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INDIAN COMPANIES ACT, 1956

CHAPTER 1 NATURE, FEATURES, INCORPORATION AND TYPES OF COMPANIES Q. 1 Ans. Define a Company. Explain various advantages and disadvantages of a Company. DEFINITION In common usage, the term company means a group of persons, who have associated themselves together, with a view of achieving some common objective. S. 3 (1) of the Companies Act defines a company as An association of individuals formed for some purpose and registered under the present Companies Act or an earlier Indian Companies Act. This definition seemed inadequate, as it was difficult to comprehend the real nature of the company. In order to know the nature of a company, one needs to refer to the definition of L. H. Haney, who defined company as; An incorporated association,, which is an artificial person created by law, having a separate entity, with a perpetual succession and a common seal.
CHARACTERISTICS OF A COMPANY OR ADVANTAGES OF INCORPORATION

As the characteristics are unique to the company and also formed to overcome the drawbacks of partnership, they are also called as advantages of incorporation. Following are the characteristics: (1) Incorporated association: A company must be incorporated (registered) under the Companies Act. In other words, it is the registration of the association that creates a company. The minimum number required is two in case of private company and seven in case of public company. The maximum being fifty in case of private company and unlimited in case of public company. (2) Artificial legal person: Company on registration is given more or less the same status of an individual. But as the company is an entity created by law, it is called an artificial legal person. (3) Independent corporate personality: A company on registration has a separate identity of its own, which is different and distinct from the members who constitute it. This principle of independent corporate personality was laid down in the famous case of Salomon v. Salomon and Co. Ltd. (1897) A.C. 22. Mr. Salomon was carrying on shoe manufacturing business on proprietorship basis. He sold his business to a company Salomon & Co. Ltd. for 30,000. Salomon received consideration in the form of shares for 20,000 of 1 each and for 10,000, he got debentures. The company had seven members, consisting of Mr. Salomon, Mrs. Salomon, four sons and a daughter. All the other members of the company had only 1 share each. After some time the company had to be wound up on account of financial difficulties. The assets realised were 6,000, while the liabilities were 10,000 to Salomon as a secured creditor and 7,000 to outsiders who were unsecured creditors. The creditors claimed priority over Salomon (secured creditor) on the ground, Salomon and Salomon & Co. were one and the same. It was however, observed that The company on incorporation, has a different personality different from the

subscribers. Therefore the identity of the subscribers is immaterial. Hence Mr. Salomon was paid first as he was a secured creditor. (4) Limited liability: The liability of the shareholders is limited to the face value of the shares held by them. In other words, once the full amount of the shares is paid, they cannot be called upon to bear the loss from their personal property. (5) Perpetual succession: A company enjoys perpetual existence. It would not cease to exist even if all its members die. It is created by law and can be put to an end only by the process of law. Prof. Grover in his book Modern Company Law stated even a hydrogen bomb cannot destroy a company. (6) Hold and dispose of property: A company can hold and dispose of property in its own name. Property of the company cannot be treated as members property and vice versa. (7) Transferability of shares: The shares are easily transferable, when compared to that of partnership. Though in between a . public and private company, its easier in the former when compared to the latter. (8) Common seal: A company is an artificial person, with no physical existence. It acts through the directors. The directors act on behalf of the company and enter into contracts by affixing companys common seal. The common seal of a company is its official signature. (9) May sue and be sued: A company having its own independent existence, can sue in its name, to enforce any of its statutory or contractual rights and be sued in its name by others, if it commits a breach of contract or fails to discharge its duties. Example: An employee not getting salary, may sue the company itself and not the directors. Similarly, if an employee has to be sued, the company and not the director who shall sue.

DISADVANTAGES OF INCORPORATION (1) Excessive formalities and expenses: Incorporating a company is both cumbersome and expensive. The formalities to be complied with for registration are many. Running the company also requires a lot of formalities to be followed, as well as funds. (2) Corporate veil: The company by its separate corporate personality is accountable for its action. In fact, there is an invisible veil between the company and the members. The Company acts through human agency, yet it alone is accountable. In other words, holding a company for something which it is incapable of doing. This is a major drawback of incorporation. (3) Company is not a citizen: Although a company is called an artificial legal person, enjoying many rights and being subject to many duties, yet it is not treated as a citizen. (State Trading Corporation v. CTO AIR 1963 S.C. 1811).

Characteristics of a Company

Incorporated Association

Legal Person

Corporate Personality

Limited Liability

Perpetual Succession

Hold and dispose Property

Transferability of Shares

Seal

Sue and be sued

Q. 2

Explain the doctrine of Corporate veil. Under what circumstances can the veil be lifted? LIFTING THE CORPORATE VEIL Although as explained earlier, company is having a separate entity of its own and is only responsible for its actions, a need was felt that the veil in rare cases need to be lifted, to meet the ends of Justice. This principle of ignoring the companys corporate Personality and examining the character of persons, in real control of the corporate affairs is called the principle of lifting the Corporate veil or exceptions to the principle of independent Corporate personality of the company. The following are the circumstances when the veil may be lifted. (1) When the company formed is against public interest company: In Daimler & Co. Ltd. v. Continental Tyre & Rubber Co. (1916) ZA (302). The House of Lords held, A company would assume an enemy character when persons, in defacto control of its affairs are residents in an enemy country or, wherever resident are acting under the control of enemies. (2) Where the company has been formed for some fraudulent Purpose or is a sham: If the company is formed to defeat the provisions of any law, defraud creditors and avoid legal obligations, the veil would be lifted. Example: The defendant, a former employee of the plaintiff had agreed not to solicit the plaintiffs customers. He attempted to evade this obligation by forming a company. Held, the company was a sham used by the employee to defend himself from breach of a contract. (Eilford Motor Company v. Home (1933) All E.R. 109 (C.A.)). (3) Where the company is formed for evasion of taxes: If the company is formed for evasion of taxes or to avoid some welfare measures, the veil shall be pierced. (4) To investigate the relationship between Holding Company and Subsidiary Company. (5) Under statutory provisions: The Act also imposes personal liability on the directors or members of a company in certain cases. Example: Where the membership of a private company exceeds fifty members or a public company falls below the minimum of seven members.

Ans.

Q. 3 Ans.

Write a note on formation of a company. FORMATION OF A COMPANY Formation of a company involves two stages namely (1) Promoters and pre-incorporation contracts. (2) Registration. (1) Promoters and Pre-incorporation Contracts: Promoters are the persons, who undertake to a form a y and takes steps to accomplish that purpose. As they take responsibility in forming the company,, they stand in a fiduciary ion to the company they float. The contracts which these promoters enter for floating the are called pre-incorporation contracts. Effects of pre-incorporation contracts: (1) Pre-incorporation contracts are not binding on the company, after incorporation because the company was not in existence at the time the contract was entered. (2) Pre-incorporation contracts are not binding on the third party as well. (3) The promoters become personally liable. Because of these hurdles, promoters were reluctant to enter Contracts, and floating of company was not possible. The difficulties posed by the companys inability to ratify a Linary contract, has to a very large extent been overcome by S. 15 (h) and S. 19 (e) of the Specific Relief Act, 1963. Under these sections, a company can sue and be sued, provided the contract specifically falls within the object clause. S. 15(h): Sometimes, the promoters of a public company have made a contract, before its incorporation for the purpose of the company. In such cases, the company may enforce the contract f it is warranted by the terms of incorporation. The words warranted by the terms of incorporation means within the scope of the companys objects as stated in the memorandum of association. S. 19(e): The other party may also enforce the contract against the company, if the company has adopted the contract after incorporation and it is within the terms of the incorporation. (2) Registration: The following is the procedure to be followed for registration of the association, as a company. (1) An application along with the requisite fee is made to the Registrar of Companies. (2) The application must be accompanied by Memorandum of Association and Articles of Association. (3) Written consent of each person named in the articles, as director and the undertaking to buy the qualification shares. (4) A statutory declaration stating that all the requirements of t1 Act for registration are complied with. It must be signed by an advocate of the Supreme Court, attorney or pleader entitled to appear before the High Court or a Chartered Accountant, who is engaged in the formation of the company or by a person named in the articles as director. (5) The Registrar, if satisfied will register the association and grant it a Certificate of Incorporation. Certificate of Incorporation is the birth certificate of the company.

(6)

A private company can start its business immediately, while a public company requires another certificate called the Certificate of Commencement of business before it can start its business.

CONSEQUENCES OF NON-REGISTRATION The following are the consequences of non-registration (i) (ii) (iii) (iv) (v) (vi) The association shall be an illegal association Every member of the association becomes personally liable The association cannot contract debts The association cannot be ranked as a creditor The association cannot be wound up Finally, no suit can be filed for the partition of the assets or dissolution

Q. 4 Ans.

Briefly explain the classification of companies under the Act. CLASSIFICATION OF COMPANIES The conventional classification of companies, mainly into chartered Companies, Statutory Companies and Registered companies may no longer hold very true. The reason being the corporate form can take many forms in order to efficiently meet the needs of time. Thus company law recognizes a multiple classification of companies. But one must remember, the classification cannot be exhaustive. (I) Chartered Companies: These companies come into existence by the by-the Royal Charter, issued by the Head of the State In India, they are treated as foreign companies Example East India Company, Bank of Australia Statutory Companies: These are formed under the special Statute of the Parliament or the State Legislature. These are genera1ly, public undertaking and formed with the main object of public utilities and not for profits Example: RBI, SBI, LIC etc. Registered Companies: Here the companies are registered under this act or previous acts. Companies can be further divided on the basis of: (i) On the basis of Number, (ii) On the basis of Liability, (iii) On the basis of Control, and (iv) Others. On the basis of Number: (a) One-man Company: Where majority share is held by one individual or an entity. This sort of company had become defunct for some period of time. But now, with the increased use of information technology and computers, emergence of service sector, it is time that the entrepreneurial capabilities of the people are given an outlet for participation in economic activity. Such economic activity may take place through the creation of an economic person in the form of a company. Here there is one member, one director. Example: Solomon & Co. (b) Private Company: Where the minimum number is two and maximum fifty. In addition the following are the characteristics of a private company: (i) Minimum paid up capital is one lakh rupees or such higher paid up capital as may be prescribed in the articles. (ii) Prohibits an invitation to the public to subscribe to the shares or debentures.

(II)

(III)

(i)

(iii) (c) (i) (ii) (iii) (iv) (ii)

Prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives. Public Company: Is a company which; Is not a private company. Whose minimum number are seven and maximum unlimited. Has minimum paid-up capital of five lakhs rupees c such higher paid up capital, as may be prescribed. A private company, which is a subsidiary of a public company.

On the basis of Liability: (a) Limited liability companies: In these companies, there is share capital and each share has a fixed value, which t shareholder is bound to pay either at a time or by installment. The liability of the members is limited to the face value of G shares. (b) Company limited by Guarantee: These types of companies may or may not have a share capital. Each member, promises to pay a fixed sum of money, specified in the Memorandum in the event of liquidation of the company for payment of debts and liabilities of the company. The amount promised is called guarantee. (c) Unlimited liability Company: Is a company, not having any limit on the liability of the members. The members of such company are liable, in the event of its being wound up, to the extent of their fortunes to meet the obligations of the company Such company may or may not have a share capital. On the basis of Control: (a) Holding Company: Where a company has control over another company, it is known as a holding company. A company is deemed to be a holding company of another if: (i) Controls in the composition of the Directors of another company. (ii) Holds more than half in nominal value of shares of another company. (b) Subsidiary Company: Is a company under the control of another company. It is deemed to be under control if: (i) Composition of the Directors is controlled by, another company. (ii) More than half in nominal value of shares, is held by another company. (iii) Is a subsidiary of a third company which itself is a subsidiary of the controlling company. (c) Government Company: Wherein minimum 51% of the paidup capital is held by the Government, be it the Central Governfleflt or the State Government or both. It can also be a subsidiary of a Government Company. (d) (i) (ii) Foreign Company: Is a company incorporated outside India and; Having its place of business in India or Not less than 51% of the paid-up capital is held by one or more Indian citizens or one or more body corporate incorporated in India and having its business in India. Others: (a) Producer Company: Any ten or more individuals, each of them being a producer, or any two or more producer institutions or a combination of ten or more individuals and producer institution, registering as a company for the purpose of primarily dealing with the produce of its active members. It can also include be interstate co-operative societies. (Inserted by companies amendment in 2002)

(iii)

(iv)

(b) Non-Trading Company: This is also called association not for profit. Under a license granted by the Central Government, these associations are formed with the object of promoting commerce, arts, science, religion, charity or other useful object. No dividends are paid to its members. It enjoys the same privileges and obligations of a limited company.

Classification of Companies

I Chartered Companies

II Statutory Companies

III Registered

Number

Liability

Control

Others

One Man Company

Limited

Holding

Producer

Private

Guarantee

Subsidiary

Non-trading

Public

Unlimited

Government

Foreign

Q. 5

Distinguish between a Private company and a Public company.

Ans. Following are the main points of distinction between a private company and a public company. Criteria Number of members Restriction on transfer of shares Private Company A private company cannot have less than two and more than fifty members. If a private company has a share capital, it imposes some restrictions on the right of its members to transfer their shares in the company. A private company cannot invite the public to buy its shares or debentures. A private company must add the words, Private Limited at the end of its name (Sec. 13). A private company has not to file a prospectus or a statement in lieu of prospectus, with the Registrar (Sec. 70 (3)). A private company can issue new shares to outsiders. Public Company A public company cannot have less than seven members; no maximum has been fixed for it. In a public company, there need not be any such restriction.

Restriction on invitation to public Restriction on name Prospectus or a statement

A public company may do so.

There is no such restriction.

Issue of new shares

Privileges

8 9 10

Number of directors Legal controls Remuneration of directors Borrowing of loans

It enjoys a number of privileges, i.e., exemptions from certain provisions of the Companies Act, 1956. It must have a minimum of two directors. There are less legal controls. Restrictions are far less.

A public company, must file a prospectus, or a statement in lieu of prospectus, with the Registrar. A public company must offer new shares first to existing equity shareholders pro rata, unless the members in a general meeting decide otherwise. It does not enjoy privileges.

11

Directors can borrow from private companies.

It must have a minimum of three directors. There are too many legal controls. Remuneration of a director is restricted to not more than rupees six lakhs per annum. Directors cannot borrow from public companies.

Q. 6 Ans.

What are the advantages and disadvantages of incorporating a private company? Advantages of a Private Company: This may also be called as special privileges of a private company. Following are the privileges or advantages, which are available to all private companies, including a private company, which is the subsidiary of a public company: (1) Formation is Easy: A private company can be easily formed, as it requires only two members. (2) Starting of Business: It can start its business immediately on incorporation. There is no need to wait for certificate of commencement of business. (3) Exempted from Issue of Prospectus: A private company is restricted from making invitation to the public. Hence, it is not required to issue a prospectus. Thus, saves both time and money. (4) Exempted from the Requirement of Minimum Subscription: A private company can proceed to allot shares without waiting for the minimum subscription. As no shares are issued to the public, there is no question of minimum subscription. (5) Further Issue of shares: In certain cases of new allotment, the shares must be offered to the existing equity shareholders. But a private company can issue shares directly to outsiders, even without making an offer to existing shareholders. (6) Exempted from Holding Statutory Meeting: A private company need not hold a statutory meeting. Thus, there is no requirement of filing a statutory report. (7) Exempted from Keeping an Index of Members: Index of members is required to be maintained where there are more than 50 members. As a private company can have a maximum of only 50 members, there is no question of having an index of members. (8) Minimum Number of Directors: A private company requires only a minimum of 2 directors. Disadvantages of a Private Company: (1) Restrictions on Members: A private company can have a maximum of only 50 members. Thus, it cannot enjoy more financial facilities as can be enjoyed by having more members. (2) Restrictions on Transferability of Shares: In case of private company, there is restriction on transferability of shares. Thus a person if requires money immediately, may face problems. Liquidity is difficult. (3) Restrictions on Issue of Prospectus: As a private company cannot issue prospectus, thus it cannot enjoy the benefit of public money. (4) Other Disadvantages: (a) A private company cannot issue share warrants. (b) A member cannot appoint more than one person as proxy, to attend and vote at a meeting. (c) A private company is required to send a certificate to the Registrar stating that: (i) since the last annual general meeting, no body corporate has held twenty-five percent or more of its paid up share capital, (ii) it did not hold twenty-five per cent or more of its paid up share capital, of one or more public companies, (iii) its average annual turnover in the preceding three years was not 25 crores or more, and (iv) it did not accept or renew deposits from the public. (d) A private company, while sending its annual list of members and summary to the registrar, must also send with this return a certificate stating that since the date of last return, the company has not issued any invitation to the public to subscribe for shares or debentures.

