Nature of Company

CHAPTER CONTENTS

O Definition of Company o The

Companies Act, 1956
Characteristics of a Company
a Liting or Piercing the Corporate Veil
o Companies Act, 2013
o Statutory Exceptions
o
Companies (Second Amendment) Act, 2019
Test Questions
a Company Distinguished from Partnership Practical Problems
Company Law in India

A company, in common parlance, group of persons associated together for the attainment of a
means a
common end, social economic. It has "no strictly technical or
or
legal meaning". It represents different
kinds of associations, both business and otherwise. In this Book we shall
mostly be concerned with
registered or incorporated companies. The term 'registered company' means a company incorporated
under the Companies Act, 1956 or some earlier Companies Acts.
Companies incorporated under the
Companies Act, 1956 are mostly business companies but they may also be formed for promoting art,
charity, research, religion, commerce, or any other useful purpose.
The law relating to companies in India is contained ir. the
Companies Act, 1956, as amended
up-to-date.

DEFINITION OF COMPANY
Avoluntary association of persons. A company, in broad sense, may mean an association ofindividuals
formed for some common purpose. But it is a voluntary association of
persons. It has capital divisible
into parts, known as shares. At the same time it is an
artificial person created by a process of law. It has
a
perpelual succession and a common seal. It exists only in contemplation of law, i.e., it is
regarded by
the law as a
person, just as a human being, Ram or Shyam, is a person.
An artificial
person has no body or soul. A company has no body, no soul and no conscience nor
-

1S it
subject imbecilities of the body. It is not visible, save to the eye of the law. These physical
to
asabilities make a
company an artificial person. But then a company really exists and it is not a fictitious
entity.
1.
ror a detailed discussion of the subject, refer to author's Elements of Company Law, 28th 2008 Edition, published by
Sultan Chand & Sons.
 282 BUSINESS Law | TIE CoMPANIES ACT, 2013

Lindley's Definition. Lindley, L.J. defines a company as "an association ofmany persons who contribute
money or money's worth to a common stock, and employ it in some common trade or business (i.e., for
a common purpose), and who share the profit or loss (as the case may be) arising there from. The
common stock so contributed is denoted in money and is the capital of the company. The persons who
contribute it, or to whom it belongs, are members. The proportion of capital to which cach member is
the right to transfer them is often more or
entitled is hisshare. Shares are always transferable although
less restricted".
with a perpetual succession
On incorporation a company becomes a body corporate or corporation
and a common seal. It also acquires a personality distinct from its members.

CHARACTERISTIcs OF A COMPANY
from its members. In
as an entity separate
.Separate Legal Entity. A company is in law regarded
of its members can enter into contracts
other words, it has an independent corporate existence. Any
the acts of
With it in the same manner as any other individual can
and he cannot be held liable for
The company's money and property
the company even if he holds virtually the entire share capital.
shareholders own the company).
shareholders (although the
belong to the company and not to the from Ram even if he holds practically
Thus, Ram & Co. Limited is an entirely different person
of Ram.
all the shares in the company. Its property is not the property established in the
of the of a company was, however, firmly
separate entity
The importance
following case: A.C. 22. S sold his boots business to
a newly formed
Salomon v. Salomon & Co. Lid., (1897)
share each. S took
of £l
company for £ 30,000. His wife, one daughter and four sons took up one
S'a charge
debentures in the company. The debentures gave
23,000 shares of £leach and £ 10,000
consideration for the transfer of the business. Subsequently
over the assets of the company as the
assets were found to be worth £ 6,000 and its
liabilities amounted
when the company was wound up, its
were due to S (secured by debentures)
and £ 7,000 due to unsecured
to £ 17,000 of which £ 10,000 and
claimed that S'and the company were one and the same person
creditors. The unsecured creditors the
for S' and hence they should be paid in priority to S. Held,
that the company was a mere agent
from S and was not his agent
was, in the eyes of the law, a separate person independent
company
all the shares in the company, was also a secured creditor and
was
though virtually the holder of
to the unsecured creditors.
entitled to repayment in priority
of separate corporate personality. For instance, with reference
Consequences of the principle
Ram & Co. Limited given above:
to the example of
insurable interest in the property of Ram & Co. Limited.
(a) Ram has no assets of the company,
(b)When Ram dies, the company continues to exist. His shares, and not the
vest in his personal representatives.
(c) The nationality
of the comnpany does not depend on the nationality of Ram.
Chief Justice Marshall's oft-quoted definition. The characteristic separate corporate personality
of
ofacompany was also emphasised by Chief Justice Marshall of U.S.A. when he defined a company
as a person, artificial, invisible, intangible and existing only in the eyes of the law. Being a mere
creation of law, it possesses only those properties which the charter of its creation confers upon it
either expressly or as accidental to its very existence." [Trustees of Darmouth Collegev. Woodward.
U.S. 518].
(1819) 17
Limited Liability. A company may be a company limited by shares or a company limited by
guarantee. In a company limited by shares, the liability of members is limited to the unpaid value
NATURE OF COMPANY 283

ofthe shares. For example, if the face value of a share in a company is 10 and a member has
already paid ? 7 per share, he can be called upon to pay not more than ? 3 per share during the
lifetime of the company. In a company limited by guarantee, the liability of members is limited to
such amount as the members may undertake to contribute to the assets of the company, in the event
of its being wound up.
3. Perpetual Succession. A company is a juristic person with a perpetual succession. It is not
susceptible to "the thousand natural shocks that flesh is heir to."As such it never dies nor does its
life depend on the life of its members. It is not in any manner affected by insolvency. mental
disorder or retirement of any of its members. It is created by a process of law and can be put an end
to only by a process of law. Members may come and go but the company can go on forever (until
dissolved). It continues to exist even ifall its human members are dead. Even where during the war
all the members ofa private company, while in general meeting, were killed by a bomb, the company
survived; not even a hydrogenbombcould have destroyed it [K/9 Meat Supplies (Guildford)
Re (1966) 3 All. E.R. 320].
Perpetual succession, therefore, means that a company's existence persists irrespective of
the change in the composition of its membership. Thus its continued existence is not affected by a
constant change in its membership "in the like manner as the river Thames is still the same river,
though the parts which compose it are changing every instant."
4. Common Seal. Since a company has no physical existence, it must act through its agents and all
such contracts entered into by its agents must be under the seal of the company. The common seal
acts as the official signature of the company.
5. Transferability of Shares. The capital of a company is divided into parts, called shares. These
shares are, subject to certain conditions, freely transferable, so that no shareholder is permanently
or necessarily wedded to company. When the joint stock companies were established the great

object was that the shares should be capable of being easily transferred.
6. Separate Property. As a company is a legal person distinct from its members, it is capable of
its and assets are
owning, enjoying and disposing of property in its own name. Although capital
The
contributed by its shareholders, they are not the private and joint owners of its property.
is vested and by which it is controlled, managed
company is the real person in which all its property
and disposed of.
7. Capacity to Sue. A company can sue and be sued in its corporate name. It may
also inflict or suffer

wrongs. It can in fact do or have done to it

most of the things which may be done by or to a human
being
LIFTING OR PIERCING THE cORPORATE VEIL

company is legal person distinct from its members [Salomon v.

rom the juristic point of view, a a
Salomon & Co. Lid., (1897) A.C. 22]. This principle may be referred to as the veil of incorporation'.
this principle. The effect of this principle is that
he Courts in general consider themselves bound by That is, the company has
there is a fictional veil (and not a wall) between the company and its members.
a corporate personality which is distinct from its members.
as a cloak
The human ingenuity, however, started using this veil ofcorporate personality blatantly
TOr fraud or improper conduct. Thus it became necessary for the Courts to break through or lift the
of corporate personality and look at the persons behind the company
Corporate veil or crack the shell
who are the real beneficiaries of the corporate fiction.
Ceptions. The various cases in which corporate veil has been lifted are as follows
 BusSINESS Law Tu
284 COMPANIES ACT, 2013
1. Protection of Revenue. The Courts may ignore
the corporate entity of pany where it isis
a
company
evasion [Juggilal v. Commr: ofIncome-tax, A.l.R. (1969) S.C. 982]. Tax planning may heused
.

t for tax
provided it is within the framework of law. Colourable devIces cannot
be part of tax plannin ale
SirDinshaw Maneckjee Petit, Re, A.I.R. (1927) Bom. 371. D, an assessee, who was reo.
huge dividend and interest income, transferred his investments to 4 private companies formed
the purpose ofreducing his tax liability. These companies transferred the income to
rmed fo
to D as a nr.
Das
loan. Held. the companies were formed by D purely and simply as a
apretender
means of avoiding tax oblign
and the companies were nothing more than the assessee himself. They did no business but w 1gation
were
created simply as legal entities to ostensibly receive the dividends and interest and to hand the
them
over to D as pretended loans.
2. Prevention of Fraud
Improper
or
Conduct. The legal personality of company may also be
a
disregarded in the interest of justice where the machinery of incorporation has been used for some
fraudulent purpose like defrauding creditors or defeating or circumventing law.
Jones v. Lipman. (1962) AIl E.R. 442. L agreed to sell a certain landto J. He subsequently
changed his mind and to avoid the specific pertormance of the contract, he sold it to a company
which was formed specifically for the purpose. The company had L and a clerk of his solicitors as
the only members. J brought an action for the specific performance against L and the
company.
The Court looked to the reality of the situation, ignored the transfer, and ordered that the
company
should convey the land to J.
3. Determination of Character of a Company whether it is Enemy. A company may assume an
enemy character when persons in de facto control of its affairs are residents in an enemy country.
In such a case, the Court may examine the character of persons in real control of the company, and
declare the company to be an enemy company.
Daimler Co. Lid. v. Continental Tyre & Rubber Co. Ltd., (1916) 2 A.C. 307.A company was
incorporated in England for the purpose of selling in England tyres made in Germany by a German
company which held the bulk of shares in the English company. The holders of the remaining
shares, except one, and all the directors were Germans, resident of Germany. During the First
World War, the English company commenced an action for recovery of a trade debt. Held, the
company was an alien company and the payment of debt to it would amount to trading with the
enemy, and therefore the company was not allowed to proceed with the action.
4. Where the Company is a Sham. The Courts also lift the veil wherea company is a mere cloak or
sham (hoax). The following case illustrates the point:
Gilford Motor Co. Ltd. v. Horne, (1933) Ch. 935 C.A. Home, a former employee ofa company,
was subject to a covenant not to solicit its customers. He formed a company to carry on a business
which, if he had done so personally, would have been a breach of the covenant. An injunction was
granted both against him and the company to restrain them from carrying on the business. The
company was described in this judgment as 'a device, a stratagem', and as "a mere cloak or sham
for the purpose of enabling the defendant to commit a breach of his covenant against solicitation."
5. Company Avoiding Legal Obligations. Where the use of an incorporated company is being
made to avoid legal obligations, the Court may disregard the legal personality ofthe company and
proceed on the assumption as if no company existed.
Company Acting as Agent or Trustee of the Shareholders. Where a company is acting as agent
the shareholders will be liable for the acts of the company. It is a question of
for its shareholders,
fact in each case whether the company is acting as agent for its shareholders. There may be an
express agreement to this effect or an agreement may be implied from the circumstances of each
particular case. Note the following case
NATURE OF COMPANY 285
Avaidance of Welfare Legislation. Avoidance of welfare legislation is as common as avoidance
aftaxation and the approach of the Courts in considering problems arising out of such avoidance
is generally the same as avoidance ol laxation. It is the duty of the Courts in every case where
ingenuity is expended to avoid wellare legislation to get behind the smoke screen and discover the

true state of affairs.

8. Protecting Publie Poliey. The Courts invariably lift the corporate veil to protect the public policy
and prevent transactions contrary to public policy. Thus where there is a conflict with public
policy, the Courts ignore the form and take into account the substance [Comnors v. Connors Ltd,
(1940) 4 AII E.R. 174].

