, the powers under Sections 241-
242 cannot be utilised to rope in, say for attachment of their assets, a person who
may be the head of some other organisation.
In addition to the above, there are other restrictions as well. For instance, in light of
the nature of the Tribunal’s proceedings, reliefs requiring an elaborate evidentiary
analysis (such as cases of fraud, forgery, fabrication of records) are to be dealt with
by the civil courts, and not by the Tribunal using Sections 241-242.
Likewise, where remedies of preventive and punitive nature are provided in the
statute itself, an aggrievement in those respects would not ordinarily constitute a
ground for resorting to reliefs and remedies for prevention of oppression and
mismanagement.
Similarly, decisions falling in the domain of the board’s affairs and relating to
management or day-to-day affairs of the company lie outside the jurisdiction of the
Tribunal under Section 242. Applications seeking plural remedies, which are
inconsequential to one another, also cannot be entertained for grant of relief under
Sections 241-242.