Q. 7 Ans.

Under what circumstances can a private company be treated to have become a public company? Conversion of a private company into a public company and conversion of a public company into private company (1) Conversion of a private company into a public company: There are two modes namely: (i) By default. (ii) By special resolution. (iii) Becoming a subsidiary of a public company. (iv) By provisions of law. (i) (ii) By default: When a private company fails to comply with the essential requirements of a private company. However, the default must be intentional. By special resolution: When the private company by a special resolution may become a public company.

CHAPTER 2 MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION As one is already aware of the nature of the company, it becomes necessary to know how the members who come and go, know about the company namely, what it can do, what it cannot do and how to do. To find answers to these questions, every company has two very important documents, without which no company can proceed. They are the Memorandum of Association and the Articles of Associations. These two documents are the guiding force for a company. Q. 1 What is the need for memorandum of association? Explain the clauses.

Ans. MEANING AND DEFINITION OF MEMORANDUM OF ASSOCIATION Just like a country is known by its constitution, a company is known by its Memorandum of Association. In other words the memorandum of association is the document which contains the rules regarding the constitution, activities or objects of the company. It is the frame work within which a company performs. S. 2(28) of the Act defines Memorandum as, Memorandum means memorandum of association of a company originally formed or as altered from time to time in pursuance of any previous companies law or of this Act. CONTENTS OF MEMORANDUM OF ASSOCIATION Every company shall state the following in its Memorandum of Association: (1) Name Clause. (2) Registered Office Clause. (3) Objects Clause. (4) Liability Clause. (5) Capital Clause. (6) Association Clause or Subscription Clause. (1) Name Clause: Every company must have a name of its own. The name gives the company a personal existence. The promoters who select the name of the company, are required to take care that the name is not an undesirable one. The name and emblems of UNO and WHO, Indian National Flag, the official Seal and Emblem of Central and State Government, the name and pictorial representation of political leaders have been prohibited. Further, in case of public company with limited liability must add the word Limited at the end of its name, arid the private company the word Private Limited must be added at the end. Once the name is registered, it must be printed or affixed on the outside of every office or. place of business, in a conspicuous position in letters easily legible, in the language in general use in the locality. The department of Company Affairs, has held that if the company uses any of the following key words in the name, it must have minimum authorized capital as stated below:

Key Words 1 2 3 4 5 6 7 (2) Corporation International, globe, Universal, continental, InterContinental, Asia, Asiatic (being the first name) If any of the words mentioned in (ii) is used within the name (with or without brackets) Hindustan, India, Bharat being the first word of the name. If any of the words mentioned in (iv) is used within the name (with or without brackets) Industries / udyog Enterprises, Products, Business, Manufacturing

Required authorised capital (Rs.) 5 Crores 1 Crores 50 Lakhs 50 Lakhs 5 Lakhs 1 Crore 10 Lakhs

Registered Office Clause: Every company must have a registered office. At the time of registration, the memorandum must contain the name of the state, in which the registered office of the company shall be situated. However, the company shall, from the date on which it commences its business or within thirty days of incorporation, whichever is earlier, have a registered office. The Registrar shall be intimated within 30 days of incorporation. Objects Clause: This clause defines the objects of the company and indicates what a company can do. S. 13(1)(d) along with Table B, C, D and E requires the objects clause to be divided into (1) Main objects of the company to be pursued by the company on its incorporation (2) Objects incidental or ancillary to the attainment of the main objects, and (3) Other objects f the company not included in (1) and (2). A company cannot go beyond the object clause without the approval of the shareholders and/or approval of the Central Government. It must however be noted objects cannot be illegal, immoral, opposed to public policy or the Act. Liability Clause: This clause states, the nature of liability of the members. In case of a company with limited liability, it must state that the liability of the members is limited whether it is by shares or by guarantee. In the absence of this clause in the memorandum means, that the liability of its members is unlimited. Capital Clause: This clause states, the share capital with which a company is registered and the number and value of the shares into which it is divided. Association Clause: This clause is also known as subscription clause. It is a declaration made by the subscribers who have signed the memorandum of their intention to form a company.

(3)

(4)

(5)

(6)

ALTERATIONS OF MEMORANDUM ASSOCIATION (1) Alteration of Name Clause: (i) Where the name is an undesirable one in the opinion of the Central Government, the name could be changed by passing an ordinary resolution at the shareholders meeting and with the approval of central government. The central government can also direct the company to change its name within twelve months of registration. If such a direction is issued then the company must change its name within three months, from the date of direction, unless the time is extended. The procedure being by passing an ordinary resolution.

(ii)

Where the company on its own wants to change its name, the same can be done by passing a special resolution at the shareholders meeting and with the approval of the central government. But no approval is needed if the change only relates to the dropping of word private. The change of name must be communicated to the Registrar within 30 days, who shall then enter the new name and issue certificate with the changes incorporated.

(2)

Alteration of Registered Office: Provisions in respect of change in registered office are as follows: (i) Change within same city: Where the change is from one place to another within the same city, town or village, it can be made by passing a resolution by Board of Directors. (ii) Change within same state: Where the change in the red office is from one place to another, within the same state and is within the same office of Registrar of Companies, it could be done by passing a special resolution at the share holders meeting, followed by filing a copy of the same with the Registrar of Companies within 30 days. Sometimes the change, even though within the state, may fall within the jurisdiction of another Registrar of Companies, in which case the change shall not be effective, unless approved by Regional Director. The company shall make an application to the Regional Director for confirmation. The Regional Director shall confirm the alteration within 4 weeks of receipt of the application. The company shall file with the Registrar of companies, a certified copy of the confirmation by the Regional Director within 2 months from the date of confirmation together with a printed copy of the memorandum as altered. The Registrar shall, register the same within 1 month from the date of filing. Change from one state to another: This requires change in the Memorandum of Association. As the change is going to affect the interest of the shareholders, debenture holders, and creditors, the Act has imposed substantive and procedural limits upon the power of alteration, as discussed below: (1) Substantive Limits: If the alteration is essential for the company (i) to carry on its business more economically or more efficiently. (ii) to attain its main purpose by new or improved means (e.g. by new scientific discoveries). (iii) to enlarge or change the local area of the companys operation. (iv) to carry on some business, which under existing circumstances, may conveniently or advantageously be combined with the objects, specified in the Memorandum. (v) to restrict or abandon any of the objects, specified in the memorandum. (vi) to sell or dispose of the whole, or any part of the undertaking, of the company, and (vii) to amalgamate with any other company or body of persons. (2) Procedural Limits: The following procedure is to be followed: (i) A Special Resolution of shareholders, authorising the alteration of the objects clause, must be passed. (ii) Thereafter, a petition must be made to the central government for confirmation of the alteration. (iii) If the alteration is confirmed by the central government, a certified copy of the order, together with a printed copy of the Memorandum as altered, must be filed with the Registrar within three months of the date

(iii)

(3)

(4) (5)

of the order, otherwise the alteration. and th entire proceedings of alteration will lapse and become void. The certificate of the Registrar of Companies is the conclusive evidence of the alteration and its validity (S. 18). Alteration of the Object Clause: The procedure for alteration of the object clause is the same as e alteration of registered office from one state to another. (Refer the same). Alteration of Liability Clause: No alteration can increase the liability unless voluntarily by the members. Alteration of Capital Clause: The capital can be increased by passing a ordinary resolution the general body meeting

OBJECT CLAUSE AND THE DOCTRINE OF ULTRA VIRES We have already stated that a company must function within the frame work of its objects. The objects of a company serve two fold functions. They are: (1) It tells what the company can do. (2) In the negative, it tell us what a company cannot do. Anything that a company does which is beyond the scope of the object clause is called ultra vires the object clause and is null and void. This doctrine was laid down in Ashbury Railway Carriages and Wagons Company v. Riche (1875) LR & HL 653. The company was incorporated with a number of objects. Two important objects being the company shall (a) make, sell, hire railway carriages and wagons, and (b) to act as mechanical engineers and general contractors. The directors of the company, contracted with Riche to finance the construction of railway line at Belgium. Subsequently, the directors repudiated the contract, on the ground that it was ultra vires the company. Riche brought an action for damages for breach of contract. The House of Lords held that the contract was ultra vires and therefore, null and void. Lord Cairns, L.C., observed thus: (i) The subscribers are to state the objects for which the proposed company is to be established and then the company comes into existence for those objects and those only. (ii) such a statement of objects has two-fold operation. It states affirmatively the ambit and extent of powers of the company and it states negatively that nothing shall be done beyond that ambit and that no attempt shall be made to use the corporate life for any other purpose than that, which is so specified. (iii) The term general contractors must be taken to indicate the making generally of such contracts, as are connected with the business of mechanical engineers. If the term general contractors is not so interpreted, it could authorise the making of contracts of any and every description.., which, would be altogether unmeaning. (iv) Hence, the contract was entirely beyond the objects in the memorandum of association. If so, it was thereby placed beyond the powers of the company to make the contract. If the company could not make it, much less could it be rat fled. Effects of Ultra Vires Transactions: (1) (2) Contract void: Ultra vires transactions render the contract void, giving no legal rights to the company or the outsiders. Such contracts can never be ratified. Property acquired under ultra vires transaction: If a company acquires property under an ultra vires transaction, the companys right over the property shall be protected because assets so acquired represents corporate capital. Injunction: Any member may obtain an order of injunction from the Court to restrain the company from persisting in ultra vires act. Ultra vires borrowing: In case of an ultra vires borrowing, the lender has no right of action in respect of the loan to the company. But he has certain rights in respect of money received by the company, provided the same is traceable. But the money lent by a company not authorised to lend, can be recovered by it because the debtor will be stopped from pleading that the company had no power to lead. Directors personally liable: Directors who part with the companys money or property for ultra vires objects, will be personally liable to restore to the company the funds used for such purpose.

(3) (4)

(5)

(6)

Liability for torts: A company can be made liable for any tort, if the following two conditions are satisfied, viz.: First, the activity, in the course of which the tort has been committed, falls within the scope of the Memorandum of Association. Second, the servant of the company must have committed the tort within the course of his employment.

ARTICLES OF ASSOCIATION Q. 2 What do you mean by Articles of Association?

Ans. Articles of Association is a document containing rules and regulations for the administration of the company. In case of public company limited by shares, articles of association may be submitted along with the Memorandum of Association. But in other cases namely unlimited company, company limited by guarantee and private company limited by shares, articles of association must be submitted along with the memorandum of association. Form and Signature of Articles: Table A in Schedule I of the Companies Act, contains, the Regulation for management of a company. A company may either accept Table A or make changes in the content of Table A for its articles. The articles shall be printed, be divided into paragraphs and must be signed by all the subscribers. Contents of Table A: The articles of a company usually deal with the following matters: (1) the business of the company. (2) the amount of capital issued and the classes of shares into which the capital is divided; the increase and reduction of share capital; (3) the rights of each class of shareholders and the procedure for variation of their rights; (4) the execution or adoption of a preliminary agreement, if any; (5) the allotment of shares; calls and forfeiture of shares for nonpayment of calls; (6) transfer and transmission of shares; (7) companys lien on shares; (8) exercise of borrowing powers including issue of debentures; (9) general meetings, notices, quorum, proxy, poll, voting, resolution, minutes; (10) number, appointment and powers of directors; (11) dividends interim and final and general reserves; (12) accounts and audit. (13) keeping of books both statutory and others. (14) regulation as to seal. (15) regulation as to winding up.

ALTERATIONS OF ARTICLES OF ASSOCIATION A company can, at any time, alter its Articles of Association , subject to the provisions of the Companies Act and also subject to the following conditions or restrictions:

(1) (2) (3) (4) (5) (6) (7) (8)

Alteration of Articles can be made only by a Special Resolution of the shareholders of the company to that effect. No alteration of Articles will be allowed, which will violate the provisions of the Companies Act, or any other provisions of general law which may be applicable. No alteration of Articles will be allowed, which will violate the conditions, contained in the Memorandum of Association of the company. Alterations must not contain anything illegal. An alteration must not constitute a fraud on the minority. In other words, an alteration must not affect the interests of the minority shareholders. An alteration of Articles which has the effect of converting a public company into a private company, shall have effect only if the alteration is approved by the Central Government. Alteration must be made bona fide in the interest of the company as a whole, even though the private interests of some members may be affected. Lastly, Articles of Associations may be altered with retrospective effect.

DISTINCTION BETWEEN MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION The following are the fundamental points of distinction between Memorandum of Association and Articles of Association:

Criteria Fundamental condition or internal regulations

Memorandum The Memorandum contains the fundamental conditions upon which, the company is allowed to be incorporated. The conditions are introduced for the benefit of the creditors, the shareholders and the outside public. The memorandum is a dominant instrument, as it states the purposes for which the company has come into existence. Section 13 provides that some of the conditions of incorporation, contained in the memorandum, such as the objects clause, and the registered office clause, cannot be altered except by the special resolution of the company and with the sanction of the central government. If a company does something outside the scope of the objects stated in the memorandum, it is absolutely null and void and

Articles The Articles of Association are the internal regulations of the company. They provide the manner, in which the company is to be carried and its proceedings disposed of.

Dominant or subordinate

Methods of alteration

The Articles are always held to be subordinate to Memorandum because they are mere internal regulations of the company. Section 31, on the other hand, provides that the Articles of Association can be altered simply by a special resolution. It does not require the sanction of the central government or of any other authority.

Effect of acts done in contravention of MOA and AOA

If the company does something in contravention of the provisions of its Articles, it is only an irregularity and can always be confirmed by the

incapable of ratification. EFFECT OF MEMORANDUM AND ARTICLES

shareholders, and thus rectified.

S. 36 contains provision regarding the binding force of the Memorandum and the Articles, on the company and its members. They are: (1) Members and the company bound towards each other: The Memorandum and the Articles bind the company and its members, to the same extent as if they had been respectively signed by the company and by each member. (2) Members inter se bound: Each member is bound to the other members, by the terms contained in the Articles. Thus, if the Articles provide about certain rights of members interse, a member can enforce such rights against the other members. Example: The plantiff was the shareholder of a private company. The Articles of Association, required a member who wanted to transfer his shares, to inform the directors of his intention, and then the directors will take the said shares equally between them at a fair value. On their refusal to take shares, it was held that the directors as members were obliged to take shares. (Rayfield v. Hands and others (1960) Ch. 1). (3) Company and outsiders: All outsiders, dealing with the company are assumed to have read the articles of the company and are bound by the same. Outsiders shall be deemed to have constructive notice of the contents of Memorandum and Articles of the Company.

DOCTRINE OF CONSTRUCTIVE NOTICE The memorandum and articles of association of a company are public documents. Any person who is dealing with a company, is presumed to have read and understood the proper meaning of the documents. In other words, no party can take the plea, that he was ignorant of what have been stated in the memorandum and articles of association. The doctrine of constructive notice comes to the aid of a company vis--vis the outsiders. However, the doctrine has been described as an unreal doctrine, as it fails to take note of business realities. Hence, the rule has in reality been diluted. The Courts have held if a person deals with the company in good faith and the person with whom he is dealing has ostensible authority to deal on behalf of the company, the company will be held liable. Example: Although the articles had clearly stated that the directors could delegate all powers, but the power to borrow an overdraft taken by the managing agent without the sanction of the board was held to be binding on the company. Such a temporary loan, was not governed by the rule incorporated in the articles. (Dehdradun Mussoorie Electric Tramway Co. v. Jagmandrdas, AIR (1932) All. 141).

DOCTRINE OF INDOOR MANAGEMENT OR TURQUAND RULE As one is aware that the doctrine of constructive notice protects the company in its dealings with outsiders, the doctrine of indoor management comes to the aid of the outsiders, while dealing with the company.