Statutory Exceptions
1 Number of Members below Statutory minimum (Sec. 45). Ifa company carries on business for
more than 6 months after the number of its members has been reduced below 7 in case of a public
company or 2 m case of a private company, every person who knows this fact and is a member
during the time that the company so carries on business after the six months, is severally liable for
the whole of the debts of the company contracted during that time, i.e., after six months. It may be
noted that in such a case the continuing members (i.e., those who continue to be members after six
months)-
(a) can be sued and not those who have withdrawn from the membership;
(b) shall be liable only if they are aware of the fact of the number falling below the statutory
minimum.
. Failure to refund application money [Sec. 69 (5)]. The directors of a company are jointly and
severally liable to repay the application money with interest if the company fails to refund the
application money of those applicants who have not been allotted shares, within 130 days of the
date of issue of the prospectus.
3.
Misdescription of Company's Name [Sec. 147 (4)]. Where an officer or agent of a company
does any act or enters into a contract without fully or properly mentioning the company's name
and the address of its registered office, he shall be personally liable. Thus where a bill ofexchange.
Rundi or promissory note is signed by an officer of a company or any other person on its behalf.
without mentioning this fact that he is signing on behalf of the company, he is personally liable to
the holder of the instrument unless the company has already paid the amount.
4. Fraudulent Trading (Sec. 542). Sometimes in the course of the winding up of a company it may
appear that some business of the company has been carried on with intent to defraud creditors of the
Company, or any other person or for any fraudulent purpose. In such a case, the Court may declare
tnat any
persons who were knowingly parties to the carrying on of the business in this way are
personally liable without any limitation of liability for all or any of the debts or other liabilities of the
any as the Court may direct. The Court may do so on the application
or the
of the Oflicial Liquidator.
.
liquidator or any creditor or contributory of the company.
Holding and Subsidiary Companies. In the eyes of the law, the holding company and its
subsidiaries (for definition of holding and subsidiary companies, refer to
legal entities. But in the following two cases, a subsidiary Chapter 2) are separate
to a certain company may lose its separate identity
extent :
() Where at the end of its financial
year, a company has
members in general meeting not only its own accounts,subsidiaries, lay before ts
it is
but also a set must
of group
showing the profit or loss earned or sulfered by the holding company and
its suos
collectively, and their collective state of affairs at the end of the year (Sec. 212).
 a case, treat a subsidiary company
(2) The Court may, on
the facts of
nerely branch or
as mer.
a

department of one large undertaking

owned by the holding company[Free Wheel (Indigi
Ltd. v. Ved Mitra, supra.
cOMPANY DISTINGUISHED FROM PARTNERSHIP
Partnership is the relation between persons who have agreed to share the profits ofa business Carriod
by all or any of them acting for all. Persons who have entered into partnership with one anot
called individually partners and collectively a firm (Sec. 4 ofthe Indian Partnership Act, 1932) are

The principal differences between a company and a partnership are as follows

1. Act. A
Regulating company
is regulated by the Companies Act, 1956, while a
partnershin
govermed by the Indian Partnership Act, 1932. Is
Mode of Creation. A company comes into existence after
registration under the Companies Act
1956. Registration is not compulsory in the case of a
3. Legal Status. A company has a
partnership.
legal personality distinct from that of its members. A firm is
not a
person in the eyes of the law; it is made up of the several who
Salomon. (1897) A.C. 22]. From the above it follows:
persons it
compose [Salomon v
(a) The members of a company are not
done by it, while the members of a
personally liable for its contracts, debts or for wrongs
(6) The property and partnershipfirm are.
rights of apartnership are vested in its members, so that on change in its a
membership its assets must be transferred to the new
company are vested in it, so that it is
partners ; the property and rights of a
never necessary to transfer its
change in its membership. assets when there 1S a

(c) The property ofa company

shareholders whereas the
belongs to the company and not to its individual members or
who are property of a partnership firm is the joint
collectively entitled to it. So long as the property of the partners
the shareholders company continues to exist, the members
composing the company cannot be
in the property of the said to have any interest, or
legal or
equitabie.
4. Liability of Members. Thecompany.liability of the members of a company
to contrnbute towards
satisfaction of the (except an unlimited compay
are liable without limit company's debts and liabilities is limited,
the case
to contribute
towards payment of
of the partnership firm, the partners re the partnership debts and whereas parue
firm. A creditor are jointly and severally liable liabiliues.
obtaining judgment liable to
to the creditors of the
ereditots
property of any of the partners in theagainst
firm.
the
firm can proceed
against and attach the pvate
shareholders but of the company. He But the creditor of a
cannot company is the creditor not
shareholders, who are not directly liable proceed against and attach the
company. to him. He
can do so only
private prope ofthethe

5.
against the property ot the
Management. The affairs of a
company are managed by its
manager, and its members have no directors, or managng
member of a partnership firm may right to take
part in the management. On the other an
take part in its very
provides otherwise. Even i1 the management unless the hand nent

Authority to bind the partnershipagreement provides otherwise, each partner partnership agi le
by still has
committed by him. contracting as its agent and may render it hadic
os
Transferability of Interest. Shares ina company are
Ovide. When shares are transterred, the freely transterable unless its Articles
transferee becomes member of the otnet
llthe rights of the ransteror. A partner a
conpany and sucee
He may assign his share
cannot transfer his share without the consent ot
rs. in the tnc
partnership, provided the partnership agrec nent
NATURE OF COMPANY

does not provide otherwise; but the assignee merely becomes

entitled to the financial benefits in
other partners of the firm agree.
respect of the share, and he does not become a partner unless
firm to make contracts and
7. Authority of Members. Each partner is an agent of the partnership
On the other hand,
incur liabilities so long as he acts in the ordinary course of the firm's business.
a shareholder is not an agent of the company and has no such power
to bind the company by his
acts [Baird's Case, (1870) Ch. App. 725].
8. Powers. A partnership firm can do anything which the partners agree to
do and there is no limit to
in its
its activities ; a company's powers are limited to those allowed by the objects clause
Memorandum of Association.
9. Restrictions on Powers. In a partnership, restrictions on the powers ofa particular partner contained
in the partnership agreement will not avail against outsiders, but those in the Articles of Association
of a company are effective as against the public because it is a public document and anyone can
inspect it to find out what is in it.
10. Insolvency of Firm and Winding up of Company. The insolvency of a partnership firm means
insolvency of all the partners, whereas the winding up of an insolvent company does not make the
members insolvent.
11. Debts. Ifa company owes a debt to any of its members he can claim payment out of its assets when
it is wound up rateably with its other creditors, whereas a partner who is owed money by his firm
cannot prove against the firm's assets in competition with its other creditors.
time
12. Dissolution. Unless a partnership is entered into for a fixed period, it may be dissolved at any
the death or insolvency of a
by any partner, and the partnership will automatically be dissolved by
partner. A company has a perpetual succession. No personal circumstance affecting a member,
It comes to end only
such as death, insolvency or unsoundness of mind, will affect its existence.
an

1956.
when it is wound up according to the provisions of the Companies Act,
13. Number of Members
whereas the minimum number of
(a) Minimum. The minimum number of partners in a firm is 2
7.
members in a private company is 2 and in case of public company
a

in a firm carrying on banking business can be

(6) Maximum. The maximum number of partners
number of members in a private company is
10 and in any other business 20. The maximum
number in case of a public company.
50; there is no limit to the maximum
14. Maintenance of Books. A company is bound by
law to maintain books of account and have its
auditors. There is no such statutory provision in the case
of
accounts audited annually by qualified
a partnership firm.
Kinds of Companies
wwww wwwwww

CHAPTER CONTENTS

O Classification on the Basis of Incorporation Government Company [Sec. 2 (45)]

o Statutory Companies Annual Reports on Government Companies
oRegistered Companies [(Sec. 394)/ (Sec. 395)]
O Classification on the Basis of Liability o Companies Incorporated Outside India
o Companies with Limited Liability [Sec. 2(21)& Associations Not For Profit (Sec. 8 of Companies
2(22)] Act, 2013)
o Unlimited Companies [Sec. 2(92)] One-person Company [Sec. 2 (62) Means a
Classification on the Basis of Number of Members Company which has only One Person as a Member
o Private Company Sec. 2(68) o Salient Features
o Public Company Sec. 2(71) oSmall Company [Sec. 2 (85)]
o Special Privileges of a Private Company o Dormant Company (Sec. 455)
When Does a Private Company become a Prohibition of Large Partnerships (Sec. 464 of
Public Company? Companies Act, 2013)
o Obtaining Approval from Central Government o Penalty for Improper use of Words 'Limited' and
Section 14 (1) Private Limited' (Sec. 453 of Compaines Act,
o Conversion of a Public Company into a Private 2013)
Company (Sec. 18) Test Questions
Classification on the Basis of Control Practical Problems
Classification on the Basis of Ownership

Companies may be classified into various kinds on the following basis

I. CLASsIFICATION ON THE BASIS OF INCORPORATION
1. Statutory Companies

These are the companies which are created by a special Act of the Legislature, e.g., the Reserve Bank of
India, the State Bank of India, the Life Insurance Corporation, the Industrial Finance Corporation, the
Unit Trust of India. These are mostly concerned with public utilities, e.g., railways, tramways, gas and
electricity companies and enterprises of national importance. The provisions of the Companies Act,
2013 apply to them, if they are not inconsistent with the provisions of the special Acts under which they
are formed.
 BUSINESs Law | THE COMPANIES ACT, 2013
292
2. Registered Companies
under the Companies Act, 1956
These are the companies which are formed and registered 6, or were
or-

registered under any ofthe earlier Companies

Acts. These are by tar the most commonly found companies
anies.
II. CLASSIFICATION ON THE BASIS OF LIABILITY
On the basis of liability companies may be classified into
Companies with limited liability. These may be
-

1.
(a) companies limited by guarantee, [Sec. 2 (21)] or
(b) companies limited by shares, [Sec. 2 (220)] or
2. Companies with unlimited liability [Sec. 2 (92)]

1. Companies with Limited Liability [Sec. 2(21) & 2(22)]

(1) Companies Limited by Guarantee. According to section 2(21) of the Companies Act, 2013,
where the liability of its members limited by the Memorandum of Association to such amount as
the members may respectively undertake to contribute to the assets of the company in the event of
its being wound up.
(2) Companies Limited by Shares. According to section 2(22) of the Companies Act, 2013, where
the liability of its members limited by the Memorandum of Association to the amount, if any,
unpaid on the shares respectively held by them.

2. Unlimited Companies [Sec. 2(92)]

Companies with Unlimited Liability. According to section 2(92) of the Companies Act, 2013,
Unlimited Company" means a company not having any limit on the liability ofits members. In casec ol
such a company every member is liable for the debts of the company.

I. CLASSIFICATION ON THE BASIS OF NUMBER OF MEMBERS

From the point of view of the general public and on the basis of number of members, a company may be

1. a private company, or
2. a public company.

1. Private Company Sec. 2(68)

According to section 2(68) of the Companies Act, 2013, "private company" means a company n a v g
minimum paid-up share capital as may be prescribed, and which by its articles-
(a) Restricts the right to transfer its shares,
(b) Limits the number of its members to two hundred (except in case of One Person Company),
(c)Prohibits any invitation to the public to subscribe for any securities ofthe company nas
minimum share capital of Rs one lakh for private companies
The requirement
of paid up
been omitted by the Companies amendment act 2015 (w.e.f. 29-5-2015).

2. Public Company Sec. 2(71)

which-
means a company
ACcording to section 2(71) of the Companies Act, 2013, public company"
(a) is not a private company
(b) has a minimum paid-up share capital as may be prescribed . dad for this
KINDS OF COMPANIES
293

As per the provision ofthe Companies Act 2013, a company which is a subsidiary ofa company, not
heing a private company. shall be deemed to be public company for the purposes of this Act even where
Cch subsidiary company continues to be a private company in its articles of association.
The requirement of minimum paid-up share capital of Rupees five lakh for public companies has
heen omitted by the Companies amendment act 2015 (w.e.f. 29-5-2015).

Distinction Between a Publie Company and a Private Company 1Sec. 2(68)|

1. Minimum umber: The minimum number of persons required to form a public company is 7. It is
2 in case of a private company.
2 Maximum mumber: There is no restriction on maximum number of members in a public company,
whereas the maximum number cannot exceed 200 in a private company.
3. Number of directors. A public company must have at least 3 directors whereas a private company
must have at least 2 directors (Sec. 149). Company Act, 2013, one director in the case of one-
person company.
4 Restriction on appointment of directors. In the case of a public company, the directors must file
with the Registrar a consent to act as directors or sign an undertaking for their qualification shares.
The directors of a private company need not do so.
5. Restriction on invitation to subscribe for shares. A public company invites the general public to
subscribe for the shares in, or the debentures of, the company. A private company by its Articles
prohibits any such invitation to the public.
6. Transferability of shares/debentures. Ina public company, the sharesand debentures are freely
transferable (Sec. 82). In a private company the right to transfer shares and debentures is restricted
by the Articles.
Specialprivileges. Aprivate company enjoys some special privileges. public company enjoys
7. A no

such privileges
8. Quorum. If the Articles of a company do not provide for a larger quorum, 5 members personally
than one thousand are
in the case of a public company if number of members is not more
present
30 members exceed 5,000
quorun formeeting of the company 15 members upto 5,000 members,
members. It is 2 in the case of a private company (Sec. 103).
remuneration in a public company
9. Managerial remuneration. Total managerial
No such restriction applies to a private
cannot exceed 11 per cent of the net profits (Sec. 198).

company.
Special Privileges of a Private Company
. Number ofmembers. A private company may have only 2 members.
shares before the minimum
.Allotment before minimum subscription. A private company can allot
subscription is subscribed for or paid.
without issuing
3. statement in lieu ofprospectus. A private company may allot shares
Prospectus or
a statement in lieu of prospectus.
a prospectus or delivering to the Registrar from its
2
issues new shares, after the expiry of years
4. Issue ofnew shares. When a public company allotment of shares,
of I year from the date of first
formation or at any time after the expiry equity
has first to offer these shares to the existing
whichever is earlier, a private company resolution,
rata. However the members
in a general meeting may, by a special
shareholders pro
decide otherwise. There is nosuch provision in case of private companies.
such voting
company may issue
share capital of any kind, and with
. Kinds of shares. A private
rights, as it may think fit.
 IV. CLASSIFICATION ON THE BASIS OF CONTROL
On the basis ofcontrol, companies may be classified into:
and
1. Holding companies,
2. Subsidiary companies.
1. Holding company |Sec. 2 (46)1. A company is known as the holding company of another company
ifit has control overthat other company. According to Sec. 4 (4),. a company is "deemed to be the
holding company of another if, but only if, that other is its subsidiary". As per the Companies
Amendment Act, 2017, for the purpose of holding company the expression 'company' include any
body corporate.
2. Subsidiary Company/(Sec. 2(87). Subsidiary company, in relation to any other company (that is
to say the holding company), means a company in which the holding company -
(a) Controls the composition of the Board of Directors; or
(b) Exercises or controls more than one-half of the total voting power (Amended by the Companies
(Amendment) Act 2018)
Provided that such class or classes of holding companies as may be prescribed shall not have
layers of subsidiaries beyond such numbers as may be prescribed.
According to Sec. 4(1), A company (say Company S) is deemed to be a subsidiary of another
company (say, Company H) in the following 3 cases:
1. Company controlling composition of Board of Directors. Where a compary (Company H)
controls the composition of Board of Directors of another company (Company S), the latter
(Company S) becomes the subsidiary of the former (Company H). For this purpose the
composition of Company S's Board of Directors is deemed to be controlled by Company H
if Company H can appoint or remove all or a majority of directors of Company S.
Example. The Board of Directors of a company (Company S) consists of 7 directors. Any
other company (Company H) which has authority to appoint 4 directors is deemed to be
the holding company of the former (Company s) which is called the subsidiary company.
2. Holding of majority of shares. Where a company (Company H) holds more than half in
nominal value of equity share capital of another company (Company S), the latter
(Company S) becomes the subsidiary of the former (Company H). The words 'nominal
value of equity capital' in Sec. 4 means the face value of the equity capital which has
been subscribed for.
3. Subsidiary of another subsidiary. Where a company (Company S) is subsidiary of another
company (say Company Hl) which is itself subsidiary of the controlling company (Company
H), the former (Company S) becomes the subsidiary of the controlling company
(Company H).
 296
Hand Comn
S is a subsidiary of Company Company S, is as
company H, by virtue of
Example. Company is a subsidiary of aboe ary of
Company S.
Company S,
Company S, Company S, be a n e
will he
Company S, is
a subsidiary
of
virtue of the above subsidiary Clause. t
ClaSidiary of
of
Sand consequently
of Company H, by
also ause. Company
chart explainsthe point:
The tollowing
Company H (Holding Company)

Company S, (Subsidiary of Company H)

Company S, (Subsidiary of Company S,)

Company S (Subsidiary of Company S)

Company S, and Company S, are subsidiaries of Company H.