The doctrine of indoor management implies, anyone dealing with the company who has no means of knowing about the internal functioning of the company has every right to presume that, things are happening the way it ought to happen. And any irregularity will not affect the rights of the outsiders. The company will not be allowed toescape liability. In other words the doctrine of indoor management is an exception to the doctrine of constructive notice. In Royal British Bank v. Turquand (1856) 6E and B 327, the articles authorised the directors to borrow on bonds, by a resolution passed at the general meeting of the company. A bond was issued against the borrowings made by the company without passing the required resolution. Held, the company was liable on the bond as the borrower could presume that the resolution had been passed before making the borrowing through the issue of bond. This came to be known as Turquand Rule. Exceptions to the Rule of Indoor Management: The doctrine of indoor management is subject to five exceptions: (1) (2) Knowledge of internal irregularities of the company: A person already aware of the irregularity, cannot claim protection under this rule. Suspicion of the internal irregularity: Where a person dealing with the company is placed in such circumstances, which are suspicious in nature and which invite inquiry, he is not protected by the doctrine. Acts void abinitio: This doctrine does not apply to acts that are void abinitio. Example: Where the document is a forged one: Acts, outside the apparent authority of the company: Where the acts of an officer, do not fall within the apparent authority of such an officer, protection under the doctrine cannot be claimed. No knowledge of articles: A person who at the time of entering into a contract with a company, has no knowledge of the companys articles of association, cannot be saved or protected by the doctrine.

(3) (4)

(5)

CHAPTER 3 PROSPECTUS In case of public company, the funds required are more. One way of getting it is by approaching the public. Prospectus is used to approach the public. Therefore, a prospectus aims at, soliciting applications from interested investors, by informing them about companys business, financial position, capital structure, directors etc. As the public subscribe to the capital by what has been stated in the prospectus, law imposes duty on the promoters to state true statements in the prospectus. DEFINITION AND MEANING S. 2 (36) defines a prospectus as any document described or issued as prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of shares in or debentures of a body corporate. Abridged prospectus: It means a memorandum containing salient features of a prospectus, as may be prescribed. It contains only those details as are included in the prospectus, though in an abridged form. Deemed prospectus or prospectus by implication: Nowadays, offer of sale of shares or debentures are made through Issue Houses. It is the Issue House, who advertises. As it is not advertised by the company, these were not deemed to be prospectus. To check the by-passing of the provision of law, all documents containing offer of shares or debentures for sale shall be included within the definition of prospectus and shall be deemed as prospectus by implication. Shelf Prospectus and Information Memorandum: It is a prospectus issued by any financial institution or bank (whose main object is financing) for one or more issues of securities or class of securities specified in that prospectus. Note: Financing means making loan to or subscribing in the capital of a private company or industrial enterprise, engaged in infrastructural financing or such other companies as the central government may notify. Red Herring Prospectus: It is a prospectus which does not contain all particulars on the price and quantum of securities offered. This means that in case the price is not disclosed, the number of shares and the upper and lower price bonds are disclosed. On the other hand, an issuer can state the size and number if shares are determined later. It is issued atleast three days prior to the opening of the offer. A document to be prospectus, must have been issued to the public. What may be treated as, an issue to the public depends upon the facts and circumstances of each case. In Government Stock and Other Securities Investment Co. Ltd. v. Christopher and Others (1956) I. W.L.R. 237) it was held for determining whether a circular or invitation has been issued to the public or not, the test is not L. who receives the circular but who can accept the offer made. What does not constitute a prospectus: No offer or invitation said to be made to the public if: (1) it is directed to a specified person. (2) it is not calculated to result in the shares or debentures becoming available to other persons. (3) it is directed to a few persons. When prospectus is not required to be issued: A company I not issue a prospectus jn the following cases: (1) In case of a private company.

(2) (3) (4) (5)

When promoters or directors, intend raising fund from personal contacts and acquaintances without offering the shares and debentures to the public. When shares are offered to underwriters under an underwriting arrangement. When the company intends raising funds only from existing shareholders! debenture holders. When the shares or debenture issued are uniform in all respects with shares or debentures previously issued and dealt in or quoted in a recognised stock exchange.

LEGAL REQUIREMENTS OF PROSPECTUS The following are the legal requirements of prospectus: (1) A prospectus is required to be issued only after the incorporation of the company. (2) The prospectus must contain all the particulars1 listed in Schedule II to the Companies Act. (3) The prospectus must be dated. (4) A prospectus must be signed by every person, mentioned therein as a director or a proposed director, or his agent. (5) Every application form for shares, issued by the company, must be accompanied by a copy of the prospectus except (a) application forms, issued for bona fide invitation to a person to enter into an underwriting agreements and (b) application forms, issued to existing members and debenturehOlders. (6) A statement, relating to the affairs of the company by an expert, may be included iit the prospectus. (7) Consent of thc expert must be obtained in- writing and this fact must be stated in the prospectus. The term expert includes an engineer, valuer, chartered accountant, and other person, whose profession gives authority to a statement, made by him. (8) No deposit can be invited without issuing an advertisement in a daily newspaper. The said advertisement must contain a statement, reflecting the companys financial position issued by the Company and in such a form or in such a manner, as may be prescribed. Section 58 A of Companies (Amendment) Act, 1974, orovides that the company and the officer, who violate the above rules, shall be punishable. These rules are not applicable to banking companies and such other companies as the Central Government may, in consultation with the Reserve Bank of India, specify on this behalf. (9) Before a prospectus is issued, a copy of it must be registered with the Registrar of Companies. (10) Prospectus shall be issued within ninety days of its registration. Section 60(5) lays down that any company and any person, who knowingly issues a prospectus without registration, is punishable with fine, which may extend to rupees five thousand. CONTENTS OF A PROSPECTUS Section 56 lays down that the matters and reports stated in Schedule II to the Act must be included in a prospectus. The format of a prospectus is divided into three parts. Part I: (1) General information: Under this head information is given about (i) Name and address of registered office of the company. (ii) Name/(s) of stock exchange/(s) where application for listing is made. (iii) Declaration about refund of the issue if minimum subscription of 90 per cent is not received within 90 days from closure of the issue. (iv) Declaration about the issue of allotment letters/refunds within a period of 10 weeks and interest in case of any delay in refund, at the prescribed rate, under s. 73. (v) Date of opening of the issue. (vi) Date of closing of the issue. (vii) Name and address of auditors and lead managers. (viii) Whether rating from CRISIL or any rating agency has been obtained for the proposed debntures/ preference shares issue. If no rating has been

obtained, this should be answered as No. (ix) Name and address of the underwriters and the amount underwritten by them. (2) Capital structure of the company: (i) Authorised, issued, subscribed and paid-up capital. (ii) Size of the present issue, giving separately reservation for preferential allotment to promoters and others. Terms of the present issue: (i) Terms of payment. (ii) How to apply. (iii) Any special tax benefits. Particulars of the issue: (i) Objects. (ii) Project cost. (iii) Means of Finandng (including contribution of promoters). Company management and project: (i) History and main objects and present business of the company. (ii) Promoters and their background. (iii) Location of the project (iv) Collaborations, if any. (v) Nature of the product(s). Export possibilities. (vi) Future prospects. (vii) Stock market data for share/debentures of the company including high and low price in each of the last three years and monthly high and low during the last six months, if applicable. Certain prescribed particulars: in regard to the company and other listed companies under the same management, which made any capital issue during the last 3 years. Outstanding litigations: relating to financial matters or criminal proceedings against the company or directors under Schedule Xffl. Management perception of risk factors: (e.g., sensitivity to foreign exchange rate fluctuations, difficulty in availability of raw materials or in marketing of products, cost/time overrun, etc.)

(3) (4) (5)

(6) (7) (8)

Part II: Requires the company to give detailed information. This part is further sub-divided into three parts viz., General Information, Financial Information and Statutory and Other Information. (1) General Information shall include information on matters like: (i) Consent of directors, auditors, solicitors, managers to the issue, Registrars to the issue, Bankers of the Company, Bankers to the issue and experts. (ii) Changes, if any, in directors and auditors during the last 3 years and reasons therefor. (iii) Procedure and time schedule for allotment and issue of certificates. (iv) Names and address of Company Secretary, legal advisor, Lead Managers, Comanagers, Auditors, Bankers to the issue. (v) Authority for the issue and details of resolution passed therefor. (2) Financial information includes: (i) reports of the auditors of the company with respect to its profits and losses and assets and liabilities, and the dividends paid during the five financial years immediately preceding the issue of prospectus; (ii) report by the accountants (who should be named) on the profits or losses for the preceding 5 financial years and on the assets and liabilities on a date which must not be more than 120 days before the date of the issue of the prospectus. (3) Statutory and Other information includes information about: (i) Minimum subscription. (ii) Expenses of the issue (iii) Underwriting commission and brokerage. (iv) Previous public or rights issue; if any, giving particulars about date of allotment, refunds, premium/discount, etc. (v) Issue of shares otherwise than for cash.

(vi) (vii) (viii) (ix) (x)

Commission or brokerage on previous issue. Particulars about purchase of property, if any. Revaluation of assets, if any. Material contracts and time and place where such documents may be inspected. Debentures and redeemable preference shares or others instruments issued but remaining outstanding on the date of the prospectus and terms of their issue.

Part III: Gives explanations of certain terms and expressions used under Part I and Part II of the Schedule.

LIABILITY FOR MIS-STATEMENTS IN THE PROSPECTUS The public, who are investing their money in the public company, comes to know of the company only by the prospectus. Hence, there is an inherent duty that the prospectus must state the true picture of the company i.e, prospectus must state things accurately and not omit material facts. The golden rule as regards, the prospectus was laid down in New Brunswick & Canada Rly. & Land Co. v/s Muggeridge (1860)3 Lt. 651- Nothing should be stated as a fact, which is not so, and no fact should be omitted the existence of which might in any degree affect the nature or quality of the principles and advantages which the prospectus holds out as an inducement to take shares Hence any omission of a material fact or addition of untrue statement in the prospectus amounts to mis-statement and both civil and criminal action follows. Persons (I) Civil Liability: Liabilities for misstatement Whenever a person subscribes to the shares or debentures of a company on the basis of untrue statements in the prospectus, has the right of action both against persons responsible for the issue of such mis-statements as well as against the company. (1) Against Persons: Whereas, prospectus is issued inviting persons to subscribe for shares in, or debentures of a company, the following persons shall be liable to pay compensation to every subscriber, for the loss he may suffer on account of the misstatement. (a) Every person who is the director of the company at the time of issue of the prospectus; (b) Every person who has authorized himself to be named and is named in the prospectus -as a director, or as one having agreed to become a director, either immediately or after an interval of time; (c) Every promoter of the company; and (d) Every person (including as expert) who has authorized the issue of the prospectus. But an expert is liable only in respect of his own un-true statement. Facts to be proved by the allottee: (a) Mis-statements must be of facts and not of law or an opinion. (b) The mis-statement must be of material fact. (c) And the allottee must have acted upon it. Remedies available: (a) Damages for fraudulent misrepresentation; (b) Compensation (c) Damages for non-compliance with the requirements regarding contents of the prospectus.

Defenses, available to avoid civil liability: The persons who could be held liable have certain defenses available to absolve their liability. They are: (a) He withdrew the consent to act as a director, before the issue of the prospectus and it was issued without his consent or authority; or (b) It was issued without his knowledge or consent, and on becoming aware of the issue he gave reasonable public notice to that effect; or (c) He withdrew his consent after the issue of the prospectus but before allotment and public notice was given; or (d) He had reasonable grounds to believe that the statements were true and believed them to be true. (e) The statement was correct, and it was fair summary or copy of an experts report; or (f) The statement was made by an official or in an official document. Example: The directors of a Tramway company issued a prospectus stating that they had the right to run tram-cars with team power instead of the horse drawn carriages. This statement was issued, as their application satisfying the conditions required was pending before the Board of Trade. But the Board of Trade rejected their application. Peek, a shareholder sued the directors for damages for fraud. Held, the directors were not liable for fraud, as they honestly believed what they said in the prospectus to be true. (Derry v/s Peak 11889 A. C, 337) (2) Against the Company: (a) Rescind the contract (b) Claim damages from the company Criminal Liability:

(II)

Where the prospectus contains any untrue statement, every person who authorizes the issue of the prospectus is punishable with (a) Imprisonment up to 2 years; (b) Fine up to rupees 50,000; or (c) Both He will not be liable is he proves either, that (a) The statement was immaterial; or (b) He had reasonable grounds to believe and did up to the time of the issue of the allotment believe the statement to be true. STATEMENT IN LIEU OF A PROSPECTUS A public limited company, (1) which has not issued a prospectus, or (2) which has issued a prospectus, but has not proceeded to allot any of the shares, offered to the public for subscription, is required to deliver to the Registrar a Statement in lieu of Prospectus for registration, at least three days before the allotment of shares or debentures.

Schedule III contains the details of the particulars to be furnished. In case of private company becoming a public company, statement in lieu of the prospectus can be filed. Schedule IV contains the details of the particulars to be furnished for the same. Such a statement is required to be signed by every person, who is named therein as a director or a proposed director, of the company, or by his agent authorised in writing. If allotment of shares or debenture is made without filing the statements in lieu of prospectus, the allottee may avoid it within two months after the statutory meeting, or where no such meeting to be held, within two months of the allotment. Contravention ilso renders the company and every director liable to a fine upto rupees 10,000. PUBLIC DEPOSITS Deposit means any deposit of money with the company and ncludes any amount borrowed by a company, but shall not include such categories or amount as may be prescribed in consultation with the RBI. [refer Rule 2(b) of Companies cceptance of Deposits) Rules 1975 for categories excluded. Rules for inviting or accepting deposits by the company: (1) No deposit can be invited, without an advertisement specifying the financial conditions, management structure and other required particulars of the company. (2) Declaration as to repayment of the deposit, in accordance with the terms and conditions. (3) Declaration by the depositor that the money is not being deposited out of the funds acquired by him by borrowing or accepting deposits from any other person. (4) Provision for nomination to be available. (5) No deposit payable on demand or repayable before three months can be accepted. (6) Any deposit repayable before six months, may be accepted provided such deposits do not exceed 10% of the paid-up capital and free reserves. (7) A company cannot accept deposits, repayable after three years. (8) A company cannot accept deposits beyond 10% of the paidup capital. (9) Any deposit received in contravention of the above rules, have to be refunded within thirty days of acceptance of the deposit. This period may be extended by another thirty days by the Central Government. (10) In case of non-repayment within the above stipulated time, the company shall be subjected to fine which shall not be less than twice the amount not repaid and every officer of the company, who is in default shall be punishable with imprisonment for a term which may extend up to five years. Small depositor: Means a depositor who has deposited in a financial year, a sum not exceeding twenty thousand rupees in a company. In the event of the company defaulting in repayment to such depositor, intimation will have to be given to the Company Law Board within sixty days of the default giving details. Company Law Board shall pass appropriate orders within thirty days. Failure to comply with the provisions of law is fine of rupees five hundred per day and imprisonment up to three years.

CHAPTER 4 - MEMBERSHIP OF A COMPANY AND REGISTER OF MEMBER


MEANING OF MEMBER According to S. 41 of the Companies Act, a member of a company means a person (i) who has subscribed his name to the memorandum. (ii) any other person, who has agreed in writing to become a member and whose name is entered in the register of members. (iii) every person, holding equity share capital of a company and whose name is entered as beneficial owner in the records of the depository (inserted by the Depositories Act, 1976). On the other hand, a shareholder is one who holds shares in a company. These two expressions are being used interchangeably. However where a company has a share capital, a shareholder is also a member of the company. While in cases, where the company has no share capital they are members. Hence a shareholder is also a member but a member may not necessarily be a shareholder of a company. ACQUISITION OF MEMBERSHIP A person may become a member of a company in the following ways: (1) By subscribing to the memorandum: Signatories to the memorandum ipsofacto become members of the company on its incorporation. By virtue of being subscribers, they are deemed to have become members and must be entered in the register of members. Hence neither application nor allotment of shares is necessary. (2) By undertaking to buy qualification shares: Where a person has signed an undertaking, to take and pay for his qualification shares, he shall as regards those shares, be in the same position as if he had signed the memorandum for shares of that number or value. Thus, an undertaking on the part of the director to buy qualification shares, puts him in the position of a subscriber to the memorandum. He is deemed to be a member of the company and must be entered in the register of members. (3) By allotment: A person may acquire membership of a company, by application and allotment of shares. (4) By transmission: On the death of a shareholder, shares are transmitted to his legal representatives, who become members of the company on their being entered in the register of members. (5) By transfer: A person who take shares from an existing member by sale, gift or some other transaction, acquires membership, on his name appearing in the register of members. (6) Membership by acquiescence and estoppel: A person is deemed to be a member of a company, if he allows his name to be put on the register of members or otherwise holds himself out as a member, even if there is no agreement to become a member. Thus, this liability springs into existence as a result of acquiescence and estoppel. (7) Joint members: When two or more persons hold share in a company in their joint names, it is called a joint membership. In such a case, the name of the member appearing first is considered to be the main member for the purpose of sending notices, dividends, etc. However, they all shall be treated as a single member. WHO CAN BECOME A MEMBER Following are the categories of persons or entities, who can a member of a company: (i) Any person competent to contract. (ii) A company can become a member of another company.

(iii)

A firm is not a legal person, and therefore cannot buy shares in its own name. However, a firm may hold shares in the names of individual partners who may be entered as joint holders. (iv) A trustee, who buys shares, will be treated as a member in his individual capacity. However, by Companies Amendment Act, 1963 has provided for appointment of public trustee by the Union Government. Hence, any person holding shares in a company as a trustee, is required to make a declaration to the public trust within the prescribed time. A copy of such declaration is required to be sent by the trustee to the company concerned within 21 days after the declaration to the public trust. Failure to do so will invite a penalty of fine. However, these provisions are not applicable to the following two cases: (a) where a trust is not created by an instrument in writing; and (b) even if the trust is created by an instrument in writing, if the value of the shares, held in trust, does not exceed Rs. one lath or if it exceeds that amount, it does not exceed Rs. 5 lakhs or 25% of the paid up share capital of the company, whichever is less. (v) A registered society can acquire shares in a company. (vi) A non-resident cannot become a member of a company without the permission of the Reserve Bank of India under the Foreign Exchange Regulation Act, 1973. (vii) An insolvent, may be taken as a member so long as his name appears in the register of members, notwithstanding the right of official assignee or receiver to be registered as a member.. (viii) A minor can be admitted to the membership of a company limited by shares, by means of transfer of shares provided the shares are full paid up.

TERMINATION OF MEMBERSHIP Termination of membership happens under the following circumstances: (1) Transfer of shares: The transferor ceases to be a member when the transferee is placed on the register of members. However, he remains liable to be placed in the B list for one year. if the company goes into liquidation. (2) If his shares are forfeited by the company. (3) If the company sells his shares under some provision in its Articles, as for example, in the exercise of its rights to enforce a lien. (4) If he validly surrenders shares to the company, where such surrender is permitted. (5) If his shares are sold in execution of a decree of the Court. (6) If he rescinds the contract to take shares, on the ground of misrepresentation in the prospectus or of irregular allotment. (7) If he is adjudicated insolvent. The shares of an insolvent, vest in the Official Receiver or Assignee. (8) If he dies. However, the estate of the deceased member remains liable until the shares are registered in the name of his legal representative. (9) If redeemable preference shares are redeemed. (10) If the company is being wound up, a member remains liable as a contributor and is also entitled to share in the surplus assets, if any.

RIGHTS AND LIABiLITIES OF MEMBERS Rights of Members: The following are the rights of the members of a company: (1) Statutory Rights: The statutory rights are conferred upon members of a company by the Companies Act. These rights cannot be withheld, taken away, or modified by the Memorandum or Articles of Association. Some of the Statutory rights of a members are as under:

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (2) (3)

A member has a right of priority to have shares offered in case of increase of capital. Right to receive notices of meetings, attend and vote at meetings. Right to transfer shares. Right to receive a share certificate. Right to receive copies of annual accounts of the company. Right to inspect the register of members, register of debentureholders and copies of annual returns. Right to apply to the Central Government for calling an annual general meeting if the board of directors fails to call such a meeting. Right to apply to the Court for calling an extraordinary meeting of the company. Right to participate in appointments of directors and auditors in the annual general meetings. Right to petition to the Central Government for ordering an investigation into the affairs of the company. Right to petition to the High Court for relief in cases of oppression and mismanagement. Right to petition to the High Court for winding up of the company.

(4)

Documentary Rights: These rights are conferred upon the members by the Memorandum and Articles of Association. Proprietary Rights: Proprietary rights include the following rights: (a) Right to be registered as a member in the companys register of members, subject only to valid and authorised transfer of shares. (b) Privilege of immunity from personal liability of companys debts. (c) Right to participate in dividend distribution, if ordered in the discretion of the directors. (d) Finally, right to participate in the distribution of assets in case of liquidation of the company. Remedial Rights: Remedial rights include the following rights: (a) Right to information and inspection of companys records. (b) Right to bring representative suits on companys cause of action, to remedy mismanagement or unauthorised acts and thereby to compel the company to enforce its rights.

Liabilities of Members: Liabilities of the members depends upon the kind of company i.e. where the company is a limited company, the liability of each is limited to the face value of the share he has agreed upon. While if the company is a company limited by guarantee, ie liability of each member is to the extent of guarantee agreed upon. Finally in case of company with unlimited liability, the iability of each member is unlimited. REGISTER OF MEMBERS Register of Members: Register of members is prima facie evidence of, one being a member of a company. Therefore every company must keep a register of members with the following details: (a) the name, address of members and shares held by each and the amount paid. (b) the date on which each person was entered in the register as a member. (c) the date on which any person ceased to be a member. Any default in complying with the above shall render the company and every officer in default liable to a fine which may extend to rupees 500 for every day during which the default continues.

(2)

(3)

(4)

Index of Members: Every company, having more than fifty members, shall keep an index of the names of the members of the company, unless the Register of Members itself is kept in the form of an index. The purpose of this is to enable entries relating to a particular member to be readily found. If there are any changes in the Register of Members, such changes must be indicated on the Index of Members within fourteen days of the alteration. Any non-compliance shall attract a fine upto rupees five hundred for every defaulting member and the company. Closure of Register of Members: A company may after giving not less than seven days notice, publish in some newspapers circulated in the district, in which the registered office of the company is situated, close the register of members for a period not exceeding 45 days in each year, but not exceeding 30 days at any one time. If the register of members is closed without giving the required notice or after giving a shorter notice or where the register is closed for an aggregate period in excess of the limit specified, the company, and every officer of the company in default shall be punishable with fine which may exceed to rupees five thousand for everyday during which the register is so closed. Foreign Register of Members: A company with share capital or which has issued debentures may, if so authorised by its articles, keep in any state or country outside India a branch register of members or debenture holders residing in that state or country. The Registrar shall be notified within 30 days of the opening of the register, as to the place of keeping the register. Similarly, whenever there is a change in the place of keGping the register or discontinuance, the same shall be notified to the Registrar. Non-compliance of any rule shall entail fine for the company and every officer upto rupees five hundred for every day of default.

RECTIFICATION OF REGISTER OF MEMBERS: As the register of members is the prima facie evidence of, whether a person is a member or not, it is important that the register maintains. true and correct information. The power to order rectification now vests with the Tribunal. Prior to year 2002, it was with the Company Law Board. It is important to note that prior to the amendment of section 111 by the Depositories Act, 1996, the provisions, for rectification of register of members for both private companies as well as public companies were the same. Now, the provisions for private company is dealt with under subsection 14 of section 111, whereas for public companies, a new section 111A has been inserted. Rectification of register of members of private companies and I public companies: Rectification could be on account of refusing to make changes, changing without sufficient cause, or omitting without sufficient cause. The person aggrieved, or any member of the pany, or the company may apply to the Tribunal for rectification of register. The petition is to be made in writing along h the prescribed fee of rupees five hundred. This application has to be filed within two months of the refusal or within four onths of cause of action. The Tribunal after hearing the parties pass relevant orders including interim orders and/or costs. In default of complying with the orders of the Tribunal, every officer of the company who is in default, shall be punishable with fine which may extend to rupees ten thousand and with a further fine which may extend up to rupees one thousand for every day after the first day after which the default continues. Rectification of register of members of public companies: Even in case of public companies, the power to order for rectification of register of member vests with the Tribunal since 2002. A participant, or investor, a depository or the Securities and Exchange

Board of India can make a petition, within two months of the intimation of the refusal for rectification along with the requisite fee. The grounds on which rectification may be sought are: (a) Where the transfer of shares is in contravention of any provision of the SEBI, Act 1992 or any regulation made there under. (b) Where the transfer of shares is in contravention of any provision of the Sick Industrial Companies (Special Provision) Act, 1985. (c) Where the transfer of shares is in contravention of any provision of any other law for the time being in force. Note: Section 111A deals only with regard to transfer of shares and debentures. For other matters, the remedy would be to file a civil suit. The Tribunal after hearing the parties, may pass the relevant orders including interim orders and/or costs. In default of complying with the orders of the Tribunal, every officer of the company who is in default, shall be punishable with fine which may extend to rupees ten thousand and with a further fine which may extend up to rupees one thousand for every day after the first day after which the default continues.. Every company having a share capital must file the annual return with the Registrar at least once in a calender year. Filing of the annual returns enables the Registrar to know of the changes that have occurred during the year. Further it enables him to record the changes. 4 must be filed within 60 days of the holding of the AGM or from the last day on which the meeting should have been held in accordance with the provisions of the Companies Act. The particulars to be stated in the annual return are different for the companies having a share capital, and for the companies having no share capital. Annual return of a company having a share capital: The annual return must contain the particulars specified in Part 1 of Schedule V. The return must contain the following particulars: (a) The registered office. (b) The register of members or debenture holders both present and past. (c) The register of debenture holders. (d) The shares and debentures of the company. (e) The particulars of the total indebtedness of the company. (f) Particulars of the directors, managing directors, managers and secretaries, past and present. Annual return of the company not having a share capital must furnish the following particulars: (a) The address of the registered office of the company. (b) The names of members and respective dates on which they became members. (c) The names of persons who ceased to be members, and the dates on which they ceased to be members. (d) All particulars with respect to persons who at the date of the return were the directors of the company, its manager and its secretary. (e) Total indebtedness of the company.

The director and the manager or secretary of the company must sign the annual returns. If the company has no manager or secretary then it must be signed by at least two directors. In case the company shares are listed on a recognized stock exchange, the whole time secretary is also required to sign. If the company fails to comply with any of the provisions contained in the Act, the company and every officer of the company who is in default shall be punishable with fine, which may extend to rupees five hundred for every day during which the default continues.

CHAPTER 5 - SHARE CAPITAL AND SHARES SHARE CAPITAL The capital raised by a limited company is called the share capital. This capital is used in the following senses: (a) Authorised Capital: Also called as nominal or registered capital. This is the amount specified in the memorandum of association. This is the maximum amount the company is authorized to raise by issue of shares. (b) Issued Capital: It is that part of the capital, that has been issued by the company for subscription. (c) Subscribed Capital: It is the amount of shares, that has been subscribed by the public. (d) Called-up capital: It is that part of the nominal capital amount of the subscribed capital, which has been demanded from the subscribers for payment. (e) Reserve capital: It is that part of the companys uncalled capital, which shall be called except on winding up. A company to start may issue a part of the capital called the issued capital to the public for subscription. But no company can allot shares unless, the amount stated in the prospectus as minimum subscription, has been received by the company in cash. Minimum subscription: The minimum subscription is the amount fixed by the Board of Directors, after taking into account the matters specified in clause 5 of part Ito Schedule II of the Act. The matters to be taken into account are: (a) The purchase price of any property purchased or to be purchased; (b) Any preliminary expenses payable; (c) Any commission payable towards subscription of any shares; (d) The repayment of any money borrowed by the company for the above matters; (e) Working capital; (f) Any other expenditure. Note: A public company cannot start, if the minimum subscription has not been received. Irregular allotment: An allotment is irregular if: (a) The company does not file with the Registrar, a prospectus or a statement in lieu of the prospectus at least three day prior to the allotment. (b) Five percent amount of the nominal value of the shares payable on application, is not paid by the subscribers or where the application money is not kept in a scheduled bank. (c) Where the shares have not been listed on the stock exchange, within 10 weeks or the application for listing has been rejected by the stock exchange. If a company makes an irregular allotment, the applicant may if he so desires, avoid the allotment within two months after the statutory meeting and if not statutory meeting is held or allotted after the meeting, then within two months of the allotment. ALTERATION F SHARE CAPITAL A company having share capital may, if so authorized by the articles, alter its share capital. Thus the capital may be altered by: (1) Issue of new share. (2) Consolidate arid divide all or any of its share capital into shares of larger amount than its existing shares.

(3) (4) (5)

Convert all or any of its fully paid shares into stock and reconvert that stock into fully paid shares of any denomination Sub-divide its shares into shares of smaller amount. Cancel shares not subscribed.

Alteration of the share capital must be done in the bona fide interest of the company. This alteration could be in the form of: (I) Increase in the share capital. (II) Reduction in the share capital. (I) INCREASE IN THE SHARE CAPITAL: The company can increase its share capital by: (1) By further issue of shares. (2) By conversion of debentures or loans into shares. Increase in the Share Capital

Further Issue of Shares

Conversion of Debentures or Loans into Shares

Increase In

(1)

Further Issue of Shares: A company by passing an ordinary resolution in its general meeting may, increase its capital by issue of new shares also called rights issue or by allotment of unallotted shares. The conditions for making a rights issue: (a) Rights issue can be offered only after the expiry of two years from the formation of the company or after the expiry of one year, from the first allotment of shares, whichever is earlier. (b) The new shares must be offered to the existing shareholders, in proportion to the paid up capital on the shares held by them on that date. Offering of shares to the existing shareholders is called the rights issue and the shareholders right to receive these shares is called the pre-emptive rights. (c) The offer of shares must be made by a notice, in the form of composite application form specifying the number of shares offered. It must be accepted within fifteen days, failing which the offer lapses. (d) The notice must inform the shareholders, that they have the right to renounce all or any of the shares, offered to them, in favour of their nominees who may or may not be members of the company.

Where, the existing shareholders have renounced shares, or where shares have been left after proportionate allotment to the existing shareholders, the directors may dispose them in a maimer most beneficial to the company.

Although further issue has got to be firstly offered to the existing shareholders, there are certain circumstances under which the company can directly issue the shares to the outsiders in total exclusion of the existing shareholders. Those circumstances are: (a) Where the company passes a special resolution in the general meeting, deciding to offer new shares directly to outsiders; or (b) Where the company passes an ordinary resolution and obtains the approval of the central government. (c) Where the existing shareholders decline to accept the shares. (d) Where the new shares are issued within two years of the formation of the company or within one year of the allotment made, for the first time after its formation. (e) Where the company is a private company. (2) Conversion of debentures or loans into shares: The debentures or loans may be converted into shares, thus having the effect of increasing the authorized capital of the company. This is done under the following circumstances: (a) Where the shares are issued against conversion of debentures or loans provided the following two conditions are satisfied: (i) That the company by passing a special resolution has accorded approval to the terms of issue of such loans or debentures; and (ii) That the terms of issue of such loans or debentures, have either been approved by the central government before the issue of the debentures or the V raising of the loans, or are in conformity with the rules, if any, made by the central government in this behalf. Debentures issued to or loan obtained from the government or any institution specified by it, which are to be converted into shares by the order of the central government.

(b)

The central government while approving must keep in mind the financial position of the company, the terms of issue of the debentures or the loan, the rate of interest payable, the capital of the company, its loan liabilities, its reserves, the profits of the company in the last five years and the current market price of the shares of the company. However, in case of conversion of debentures or loan obtained from the govermnent, the proposed order needs to be placed before each House of the Parliament while in session for a period of thirty days which may be comprised in one session or in two or more successive sessions. Where the company is not in favour of the order of conversion, the company may within thirty days from the date of communication of the order or within such further time as may be granted by the Court prefer an appeal to the Court. SEBI GUIDELINES ON RIGHTS ISSUE: (1) The guidelines apply only to existing listed companies, which intend to raise funds in excess of 50 lakhs. (2) In case the right issue of a listed company, exceed rupees fifty lakhs, the company must appoint a merchant banker. (3) Minimum subscription clause applies to rights issue as well. (4) Rights issue should be kept open for at least 30 days and not exceeding 60 days. (5) Underwriting of rights issue is not mandatory.

(6)

(7) (8)

(9)

(10)

The company must enter into an agreement with a Depository for dematerialization of securities. Option to the subscribers to hold securities in dematerialized form or in the form of share certificates. Partly paid up shares if any, must be fully paid up, or forfeited. No company shall make a rights issue during the period commencing from the submission of offer document to the SEBI, till the securities referred to in the offer document have been listed or application money refunded, on account of non listing or under subscription etc. No company shall pending conversion of fully convertible debentures or partly convertible debentures, make any rights issue, unless similar benefit is extended to the holders of such fully convertible debentures or partly convertible debentures. Moreover, the shares so reserved may be issued at the time of conversion/s of such debentures on the same terms on which the rights issue was made.. An issuer company shall not withdraw the rights issue after announcement of the record date. If it does so, it cannot make another application for listing of any of its securities for a minimum period of twelve months from the record date. REDUCTION OF THE SHARE CAPITAL:

(II)

Reduction of Share Capital Reduction of Liability Cancle of shares

Pay off

A company must as far as possible must not reduce its share capital. The reason being, the day to day functioning, the goodwill, the borrowing capacity of the company and the creditors rely on the security of the share capital. But, this not mean, that the share capital cannot be reduced. It could be done only with the sanction of the Tribunal. (Prior to the Second Anendment in 2002, the power was vested with the Court). The capital of a company may be reduced in any of the following ways: (1) (2) (3) Reduction in the liability on its unpaid shares. The company may cancel any paid up share capital, which is lost or is un-represented by any available assets. The company may pay off any paid-up share capital, which is in excess of the requirements of the company.