V.CLASSIFICATION ON THE BASIS OF OWNERSHIP

On the basis of ownership, a company may be a -

1. Govemment company, or
2. non-Government company.

Government Company [Sec. 2 (45)

A Government company means any company in which not less than 51 per cent ofthe paid-up share
capital is held by -

(a) the Central Government, or

(6) any State Government or Governments, or
() partly by the Central Govemment and partly by one or more State
Govemments. For
Corporation of India Ltd. and Minerals and Metals Trading Corporation of Indiaexample,
State lInmg
Ltd. are Govemuc
companies. The subsidiary of aGovermment company is also a Govemment
company (Sec. 61/)
Annual Reports on
Government Companies (Sec. 394)/ (Sec. 395)
Annual report to
be placed before Parliament (Sec. 619-A). Where the Central Government is a ember
of a Government
company, it shall cause an annual report on the y to
be prepared within 3 months of its
annual general meeting before
working and affairs of the co he
ne
report shall be laid betore both Houses of
which the audit report is
pla
Parliament together with a copy of the report, and any
comments upon, or supplement to, the
audit, made by the Comptroller and auait f lndia. Ino
Where in addition to the Central
Government, any State Government
Auditor-uenciaher
is also a
member of a
ofa
Government company, the State Government shall be laid
cause a copy of the above documents
before the House or both Houses of the State
member ofa Government company, the State GovermmentLegislature. Where the Central Governmeembet ember,
or every State Government
whicitne se Of
shall cause the above documents to be prepared within the specified time and laid before
both Houses of the State Legislature.
company in
The provisions of Sec. 394 and 395 shall, so far às may be.
apply to a Government co1
liquidation as they apply to any other company.
KINDS OF COMPANIESs

297
ufment of auditor and audit
reports (Sec.
Appom. 139). The
auditor of
inted or re-appointed Comptroller and Auditor-General of India.Government company shall de
a
by the
PPa shall have power to direct the manner in which the The Comptroller and Auditor-
orHe shall also have the power to conduct supplementary company's accounts shall be audited by the
a
by such person or perso as he may authorise in this behalf.
or test audit
of the company's accounts
The provisions of Sec. 143 sub-sections (5), (6), (7) which deal with
adult shall apply.
Adit reports to be subnnitted to
Comptroller and
ompany shall submit a copy of his audit report Auditor-General of India.
to the Comptroller The auditor of a Government
and Auditor-General of India who
hall have the right to comment upon, or supplement, the audit report. Any such comments upon, or
nnlement to, the audit report shall be placed before the annual general meeting of the company.
Deovisions of apply to certain companies (Sec. 619-B). The provisions of Sec. 619 shall apply to a
company in which not less than 5l per cent of the paid-up share capital is held by one or more of the
fallowing or any combination thereof, as if it were a Government company, namely,:
l the Central Government and one or more Govermment companies;
(h) any State Government or Governments and one or more Government companies;
(c) the Central Govemment, one or more State Govemments and one or more Government companies;
(d) the Central Government and one or more corporations owned or controlled by the Central
Government;
(e) the Central Government or one or more State Governments and one or more corporations owned
or controlled by the Central Government:
( one or more corporations owned or controlled by the Central Govemment or the State Governments; and
(g) more than one Government company.
Sec. is intended to strengthen the financial discipline in case of companies in which more than51
per cent shares are held jointly by Govemment, CGovermment companies and public financial corporations.
Certain provisions ofthe Companies Act not to apply: The Central Government may, by notification in
direct that
the Official Gazette, of the provisions of the Companies Act (other than Secs. 618, 619
any
and 619-A), specified in the notification

(a) shall not apply to any Govemiment company: or

and adaptations, as may be
(6) shall apply to any Govemment company, with such exceptions, modifications,
specified in the notütication.
shall be laid in draft before each House of
A copy of every notification proposed to be issued
which may be comprised in 1 or 2 or more
Parliament while it is in session for a total period of 30 days
Successive sessions. Ifboth the Houses agree in disapproving
the issue ofthe notification, the notification
notification shall be
modification in the notification, the
shall not be issued. If they agree in making any
issued in the modified fom.

Companies Incorporated Outside India

(Sec. 380)
Documents, etc., to be delivered to Registrar by foreign companies
within thirty days of the establishments of
its place of business in
() Every foreign company shall,
India, deliver to registrar for registration- and articles, of the company or
other
statutes or memorandum
(a) a certified copy of the charter, the instrument is
the constitution of the company and, if
instrument constituting or defining
certified translation thereof in English language:
in English language, a
not
office of the company;
(b) the full address of the registered or principal
 BUSINESS LAW || THE
298 COMPANIES ACT, 2013
secretary ot the company containing such
(c) a list of the directors and
prescribed;
particulars
nartin
as
may be
(d) the name and address orthe names and
addresses of one or
persons roresident in
more personc

authorized to behalf of the company service of process and anv

accept on
ces or other
India
to be served on the company;
documents required
of the company in India which is deemed to ho its to be
e) the full address of the oflice
place of business in India;
princip
particulars of opening and closing of a place of business in India on earlier occasio
ion
(g)
occasions
declaration that none of the directors of the company or the authorized renroc
India has ever been convicted or debarred from formation of companies and manaae n

India or abroad ; and in

(h) any other information as may be prescribes.
(2) Every foreign company existing at the commencement of the Act shall, if it has not delivered
o
the before
registrar such commencement, the documents and particulars specified in ction
()ofSection 5920f the ompanies Act, 1956 (1 of 1956), continue to be subject to the obligation
to
deliver those documents and particulars in accordance with that Act.
(3) where any alteration is made or occurs in the documents delivered to the
Registrar under this
Section, the foreign company shall, within thirty days of such alteration, deliver to the
for registration, a return containing the particulars of the alteration in the registrar
prescribed
form.
Accounts of Foreign Company (Sec. 381)
(1) Every foreign company shall, in every calendar year -
(a) make out a balance sheet and profit and loss account in such form, containing such
and including or having annexed or attached thereto such documents as particulars
may be prescribed; and
(b) deliver a copy of those documents to the
registrar
Provided that the Central Government may, by notification, direct that, in the case of
any foreign company or class of foreign companies, the requirements of clause (a) shall not
apply, or shall apply subject to such exceptions and modifications as may be specified in that
notification.
2) If any such document as is mentioned in sub-section (1) is not in English language, there shall oe
annexed to it a certified translation thereof in the
) Every foreign company shall send to the
English language.
him under sub-section
registrar along with the documents required to be delver
to (1), copy of list in the
a
prescribed
form of all places business estabisntu
of
by the company in India as at the date with reference to which the balance sheet referrea to
section (1) is made out.

Display of Name, etc., of Foreign Company (Sec.

382)
Every foreign company shall -
(a) conspicuously exhibit on the outside of every office or
the name of place where it caries on Duin English
company and the country in which it is incorporated, in letters easily legioi". in
characters, and also in the characters of the Ise

locality in which the ofice or place is situates;language or one of the languages in go

(b) cause the name of the company and of the be
stated in legible English characters in all country in which the is
company incorpoa
business letters, bill-heads and letter pa and in al
notices and other ofticial publications of the
company;, and
K I N D SO F C O M P A N I E S
299

Cthe liability ofthe members of the company is limited, cause notice of that fact
a) to be stated in every such prOspectus issued and all business letters, bill-heads, letter paper,
notices, advertisements and otl er official publications of the company, in legible English
characterS; and
il to be conspicuously exhibited on the outside of every office or place where it carries on
business in India, in legible English characters and also in legible characters of the language
or one of the language in general use in the locality in which the office or place is situated

Company (Sec. 383)

Service in Foreign
Anv process, notice
or required to be served on a foreign company shall be deemed to
other document

he Sufficiently
served, if addresses to any person whose name and address have been delivered to the
section 380 and left at, or sent by post to, the address which has been so delivered to
the
repistrar under
electronic mode.
registrar or by

Debentures, Annual Return,

Registration on Charges,
Books of Account
and their Inspection (Sec. 384)

(1) The provisions of section 71 shall apply mutatis mutandis to the foreign company.
to such exceptions, modifications and
(2) The provisions of section 92 and Section 135 shall, subject
to the
under this Act, apply foreign
company as
adaptations as may be made therein by rules made
in India.
they apply to the company incorporated
to extent of requiring it to keep as
3) The provisions of section 128 shall apply to a foreign company
books of account referred to in that section. with
its principal place of business in India the ,

the
sales and purchase made, and assets and liabilities, in
respect to monies received and spend,
of or in relation to its business in India.
course
mutatis mutandis to charges on properties which are
4) The provisions of chapter VI shall apply
created or acquired by any foreign company.
mutatis mutandis to the Indian business of a foreign
(5) The provisions of chapter XIV shall apply
in India.
company asthey apply to accompany incorporated
to the Registrar for registering any
Fee for Registration of Documents (Sec. 385). There shall be paid
document required by the provisions of this Chapter to be registered by
him, such fee, as may be prescribed.
incorporated outside India
Company Sec 2(42). It means any company body corporate
or
roreign
which
physically or through electronie
of business in India whether byitself or through agent,
an
a) has a place
mode; and mode covers all those
Conducts any business activity in India in any other manner Electronic
companies which are operating online on a virtual platform.

pplication of Act to Foreign Companies (SecC. S79)

Dections 380 to 386 (both inclusive) and sections 392
and 393 shall apply to all foreign comnpanies:
Government may, by Order published
in the Ofticial Gazette, exempt
Provided that the Central
of the provisions of
sections
s80
of foreign companies, specified in the Order, from any
u Class every Order shall, as soon as may
be after it is

a n d sections 392 and 393 and copy of [Updated as per company amendment act 20t/|
a such

dae, be laid before both Houses of Parliament. preference or

whether equity or
b) Where not less than fifty percent. ofthe paid-up share pital,
company is held by
one or more
citizens
ot in
cquty and partly preference, of a foreign or more
cinzens
y incorporated in India,
or by one

more companies or bodies corporate

O
 BrsINESS ILAW THE COMPANIES
300 ACT, 2013
corporate incorporated in India. whotl
bodies
ethers
ofIndia and one or more companies
or

the aggregate. such company shall comply wth the provISIons of this Chapter and or
and such in
singly
provisionsof this Act as may be prescribed
with regard to the business carried on hr other in India as
if it were a company incorporated in India

Registration of Prospectus (Section 389). No person shall ISsue, circulate or distribute in t

n india any
prospectus offering for subscription in securities of a company incorporated or to be incornowa
incorporated outside
India. whether the company has or has not established, or when formed will or will not estah
a place
ofbusiness in India, unless before the issue, circulation or distribution of the prospectus in India,a
thereof certified by the chaiperson of the company and two other directors of the companv a copy
been approved by resolution of the managing body has been delivered for registration to the D
and the prospectus states on the face of it that a copy has been so delivered, and there is
endorsed.on o
attached to the copy, any consent to the issue of the prospectus required by section 388 and
such dociumemts
as may be prescribed. hts

Punishment for Contravention (Section 392). If the foreign company contravenes

the provisions of
this Chapter, the foreign company
shall be punishable with fine which shall not be less than
L00 000
but which may extend to 3,00,000 and in the case
which may extend to 50,000 for every
of a continuing offence, with an additional fine
day after the first during which the contravention continues and
every officer of the foreign company who is in default shall be
which may extend to six months punishable with imprisonment for a term
or with fine which shall not be less than 25,000 but which may extend
to 5,00.000 or with both.