The company can reduce its share capital only if authorized by the articles of association. If the articles do not contain any provision for reduction, firstly the articles must be altered to provided for the same. The company must pass a special resolution followed by the approval of the Tribunal, confirming the reduction in the share capital. The Tribunal before confirming must look into the interest of the creditors as well as the interest of the shareholders. The certified copy of the Tribunal confirming the reduction of the capital must be ified with the Registrar of Companies, who shall register the same. The order becomes operative from the date of registration. However, one must not forget that the liability of both present and past members shall change in accordance with the reduction in the capital.

Example: Where the share value is Rs. 100 and is reduced to Rs.80 per share. If Rs. 70 has already been paid, the liability on each share shall be only R.s.10 However, there are certain circumstances wherein reduction in the share capital occurs, without the sanction of the Tribunal. Those circumstances are: (1) (2) (3) (4) (5) (6) In case of forfeiture of shares. By surrender of shares. By cancellation of shares which have not been taken or agreed to be taken. Purchase of shares by the company under the orders of the Tribunal under sec.402(b) V By redemption of redeemable preference shares by the company. V By buying back of shares by the company.

SHARES Share has been defined as a share in the share capital of company, and includes stock except where there is a distinction between stock and shares is expressed or implied. Farwell J. has defined share as the interest of a shareholder in the company measured by a sum of money, [i.e., the nominal amount], for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se. Shares represent equal portion into which the capital is divided. A person acquires shares in a companyV by making application to the company, when subscription is invited. Allotment is governed by the rules of the Indian Contract Act, 1872. Allotment of the shares can be made only after the Board of Directors have passed a resolution to that effect. It must be noted no shares or debentures shall be made, until the beginning of the fifth day after the day on which the prospectus is first issued or luch later time as may be prescribed in the prospectus. Any contravention of this will make the company and every .icer of the company who is in default punishable with fine up rupees fifty thousand.

KINDS OF SHARES A share carries both rights and obligations. A company may issue all shares with same rights and obligations, or may issue shares with different rights and obligations. Where there is variation, the rights attached to different classes of shares are called class rights. The most common types of classes of shares are: (1) Equity or ordinary shares (2) Preferential shares (1) Equity Shares: Means shares, which are not preference share. The rate of dividend is not fixed. In the event of winding up of the company, equity share capital is repayable only, after repayment of the claims of the creditors and preference shareholders. Further equity shares have been on the basis of voting rights are further sub-divided into two kinds, namely: (a) With voting rights or (b) With differential voting rights. Preference shares: A preference share is one, which carries the following two rights over holders of equity share: (a) (b) A preferential right in respect of dividends, at a fixed amount or rate, and A preferential right in regard to repayment of capital on winding up.

(2)

(Note: A private company which is not a subsidiary of a public company, may issue preference shares which provide, no preferential right in return of capital in the case of winding up.) Preference shares are further classified as follow: (a) Cumulative and Non-cumulative: When a company fails to declare the dividend in a particular year, but carrys forward the arrears of dividend, and pays out of the profits of the subsequent year is called as cumulative preference shares. Generally preference shares are cumulative in nature. The arrears shall be paid, before paying the equity shareholders. Non-cumulative preference shares are, when the dividend of a previous year if unpaid, camot be carried forward. Participating, and non-participating: Preference shareholders who participate in the surplus profit, after paying off the preference shareholder and equity shareholder, are called participating preference shareholder On the other hand, if the preference shareholders do not participate in the distribution of the surplus profit, they are called non-participating preference shareholder. Redeemable and Irredeemable Preference shares: Are when shares become payable during the lifetime of a company after the expiry of a fixed period or after giving a certain notice at any time at the will of the Company are called redeemable preference shares. The shares may be redeemed, out of the profits of the company or out of the proceeds of a fresh issue, made for the purpose of redemption. Where the shares are redeemed out of the profits, a sum equal to the amount paid on redemption from profit, shall be transferred to an account called the capital redemption reserve account. On the other hand if the shares are redeemed out of the proceeds of a fresh issue of shares, such shares may then be cancelled according to the procedure laid down. Non-compliance shall render the company and every officer in default, punishable with fine up to Rs. 10,000.

(b)

(c)

On the other hand, if the shares become payable only at the time of liquidation of the company, are called irredeemable preference shares. Generally a company cannot issue irredeemable preferential shares. (d) Convertible and Non-convertible preference shares: Preference shares carrying the option of being converted into equity shares, within a certain period of time are termed convertible preference shares. On the other hand if they do not carry any option of conversion, they are non-convertible preference shares.

OTHER MATTERS RELATING TO SHARES (1) Underwriting agreements: A company may pay commission, to any person who agrees to subscribe or procure subscription for shares or debentures of a company. Such agreements are called underwriting agreements. The payment of commission is subject to the following conditions: (a) Must be authorized by the Articles. (b) The commission paid or agreed to be paid, must not exceed five percent of the price at which the shares are being issued or any other price whichever is less. In case of debentures, the commission must not exceed two and a half percent of the price of the debentures are issued or anyrother price whichever is less. (c) The rate of commission must he disc1od in the prospectus or in the statement in lieu of the prospec as the case may be. (d) The prospectus must state the number of shares or debentures agreed to be underwritten. (e) A copy of the underwriting agreement must be submitted to the Registrar. (f) No commission shall be paid to any person on shares or debentures, which are not offered to the public. Underwriting agreements may be hard underwriting or soft underwriting: Hard underwriting: Where, the underwriter agrees to buy his commitment at the earliest stage. Soft underwriting: Is where an underwriter agrees to buy the shares at a later stage, as soon as the pricing process is complete. (2) Issue of shares at a premium: A company enjoys the power to issue shares at a premium. When the securities are issued at a price above the par or nominal value they are said to be, issued at a premium. The amount received, as premium shall be transferred to an account called the Securities Premium Account. The amount from this account can be utilized only for specffic purposes listed by the act. Issue of shares at a discount: Means, issue of shares below par or face value. Generally this is not allowed, as it would affect the interest of the creditors. But under certain circumstances, the same shall be allowed provided it is specified in the Articles, Ordinary resolution has been passed together with the approval of the Central Government. However, discount not exceeding ten percent shall be permitted. Discount can be allowed only after one year of commencement of the business of the company. Any default in complying with the rules, subjects the company and every officer of the company who is in default, punishable with a fine extending up to rupees fifty.

(3)

Note: Debentures cannot be issued at a discount. (4) Sweat Equity Shares: Are issued to a class of employees at discount or for consideration other than cash, for providing know how or making available rights in the nature of intellectual property or value additions be whatever named called. This can be issued, only after one year of commencement of business, by passing a special resolution and in accordance with the SEBI regulations. Buy Back of shares or Safety Net: By Companies (Amendment), 1999 Act a company can buy back its own shares and other specified securities, from specified reserves, by passing a special resolution. However the buy back cannot exceed twenty-five percent of the total paid up capital and free reserves of the company in that financial year. However by an amendment in 2001, the Board of Directors by passing a resolution authorize for buy back of shares and securities not exceeding ten percent of the total capital and reserves, in any period of 365 days. (6) Price Band: Price band is the price for securities within which the investors can bid. The spread between the floor and the cap of the price band shall not be more than 20%. In other words, it means the cap should not be more than 120% of the floor price. Book Building: Is a process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built up and the price for the securities is assessed on the basis of the bids obtained for the quantum of securities offered for subscription by issuer. This gives an opportunity to the market to discover the price for securities. Green Shoe Option: Is an option of allocating shares in excess of the shares, included in the public issue and operating a post-listing price stabilizing mechanism for a period not exceeding thirty days in accordance with the provisions of Chapter VIII A of the DIP guidelines. This is an arrangement wherein the Issue would be over allotted to the extent of maximum of 15% of the issue size. The company, through a stabilizing agent, exercises this option. Call on shares: Is the demand by the company on its shareholders to pay up the whole or part of the unpaid amount on shares. Call on shares can be made at any time during the lifetime of the company or during the winding up. The following rules needs to be followed: (a) Call must be made in accordance with the Articles. (b) A resolution must be passed by, the Board of Directors. (c) The resolution must state the amount and the time, within which the payment is to be made. Minimum fourteen days notice to be given (d) It must be made on uniform basis. (e) The maximum amount per call cannot exceed twenty- five percent of the nominal value of the share. (f) Call to be made only in the bona fide interest of the company.

(5)

(7)

(8)

(9)

TRANSFER OF SHARES Transfer of shares can take place under: (1) The Companies Act, 1956 (2) The Depositories Act, 1996

(1)

Transfer of shares under the Companies Act: Transferring of shares is one of the important features of a company. Shares can be transferred in accordance with the Articles of Association of a company together with the provisions of the Companies Act. However in case of a private company, there are restrictions on its members with regard to the transfer of shares. Transfer of shares takes place by means of a Share Transfer form, which shall be presented for being stamped by the Registrar. No transfer is valid, unless the requisite stamp is affixed. Then the form is sent to the company for effecting the transfer. Here transfer takes place in a paper format. Transfer of shares become complete only when the name of the transferee is registered in the register of members. Where a company refuses to register a transfer, it shall within two months from the date on which the instrument of transfer was delivered to the company, send notice of refusal to the transferor and transferee, giving reasons for such refusal. Against the order of refusal, appeal can be filed before the National Company Law Tribunal within two months. In case the company does not send notice, in which case an appeal can be filed within four months from the date on which the instrument of transfer was delivered to the company. The National Company Law Tribunal may dismiss or direct the company to register the transfer within ten days of the receipt of the order. Failure to comply with the orders of the Tribunal, shall make the company and every officer in default punishable with fine up to Rs. 10,000 and with a further fine of Rs. 1,000 for every day, after the first day after which the default continues.

(2)

Transfer of shares under the Depositories Act: In this the shares are held in an electronic form. This is done with the help of a Depository Participant, who is an agent of the depository. Share certificates shall be surrendered and credit shall be given to ones account with the number of shares. This process is called dematerialisation. Here transfer takes place with a request of debit through the depository participant. The depository shall arrange to complete the transaction by updating ones account. Here no further communication to is necessary.

TRANSMISSION OF SHARES Here transfer of shares takes place by operation of law. Transmission of shares is the transmitting of shares under the following three circumstances namely: (1) On the death of a shareholder. (2) Insolvency of the shareholder. (3) If the company which is a shareholder, goes into liquidation. (1) On the death of a shareholder, the shares shall vest in legal representatives, subject to the production of Probate or Letter of administration or Succession Certificate as evidence of title. (2) In case of insolvency of the shareholder, his shares shall vest in the Official Assignee or Official Receiver, who can sell and transfer the shares. (3) Where a company is a shareholder and it goes into liquidation, the shares shall vest with the liquidator for necessary action.

CHAPTER 6 - DIRECTORS
A company is an artificial legal person, lacking both physical existence of its own as well as a mind of its own. Hence, it requires some human agency, through which it can function. The Act provides that human agency in the form of directors, who are responsible for the functioning of the company. The minimum number of directors required is two in case of private company and three in case of public company. DEFINITION AND LEGAL POSITION OF A DIRECTOR Definition: S. 2 (13) defines Director includes any person occupying the position of director, by whatever name it called. Thus his position, function and duties that he discharges are important and not the name by which he is called. However, it is important to note that only individuals can be directors. Legal position of a director: As a director performs multi functions, it is very difficult to describe his position. The judiciary has given number of opinions as to the position of the directors. He has sometimes been described as agent, sometimes as trustee, sometimes as managing partner, sometimes as an employee and sometimes as an organ of the human body. But none of these expressions are exhaustive of their powers and responsibilities. This is because the directors position and functions are having similarities with the expression used but are also dissimilar from them. (1) Director as agent: Director is primarily recognised as an agent of the company. Directors role is akin to the agent in the following aspects: (i) Acts of the director are acts of the company: The director is the agent, while the company is the principal. Generally, for the acts of the agent falling within the scope of authority, the principal is liable. So is it in case of company i.e. the company is liable for the directors act. (ii) Notice to a director is. notice to the company: Just as notice given to the agent is notice to the principal, any notice given to the director will be taken to be given to the company. (iii) Ratification: Like a principal who may ratify the act of an agent, company can also ratify acts of a director provided it is not ultravires. Dissimilarities with agent: (1) There can be an implied agency, but not implied director. (2) The directors are agents of the company not shareholders. (3) The directors enjoy much more powers than that of an ordinary agent. (Case Fergusan v. Wilsn (1866)2 Cli. App 771. Director as trustee: Though a director is not trustee in the strict sense of the term yet he has been held to be so since he stands in a fiduciary relation towards the shareholder. Similarities: (1) Director is the trustee of companys property and money like a trustee. (2) Director is the trustee of the powers delegated to him by the shareholders. (3) Like a trustee, he cannot retain secret profits. Dissimilarities: (1) A trustee can acquire property in his own name on behalf of the trust whereas a director cannot do so. (2) Director is a commercial man, managing for the benefit of shareholders and self, while trustee manage only for the benefit of the beneficiary.

(2)

(3) (3)

Role of a director is more varied when compared to that of a trustee.

Director as managing parther: In Automatic Self Cleansing Filter Syndicate Co. Ltd. v. Cunningham (1926) 2 CH. 34, it was held directors role is akin to that of a managing partner. This is because directors while holding the interest of the company, are authorised by the shareholders to manage and control the affairs of the company in which shareholders are considered as inactive partners. Dissimilarities: (1) An individual director cannot bind the other directors unlike partners, where act of one partner binds all other partners. (2) Liabffity of directors are limited, while the liability of partners are unlimited.

(4)

Director as an employee: Although a director may be compared to an employee as he gets paid for the work done, it may not be correct to call him so. Dissimilarities: (1) He is not employed by the company, rather he is appointed by the members in the AGM. (2) A director can hold directorship of as many as 15 companies.

(5)

Director as an organ of the body: A director is many a time compared to the brain, because the company operates through the director. Dissimilarity: Generally an organ does not suffer from any illness without its immediate effect on the whole body. Whereas director is liable independently for breach of duty.

In conclusion one may say, director performs all the roles, but not any one role exclusively. Directors ,

MODES OF APPOINTMENT OF DIRECTORS Constitution of Board of Directors: The directors of a company are collectively called Board of Directors. Every public company shall have a minimum of 3 directors and private company shall have a minimum of 2 directors. By amendment in 2000, a public company having paid up capital of 5 crores or more or having 1,000 or more small shareholders, ha1l have a director elected by the small shareholders. The maximum number is twelve, but may be increased with the permission of the Central government. A person cannot be a director of more than 15 companies simultaneously Modes of appointment of directors: There are five modes of appointments. They are: (1) First Directors. (2) Appointment of directors in the Annual General Meeting. (3) Appointment of directors by the Board of Directors. (4) Appointment of directors by the Central Government. (5) Appointment of directors by the third parties. (1) First Directors: They are usually named in the articles of association. If not named, the subscribers may appoint or they themselves shall be deemed to be the directors.

However, these directors hold office only till the first annual general meeting. (2) Appointment in the Annual General Meeting: In case of public company or a private company which is a subsidiary of a public company, only one-third of the directors are permanent directors. While two-thirds of them retire by rotation. Of the two thirds, one-third shall retire in every annual general meeting. The director longest in office is first to retire. The directors are elected by ordinary or by proportional representation. Directors are eligible for reappointment. Appointment by the Board of Directors: There are three kinds of directors appointed by the Board of Directors. (i) Additional Directors: Subject to the provision of the articles of association the Board, can appoint additional directors. However, these directors hold office only till the next annual general meeting. (ii) Filling up Casual Vacancies: The board is empowered to fill up a casual vacancy, arising by reasons of death, resignation, disqualification of a director appointed in the general meeting. The person shall hold office only upto the date, the director in whose places he is appointed would have held the office, if he had not vacated or the next AGM whichever is earlier. (iii) Alternate Director: The Board if authorised by the articles of association or by the company in the general meeting, appoint alternate director to act for a director during his absence, for a period of not less than three months from the State where the meetings are ordinarily held. The alternate director holds office, till the return of the director in whose place he was appointed or till the period the original director was entitled to hold office, whichever is earlier. Appointment by Central Government: The Central Government is empowered to appoint directors to prevent oppression and mismanagement on orders passed by the Company Law Board. These directors can hold office for a period of not more than three years on one occasion. Appointment by third parties: At times third parties like financial institutions, under Sick Industrial Companies Act, directors may be appointed.