ASSOCIATIONS NOT FOR PROFIT

(Sec. 8 of Companies Act, 2013)
According to Sec. 8, the name of a limited company must end with
the word 'Limited' in the case of a
public company, and with the words Private Limited' in the
case of a
however, permits the registration, under a licence private company. Sec. 8 of the Act
for profit with limited granted by the Central Goverment, of an association not
liability without using the word
'Limited' or the words Private Limited to ts
Conditions for grant of licence. The name
Central Government may grant such a licence to an assoC
where it is proved to the 1ato
satisfaction of the Central Government that it
(a) is about to be formed as a limited
company for promoting commerce, science, religion, cnuruy
any other useful object;
(b) nlends to apply its profits, if any, or other income in promoting its objects and to the
payment of any
dividend to its members and pro
(c) to
prohibit payment of
the ;
dividend to its members.
any
The Central
Government may, by licence, direct that the association may be registered as pany
with limited liability, without the
addition to its name of the word Limited' or the words
The assocation may 'Fva
thereupon be registered accordinglv. Onu registration it enjoys all the an
IS Subject to all the privtg
obligations of limited companies. Unless its Articles otherwise provide, it ls c
from such of the provISIons
general or special order.
of the Companies Act as may be specitied by the c n a t
such
A licence may be granted by the
Central Government on such conditions and suoje
regulations as it thinks fit. The conditions and regulations are binding on the body to which t
is granted. These conahtions shall be inserted in the Memorandum, or in the Articles, or pary
and partly in the other, if the Central Government so directs.
KINDS OF COMPANIES
301

fim may be a member of any association or company licensed under Sec. 25.
A
Government. Upon
DovOCation of licence. Ihe licence may at any time be revoked by the Central
cation the Registrar shall enter the word Limited' or the words Private Limited' at the end ofthe
ne upon the register of the body to which it was granted and the body shall cease to enjoy this
n a m e

of its
evemption. But before a licence is so revoked, the Central Government shall give notice writing
in
atention to the body and afford it an opportunity of being heard in opposition to the revocation.
intent
licence is granted under Sec. 25 can alter the provisions of its Memorandum
A body in respect ofwhich
its objects only with the previous approval of the Central Government. If an alteration is
with respect to
the Central Government, the Central Government may revoke the licence.
made without the apprOval of
licence has been revoked contains the words Chamber of Commerce', it shall, within
Ifa body whose
a neriod
of 3 months from the date of revocation or such longer period as the Central Government may
name to a name which does not contain these words. If the body makes default
in
allow, change its
extend to 5,000 for
complying with these requirements, it shall be punishable with fine which may
which the default continues.
every day during

ONE-PERSON COMPANY
[Sec. 2 (62) Means a Company which has only One Person as a Member)
whole ofthe share capital of
This is a company (usually private) in which one man holds practically the
minimum number of members, some
the company, and in order to meet the statutory requirement of
I or 2 shares each. The dummy
dummy members who are mostly his relations or friends, hold just
owner of the business and
members are usually nominces of the principal shareholder who is the virtual
who carries it on with limited liability.
divided into
Example. A privatecompany is registered with a share capital of7 5,00,000
5,000 shares of 100 each. Of these shares 4,999 are held by A and one share is held by
A's wife, B. This is a one-man company

A one-person company, like any other company, is a legal entity distinct from its members. On the
facts ofa case, it may appear that a company is not the real owner ofa business but it is merely carrying
individual may carry on a
it on as an agent of the person who holds the shares in the company just as an
business as agent of another. But if a business is in fact and in law the property ofa separate legal entity,
who owns all the
a limited company, it cannot be held that the business is the property of the person
shares in the company and that the company is an agent for that other person [E.B.M. & Co. Lid. v.

Dominion Bank, (1937) All E.R. 555

Salient Features
2013 introduces a new type of company in the
Concept and Historical Background. Companies Act,
it is called. One Person Company was irst formulated
orm of One Person Company or OPC in short as constituted to look into various issues involving
oy ne Jamshed J. Irani Expert Committee which was

company law and which have submitted its report eight years ago.
increase in
in the report, the committee had stated that with growth of the economy and the
the
keep on changing. There is the
cOmplexities of business operations, the form of corporate organization
kind ofcompanies that may exist and
Ccd Tor the law to take into account the requirements of different refer while devising their corporate
CK O provide common principles to which all kind ofcompanies may
controls and regulations inhibit the risk taking
Sovernance structure. Rigid structures unnecessary
for different form, of corporate
of entrepreneurship. To enable a comprehensive framework
Vs The Irani Committee
dl7ations, the Company Law should ensure multiple classifications ofcompanies.
 [Sec. 2 (85)]
Small Company
means company a public
other than a company
Small Company
naid up share capital of which does not exceed Fifty Lakh rupees or such higher amount as may be
shall not be than Ten Crore rupees, or
nrescribed which more

as per profit and loss account for the immediately preceding financial vear does
l turnover of which
as may be prescribed which shall not be more
crore rupees or such higher amount
not exceed two
than one hundred
crore rupees.

Provided that it shall not apply to -

company/subsidiary company.
(a) holding 8.
a company
registered under Sec.
(b) special Act.
company governed by any
(c) a
 , 2013
304

Dormant Company (Sec. 455)

Affairs to introduce the concept of Dormant con
This a new initiative of Ministry of Co.porate
which are not carrying on any signiticant accounting transaction fora
which means Companies
Registrar of Companies for getting Dormant Comnani
declared itself as
of two years can apply to In
In
lot Companies are formed for the purpose of holdina an.
today's cconomic environment, a
assets
particularly real assets or any IPR or for a future project and sucn Company just keeps on comnlsin

being done transacted.

if no actual business is
or
with the laws even

Salient Features

. Where a Company is formed and registered under the new law for a future project or to hold an asset or
intellectual property and has no significant accounting transactions, such a Company or an inactive
Company may now nmake an application to the Registrar for obtaining the status of a 'Dormant Cormmam
The proposed law also includes a definition of an *Inactive Company" defined as meaning a
Company which has not been carrying on any business or operation, or has not made any significant
accounting transaction during the last two financial years, or has not filed financial statements and
annual returns during for the last two financial years.
The proposed law also includes a definition of "Significant Accounting Transaction" meaning any
transaction other than that of (a) payment of fees by a Company to the Registrar, (b) payments
made by it to fulfill the requirements of this Act or any other law, (c) allotment of shares to fulfill
he requirements of this Act and ( ) payments for maintenance of its office and records.
The Registrar on consideration ofthe application may allow the status of a Dormant Company to
the applicant company and issue a certificate to that effect.
The Registrar shall maintain a register of Dormant Companies
In case of a Company which has not filed financial statements or annual returns for two financial
years consecutively, the Registrar may issue a notice to that Company and enter the name of such
Company in the register maintained for Dormant Companies.

PROHIBITION OF LARGE PARTNERSHIPS

(Sec. 464 of Companies Act, 2013)
Illegal Association. A company, association or partnership consisting of more than 10 persons ror tne

any other
purpose of carrying on banking business and of more than 20 persons for the purpose of carrying
on

business with the object of earning profits can be legally formed only when it is registered under the Companies
on business
Act, 2013, or is formed in pursuance ofsome other Indian law or is a Joint Hindu Family carry1ng
nor
limit and it is
as such. If the number of members in an association or partnership exceeds this statutory
registered under the Companies Act, it is an illegal association and has no legal existene
but tor some otner
An association of more than 20 persons which exists not for acquisition of gain
purpose such as the promotion of art, charity, religion, science, etc., does not require registration.
tollows
Consequences of an illegal association. The consequences of an illegal association are as
liable for all liabilities
. Personal liability. Every member of an illegal association is personally
Rupees one lakh.
incurred in the business and is punishable with fine which may extend to

2. Contracts.
(a) An 1llegal association into any contract nor can it sue any
cannot enter
member or ouisiuel
not even if the company is subsequently registered.
for it cannot
on its business
( O t cannot sue or be sued for debts due to it or from it in carrying
contract debts, or enter into any contract.
KINDS OF COMPANIES

305

(c) No
L member of the association can sue any other member in respect of any matter connected
with the association.

The members cannot either individually or collectively bring an action to enforce any contract
which they may have purported to make on behalf of the association, or to recover any debt
given to the assoCiation.

3 Winding up. An illegal association cannot be wound up under the Companies Act either at the
instanceof acreditor, or a member or the association itself. The Tribunal will do nothing in relation
not even entertain a petition for
to it that will amount to its recognition. In fact, the Tribunal does
if it did, it would be indirectly according recognition to the illegal association.
its winding up, for

Penalty for Improper

use of Words Limited' and Private Limited
(Sec. 453 of Compaines Act,
2013)
trade or carry on business under any name or title of which
the word, 'Limited
If any person or persons
that person or each of thesepersons shall,
or the words
'Private Limited' is or are the last word or words,
as the case may be, be punishable
with fine
as public or private company,
unless duly incorporated
which that name has been used.
which may extend to 500 for every day upon
 w.
wwwww. yp

Prospectus
CHAPTER CONTENTS

SEBI (lssue of Capital and Disclosure Require-

ments) Regulations, 2009
o Issue of Application Form for
Public Offer and Private Placements (Section 33) Securities
(Section o Criminal Liability for
Prospectus (Section 34) Misstatements in
23)
Power of Securities and
Exchange Board to o Punishment for
Fraud
Regulate Issue and Transfer of Securities, etc. o Punishment for False (Section 447)
(Section 24) Statement
Document Containing Offer of Securities for oCivil Liability for Misstatements in(Section 448)
Sale to be Deemed (Section 35) Prospectus
Prospectus (Section 25) o Punishment for Fraudulenthy
ODefinition Inducing Person
to Invest
Contents of Prospectus/Disclosures in Prospectus Money (Section 36)
o Matters to be
Stated in Prospectus Misstatements in Prospectus and and their
thein
26) (Section Consequences
oVariation in Terms of Contract or Civil Liability (Sec. 35, New
Objects in o Remedies Companies Act)
Prospectus (Section 27) Against the Company
o Remedies
Offer of Sale of Shares
by Certain Members Against the Directors, Promoters
of Company and Experts
(Section 28)
Offer of Securities to be in O
o Public Section 34 (New Companies
Act)
Dematerialised form (Section 29) OAction by Affected Persons (Section 37)
Concept of Dematerialised Shares (Section 29 of o Punishment for Personation for Acquisition,
the Companies Act, etc., of Securities (Section 38)
2013) o Allotment of Securities by Company
Advertisement of Prospectus (Section 30)
O Book Building (Section 39)
o Securities to be Dealt
oWhatis Book Building? with in Stock Exchanges
o Process of
Book Building (Section 40)
oEvaluation of Book Building o Global Depository Receipt (Section 41)
o Offer or Invitation for Subscription of Securities
Shelf prospectus (Section 31) on Private Placement
Red Herring
Prospectus (Section 32) Test Questions
(Section 42)
Practical Problems
 341
DEFINITION
2(76) defines a propectus as any
ring prospectus referred to in Sec. 32document described or issued as
or
shelf prospectus and includes a red
a

advertisement or other document inviting depositsprospectus

advo referred to in Sec. 31 or
from the public or any notice, circular,
heSubscription or purchase of any shares in, or debentures inviting offers from the public for
ment inviting deposits firom the public or of, a body corporate". In
simple words, any
shares or debentures ot a company is a prospectus.
inviting offers from the public for the
subscription of
Prospectus to be in writing. A prospectus must be in
in. or debentures of, a company, or
n writing. An oral invitation to subscribe for shares
deposits is not a
prospectus. Likewise, an advertisement in television
or a film is not treated to be a prospectus.

Invitation to public. A document is not a prospectus unless it is an invitation to the

for sharesin, or
debentures of, a company. But if the document public to subscribe
satisfies the condition of invitation to the
public, it is
a
prospectus even though it is issued to a defined class
AC. 158]. Thus an advertisement which stated that "some of the public [Mash v. Lynde, (1929)
shares are still available for sale
the terms of the company which may be obtained on according to
invited the public to purchase shares [Pramatha Nath application" was held to be a
prospectus as it
Sanyal v. Kali Kumar Dutt,
A.I.R. (1925) Cal.
7141. If. however, the invitation is made to a small circle of friends of the
directors or the existing
shareholders, it is not an offer to the general public.
Offer to the public, i.e., public issue. Whether shares have been 'offered to the public' is a matter of
fact and will depend on the circumstances of a particular case.
How many persons constitute public ? Under the proviso to subsection (2) of Sec. 42, the offer of
securities or invitation to subscribe securities, shall be made to such number of persons not exceeding
fifty or such higher number as may be prescribed treated as made to the public.

CONTENTS OF PROsPECTUS/DISCLOSURES IN PROSPECTUS

The 'Golden Rule' as to framing of prospectus. The "golden rule as to framing of prospectuses' was
laid down by V.C. Kindersley in New Brunswick & Canada Rly. & Land Co. v. Muggeridge. (1860) 1
Dr. and Sm. 363 in the following words
Those who issue prospectus holding out to the public the great advantages which will acerue
to persons who will take shares in a proposed undertaking, and inviting them to take shares on
the faith of the representations therein contained, are bound to state every thing with strict and
scrupulous accuracy and not only to abstain from stating as fact that which is not so, but to omit
no one fact within their knowledge, the existence ofwhichmight in any degree afect the nature
or extent and quality ofthe privileges and advantages which the prospectus holds as inducement
to take shares".
Prospectus is the window through which an investor ean look into the soundness of a conmpany's
venture. The investor must, therefore, be given a complete picture of the company's intended activities
and its position. This is done through prospectus which must secure the fullest disclosure of all material
ud essential particulars and lay the same in full view of all intending purchasers of shares.
In order to finance its activities, a company needs capital which is raised by a public company by
ne issue of a prospectus inviting offers for shares and debentures from the public. A private company is
to subscribe for any shares in, debentures of, the
making any invitation to the public
or
pronibited from
company. Hence, it need not issue a prospectus.
 PANTES ACT, 2013
The central theme of prospecths, from the
money raising point of view. is that it sets outit prospectus
ofthe company and the purpose for which the capital is required. The prospectus is the the neo.
the perspective investors fom their basis on
opinion and take decisions as to the worth and prospects
company prospects of the
Matters to be Stated in Prospectus (Section 26)
(1)Every prospectus issued by behalf of a public company either with reference to
or on
or
subscquently. by or on behalf of any person who is or has been engaged or
or
its
formatine
formation of a public interested in th e
company, shall be dated and signed and shall
State such information and set out such
by the Sccurities and
reports on financial information as may be
Exchange Board in consultation with the Central Government. specified
(a) Information to be stated in the
(i) names and addresses
prospectus state the following information, namely
of the registered office of the
Chief Financial Officer auditors,
company, company secretary
legal advisers, bankers, trustees, if any. underwriters
and such other persons as
may be prescribed;
(ii) dates of the
opening and closing of the issue, and declaration about the issue of
allotment letters and refunds within the
(ii) a statement by the Board of Directors
prescribed time;
about the separate bank account
monies received out of the issue are to be transferred where all
and disclosure of details of all
monies including utilised and unutilised
monies out of the previous issue in
the
prescribed manner;
(iv) details about underwriting of the issue;
(v consent of the directors, auditors, banker to the issue, expert's
such other persons, as may be opinion, if any, and of
prescribed;
the authority for the issue and the
(vi) details of the resolution
(vii) passed therefor:
procedure and time schedule for allotment and issue of securities:
(vii) capital structure of the company in the prescribed manner;
ix) main objects of public offer, terms of
the present issue and such other
may be prescribed; particularsas

(x) main objects and present business of the

implementation of the project; company and its location, schedule ot

(xi) particulars relating to -

(a) management perception of risk factors specific to the project;
(b) gestation period of the
project;
(c) extent of progress in the
(d) deadlines for
project;
completion of the project; and
(e) any litigation legal action pending or taken by a Government
or

statutory body during the last five years Department or a

SSue of prospectus immediately preceding the year ot the

against the promoter of the company;
(xii) minimum subscription, amount
than on cash;
payable by way of premium, issue of shares otherwise
(xii) details of directors
including their appointments and remuneration, and such
of the nature and extent of,
their interests in the company
particulai
and
as may be prescriocu
(xiv) disclosures in such manner as may be prescribed about sources of promoter
contribution;
 hi Reports to be included in the prospectus set out the following reports for the purposes ot
the financial information, namely
(i) reports by the auditors of the company with respect to its profits and losses and assets
and liabilities and such other matters as may be prescribed
(i) reports relating to prolits and losses for each of the five financial years immediately
preceding the financial years of the issue of prospectus including such reports of its
subsidiaries and in such manner as may be prescribed:
Provided that in case of a company with respect to which a period of five years
has not elapsed from the date of incorporation, the prospectus shall set out in such
manner as may be prescribed, the reports relating to profits and losses for each of the
financial years immediately preceding the financial year of the issue of prospectus
including such reports of its subsidiaries;
(i) reports made in the prescribed manner by the auditors upon the profits and losses of
the business of the company for each of the five financial years immediately preceding
issue and assets and liabilities of its business on the last date to which the accounts of
the business were made up, being a date not more than one hundred and eighty days
before the issue of the prospectus:
Provided that in case of a company with respect to which a period of five years
has not elapsed from the date of incorporation, the prospectus shall set out inthe
manner, the reports made by the auditors upon the profits
and losses of the
prescribed
business ofthe company for all financial years from the date of its incorporation, and
assets and liabilities of its business on the last date before the issue of prospectus
and
of the securities are to
(iv) reports about the business or transaction to which the proceeds
be applied directly or indirectly;
of
c) Declaration to be included in the prospectus make a declaration about the compliance
that nothing in the prospectus is
the provisions of this Act and a statement to the effect
Securities Contracts (Regulation) Act, 1956 and
contrary to the provisions of this Act, the
rules and regulations made
the Securities and Exchange Board of India Act, 1992 and the
thereunder, and
state such other matters and
(d) Other matters and Reports to be included in the prospectus
set out such other reports, as be prescribed.
(2) Nothing in sub-section (1) shall apply of a prospectus or form
existing members or debenture-holders of company,
a
a)to the issue to
the company, whether an applicant has a
of application relating to shares in or debentures of
to renounce the shares or not under sub-clause (ii)
of sub-section (1) of Section 62 in
ight
favour of any other person; or
10 the 1Ssue of a prospectus or from of application relating
to shares or debentures which are,
D
the
or are to be, in all respects uniform with shares or
debentures previously issued and for
ime being dealt in or quoted on a recognized stock exchange.
toa prospectus or a fromot
Subyect to sub-section (2), the provisions ofsub-section (1) shall apply
Ppication, whether issued on or with reference to the formation of a company orsubsequenuy.
the date ot its
aplanation The date indicated in the prospectus shall be deemed to be
publication.
(4) prospectus shall be issued by or on behalf of a company or in relation to an intended company
delivered to the Registrar for filing,
has been
e s s on or before the date or its publication, there
 CONCEPT OF DEMATERIALISED
(Section 29 of the Companies Act,SHARES 2013)
arally a company issuing share capital to the
public issues shares certificates to the members. A share
rtificate is a certificate in physical form issued to the members
1ccifving the number of shares held by a member and the amount
by the company under its common seal,
is a Drima facie evidence of number of shares held and paid up value. paid on each share. A share certificate
It involves a declaration by the
camnany to the world that the person in whose
name the certificate is made out and to
whom it is given
isabonatide shareholder of the company.
Under Section 29 of the Companies Act, 2013, every listed company
making an Initial Public Offering
IPO) of 7 10 crores or more should issue securities only in dematerialised form in accordance with
Depositories Act, 1996.

Dematerialised Securities are the securities held in electronic from instead of the physical from.
Dematerialised securities/ shares do not have any distinctive numbers. All the holdings ofa particular
security are identical and interchangeable. The process by which physical certificates of an investor are
converted to an equivalent number of securities in electronic form and credited into the investor's account
with his Depository Participant is called as 'dematerialisation'. The process by which electronic holdings
are converted back into physical certificates is called 'rematerialisation'.
There are several benefits of holding securities in electronic form as demateralised securities.
Some of these are as under:
There is elimination of risks associated with physical certificates such as theft, loss of share
certificates, fake securities, bad delivery.
No stamp duty on transfer of securities.
Immediate transfer of securities.
Reduction in paper work involved in transfer of securities.
Reduction in transaction cost for purchase and sale of securities.
Increased liquidity of securities.
 BuSINESS LAw || THE CoMPANIES
346 ACT, 2013
share can be sold.
even one
No odd lot problem:
Nomination facility. securities.
convenient way to hold
A safeand
It 1S CSsential to understand the Depositores.
In the context of dematerialiscd securities, sitores system
1. What is a Depository?
A depository is an organization which hoids securities of investors in electronic from at fha request o
the investors through a registered Depostory r'aruCipant, it also provides services related to sactieons

in securities.
A depository can be compared with a bank, which holds the funds for depositors. A Bank Deposito
sitory
analogy is given in the table below:
Bank Depositony
Holds funds in an account Holds, securities in an account
Transfers funds between accounts on the Transfer securities between accounts on the
instruction of the account holder instruction of the account holder
Facilitates transferwithout having to handle Facilitates transfer of ownership without having
money to handle securities
Facilitates safekeeping of money Facilitates safekeeping of securities

The minimum net worth stipulated by SEBI for a Depository is 100 crore.
At present, two Depositories, viz., National Securities Depository Limited (NSDL) and Central
Depository Services (l) Limited (CDSL) are registered with SEBI.
2. Who is a
Depository Participant?
ADepository Participant (DP) is an agent of the Depository through which it interfaces with the investor.
A DP can offer depository services only after it gets proper registration from SEBI. Banking services
can be availed through a branch whereas depository services can be availed through a DP.
As on 31.03.2005, 477 Depository Participants (DPs) are registered with SEBI.

3. Is it
compulsory for every investor to open a depository account to trade in the capital market?
As per available statistics at BSE and NSE, 99.9% settlement takes place in demat mode only. Therefore,
inview of the convenience in settlement through demat mode, it is advisable to have a beneficiary owner
(BO) account to trade at the exchanges.
4. How services
can
ofa depository be availed?
To avail the services ofa
depository an investor is required to open an account with a Depository Partic1pant
of any depository.
How Can One Open an Account?

First, an investor has

to approach a DP and fill up an account
opening form. The account opening from
must be supported by copies of any one of the approved documents to serve as proof of Identity (POI)
and proof of Address (POA) as
specified by SEBI.
All applicants should carry original document for verification by an authorized oficial of the
Depository Participant, under his signature.
Further, the investor has to sign an agreement with DP in a depository prescribed standard format,
which details rights and duties of investor and DP. DP should provide the investor with a copy of the
 PROSPECTUS 347

ereement and schedule of charges for their fiuture reference. The DP will open the account in the system
d give an account number, which is also called BO ID (Beneficiary Owner Identification) number.

s Mhat is dematerialisation? How can one convert physical holding into electronic holding i.e., how can
one dematerialise securities?

Dematerialisation is the process by which physical certificates of an investor are converted to an equivalent
into the investor's account with his/ her DP.
electronic from and credited
number of securities in
securities one has to fill in a DRF (Demat Request Form) which is
In order to dematerialize physical
same for along with physical certificates one wishes to dematerialise.
aailable with the DP and submit the dematerialisation is
has to be filled for each ISIN Number. The complete process of
Separate DRF
outlined below:

Surrender certificates for dematerialisation to your depository Participant.

the system.
.Depository Participant intimates Depository of the request through Issuer Company.
certificates to the Registrar of the
Depository Participant submits the
Registrar confirms the dematerialisation request
from depository
accounts and informs depository of the
After dematerialising the certificates, Registrar updates
completion of dematerialisation.

accounts and informs the Depository Participant.

Depository updates its
the demat account ofthe investor.
Depository Participant updates
dematerialised securities?
6. What is the procedure for buying and selling
dematerialised securities is similar o
the procedure for buying and
The procedure for buying and selling and receipt (in
of delivery (in case of sale)
The difference lies in the process
selling physical securities.
case of purchase) of
securities.

In case of purchase- day.

securities in his account on the payout
The broker will receive the account and credit
investor's account
instruction to its DP to debit his from.
The broker will give credit by filling appropriate
Instruction' to DP for receiving obviate the need
Investor will give 'Receipt one's account that will
instruction for credit in to
However one can give standing
time.
of giving Receipt Instruction every
account.
of sale credit the broker's
In case his account and
-

instruction to DP to debit otherwise DP will

The investor will give delivery before the pay-in as

reach the DP's office at last 24 hours

Duch should
instruction
investor 's risk.
accept the instruction only at the
offering directly in the electronieform?
securities allotted in public In the
it possible to get in the electronic form.
s
offering directly
allotted to in public an investor
wants the
is
it possible to get securities m a n n e r in which
Tes, to indicate the form.
application form, there is a provision the name and ID of the DP on the application
PuDC Ssue BO ID and
allotted. He has to mention the
CCurities BO account.
credited into the
ny allotment made will be
received?
benefits such as dividend / interest the date of the
i o w are cash corporate as on
holders and their holdings
obtains the details
beneficiary of made by the company
the investors will be
Concerned company The payment to
the dividend/
interest
book / record date from Depositories. available. Thus
Clearing Service)
facility, wherever
Ough the ECS (Electronic
 ECS facility is not available, dividend/ interest will
will be credited to your bank account directly. Where
be given by issuing warrants on which your bank account details are printed. The bank account details will

be those which you would have mentioned in your account opening form or changed thereafter.

Advertisement of Prospectus (Section 30)

Where an advertisement of any prospectus of a company is published in any manner, it shall be necessary
to specify therein the contents of its memorandum es regards the objects, the liability of members and
the amount ofshare capital of the company, and the names of the signatories to the memorandum and the
number of shares subscribed for by, them, and its capital structure.
Shelf Prospectus |Sec. 31]. 'Shelfprospectus' means a prospectus issued by any financial institution or
bank for one or more issues of the securities or class of securities specified in that prospectus.
Any public financial institution, public sector bank or scheduled bank whose main object is financing
shall file a shelfprospectus. 'Financing' means making loans to or subscribing in the capital ofa private
industrial enterprise engaged in infrastructural or, such other company as the Central Government may
notify in this behalf.
A company filing a shelf prospectus with the Registrar shall not be required to file prospectus afresh
at every stage of offer of securities by it within a period of validity of such shelf prospectus. It shall be
required tofile an information memorandum on all material facts relating to new charges created, changes
in the financial position as have occurred between the first offer of securities, previous offer of securities
and the succeeding offer of securities within the time prescribed by the Central Government, prior to
making ofa second or subsequent offer of securities under the shelf prospectus.
An information memorandum shall be issued to the public along with shelf prospectus filed at the
stage of the first offer of securities and such prospectus shall be valid for a period of one year from the
date of opening of the first issue of securities under that
prospectus.
Where an update of information memorandum is filed every time an offer or securities is made, such
memorandum together with the shelf prospectus shall constitute the prospectus.
Information Memorandum. Information memorandum means a process undertaken prior to the filing
ofa prospectus by which a demand for the securities proposed to be issued by a company is elicited, and
the price and the terms of issue for such securities is assessed, by means of a notice, circular, advertisement
or document.

Circulation ofinformation memorandum prior to the opening of subscription lists. A

public company
making an issue of securities may circulate information memorandum to the public prior to filling of a
prospectus.

BOOK BUILDING*
The success of an issue of securities depends, to a large extent, on the price at which it is made. An issue
at discount maybe fully subscribed, but it provides company costly funds. A premium issue promises
cheap funds but reduces chances for full subscription. Thus, issue pricing is an important question an
calls for considerable expertise on the part of issuers and promoters of any company. The problem could
be still mote serious if the
organisation is a new company.
Market value-based pricing- The securities are issued at a price at which any security ofthe
same company has been previously or currently traded. As per this method the issue price is fixeu
near to the market value of the share.
 .Net Asset Value INAVI-based pricing The issue price is fixed on basis of NAV of company.
The NAV is calculated on the basis of assets and liabilities figures appearing in the balance sheet
of the company.
. Reference pricing The price is determined in comparison with other similar companies. The
shares are issued al a price at which the share of some other same company is valued.
. Tender pricing-This method is also known as bid-determined pricing or Book Building.