(3)

(4)

(5)

QUALIFICATIONS AND DISQUALIFICATIONS Qualifications: (1) He must be competent to contract. (2) Share qualifications: Although the Companies Act does not specify share qualification, articles may specify the minimum shares a director must hold in order to be eligible to be a director. The nominal value of qualification share shall not exceed rupees five thousand unless the nominal value of one share is more than five thousand rupees. The share must be acquired latest by 2 months of appointment. Disqualification: A person shall not be capable of being appointed as a director of a company if (1) he is found to be of unsound mind. (2) he is an undischarged insolvent. (3) he has applied to be adjudicated as insolvent. (4) he has been convicted of any offence involving moral turpitude and sentenced to imprisonment for not less than six months and a period of five years has not lapsed from the date of expiry of the sentence. (5) he has not paid calls for six months.

(6)

he has been disqualified by the Court on the ground of fraud or misfeasance in relation to the company.

VACATION OF THE OFFICE OF DIRECTORS The office of a director shall become vacant if the director incurs the below mentioned disqualifications or on any of the following additional grounds: (1) Where he absents himself from three consecutive meetings of the Board or from all meetings of the Board for a continuous period of three months, whichever is longer, without leave of absence. If he has taken a loan from the company in contravention of Companies Act. If he fails to obtain the qualification shares within two months of his appointment or at any time he ceases to hold them. If he enters into a contract with the company without disclosing his personal interest. If he is disqualified by an order of the Court. If he is removed before the expiry of period of his office. The rules of vacation shall apply to both public and private companies.

(2) (3) (4) (5) (6)

MODES OF REMOVAL OF DIRECTORS There are three modes of removal of directors. They are (1) By Shareholders. (2) By Tribunal. (3) By Central Government. (1) By Shareholders: Shareholders can remove a director by following the below mentioned procedure: (i) The company must be. served with special notice atleast fourteen days prior to the passing of the resolution for removal of the director. Grounds may be stated. (ii) A copy of the same is sent to the director concerned. (iii) Reply if any, by the director may be circulated amongst members, if time permits or else may be read out before passing of resolution. (iv) All members are informed. (v) Removal is effected by passing ordinary resolution. However, in the following cases, a director cannot be removed by the shareholders: (i) Where appointment is by the Central Government. (ii) Where the director is holding office for life on April, 1, 1956 of a private company. (iii) Where the company appoints two-thirds of its directors by proportional representations By Tribunal [Substituted for Company Law Board, by Companies (Second Amendment) Act, 2002]: In case of oppression and mismanagement, the Tribunal may order removal of director/s In such cases, the Tribunal may appoint a special officer or an advisory board for the proper working of the company. By Central Government: The Central Government on the recommendation of the Tribunal may remove a director.

(2)

(3)

Grounds for reference to Tribunal: (a) The director is guilty of fraud, misfeasance, breach of trust or persistent default in discharging his duties.

(b) (c) (d)

Business is not being carried on; in accordance with sound business principles. That the conduct of business by such director, is affecting the interest of trade, industry or business to which such company pertains. That the business of a company is, or has been conducted by such a person with a intent to defraud creditors, or for unlawfu purpose or in a manner prejudicial to the public interest.

Procedure: (1) The Central Government may refer a case against the director to be removed on any of the above grounds to the Tribunal. (2) The Tribunal, shall conduct an enquiry. (3) The Tribunal, may if it thinks fit, direct the director against whom enquiry is pending, not to discharge his duties during the inquiry. (4) The Tribunal, shall send its recommendations to the Central Government. (5) The Central Government shall suitably pass orders. If a director is removed by the Tribunal, he shall be disqualified from holding any such post for a period of five years.

POWERS AND RIGHTS OF DIRECTORS Powers of Directors: Powers of directors can be studied under the following headings: (1) General powers. (2) Powers exercisable with the approval of the Board. (3) Powers exercisable with the approval of shareholders. (4) Powers exercisable with the consent of Central Government. (1) General powers: The powers of the Board of Directors are coextensive with that of the company. However, the shareholders, have an overriding power over the decisions of the Board in. the following cases: (i) Directors acting malafide. (ii) Board becoming incompetent. (iii) Deadlock in the management. (iv) Under residuary powers.

(2)

Powers exercisable with the approval of the Board of Directors: The board of directors shall exercise the followings powers only by passing a resolutions at the board meeting: (a) call on shares (b) issue debentures (c) buy back shares (d) borrow money (e) power to make loans (f) invest money (g) appoint additional, casual and alternative directors. Powers exercisable only with the consent of shareholders (by approval at the AGM): This powers may also be referred as restrictions on the powers of the board of directors. (i) Sale, lease or disposal of the companys undertaking. (ii) Extension of time for repayment of debt due by a director. (iii) Investment of amount of compensation, received by the company on compulsory acquisition in securities other than trust securities.

(3)

(iv) (v)

Borrowings beyond paid-up capital of the company. Contributions to any charitable or other funds beyond Rupees 50,000 in one financial year or 5% of its average net profits during the preceeding three financial years, whichever is greater.

(4)

Powers exercisable with the approval of the Central Govemment: The following powers may be exercised by the board of directors only with the prior approval of the Central Government. (i) To amend provision relating to the appointment of a managing director, wholetime director or non-rotational director. (ii) To appoint a person for the first time as managing or whole-time director. (iii) To sanction loan to directors of a public company. (iv) To increase the remuneration of a director. (v) To invest in shares of another company.

Rights of Directors: The Act confers following rights on directors: (i) Right to attend and participate in the meetings. (ii) Right to remuneration: For whole-time director or managing director of a public company or a private company, which is a subsidiary of a public company remuneration may be upto 5% of net profits, if there is one such director and not more than 10% if there are two or more directors. For other directors it should not exceed 1% of net profits where the company also has managing or whole time directors and not more than 3% of net profits in other cases. The remuneration in all cases may be paid monthly, quarterly or yearly. (iii) Right to compensation: A director is entitled to compensation on pre-mature termination. However no compensation shall be paid if the director is guilty of fraud, breach of trust.

DUTIES AND LIABILITIES OF DIRECTORS Duties of Directors: The duties of a director are (i) Duty to act in good faith: Directors are in a fiduciary relation to the company. Therefore, they must discharge their duties with greatest good faith. (ii) Duty to act with reasonable care and diligence. (iii) Duty to attend board meetings and committee meetings. (iv) Duty not to delegate functions. (v) Duty to invest companys money in a proper state of investments. (vi) Duty to deposit money of the company in a scheduled bank. (vii) Duty to forward statutory report to every member. (viii) Duty to call for extra-ordinary meeting, when validly demanded. (ix) Duty to make good the losses in capital before declaration of dividend. (x) Duty to prepare and place the balance sheet at the ACM. (xi) Duty to refrain from acting on behalf of the company, in the case of liquidation. Liabilities: The liabilities of directors may be studied from three points. (i) Liability of directors as shareholders: Directors are also shareholders of the company. Hence like the shareholder their liabilities may be limited, unlimited or limited by guarantee based on the nature of the company.

(ii)

(iii)

Personal liabilities of directors: Personal liabilities of directors occurs in the following circumstances: (a) For breach of trust. (b) For untrue statement in the prospectus, failure to allot shares within stipulated time. (c) For ultravires acts of the company. (d) For misapplication of companys money. (e) For fraud and torts of the company directed by the directors. (f) For loss on account of failure to exercise skill and diligence. Criminal liability: The Companies Act imposes criminal liability upon directors, for certain breach of their duties like making untrue statement in the prospectus, falsification of accounts etc.

MANAGING DIRECTOR Sec. 2(26) defines a managing director as: A director wlo by virtue of an agreement with the company or of a resolution passed by the company in general meeting or by its Board of directors or, by virtue of its memorandum or articles of association, is entrusted with substantial powers of management which would not otherivise be exercisable by him, and includes a director occupying the position of a managing director, by whatever name called. Thus a managing director is a person with vast substantial powers, and could be appointed by an agreement or by resolution passed in the general meeting or by resolution passed in the board of directors meeting or by virtue of Memorandum of Association or Articles of Association. Every public company and every private company, which is a subsidiary of a public company and having a paid up capital of Rs. 5 crores, shall have a managing director. The appointment however, has to have the approval of the Central Government. The application for approval of the appointment has to be made within 90 days of appointment. Where the application is not approved by the Central Government and if the managing director so appointed fails to vacate the office, is liable to be fined which may extend up to Rs. 5000 per day, till he vacates the office. Where the appointment is made in contravention of Schedule XIII, the Central Government may refer the matter to the Tribunal, in which case the Tribunal has the power to impose the following penalties: (1) Company shall be liable to fine up to Rs. 50,000. (2) Every officer of the company who is in default, shall be liable to a fine up to Rs. 1 Lakh. (3) The person appointed as managing director shall be liable to fine up to Rs.1 lakh and also will have to refund the entire amount of salaries, commission and perquisites received. Note: The acts done up to the date of finding, would be valid provided they were otherwise valid. A person cannot be a managing director of more than two companies, if one of the two is a public company or a private company, which is a subsidiary of a public company. Appointments cannot be made for more than five years at a time. These provisions do not apply to a private company. A managing director is disqualified if: (1) If he is an un discharged insolvent; or (2) Has at any time been adjudged an insolvent; or

(3) (4)

If he suspends, or has at any time suspended payment to his creditors or makes or has at any time made a composition with the; or If he is, or has at any time been convicted by a court of an offence involving moral turpitude.

A managing director may be paid remuneration either monthly or at specified percentage of the net profits of the company or partly by one way and partly by another. But such remuneration shall not exceed -five percent of the net profits for one such director and if there are more than one managing director not more than ten percent of the net profits for all of them put together. Any change in remuneration other than stated needs the prior approval of the central government.

WHOLE TIME DIRECTOR The Companies Act has not specifically defined whole time director. The term managing director or whole time director has been generally used in the sections. However, in the explanation to sec. 269, it has been stated, whole time director includes a director in the whole time employment of the company. The provision regarding appointment, remuneration, disqualification, tenure etc. are the same as that of the managing director. The only points of difference between the whole time director and the managing director are, the former cannot be appointed in more than one company at the same time, whereas the managing director can be appointed in two or more companies depending on the nature of the company. Also a whole time director has no restriction on the term of appointment, whereas a managing director can be appointed for not more than five years at a time.

IMPORTANT QUESTION Chapter 1 Q. 1 Define a Company. Explain various advantges and disadvantages of a Company. Q. 2 Explain the doctrine of Corporate veil. Under what circumstances can the veil be lifted? Q. 3 Briefly explain the classification of companies under the Act. Q. 4 Distinguish between a Private company and a Public company. Chapter 2 Q. 1 What is the need for memorandum of association? Explain the clauses. Q. 2 What do you mean by Articles of Association? Chapter 3 Q. 1 What is a prospectus? What does not consitute a prospectus? Q. 2 What are the remedies available to a subscriber for mis-statements in the prospectus? Discuss. Chapter 4 Q. 1 Who is a member of a company? Explain the different modes of acquiring membership in a company. Q. 2 What are the rights and liabilities of a member of a company? Chapter 5 Q. 1 Briefly explain the various classification of preference shares. Q. 2 Write a note on transfer and transmission of shares. Q. 3 Write a note on underwriting agreement.

CHAPTER 7 - COMPANY MEETINGS INTRODUCTION A company is an artificial person, acting through the Board of Directors. In fact, the capital of the company comes from the shareholders and members. Hence, as they have invested money, they are also interested in the functioning of the company. But they are not in a position to monitor day to day activities. They express their opinion on important decisions of the company in the meetings. The following are the kinds of meetings where the shareholders participate. (1) Statutory Meeting (2) Annual General Meeting (3) Extra-ordinary General Meeting (4) Class Meeting KINDS OF MEETINGS (1) Statutory Meeting: This meeting is to be held by every public company limited by shares or limited by guarantee and having a share capital. The object of the meeting is to acquaint the members with matters arising out of the promotion and formation of the company. It is conveyed after one month and not later than six months of commencement of business. The Directors are required to give minimum twenty-one days notice to the members. Along with the notice, a statutory report must be sent to all the members. A copy of the report is required to be sent to the Registrar. The statutory report contains the following matters: (a) Total shares allotted. (b) Cash received. (c) Summary of receipts and payments made up to 7 days prior to the report. Company Meetings 139 (d) Names, addresses and occupations of the directors, manager and secretary of the company and of its auditors. (e) Particulars of contracts if any. (f) Extent of non-carrying of each underwriting contract, together with the reason. (g) Details of commission and brokerage paid or to be paid to the director or manager, in connection with the issue of sale of shares or debentures. (h) Details of arrears due from every director and manager. If any default is made in filing the statutory report or in holding the statutory meeting, those in default are liable to fine, which may extend to five thousand rupees. Another consequence being the Tribunal can order for compulsory winding up of the company. (2) Annual General Meeting (AGM): Every company is required to hold the annual general meeting, in addition to any other meeting held by the company. This meeting enables the shareholders with the opportunity to exercise their powers of control, to place their views, and seek clarifications on matters that may not have convinced them.

The first general meeting is required to be held within a period of not more than 18 months from the date of its incorporation, and if such a general meeting is held within that period, it shall not be necessary for the company to hold any annual general meeting in the year of its incorporation or in the following year. Example: A company incorporated in January 1, 2003. The first annual general meeting of the company was held in May 2004. The company need not hold any other meeting in 2003 and 2004. The provisions relating to this meeting may be summarized as follows: (a) AGM must be held once a year. The gap between two consecutive AGMs cannot be more than 15 months. However, the Registrar of Companies may extend the time for holding the ACM by not more than 3 months. (b) At least 21 days notice of the meeting must be given to every member of the company. The notice must specify the date, place and time of the meeting. (c) Shorter days of notice may be given with the consent of all members entitled to vote at the meeting. The meeting must be held on a day, which is not a public holiday and during the business hours. (d) The meeting must be held at the registered office or the company or at some place within the city, town or village in which the registered office is situated. (e) The business to be transacted at such a meeting may comprise of: (i) Consideration of accounts, balance sheet and the reports of the Board of directors and auditors. (ii) Declaration of dividend (iii) Appointment of directors. (iv) Appointment of auditors and fixation of their remuneration. (v) Any other business. (f) Where the meeting is not held in accordance with the law, the company and every officer of the company who is in default shall be punishable with fine which may extend to Rs. 50,000 and in case of continuing default with further fine which may extend to Rs. 2,500 per day during the continuance of default. Further the Central Government has the power to call for the ACM. (3) Extraordinary or Special General meeting: Any meeting held between two annual general meeting is called extraordinary general meeting. It is called to transact some urgent or special business, which cannot be postponed till the next annual general meeting. The provision relating to this meeting may be summarized as follows: This meeting may be called: (a) By the Directors (b) By the Directors, at the requisition by such number of members who hold at least 1/10th of the paid up capital, and have a right to vote. If the company has no share capital, it must be signed by such number of members who have at least 1 / 10th of the total voting power.

(c)

(d)

(Note: The meeting must be called within 45 days from the date of deposit of the requisition.) By the requisitionists themselves, where the Directors fail to call the meeting under the previous subsection. The meeting must be held within 3 months from the date of deposit of the requisition. By the Tribunal, when it is impracticable to call for an extraordinary meeting. Here the Tribunal may give directions in respect of the place, date and the manner in which the meeting be held and conducted.

(4)

Class meeting: It is a meeting of a particular class of shareholders. It is generally held to pass resolution, that will bind only the members of the class concerned. These class meetings must be convened, whenever it is necessary to alter or change the rights or privileges of that class as provided by the articles.