What is Book Building?

Raok Building' means a process undertaken by which a demand for the securities proposed to be issued
h abody corporate is elicited and built up and the price for such securities is assessed for the determination
of the quantum of such securities to be issucd by means of a notice, circular, advertisement or offer
document.

Bids are collected from investors, at various prices which are above or equal to the floor price (the
date, based on certain
minimum price). The final price of the share is determined after the bid closing
the IPO will be
evaluation criteria. The bidders can offer their bids during a certain period for which
open Price band is the
Price band comes into play when IPOs are done through a book-building process.
lower and the upper share price declared by the company in the
issue document when it adopts book-
building route.
Issue of 8,00,000
For instance, Punjab National Bank (PNB), which had come out in 2005 with public
390 per equity share.
Equity shares of 7 10 each, had indicated the price band of 7 350 to In the exampie of
in the price band the lower end is called floor price and the higher end cap price.
investors who desire to
PNB given above, 350 is the floor price and F 390 the cap price. It means the
least 350 per share and the maximum
apply for the shares of this company would be ready to pay at the
amount that the share price may go cannot exceed 390.
20% of the floor price of the
As per SEBI guidelines, the cap of the price band shall not be than
120% of the floor price of the band.
band, i.e., cap of the price band shall be less than or equal to
Bid shall be open for at least 5 days and not more than 10 days.
for retail
Individual investors encouraged by reserving a portion of the issue
are
category.
who have bid the final price or
When all the bids are received and the final price is decided, those
above get the allotments and other would get refund, Those retail
investors who do not want to take a
haveoption to bid at 'cut-off". which
quoting the bid price and want assured allotment,
an
d i c e in
However.
at the final price decided through the BB route.
dns they are agreeable to have shares allotted
y are required to pay money at the bid stage itself, at the cap price.
book-built portion and the remaining 25°% is to be
In partial book building, 75% of the issue is the is reserved for the book building
0aded in the general market. In 100% book building, the entire issue
O PNB issue is an example for 100°o Book
n and nothingis for the general market. The recent
kept
Building issue.
 uS.
Red Herring Prospectus (Section 32)
Aconmpany proposing to make an ofter of securities
may issue a red herring
issue of a prospectus. prospectus prior to the
Acompany proposing to 1ssue a red
herring prospectus under sub-section (I ) shall file it with the
Registrar atleast three days prior to the
opening of the subscription list and the offer.
Ared
(3) herring prospectus shall carry the same obligation as are
ariation between the red applicable to prospectus and any
herring prospectus and a prospectus shall
a

be highlighted as variations in
the prospectus.
ALinon the closing of the offer of securities under this section, the
total capital raised, whether by way of debt or share prospectus stating therein the
capital, and the closing price of the securities
and any other details as are not included in the red
Registrar and the Securities and Exchange Board.
herring prospectus shall be filed with the
Explanation For the purposes of this section, the expression "red herring
-

prospectus" means a
prospectus which does not include complete particulars of the quantum or price of the securities
included therein.

Issue of Application Form for Securities (Section 33)

(1) No form of application for the purchase of any
ofthe securities of a company shall be unless such
foom is accompanied by an abridged prospectus
Provided that nothing in this sub-section shall apply if it is show that the form of
was issued -
application
(a) in connection with a bona fide invitation to a person to enter into an underwriting agreement
with respect to such securities; or
(b) in relation to securities which were not offered to the public.
2)A copy of the prospectus shall, on a request being made by any person before the closing of the
Subscription list and the offer, be furnished to him.
(3) fa company makes any default in complying with the provisions ofthis section, it shall be liable
to a
penalty of fifty thousand rupees for each default.
Criminal Liability for Misstatements in Prospectus (Section 34)
Where
unrue
a
prospectus, issued, circulated or distributed under this Chapter, includesany statement which is
or misleading in form or context in which it is included or where any inclusion or omission of any
ndter is ikely to mislead, every who person who authorizes the issue of such prospectus shal be liable
under section 447:
 COMPANIES ACT, 2011
352
to a person if he proves that such
this section shall apply
Provided that nothing in
reasonable grounds to
believe, and did upand
up to th time
to the
of
tatement or
immaterial or that he had issue af
omission was
true or the inclusion or
omission was n necessary
ece
was
that the statement
the prospectus believe,

Punishment for Fraud (Section 447)

dept under this Act or any other l a e
Without prejudice to any liability including repayment of any
shall be punishable with imnehe the
any person who
is found to be guilty of fraud,
time being in force, extend to ten years and shall
which shall not be less than six months but which may o be
for a term
less than amount involved in the traud, but which may extend to
liable to fine which shall not be ree
times the amount involved in the fraud:
Provided that where the fraud in question involves public interest, the term of imprisonment shal

not be less than three years.

Explanation For the purpose of this section-

-

(i)fraud" in relation to affairs of a company or any body corporate, includes any act, omission
concealment of any fact or abuse of position committed by any perSon or any other person with the
connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the
interest of, the company or its shareholders or its creditors or any other person, whether or not
there is any wrongful gain or wrongful loss
(ii) "wrongful gain'" means the gain by unlawful means of property to which the person gainingis not

legally entitled;
Gii) wrongful loss" means the loss by unlawful means of property to which person losingis legaly
entitled.

Punishment for False Statement (Section 448)

Save as otherwise provided in the this Act, if in any return, report, certificate, financial statement
of
prospectus, statement, prospectus, statement or other document required by, or for, the purposes any
of the provisions o f this Act or the rules made thereunder, any person make a statement -

(a) which is false in any material particulars, knowing it to be false; or

b) which omits any material fact, knowing it to be material, he shall be liable under section 44

Civil Liability for Misstatements in Prospectus (Section 35)

(1) Where a person has subscribed for securities of a company acting on any statement inchudeu. o
the inclusion or omission of any matter, in the prospectus which is misleading and has sustatee

any loss or damage as a consequence thereof, the company and every person who-
(a) is a director of the company at the time of the issue of the prospectus;
the
(by has authorised himself to be named and is named in the prospectus as a director o
company, or has agreed to become such director, either immediately or after an interval
time,
(c) is a promoter of the company;
(d) has authorised the issue of the prospectus; and
(e) is an expert referred to in sub-section (5) of section 26,
be
shall, without prejudice to any punishment to which any person may be liableunder sect
able to pay compensation to every person who has sustained such loss or damage.
(2) No person shall be liable under sub-section (1), if he proves -
 (a that, having consented to become a director of the
company, he withdrew his consent before
the issue of the prospectus, and that it was issued without his
authority or consent: or
(b) that the prospectus was issued without his knowledge or consent, and
that on becoming
aware of its issue, he forthwith gave a reasonable
knowledge or consent.
public notice that it was issued without his
c) that. regards every misleading statement purported to be made by an expert or contained
as

in what purports to be a copy of or an extract from a

report or valuation of an expert, it was
a correct and fair representation of the statement, or a correct
copy of. or a correct and fair
extract from, the report or valuation; and he had reasonable ground to believe and did up to
the time of the issue of the prospectus believe, that the person making the statement was
competent to make it and that the said person had given the consent required by sub-section
(5) of section 26 to the issue of the prospectus and had not withdrawn that consent before
delivery ofa copy ofthe prospectus for filing or, to the defendant's knowledge. before allotment
thereunder.
) Notwithstanding anything contained in this section, where it is proved that a prospectus has been
issued with intent to defraud the applicants for the securities ofa company or any other person or
foranyfraudulent purpose, every person referred to in sub-section (1) shall be personally responsible.
without any limitation of liability, for all or any of the losses or damages that may have been
incurred by any person who subscribed to the securities on the basis of such
prospectus.
Punishment for Fraudulently Inducing Person to Invest Money (Section 36)
Any person who, either knowingly or recklessly makes any statement, promise or forecast which is
false, deceptive or misleading, or deliberately conceals any material facts, to induce another person to
enter into, or offer to enter into-
(a) any agreement for, or with a view to, acquiring, disposing of, subscribing for, or underwriting
securities; or
(b) any agreement, the purpose or the pretended purpose of which is to secure a profit to any of the
parties from the yield of securities or by reference to fluctuation in the value of securities: or
tinancial
a n y agreement for, or with a view to obtaining credit facilities from any bank or institution,

shall be liable for action under section 447.

Liability for misstatements in prospectus

Civil liability (Sec. 35) Criminal liability tSec. 34)

Against the Against the directors,

company promoters and experts

Rescission Claim for Damages Compensation Damages for

of
damages non-compliance
contract

For frauo ent For innocent

misrepresentation misrepresentation
Memorandum of Association
wwwIwo9eoaoov0

CHAPTER CONTENTS
Fundamental Document oAlteration of Conditions
Contents of Memorandum (Sec. 4, Companies Act, O Doctrine of Ultra Vires
2013) Test Questions
Alteration of Memorandum Practical Problems

FUNDAMENTAL DOCUMENT
memorandum" means the memorandum of association of a company as originally framed or as altered
from time to time in pursuance of any
previous company law or of this Act [Sec.2(56)].
The Memorandum of Association is a document of great
importance in relation to the proposed
company. It contains the fundamental conditions upon which alone the company is allowed to be
incorporated. It is the charter of the company and defines its raison d'etre (i.e., reason for existence). It
lays down the area of operation of the company. It also regulates the external affairs of the company in
relation to outsiders. Its purpose is to enable shareholders and those who deal with the company to know
what its permitted range of enterprise is. It not only shows the object of the formation of a company but
also the utmost possible scope of it. It is, as it were, the area beyond which the actions of the company
cannot go; inside that area the shareholdersmay make such regulations for their own govenance as
they think fit [Ashbury Rly. Carriage & Iron Co. Lid. v. Riche, (1875) L.R. 7 H.L. 653]
Purpose of Memorandum. The purpose ofthe Memorandum is two-fold:
1. The prospective shareholders shall know the field in, or the purpose for, which their money 1s

going to be used by the company and what risk they are undertaking in making investment.
2. The outsiders dealing with the company shall know with certainty as to what the objects ot the
company are and as to whether the contractual relation into which they contemplate to enter witn
the company is within the objects of the company [Cotman v. Brougham. (1918)
A.C. 514].
Printing and Signing of Memorandum. The Memorandum of Association of a company
shall be -

(a) printed,
 MEMORANDUM OF ASSOCIATION
321

divide
numbered consecutively, and
into paragraphs
h) in case of private company) subscribers
(c)
igned by 7(2
Each
bscriber shall sign (and add his address, description and occupation, if any) in the presence

witness ttest
who shall atte the signature and shall likewise add his address, deseription and
least 1
ofat
occupation, if any
The Memorandum of Association printed on computer laser printers should he accepted hy the
of a company proVided it is neatly and legibly printed (Press Note, issued hy
n strar for registration
dated 22-6-1993),
he Department of Company Afairs,
m of Memorandum (Sec. 14). The Memorandum of Association of a company shall be such onein

Forms in Tables B, C. D and E in Schedule I to the Companies Act, 1956, as may be applicable to
or in a Fom as near thereto as circumstances admit.
the case
c of the company.
CONTENTS OF MEMORANDUM
(Sec. 4, Companies Act, 2013)
company shall contain the following clauses (described as conditions of the
Memorandum of every
company s incorporation)
1 . The Name o f the company, with the last w o r d 'Limited ' in the case o f a public limited company

or the last words, "Private Limited' in the case of private limited company.

The State in which the registered office of the company

is to be situated.
2
3. The Objects for which the company
is proposed to be incorporated and any matter considered
necessary in furtherance
thereof.
its members is
LimitedLiability. The memorandum ofa company limited by shares, that liability of
them.
limited to the amount unpaid, if any, on the shares held by
the amount of share capital with which
5. Share Capital. In case of a company having a share capital,
division thereof into shares of a fixed amount. In such
a
e company is to be registered and the
at least one share and shall write opposite
his name the number
company each subscriber shall take
of shares he takes.
each member undertakes
The Memorandum of company limited
a by guarantee shall also state that
need be, in the event of its being wound up.
to contribute a certain sum to the assets of the company, if subseribers
'association clause' which states that the
he Memorandum shall conclude with an
0Eesire to form a company and agree to take shares in it.
These clauses are now considered in detail
establishes its identity and is the symbol ofits existence.
ne Name Clause. The name ofa company select any suitable name
-

A
Company may, subject to the following rules, which, in the
A company cannot be registered by
a name
Undesirable name to be avoided. a name is undesirable
undesirable. Broadly speaking,
opinion ofthe Central Government, is
and therefore rejected if it is either
to an exísting company
registered under this Act
(a) identical with or resemble too nearly
previous company law;
or
or any with or haviug the patronage
connected
that the company is
(b)misleading, i.e., suggesting Govermment or any local authority, corporation
any State
ofthe Central Government,Central Government or any State Government under any
constituted the by
or body
law for the time being in torce
as may be prescribed.
(search word orexpression,
 322 BUSINESS LAw
Bu || HE
COMPANIES ACT, 2011
(2) Limited'or Private Limited 'as the last word or words of the name. The Memo
shall state the name ofthe company with 'Limited' as the last word ofthe name in cac
limited and with "Private Limited' as the last words ofthe name in of a
public conmpany,
private limited company.
Emblems and Names (Prevention of Imnton
(3) Prohibition of use of certain names. The oper
or firm with, any name
the usc of or registration of a company
Use) Act, 1950 prohibits,
to the Act. The Schedule specifies, amongst others the
emblem specified in the Schedule
emblem or official seal of the United Nations Organization,
following items, i.c., the name,
the United Nations Educational, Scientific and Cultural
the World Health Organization, emblem or official seal of the Central
National Flag, the name,
Organization, the Indian emblem or official seal of the President of
the name,
Government and State Governments,

India or Governor of any State.

shall
Act, 2013]. Every company
-

of Name [Sec. 12(3) of Companies

2. Publication
office, and keep the same painted or
and the address of its registered
(a) paint or affix its name,
office or place in which
its business is carried on, in aa
affixed, on the outside of every characters employed
therefor are not those
letters, and if the
conspicuous position, legible
in
one of those languages;
of the language or of on its seal;
engraved in legible characters Number along with
(b) have its and the Corporate Identity
n a m e
office
address of its registered addresses, if any, printed
in all its
(C)get its name, if any, e-mail and website and
fax number, other official publications;
telephone number, and in all its notices and
other
letter papers such
letters, billheads, exchange and
business
promissory notes, bills of
n a m e printed
on hundies,
(a) have its n a m e s during
the last two
documents prescribed: its n a m e or
a company
has changed the former name
Provided that where along with its name, may be,
print, as the
case

it shall paint o r
affix or under clauses (a) and (c):
years, two years as required in brackets

s o changed
during the last shall be
mentioned
names Person Company
the words "One
or
that aftixed or engraved.
Provided further
wherever its n a m e
is printed,
2013)
n a m e of
such company, Companies Act,
below the
12 s u b - s e c t i o n 4(1)
times thereafter,
have a (6) of New
Office Clause (Sec. and at all
The Registered of its incorporation and notices
3. within thirty days all
communications

shall, acknowledging
(1) A company
receiving and
capable of
office a perod
registered office within
it. its registered
may be
a d d r e s s e d to verification of
as
to the Registrar be prescribed.
shall furnish m a n n e r as may domicile [Daimler
(2) The c o m p a n y in such
incorporation d e t e r m i n e s its
of its
of thirty days office of a company

of the registered 2 A.C. 307].

Co. Lid, (1916)
situation
The Rubber
Continental Tyre &
Co. Lid v

Office
Registered
of the
Act 201
Verification

Act 2019: (Amendment)

Amendment Companies

As per
Section 10A of c o m m e n c e m e n t
ofthe any
borrowing pow
incorporated
after the
any
business or exercise
O
c o m m e n c e

Acompany shall not days

(1) a s h a r e capital hundred and eighty
periodof one
and having
director
within a verified in such mannc
unless and
is filed by a
in such form memorandut

the
subscriber to
declaration

(a) A
i n c o r p o r a t i o n of
the company

that every
the date of with the
Registrar
prescribed,
may be
 paid the value of the shares agreed to be taken by him on the date of making such
declaration; and
(b) The company has filed with the Registrar a verification of its registered office as
provided in sub-section (2) of section 12
(2) If any default is made in complying with the requirements of the section, the company shall
be liable to a penalty of fifty thousand rupees and every officer who is in default shall be
liable to a penalty of onethousand rupees for each day during which such default continues
but not exceeding one lakh rupees.
(3) Where no declaration has been filed with the Registrar under clause (a) of sub-section (1)
within a period of one hundred and eighty days of the date of incorporation of the company and
the Registrar has reasonable causeto believe that the company is not carrying on any business
or operations, he may, without prejudice to the provisions of sub-section (2), initiate action for
the removal of the name of the company from the register of companies under Chapter XVII.
4. The Objects Clause [Sub-secion 4 (1) (c)]. The objects of a company shall be clearly set forth in
the Memorandum, fora company can do what is within, or incidental to, the objects stated in the
Memorandum. The objects clause both defines and confines scope of the company's powers, and
once registered, it can only be altered as provided by the Act.
The purpose of the objects clause is -

(1) to enable subscribers to the Memorandum to know the uses to which their money may be
put, and
(2) to enable creditors and persons dealing with the company to know what its permitted range
ofenterprise or activities is[Egyptian Salt & Soda Co.Ltd., v. Port Said Salt Assn. Lid.(1931)
A.C. 677]
The powers specified in the Memorandum must not be construed strictly. The company may
do anything which is fairly incidental to these powers. Anything reasonably incidental to the
attainment or pursuit of any of the express object ofthe company will, unless expressly prohibited
be within the implied powers of the company.
5. The Capital Clause. The Memorandum of a company, having a share capital, shall state the

amount of the share capital with which the company is to be registered and the division thereof
into shares of a fixed amount. The capital with which a company is registered is called 'registered'.
authorised', or 'nominal' capital. A company cannot issue more shares than are authorized for the
time being by the Memorandum. The shares issued by a company can only be equity shares or
prefererice shares. The equity share capital may be with the voting rights; or with differential right
as to dividends, voting or otherwise in accordance with such rules as may be prescribed (Sec. 43).
A private company which is nota subsidiary ofa public company may issue shares of any kind and
with disproportionate rights.
shares or by guarantee shall
h e Liability Clause. The Memorandum of a company limited bythat the members be
aiso state that the liability of its members is limited. This means amount on the shares only
can

held by
cd upon to pay to the company at any time the uncalled or unpaid
nem, or up to the maximum of the amount which they have guaranteed.

*ne AsSociation Clause. The association clause states: "We, the several persons whose names

and addresses are subscribed, are desirous of being formed into company in pursuance of this
a
norandum ofAssociation, and we respectively agree to take the number of shares in the capital

o1descriptions
the company set opposite out respective names. "This 1s tollowed by the names, addresses and
of the subseribers and the number of shares taken by each one of them. Each subscriber
has to take at least 1
share.
 324 BUSINESS LAW THE
COMPANIES ACT, 2013
The Memorandum shall be signed by at least 7 subscribers in the case of a public company, and
at least 2 subscribers in the case of a private company one person, where the company to be formed i .by
be one person company that is to say, a private company. The signature of each subscriber shall
de
attested by at least I witness who cannot be any of the other subscribers.

ALTERATION OF MEMORANDUM

Alteration of Conditions
I. Change of Name. Byspecial resolution (Sec. 13). A company may change its name subject to the
provisions of sub-section (2) and (3) of Section 4 bya special resolution and with the approval of
the Central Government signified in writing. But a change of name which merely involves
the
deletion or addition of the word °Private' on the conversion of a public company into a
private
company or vice versa does not require the approval of the Central Government.

Rectification of name of company (Sec. 16)

(1) If, through inadvertence or otherwise, a company on its first registration or on its registration
by a new name, is registered by a name which-

(a) in the opinion of the Central Government, is identical with or too nearly resembles
the name by which a company in existence had been previously registered, whether
under this Act or any previous company law, it may direct the company to change its
name and the company shall change its name or new name, as the çase may be, within
a period of three months from the issue of such
direction, after adopting an ordinary
resolution for the purpose.
(b) on an application by a registered proprietor of a trade mark that the name is identical
with or too nearly resembles to a registered trade mark of such proprietor under the
Trade Marks Act, 1999, made to the Central Government within three years of
incorporation or registration or change of name of the company, whether under this.
Act or any previous company law, in the opinion of the Central Government, is identical
with or too nearly resembles to an
existing trade mark, it may direct the company to change
its name and the company shall change its name or new name, as the case may be, within a
period of six months from the issue of such direction, after adopting an ordinary resolution
for the purpose.
(2) Where a company changes its name or obtains a new name under sub-section (1), it shall
within a period of fifteen days from the date of such change, give notice of the change to the
Registrar along with the order of the Central Government, who shall carry out necessary
changes in the certificate of incorporation and the memorandum.
(3) Ifa company makes default in complying with any direction given under sub-section (1), the
company shall be punishable with fine of one thousand rupees for every day during
default continues and whicn tne
every officer who is in default shall be punishable with fine which shal
not be less than five thousand
rupees but which may extend to one lakh rupees.
Fresh certificate
ofincorporation (Sec. 23). Where a company changes its name, the Registrd
shall enter the new name on the
Register in the place ofthe former name. It shall also issue to
the company a fresh certificate of
incorporation.The of name shall be
change complete
and
effective only on the issue of such a certificate. The
alteration in the Memorandum of Association of the
Registrar shall also make the necessary
company.
2 Change of Registered Office. This may involve:
(a) Change ROC 1o the jurisdiction of another
of registered office from the jurisdic tion of one
ROC within a State i.e., where there is more than one ROC within a State [Sec. 17-A as
introduced by the Companies (Amendment) Act, 2000]. A company can change the place of
its registered office from one place to another within a State, if it is confirmed by the Regional
Director. For this purpose, the company has to make an application to the Regional Director
for confimation. This confimation shall be communicatcd to the company within a period of

thirty days from the date ofreceiptofapplication. The companywithin

shall then file with the Registrar
the date of
a certified copy of the confirmation by the Regional Director, sixty days from
confirmation, together with a printed copy of the Memorandum of Association as altered. The
document.
registrar shall register the same within one month from the date of filing of such
resolution.
(b) Change ofregistered office from one State to another.A company may. by special
These
change the place of its registered office from one State to another for certain purposes.
of objects and are discussed under the heading
purposes are the same as in case of alteration
Alteration of objects".
Procedure of Alteration
at a general meeting so as to
(1) Special Resolution. A special resolution shall be passed
another.
change the place of registered office from one State to
alteration shall not take effect until it is
(2) Approval by the Central Government. The
approved by the Central Government.
Government shall dispose of the application
(3) Consent ofaffected parties. The Central itself that the
within a period of sixty days and before passing its order may satisfy
alteration has the consent of the creditors, debenture-holders and other persons
has been made by the
concerned with the company or that the sufficient provision
of all its debts and obligations or that adequate
company either for the due discharge
security has been provided for such discharge.
Government to be filed with the Registrar. A company
4) Certified copy ofthe Central
order of the Central Government
shall file with the Registrar- a certified copy ofthe
time and in such manner as may be prescribed.
confirming the change within such
Memorandum as altered. The Registrar
The company shall also file a printed copy ofthe
within thirty days from the date of
shall register the same and certify the registration
certificate shall be conclusive evidence that all the
filing of such documents. The have
to change and the contirmation thereof
requirements of the Act with respect
been complied with.
Memorandum shall have effect unless it has
Effect of failure to register. No alteration of
of Sec. 13. If the documents to be filed
been registered in accordance with the provisions
within the preseribed period, such alteration
with the Registrar under Sec. 13 are not filed become
all proceedings connected therewith shall
and order of the Central Government and
void and inoperative
the alteration shall be tiled by the company
A certified copy of the order approving
which the registered otlice is to be shifted and
with the Registrar of the each ofthe States in
be shitted to the Registrar
he shall register the same. All the records ofthecompany shall then
of the State in which the registered office of the company is shitted.
clause in the
Alteration of objects (Sec. 13 (8)|. The objects clause is the existsimportant
most

Memorandum of Association. The legal personality of a company only for the particular
purposes of incorporationas defined in the objects clause.
 13
The power of alteration of objects is subject to two limits, namely
(1) substantive orphysical limit, and
(2) procedural limit.
Substantive Limit. The objects of a company may be altered by special resolution so as to enak.
able
the company
(a) To carry on its busines more economically or more efficiently. The alteration must howev
leave the business ofthe company substantially what it was before the alteration. This clase
use
contemplates only such changes in the mode of conducting business as will enable it to he
be
carried on more economically or more efficiently.
Scientific Poulry Breeders'Assn., Re (1933) Ch. 227. A company which
forbidden by its Articles of Association from paying remuneration to its managers wanted to
alter its objects clause so as to acquire power to pay this remuneration to carry on its
business
more economically or efficiently. The alteration was allowed.
) To attain its main purpose by new or improved means. The emphasis here is on
the company's main purpose. The word "purpose' is more restricted than
attaining
objects', and
consequently the alteration must be one to carry out the main purpose of the company rather
than one of the objects of the company, although that object may be described in the
Memorandum as a main object.
(c) To enlarge or change the local area
of its operations. An alteration of this nature may necessitate
an alteration in the name
ofthe company. The following case illustrates the point
Egyptian Delta Land & Investment Co., Re (1907) W.N 16. A company which was
formed to acquire land in Egypt wanted to alter its
Memorandum to take power to
acquire land in Sudan. Held, the alteration could be made provided the company
inserted the words 'and Sudan' after the word 'Delta' in its
name.
d) To carry on some business which
may conveniently or advantageously be combined
with the objects specified in the Memorandum. A
on some business which is a
company may be allowed to cary
departure from the business already carried on provided
such business is one which can
conveniently or
advantageously be combined with the
existing business of the company and is not destructive of or inconsistent with the
existing business.
In thefollowing cases alteration of the objects clause was
permitted:
(e) To restrict or abandon any
of the objects specified in the Memorandum ;
To sell or dispose of the whole, or any part, of the undertaking. or of oy ine
any
undertukings, of the company; or
(g) To amalgamate with any other
company or body of persons.
Procedure of Alterantion
(1) Special resolution. A special resolution shall be passed at a
objects of the company. general meeting so as to alter tne
(2) Copy of special resolution to
be filed. The shall file with the Registrar the
resolution within 1 month from the date company
of the resolution with a specia
Memorandum as altered. printed copy of the

(3) Certification ofregistration. The Registrar shall register the special resolution and certify
the registration under his hand within I month from the date of the filing of the special
resolution.
 A Change in Liability Clause. A company 1limited
by shares or guarantee cannot change its
Memorandum so as to imposc any additional liability on the members
additional shares of the company unless all the members agree in writing tocompel them to buy
or to

such change either

before or after the change.
5. Change in Capital Clause. For ehange in the capital clause which involves increase, reduction or
reorganisation of capital, refer to Chapter on 'Share Capital' (Sec. 61).