LEGAL RULES FOR A VALID MEETING The company meetings are held wherein decisions on important and relevant matters are taken. Also, these decisions shall be binding on all persons in respect of whom the matters are decided. Hence, it is important that the meetings are held in accordance with the procedure laid down. The following are the legal rules for a valid meeting: (1) Proper Authority: The meeting must be called, for by the proper authority. The proper authority to call a general meeting is the Board of Directors. Proper Notice: A proper notice should be given to every member of the company. A deliberate omission of notice, even to a single member shall invalidate the meeting. The notice should be given minimum 21 days prior to the date of the meeting. In computing the period, the date of receipt of notice and the date of meeting shall be excluded. Contents of Notice: The notice must specify the following: (a) The place, day and hour of the meeting. (b) The nature of the business to be transacted at the meeting. Quorum: The quorum that is required to hold the meeting as valid, is stated in the Articles of Association. However the minimum required is 2 members in case of a private company and 5 members in case of a public company. Chairman of the Meeting: The Chairman is necessary for the conduct of the meeting. He is the person to put resolution to the meeting, count the votes, declare the result and authenticate the minutes by signing. The appointment of the chairman is regulated by the Articles of Association of the company. But, if the Articles are silent, then the members shall elect a chairman for the meeting.

(2)

(3)

(4)

(5)

QUORUM Quorum means the minimum number of members required, to being present personally in order to constitute a valid meeting. The Articles of Association provides for the quorum. But if the quorum has not been stated in the Articles, then minimum 5 members in case of a public company and 2 members in the case of any other company constitute the quorum (member refers to member present in person and not by proxy). If within half an hour the quorum is not present, the meeting shall stand adjourned to the same day next week at the same time and place. However, the Board may fix some other time, day and place but it should be within the town, city or village of the registered office. If in the adjourned meeting also, quorum is not present within half an hour, then the number of members present shall constitute the quorum and the meeting may proceed. One must note that quorum is required at the time when the meeting proceeds to transact business. It need not be present through out or at the time of passing resolutions or voting. In Sharp v/s Dawes (1876), 2 Q.B.D.26, held one person cannot constitute a meeting as prima-facie meeting means coming together of more than one person. However under the following circumstances the presence of one member may constitute a valid quorum: (1) In case of class meeting of shareholders where all the shares of that class are held by one person. (2) Where the Central Government/Tribunal calls or directs the calling of AGM of the company, on the application of any member of the company, it may direct even one member of the company present in person or by proxy shall be deemed to constitute a valid meeting. (3) The Central Government/Tribunal may call a meeting other than the AGM and may direct that even one member present in person or proxy shall be deemed to constitute a valid meeting. (4) When the Board of Directors is empowered by Articles of Association to delegate some of their powers to a committee consisting of one member. (5) In case of adjourned meeting, quorum is irrelevant. Even one member present personally, constitutes the quorum. VOTING There are various methods, which can be adopted by the chairman to put the matter to vote in order to ascertain the wishes of the members. They are as follows: (1) By show of hands or (2) By taking a poli (1) By show of hands: At any general meeting, matters may be put to vote by show of hands. Here, it is one man, one vote irrespective of the number of shares held. It shall be the duty of the chairman to count the hands raised and to declare the results accordingly. A declaration by the chairman as to the results shall be conclusive.

(2)

By poll: Poll may be demanded by the members if they are dissatisfied by the results of voting by show of hands. The chairman is bound to order for a poli when demanded by: (a) In case of a public company having a share capital, by member or members having: (i) At least 1 / 10th of the total voting power in respect of resolution, or (ii) At least Rs.50,000 of paid-up capital. (b) In case of a private company having a share capital by: (i) One member present in person or by proxy if not more than seven such members are personally present, and (ii) Two such members present in person or by proxy if more than seven members are personally present. (c) In case of any other company, by members having at least 1/10th of the total voting power in respect of the resolution. A poll demanded on a question of adjournment or the appointment of a chairman, shall be taken forthwith. In any other case, a poll shall be taken within 48 hours of the demand for poll. A poll is complete when the result is ascertained. RESOLUTIONS A formal proposal put to the members in a meeting of the company is called resolution. There are three kinds of resolutions, may be passed by a company. They are: (1) Ordinary Resolution; (2) Special Resolution; (3) Resolution requiring special notice. 1. Ordinary Resolution: When a motion is passed by simple majority of the members voting at a general meeting it is said to have been passed by an ordinary resolution. In other words, the votes cast in favour of the resolution are more than the votes cast against the resolution. Some of the matters requiring ordinary resolution are as follows: (a) Issue of shares at a discount. (b) Alteration of share capital. (c) Adoption of statutory report. (d) Adoption of profit and loss, account, balance sheet along with report of directors and auditors. (e) Appointment of auditors and fixation of their remuneration. (f) Appointment of first directors who are liable to retire by rotation. (g) Appointment of managing director. (h) Removal of a director before the expiry of his term. Approval of appointment of sole selling agent. (i) Voluntary winding up of a company. (j) Register an unlimited company as a limited company. Special Resolution: When the motion is passed by not less than three-fourth majority of the members at the meeting. Generally matters are so important and outside the

(2)

ordinary course of the companys business, that majority of the need to members approve of them. Matters requiring special resolution are: (a) Alteration of any provision contained in the Memorandum, which could lawfully have been contained in the Articles instead of the Memorandum. (b) Alteration of the registered office clause from one city! town/village to another or from one state to another. (c) Alteration of the object clause. (d) Alteration of the Articles. (e) To create reserve capital. (f) To reduce the share capital. (g) To commence new business. (h) To pay interest out of the capital. (i) To appoint auditors under certain circumstances. (j) To appoint inspectors to investigate the affairs of the company. (k) To appoint sole selling agents, where the paid up capital of the company is Rs. 50,00,000 or more. (1) To permit directors etc. to hold office of profit. (m) Investment exceeding the prescribed limit. (n) To have the company wound up by the tribunal. (o) Winding up of the company voluntarily. (3) Resolution requiring special notice: A resolution requiring special notice means a notice of at least 14 days, to move the resolution has to be given to the company by the shareholder. The company on receipt of the notice shall issue a notice to its shareholders in this regard, not less than 7 days before the meeting. The company if so desires may instead of serving notice on the shareholders, may give an advertisement in the newspaper or may adopt any other appropriate manner. Matters requiring resolution with special notice are: (a) Appointment of auditor other than the retiring one. (b) Removal of director before the expiry of the term and appointment of another in the place of the removed director. (c) Appointment of certain person, who cannot be appointed in the ordinary course as director.

PASSING OF RESOLUTION BY POSTAL BALLOT: This provision has been incorporated by Companies (Amendment) Act, 2000 with effect from June 2001. The company is permitted to seek votes of its members through postal ballot. The company shall send a notice to all the shareholders, along with a draft resolution explaining the reasons thereof, and requesting them to send their assent or dissent in writing on a postal ballot within a period of thirty days from the date of posting of the letter. The company shall appoint one scrutinizer (a person who is not in the employment of .the company, may be a retired judge or any person of repute) to conduct the postal ballot voting process in a fair and transparent manner.

The following are the matters where resolutions may be passed through postal ballot: (1) Alteration of the object clause of Memorandum. (2) Alteration of the articles of association in relation to the deletion or insertion of provisions defining private company. (3) Buy-back of own shares by the company. (4) Issue of shares with differential voting rights as to voting or dividend or otherwise. (5) Change in place of registered office outside the local limits of any city, town or village. (6) Sale of whole or substantially the whole of the undertaking of a company. (7) Giving loans or extending guarantee or providing security in excess of the prescribed limit. (8) Election of a director i.e., small shareholders director. (9) Power to compromise or make arrangements with creditors and members. (10) Variation in the rights attached to a class of shares or debentures or other securities. Any default made in complying with the rules, the company and every officer of the company, who is in default shall be punishable with fine, which may extend to fifty thousand rupees. MINUTES Minutes are a record of the business transacted at a meeting. The minutes must contain a fair and correct summary of the proceedings. The minutes are maintained in the Minute Book, which have the pages numbered. Minutes must be entered within 30 days of the conclusion of the meeting concerned. The minutes are the evidence of the proceedings. A member has the right to inspect free of cost the minutes of the general meeting of the company. Also copy can be obtained on payment of the prescribed fee. The copy shall be furnished within 7 days of requisition.

CHAPTER 8 - BORROWING POWERS OF THE COMPANY

INTRODUCTION All companies be it a trading company or a non-trading company requires money to carry on its activities. The finance required by a company are met by two ways: (1) Issue of shares (2) By public borrowing Finance secured from the issue of shares has already been covered. Hence, in this topic we shall restrict ourselves to public borrowings. BORROWING POWERS Every companys power to borrow money is subject to the Companies Act and/or the Memorandum or Articles. However this right varies, depending on whether the company is a trading company or a non-trading company. Where the company is a trading company, the power to borrow is implied and hence, the company may borrow even if the power has not been specifically provided in the Memorandum or Articles. However, in case of non-trading company, on the other hand, does not have the power to borrow, unless it has been expressly or impliedly stated in the Memorandum or Articles. In all kinds of companies, this power to borrow can be exercised by the board of directors. The power to borrow money can be exercised by a public company, only after obtaining the certificate of commencement of business. While in the case of a private company, the board of directors can borrow money at any time. EFFECTS OF ULTRA VIRES BORROWING Although the company has the power to borrow, if it borrows beyond its express or implied powers, the borrowing becomes ultra vires. Borrowing may be ultra vires the company or ultra vires the directors. Thus the effects can be accordingly dealt with. Effect of borrowing which is ultra vires the company: Where the board of directors borrow money beyond its express or implied powers, the borrowing is ultra vires the company and is void. Hence, does not create an actionable debt. However, the following equitable remedies shall be available to the lender: (1) Injunction and recovery: Where the money lent to the company has not been spent, the lender may obtain an injunction, to restrain the company from parting with the money and seek for the recovery. (2) Subrogation: If the company in paying off its lawful debts, has used the money borrowed, the lender can subrogate to the position of the creditor so paid. However, he shall not have any priority over the other creditors even if the debts paid off had priority. (3) Identification and tracing: Where the money is traceable or where the company has purchased property, with the ultra vires borrowing, the lender may claim such money or property.

(4)

Suit for damages against the directors: The lender may claim damages from the directors and sue them personally for a breach of warranty of authority. However, this right is not available, where the fact that the company has no power to borrow is apparent. Borrowing which is intra vires the company but ultra vires the directors: Where the borrowing is merely in excess of the power of the directors but not of the company, it can be ratified and rendered valid. Then, it would be binding both on the company and the lender. On the other hand if the company refuses to ratify the directors act, the principle of agency shall apply. However, if the borrowing amounts to an internal irregularity over which the outsider has no means of knowing, then the rule laid down in Royal British Bank V/S Turquand shall apply.

DEBENTURES The most usual form of borrowing by a company is by the issue of debentures. Debentures under the companies reads as: Sec.2(12) Debenture includes debenture stock, bonds and any other securities of a company whether constituting a charge on the companys assets or not. Thus the act does not define what a debenture is. Thus it is commonly understood to mean, a document acknowledging a loan made to the company and providing for the payment of interest on the sum borrowed until the debenture is redeemed. It may or may not be under seal and so does not necessarily imply that any charge is given on the companys asset, though such a charge usually exists. CHARACTERISTICS OF DEBENTURES (1) (2) (3) (4) (5) It is issued by a company and is usually in the form of a certificate, which is an acknowledgement of indebtedness. It usually specifies the date of redemption. It also provides for the payment of principal and interest at specified date or dates. It generally creates a charge on the undertaking/s of the company. A debenture holder does not have any right to vote in the company meetings. The debentures of a company are movable property, transferable in the maimer provided by the articles. KINDS OF DEBENTURES Kinds of Debentures Nonconvertible

Bearer

Registered

Redeemable

Irredeemable

Convertible

(1)

Bearer debentures: Are also known as unregistered debentures, and are payable to bearer. They are regarded as negotiable instrument. Now-a-days companies generally do not issue this kind of a debenture. Registered debentures: These are debentures which are payable to the registered holders, whose name appears in the register of debenture holders. Such debentures are transferable in the same way as share or in accordance with the conditions stipulated. Redeemable Debentures: Here the debentures are issued for a specified period of time. On the expiry of that specified time, the company has the right to pay back the debenture- holders and have its properties released from the mortgage or charge. Generally, debentures are redeemable. Irredeemable debentures: Are also known as perpetual debentures. A debenture will be treated as irredeemable, where either there is no period fixed, for repayment of the principal amount or repayment of it is made conditional on the happening of an event, which may not happen for an indefinite period of time, e.g.; winding up of a company. Convertible debentures: These debentures carry an option to the holders to convert them into preference or equity shares, after a certain period. If the holder, exercise the right of conversion, they cease to be lenders to the company and become members. The convertible debentures may be ful1y convertible (FCD) or partly convertible (PCD). Non-convertible debentures: These debentures do not give any option to their holders to convert them into preference e equity shares. They are to be duly paid, as and when they mature.

(2)

(3)

(4)

(5)

(6)

DEBENTURES WITH PARI PASSU CLAUSE Generally, creditors of a certain kind are ranked in the order of time. Debenture holders are also like creditors. Hence in the event of the company having insufficient funds, the debentures shall be payable according to the date of issue or in accordance with the numerical order. However, where the pari-passu clause is used in the debenture, then all the debenture of the same series are to be ranked together, without any priority of one over the other, as regards the charge created to secure them. In other words they are discharged rateably, though issued at different and varying times, in the event of insufficient funds. MORTGAGES AND CHARGES When a company borrows money, it also has the power to give security for the debt by creating a mortgage or charge upon its assets. Although strictly speaking there is a difference in mortgage and charge, under section 124 of the act, the expression charge includes mortgage. The charge created on the assets of the company may be of two kinds. They are: (1) Fixed Charge. (2) Floating Charge.

(1)

Fixed Charge: Is also known as Specific Charge. It is an equitable charge, which is created on some specific and definite assets of the company eg.; charge on the land, building etc. Thus, the company is restrained from dealing with the property with charge, without the consent of the holder of the charge. All transactions are subject to the charge.

(2) Floating Charge: It is a charge that is created on property that is changing, eg.; stockin- trade. The company can deal with such property, in the normal course of business. A floating charge may get converted into a fixed charge. This is known as crystallisatiOn of a floating charge. This happens when: (a) (b) (c) (d) The company goes into liquidation1 or The company ceases to carry on business, or A receiver is appointed1 or A default is made in paying the principal and / or interest and the holder of the charge brings an action to enforce it.

REGISTRATION OF CHARGES Registration of charge helps the people dealing with the company, to ascertain as to what extent the company has charge on its assets and it also facilitates inspection of documents and records. The Act requires the following charges to be registered with the Registrar. (1) A charge for the purpose of securing any issue of debentures; (2) A charge on uncalled share capital of the company (3) A charge on any immovable property; (4) A charge on any book debts of the company; (5) A charge not being a pledge on any movable property of the company. (6) A floating charge on the undertaking or any property of the company including stock in trade; (7) A charge on calls made but not paid; (8) A charge on a ship or any share in a ship; (9) A charge on goodwill, or a patent or a licence under a patent, or.a trademark or a licence under a trademark; or a copyright or a licence under a copyright. The company is required to register the charge in the above- mentioned cases within 30 days of creation of the charge. The Registrar may if satisfied, extend the period by another 30 days on payment of additional fee not exceeding ten times the amount of fee specified. CONSEQUENCES OF NON-REGISTRATION OF CHARGE (1) The money secured becomes immediately payable. (2) The charge-holder cannot claim right of lien on the documents of title. (3) The unregistered charge automatically becomes void against the liquidators when the winding up commences. (4) On the winding up of the company, the charge-holder becomes an unsecured creditor and cannot claim benefit of the charge.

(5)

Failure to register the charge as required, will hold the company and its officer punishable with fine up to Rs. 5000 for every day the default continue.

CHAPTER 9 - THE MAJORITY RULE AND MINOROTY RIGHTS INTRODUCTION The company is an artificial legal person. It acts through the human agency. The number involved in case of a company, may range from minimum two in case of a private company to a maximum of fifty, while in case of public company the minimum number is seven whereas the maximum is unlimited. For all- important matters governing the company administration and management, other than those delegated to the board of directors, decision is by, the majority votes of the shareholders. The majority vote may either be a simple majority or a special majority. This is evident from the provisions of resolutions under the companies act. Thus the company is governed and managed by the will of the majority and thus bind the minority. This rule is known as Majority rule or the rule of supremacy of the majority. MAJORITY RULE OR RULE IN FOSS V/S HARBOTTLE The supremacy of the majority rule was laid down in the year 1843 in the famous case of Foss v/s Harbottle. (1843)2 Hare 461. In this case, two shareholders brought an action against the directors and promoters of the company alleging, that they were responsible for concerting and affecting various fraudulent and illegal transactions, whereby the property of the company was misapplied, alienated and wasted and prayed, the directors be asked to make good the loss suffered by the company. However, the company in its general body meeting had already decided not to take action against the directors. The court held, the acts of the directors were capable of confirmation by the majority of members,and the proper plaintiff for wrongs done to the company, is the company itself and not the minority shareholders. It further held, that the company can act only through its majority shareholders. BASIS OF THE RULE OF SUPREMAC OF MAJORITY The basis of the rule of supremacy of majority may bestated as follows: (1) To honour the will of the shareholders: The will of the majority must prevail. It is also inferred that the sbreholder agrees to be guided, by the will of the majority shafeholders. Thus the acts, which are legally confirmed by the majority, are binding on the company and minority cannot bring an action. (2) To avoid multiplicity of suits: It is the fundamental principle of law, unnecessary litigation should be avoided, and there should be an end to the litigation. The rule of majority, seeks to ensure this principle. If each and every shareholder were given the right to bring an action against the person who has caused loss to the company, then there may arise a situation that for the same cause, as maiiy actions as the number of shareholders may be brought. (3) To recognize the separate legal entity of the Company: it is s believed that any wrong to the company, the COmpaty itself should bring an action and not individuals. (4) To preserve the rigit of the majority to decide a democracy, majorities will, that shall prevail.

EXCEPTIONS TO THE RULE OF SUPRE1MCY OF MAJORITY Although law firmly believes in the majority rule, but one cannot totally ignore the voice of the minority. With tie it was realized the majority could approve, only those acts which can be ratified. This resulted in the exceptions to the majoty rule wherein every shareholder may bring an action. This is4 called as the minority rights. Under the following circumstances the minority can exercise their right: (1) Ultra vires acts: The acts that are ultra vires the company, cannot be ratified even by the majority. Every shareholder has the right to bring an action to restrain the company from doing such acts. Example: A company was formed, and one of the objects was to advance money on security of land, houses, machinery. However, the company lent money without any security. Even a single shareholder, has the right to bring an action, as the act is ultra vires the object clause. (Bharat Insurance Company v/s Kanhaya La! AIR (1935) Lahore 792). (2) Fraud on the minority: Sometimes, the decision of the majority constitutes a fraud on the minority. In such case, the minority may challenge it. Example: A and B were two competing companies. The majority of the members of A were also the members of B. A had started some legal action against B. But at the meeting of the company A, the majority passed a resolution to compromise the action in a manner which was favourable to company B and unfavourable to company A. Held, the minority of company A can bring an action for setting aside the compromise. (Menier v/s Hoopers Telegraph Works, (1874) 9 Cli. App. 350). Acts requiring special majority: When the act requires the approval of special majority, a simple majority cannot approve it. If done so, any shareholder can bring an action restraining the majority from doing. Example: Changing the registered office from one place to another within the state requires special resolution. If with ordinary resolution the registered office is being changed, any shareholder can bring an action. Acts inconsistent with the articles of association: The minority shareholders can restrain the company from doing an act, which is inconsistent with the articles. They can also bring an action to restrain the alteration of the articles, which is not made bona fide for the benefit of the company,as a whole. Example: A large majority (98%) of the shareholders wished to buy up the minority (2%) with a view of extending the capital. The minority refused to sell, and the majority then passed a special resolution, altering the Articles so as to enable thee majority to purchase the minority shares compulsorily. Held, the minority cOuld bring an action. (Brown v/s British Abrasive W1el Co., (1919) 1 Ch.290) Infringement of personal rights of individual members: Every shareholder has certain rights against the company. These rights may be conferred by the Companies Act or by the Articles or by the General law. Any violation of them gives the individual a right of action.

(3)

(4)

(5)

Example: A shareholder is denied the right to vote in the meeting without valid ground. The shareholder can challenge it. (6) Breach of duty: The minority shareholders may bring an action against the company, where there is a breach of duty by the directors and majority shareholders to the detriment of the company. The action will be allowed even if no fraud exists. Oppression and mismanagement: Sometimes, there is oppression of minority, or the mismanagement of the companys affairs. The minority can bring an action under Ss. 397 and 398 of the companies act.

(7)

The companies Act as well as the General law provide certain specific provisions for protection of the minority shareholders and limits the majority rule. These are: (1) Right to apply to the court, for the cancellation of the variation of cla.ss rights. (2) Right to apply to the Tribunal, for the investigation of companys affairs. (3) Right to apply to the court with regard to reconstruction and amalgamation. (4) Right to apply to the Tribunal, for prevention of oppression and mismanagement. (5) Right to apply to the Court for winding up of the company. Under General Law: They are the exceptions to the majority rule. These have been discussed under the relevant heading.

CHAPTER 10 - PREVENTION OF OPPRESSION AND MISMANAGEMENT INTRODUCTION In the earlier chapter, we have already seen how the majority rule prevails in the case of company matters barring, t exceptions provided. One such exception, where the minority L, got the inherent right to interfere, is to prevent oppression and mismanagement. The minority shareholders have the following I powers for the protection of their own interest and also that of the public: (1) Application to the Tribunal for prevention of oppression and mismanagement. (2) Application to the Central Government seeking relief from the Tribunal (3) Application to the Central Government (4) Application to the Court for winding up MEANING OF OPPRESSION The term has not been defined in the act. Hence it is to be understood in the general and common way. It refers to, not keeping to the accepted standards of honesty and fairness and a lack of regard of the other shareholders interest. It has been taken to mean, that the act of the company is harsh and unjust. In Needle industries (India) Ltd. V/s Needle industries Newey (India) Holding Ltd., (1981) 51 Comp. Cas. 743 (S.C.), the Supreme Court observed with regard to oppression: The true position is that an isolated act, which is contrary to law, may not necessarily and by itself support the inference that the law was violated with a mala fide intention or that such violation are bur4ensome, harsh and wrongful But a series of illegal acts following upon one another can, in the context, lead justifiably to the conclusion that they are a part of the same transaction, of which the object is to cause or commit the oppression of persons against whom those acts are directed. Instances of Oppression: (1) (2) (3) Where majority shareholders persistently flouts the decisions of the board of directors, and makes it impossible for the company to function. Where the members of a company are deprived of their right to vote, to elect directors and to receive dividends. Where there is an ui-treasonable and consistent refusal to accept a transfer or transmission of shares, thereby not permitting some shareholders to have voting rights in the company. Persistently disregarding the decisions of the board, in order to gain control over companys affairs. Forcing new and moite risky objects upon an unwilling minority. Omission to do something, which is otherwise just to do for protecting companys interest.

(4) (5) (6)

However the courts have held the following acts do not amount to oppression: (1) Minor acts of mismanagement. (2) Failure to declare dividends and building up of reserves does not amount to oppression.

(3) (4) (5)

The denial of right of inspection to the shareholder. Alteration of voting rights in the interest of the company. Failure to comply with formalities required in the matter of giving notice of a general meeting.

MEANING OF MISMANAGEMENT Means an improper management of the affairs of the company member/s to apply i.e; conducting the affairs of the company in a manner which is not in the interest of the company or the public. Instances of Mismanagement (1) (2) (3) (4) Infighting among directors resulting in serious losses to the company. Continuation in office by the managing directors after the expiry of their term. Controlling group conspiring to defraud the members. Where the company had not maintained proper records.

Instances where courts have held there is no mismanagement (1) Bona fide decisions of the directors which are consistent with the companys memorandum and articles of company itself association, even if they turn out to be wrong or cause temporary losses Advances out of companys funds by the controller to the sister concerns is not a mismanagement, where satisfactory explanation are given and also the advance is not against the interest of the lending company. Business loss will not automatically show mismanagement.

(2)

(3)

WHO CAN APPLY? (1) Where the company has a share capital, not less than 100 membersor not less than 1/10th of the total numbner of its members which ever is less. In case of a company not having a share capital, by not less than 1/5th of the total number of its members. The Central government of deems fit may authorise any member/s to apply. The central government may by itself apply.

(2)

(3) (4)

APPLICATION TO THE TRIBUNAL FOR RELIEF IN CASE OF OPPRESSION AND MISMANAGEMENT

Any of the above- mentioned category, may apply to the Tribunal for prevention of oppression and mismanagement. After hearing, the Tribunal, notwithstanding the general powers to pass appropriate orders, it can also pass the following orders: (1) (2) (3) (4) The regulation of the conduct of the companys affairs in future. Purchase of the shares or interests of any members of the Reduction of the share capital, in case of purchase of shares by the company itself. The termination, setting aside or modification of any agreement made between the company on one hand and managing director/ any other director/ manager on the other. The termination, setting aside or modification of anyagreement made between the company on one hand and managing director / any other director / manager on the other. The setting aside of any fraudulent preference made within 3 months before the date of the application. The fraudulent preference means any payment, transfer of goods or other acts done with the intention of defrauding the creditors.

(5)

(6)

APPLICATION TO THE CENTRAL GOVERNMENT SEEKING RELIEF FROM THE TRIBUNAL The central government has also the right to directly apply to the Tribunal in cases of oppression and mismanagement. The1 Tribunal can pass such order as it deems fit. APPLICATION TO THE CENTRAL GOVERNMENT TO PREVENT OPPRESSION AND MISMANAGEMENT On the recommendation of the Tribunal, the central government may appoint such number of directors, known as government directors to prevent oppression or mismanagement. This directors hold office for a period not exceeding three years at a time. APPLICATION TO THE COURT FOR WINDING UP It is a process by which the company is dissolved. This process can be initiated by: (1) The tribunal (2) On petition by the company, by creditors/s (3) Any contributory/ies (4) By all the above categories. Thus winding up may be voluntary or involuntary.

CHAPTER 11 COMPANY LAW ADMINISTRATION INTRODUCTION Before the Companies (Second Amendment) Act 2002, there were various bodies like the High Court, Company Law Board, Industrial and Financial Reconstruction and Appellate Authority for Industrial and Financial Reconstruction for dealing with various matters related to companies. In spite of there being a number of bodies, yet there was long delay in disposing off the matters, many a time there were multiplicity of proceedings. In order to avoid such difficulties, a need was felt that there be one body which shall deal with all matters like merger, amalgamation, acquisition and reconstruction, revival and rehabilitation and winding up of companies. This resulted in the setting up of the National Company Law Tribunal and National Company Law Appellate Tribunal on the recommendations of Eradi committee. And the matters pending disposal before various authorities have been transferred to the National Company Law TribunaL NATIONAL COMPANY LAW TRIBUNAL (NCLT) The National Company Law Tribunal was set up by the Central Government, on the recommendations of the Selection Committee. The Tribunal consists of the President and such number of judicial and technical members not exceeding sixty-two. NCLT also has the power to set up benches comprising of one or two members. In case of matters relating to rehabilitation, restructuring or winding up of the company, special benches comprising of three members of whom one shall be technical, one non technical and one from other categories like persons mentioned in category 3 of qualification for technical member shall be set up, by the President. Qualification for the President: President shall be a person who has been the judge of the High Court or is eligible to be appomted as a judge of the High Court. Qualification for the judicial members: A person shall not be appointed as a member of the tribunal unless he/she possess any of the following qualification: (1) Has held judicial office for at least 15 years, or (2) Has at least 10 years experience as an advocate of a High Court or has partly held judicial office and has been partly practiced as an advocate, for a total period of 15 years, or (3) Has held for at least 15 years a Group A post or an equivalent post under the Central government (including at least 3 years of service as a member of the Indian Legal Service in grade I of that service), or (4) Has held for at least fifteen years a Group A post or an equivalent post under the Central government (including at least 3 years of service as a member of the Company Law Service (Accounts Branch) in a senior administrative grade, or (5) Has held the post of the Joint Secretary to the Government of India for not less than 5 years, or (6) Is or has been a Chartered Accountant! Cost Accountant! Company Secretary for not less than 15 years.

Qualification for the Technical Member No person shall be qualified to be a technical member unless: (1) He has held for not less than 15 years Group A post or an equivalent post under the Central !State Government (including 3 years service as a. member of the Company Law Service (Accounts Branch) in a senior administrative grade) or Is or has been a joint Secretary to the Government for not less than 5 years and has adequate knowledge and experience in dealing with the problems relating to the company law, or The member shall be a person of ability, integrity and standing having special experience of not less than 20 years in science, technology, economics, banking, industry, law, matters relating to labour, industrial finance, industrial management, industrial reconstruction, administration, investment, accountancy, marketing or any other matter, with the special knowledge, or professional experience, which would be in the opinion of the Central Government useful to the tribunal, or Is or has been Presiding Officer of a Labour Court, Tribunal or National Tribunal constituted under the Industrial Disputes Act, 1947, or Is a person having a special knowledge of and experience of not less than 15 yeas in the matters relating to labour.

(2)

(3)

(4) (5)

Selection Committee: The Selection committee shall comprise of the Chief Justice of India or his nominee as Chairman of the committee and Secretaries of the Ministry of Finance and Company Affairs, Labour Law & Justice as members of the Committee. Terms and Conditions: (1) Tenure is 3 years but is eligible for reappointment. No person shall hold the office of the president beyond 67 years and for that of the members it is 65 years. (2) Salary allowances etc shall be prescribed by the central government. Removal of the President or Member The Central Government in consultation with the Chief Justice of India, may remove from office the President or any Member who: (1) Has been adjudged insolvent; or (2) Convicted for an offence involving moral turpitude; or (3) Has become physically or mentally incapable for acting as such President or member of the Tribunal; or (4) Has acquired such financial or other interest as is likely to affect prejudicially his functions as such president or member of the tribunal; or (5) Has abused his position, as to render his continuance in office, prejudicial to the public interest. Powers and Procedure: (1) Power to pass orders. (2) Power to rectify any mistake apparent from record, or amend its order within a period of 2 years from the date of passing of the order. (3) Power to review its order

(4)

Power to seek assistance from Chief metropolitan Magistrate and District Magistrate.

The Tribunal has the same powers as those exercised by the Civil Court.

NATIONAL COMPANY LAW APPELLATE TRIBUNAL (NCLAT) Constitution: Central Government shall constitute NCLAT on the recommendation of the Selection Committee. The NCLAT shall consist of a Chairperson and two Members. Qualification for the Chairperson: The chairperson shall be a person who has been a judge of the Supreme Court or the High Court. Qualification for the Member. No person shall be appointed as a member unless, he is a person of ability, integrity and standing having special experience of not less than 25years in science, technology, economics, banking, industry, law, matters relating to labour, industrial finance, industrial management, industrial reconstruction, administration, investment, accountancy, marketing or any othe matter, the special knowledge of, or professional experiel which, would be in the opinion of the Central Government usefu., to the Appellate tribunal. Selection Committee: The Selection Committee shall comprise of the following persons: Chief Justice of India or his nominee Secretary in the Ministry of Finance and Company Affairs Secretary in the Ministry of Labour Secretary in Ministry of Law and Justice Department of legal Affairs and legislative department) Secretary in the ministry of Finance and Company Affairs (Department of Company Affairs)

Chairperson Member Member Member Member

The Joint Secretary in the Ministry or Department of the Central Government dealing with this Act shall be the Convener of the Selection Committee. Terms and Conditions: (1) Tenure is 3 years for both the President and Member, but is eligible for reappointment, No person shall hold the office of the President beyond 70 years and for that of the Members it is 67 years. (2) Salary, allowances etc, shall be prescribed by the Central Government. Removal of the President or Member: The Central Government in consultation with the Chief Justice of India, may remove from office the President or any Member who(1) Has been adjudged insolvent; or (2) Convicted for an offence involving moral turpitude; or

(3) (4) (5)

Has become physically or mentally incapable for acting as such President or member of the Tribunal; or Has acquired such financial or other interest as is likely to affect. prejudicially his functions as such president or member of the tribunal; or Has abused his position as to render his continuance in office, prejudicial to the public interest.

Powers and Procedure: (1) Power to hear appeals from the Tribunal. The appeal has got to be ified within 45 days of the receipt of the order or decisions. However the Appellate Tribunal may hear matters even on the expiry of the term, if satisfied with the reasons for delay. (2) Power tO pass orders. (3) Power to review its order The Appellate Tribunal has the same powers as those exercised by the Civil Court. Note: The parties may represent in person, or by a legal Practitioner or by a Chartered Accountant or by a Company Secretary or by a Cost Accountant. From the orders of the Appellate Tribunal, appeal shall lie to the Supreme Court. Appeals to be made within 60 days of the communication of the order.

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