DOCTRINE OF ULTRA VIRES

A company has the power to do all such things as are
(1) authorised to be done by the Companies Act, 2013;
2essential to the attainment of its objects specified in the Memorandum
3) reasonably and fairly incidental to its objects [Foster v. London Chatham & Dover Co.. (1895) 1
Q.B. 711].
Everything else is ultra vires the company. "Ulra 'means 'beyond' and 'vires 'means 'powers'. The
term ultra vires for a company means that the doing of the act is beyond the legal power and authority
ofthe company. The purpose of these restrictions is to protect-
(1) investors in the company so that they may know the objects in which their money is to be employed
and
(2) creditors by ensuring that the company's funds are not wasted in unauthorised activities.
Ultra vires act is void. Ifan act is ultra vires the company, it does not create any legal relationship. Such
an act is absolutely void and even the whole body ofshareholders cannot ratify it and make it binding on
the company. It is not necessary that an act to be considered ultra vires must be illegal; it may or may not

Registrar, A.l.R. (1968) All. 22]. The leading case on the point is
:
be [Anand Parkash v. Asst.

Ashbury Rly Carriage & Iron Co. Ltd. v. Riche, (1875) L.R. 7 H.L.
653. Acompany was incorporated
with the following objects:
(a) to make, sell, or hire, railway carriages and wagons;
lend on
and general contractors
(b) to carry on the business of mechanical engineers
land and buildings.
(c)to purchase, lease, work, and sell mines, minerals,
The company entered into a contract with Riche for
the financing of the construction of a railway
covered within the meaning of
that contract was
ine in Belgium. The question raised was whether
contractors'. The House of Lords held
that the contract was ultra vires the company and
general
void so that not even the subsequent
assent of the whole body of shareholders could ratify it.
The main feature and facet of the doctrine of ultra vires is that a company being a corporate person
acts or acts of its agents, if they are beyond its
should not be mulcted (fined or punished) for its own
27 Comp. Cas. 233]. Where the company
powers and privileges [Bhodani v. Bank of Baroda, (1957)
of the authority and bad as to the excess. But if the
exceeds its authority, the act is good to the extent
conferred on the company by the Memorandum, the
CXcess cannot be separated from the authority
ultra vires and would be void. But there is
whole transaction would be affected by the doctrine of
its property. The leading case on the point is:
OUning to prevent a company from protecting
A.C. 317. A telephone company put up
National Telephone Co. v. St. Peter Port Constables, (1900) Memorandum to put up wires
The company had no power in the
telephone wires in a certain area.
could sue for damage to the wires.
there. The defendants cut them down. Held, the company
of fact and is
act on the part of a company is within its powers is a question
Whether particular
a
aecided on the construction of the terms of the Memorandum.
 Articles of Association
CHAPTER CONTENTS

Contents of Articles D Legal Efect of Memorandum and Articles

Alteration of Articles Constructive Notice of Memorandum and Articles
Alteration of Memorandum or Articles to be Doctrine of Indoor Management
Noted in Every Copy (Section 15) o Exceptions to the Doctrine of Indoor
Limitations to Alteration Management
Articles and Memorandum Their Relation Test Questions
A r t i c l e s and Memorandum - Distinction
Practical Problems

CONTENTS OF ARTICLES
The Articles ofAssociation or justArticles are the rules, regulations and bye-laws for the internal management
are framed with the object of carrying out the aims and objects
as set out
company. They
of the affairs of a
in the Memorandum ofAssociation.
contains the
The Articles are next in importance to the Memorandum of Association which
are as such
Jundamental conditions upon which alone a company is allowed to be incorporated. They
Subordinate to, and controlled by, the Memorandum.
must be taken to see that regulations framed do not go
In framing the Articles of a company care

itself as contemplated by the Memorandum of Association.

beyond the powers of the company
to the following matters:
Contents of Articles. Articles usually contain provisions relating
(1) Share capital and variation ofrights.
(2) Lien.
(3) Calls on shares.
(4) Transfer of shares.
(5) Transmission of shares.
6) Forfeiture of shares.
(7) Alteration of capital.
(8) Capitalization of profits.
9) Buy-back of shares.
(10) General meetings.
1 ) Proccedings of general meetings
(12) Adjournment of mecting
(13) Voting rights.
(14) Proxy
(15) Board of Directors
(16) Proceedings ofthe Board
17) Chief Executive Officer, Manager, Company Secretary or Chief Financial Officer
icer
18) The Seal
(19) Dividends and reserves.

(20) Accounts
(21) Windingup.
(22) Indemnity
Companies which must have their own Articles (Sec. 5). The following companies shall has
ther
own Articles. namely,
(a) unlimited companies,
(b) companies limited by guarantee,
(c)privatecompanies limited by shares.
The Articles shall be signed by the subscribers of the Memorandum and registered along wth the
Memorandum.
A public company may have its own Articles of Association. If it does not have its own Articles. t
may adopt Table F given in Schedule I to the Act.

unlimited company, a company limited by guarantee and a

Regulations required in case of an

private company (Sec. 5)

1. Unlimited company. In the case unlimited company,
of an the Articles shall state
members with which the company is to be registered, and
(a) the number of is to be registered
(b) ifit has share capital, the amount of share capital with which the company
a
shail
limited by guarantee. In the case of a company
limited by guarantee, the Articles
2. Company
state the number of members with which the company is to be registered.
a share capital, the
Articies sail
3. Private company. In the case of a private company having
contain provisions which
(a) restrict the right to transfer shares,
employee-members). anu
(b) limit the number of its members to 50 (not including or debentures
Ot.

invitation to the public to subscribe for any shares in,

(c) prohibit any
company.
Table F
Adoption and Application of
:

adopt Articles
There are 3 alternative forms in which a public company may
1. It may adopt Table F in ful
set out its Articles in full.
It may wholly exclude Table F and
own
2.
3. It may frame its own Articles and adopt part of Table F. s of
expressly exclude any
or all provisio
In other words, unless the Articles of a public
company

Table F, Table F shall automatically apply to it.

Articles of any conpany, the
Form of Articles in the of other companies (Sec. 5). The
case
in Schedule
Tables G, H, I and J
company limited by shares, shall be in such one ofthe Forms in
 m2v be applicable, or in a form as near 331
AC include
may additional matters in its Articlesthereto
ude any additia in so
as
circumstances admit. Further, such
far as a
company
containedin the Form in any of the ables G, H, I and J they are not inconsistent with the provisions
adopted by the company.
Earm and signature of Articles (Sec. 7). The Articles shall be-
(a) printed
(6) divided into paragraphs, and
sioned
(c by each subscriber of the
Memorandum (who shall add
occupation, if any) in the presence of at least one witness his address,
who will description and
attest the signature and likewise
add his address, description and
Occupation, if any.
The Articles of Association printed on
computer laser printer should be
for registration of a company provided
they are neatly and legibly accepted by the Registrar
Department of Company Affairs, dated 22-6-1993). printed (Press Note, issued by the

ALTERATION OF ARTICLES
Companies have been given very wide powers to alter their Articles. The
important that a
company cannot in any manner, either by right to alter the Articles is so
independent contract, deprive itself of the power to alter itsexpress provision in the Articles or by an
restricts or prohibits alteration of Articles is Articles. Any clause in the Articles that
invalid. If, for example, the Articles of a
any restriction that the company shall not alter its company contain
Articles, it will becontrary to the
therefore, inoperative. Companies Act and,
Procedure of alteration (Sec. 14). A
time. Again any Articles
company may, by passing a special resolution, alter its Articles
may be adopted which could have been lawfully included originally. A copyanyof
every special resolution altering the Articles shall be filed
with the Registrar within 15
and attached to
every copy of the Articles issued thereafter. Any alteration so made in
days of its passing
be as valid as if the Articles shall
originally contained in the Articles.
Every alteration of the articles under this section and a copy of the order of the
Central Government
approving this alteration as per the sub-section (1) shall be filed with the
printed copy of the altered Registrar, together with a
articles, within a period of fifteen days in such manner as may be
who shall
register the same. prescribed,
[Sec. 14(2)].
AITeration of Memorandum or
Articles to be Noted in Every Copy (Section 15)
Every alteration made in the memorandum or articles of a company shall be noted in
the every copy of
memorandum or article, as the case may be.
a company makes any default in complying with the provisions of sub-section (1), the company
and
every officer who is in default shall be liable to a penalty of one thousand
rupees for every
OPy Or the memorandum or articles issued without such alteration.
Limitations to Alteration
* s t not be inconsistent with the Act. The alteration of the Articles must not be inconsistent
, or go beyond, the provisions of the Companies Act. For example, the Articles cannot be
aered so as to give power to a company to purchase its own shares.
u s t not
conflict with the Memorandum. The alteration of the Articles must not exceed the
wergiven by the Memorandum, or conflict with the provisions of the Memorandum. If it does,
will be ulira
vires and wholly void and inoperative.
332
BUSINESS LAW HE COMPANIES ACT,
2013
3. Must not sanction anything illegal. The alteration must not purport to sanction anvthin
whic
ndum, itit may
illegal. But if it is legal and it is not clearly prohibited by the Memorandum, may be hela
be
held to be
valid even where it alters the whole structure of the company.
4. Must be for the benefit of the company. The alteration must be made honafide for the he.
enef
the company as a whole. That the power of alteration must be "exercised subject to thoses of
principles oflaw and equity which are applicable to all powers conferred on majorities anddeenabling
them to bind minorities".
Browny. British Abrasive Wheel Co. Ltd., (1919)1 Ch. 290. A company was in financial difficultie
The majority of the shareholders were willing to provide more capital it the remaining 2 per cent shar
holders would sell them their shares. The majority then passedaspecial resolution altering the Articles
so as to enable 9/10ths ofthe shareholders to buy out any other shareholders. Held, the alteration ofthe
Articles could be restrained as it was designed to allow the majority to do compulsor1ly what they coula
not do by agreement and it was not for the benefit of the company as a whole.
5. Must not increase liability of members (Sec. 38). The alteration must not in any way increase the
liability of the existing members to contribute to the share capital of, or otherwise pay moneyto,
the company unless they agree in writing before or after the alteration is made. But where the
company is a club or association, the Articles may be altered to provide for subscription or charges
at a higher rate.
6. Alteration by special resolution only. The alteration can be made only by a special resolution.
Even clerical errors in the Articles should be set right by a special resolution [Evans v. Chapman,
(1902) 18 L.T. 506].
7. Approval of the Tribunal when a publie company is converted into a private company. The
alteration in the Articles which has the effect of converting a public company into a private company
can be made only if it is approved by the Tribunal. Where this alteration has been approved by the
Tribunal, a printed copy of the Articles as altered shall be filed by the company with the Registrar
within 15 days of the date of receipt of order of the approval.
8. Breach of contract. A company is not prevented from altering its Articles even if such an alteration
would result in breach of some contract. The affected party may, however, file a suit for damages for
the breach of contract.
9. Must not result in expulsion of a member. An assumption by the Board of directors of a company
of any power to expel a member by amending its Articles isillegal and void. Any provision in tne
Articles conferring such a power on the Board of directors is repugnant to the various provisions
in the Companies Act pertaining to the rights of a member in a public limited company.
10. No power of the Tribunal to amend Articles. The Tribunal has no power to amend or rectity tne
Articles even where there is a mistake or drafting error which the Tribunal would rectuyn
declare
case
of any other contract [Evans v. Chapman, (1902) 18 L.T.R. 506]. The Court can only
some clause to be ultra vires [Scoft v. Frank Scoft (London), Ltd.,(1940) Ch. 794].
ettect
11. Alteration may be with retrospective effect. The Articles may be altered with retrospective
and the fact that some members suffer a detriment does not make it void.

ARTICLES AND MEMORANDUM-THEIR RELATION

1. The Articles are subordinate to Memorandum. The Articles cannot give powers to a compai
to create rights whicha
which are not conferred by the Memorandum nor can they purport is to sta
because the object of the Memorandum
inconsistent with the Memorandum. This is so "

which the has been established, while the Articles provide the manner
the purpose for company
of the company is to be carried.
which the internal management
 -

ARTICLES OF ASSOCIATION
333
The Memorandum must be read in conjunetion with Articles. This is the case when it is
necessary-
(a)to explain any ambiguity in the terms ofthe Memorandum, or
(b) to supplement the Memorandum upon any matter about which it is silent except as regards
matters which must by Statute be provided by the Memorandum.
The Articles may explain or supplement the Memorandum, but cannot extend or enlarge its scope.
3. The terms of the Memorandum cannot be modified or controlled by the Articles. If, however,
there is any ambiguity in the Memorandum, the Articles may be referred to for clarification. But so
far as the fundamental conditions in the Memorandum are concerned, they cannot be explained
with the aid of the Articles.

Articles and Memorandum Distinction

Memorandum of Association Articles of Association
1. It is the charter ofthe company indicating the nature 1. They are the regulations for the internal
of its business, its nationality, and its capital. It also management of the company and are subsidiary to
defines the company's relationship with outside the Memorandum.
world.
2. It defines the scope of the activities ofthe company, 2. They are the rules for carrying out the objects of
or the area beyond which the actions of the company the company as set out in the Memorandum.
cannot go.
3. It, being the charter ofthe company, is the supreme 3. They are subordinate to the Memorandum. Ifthere
document. is a conflict between the Articles and the
Memorandum, the latter prevails.
4. Every company must have its own Memorandum. 4. Acompany limited by shares neednot have Articles
of its own. In such a case, Table F applies
5. There are strict restrictions on its alteration. Some 5. They can be altered by a special resolution, to any
of the conditions of incorporation contained in it extent, provided they do not conflict with the
cannot be altered except with the sanction of the Memorandum and the Companies Act.
Company Law Board.
6. Any act of the company which is ultra vires the 6. Any act of the company which is ultra vires the
Memorandum is wholly void and cannot be ratified Articles (but is intra vires the Memorandum) can
even by the whole body of shareholders. be confimed by the shareholders.

LEGAL EFFECT OF MEMORANDUM AND ARTICLES

The Memorandum and Articles, when registered, bind a company and the members thereof to the same
extent as if they had been signed by the company and each member.
The effect of these provisions is to constitute, through the Memorandum and the Articles of a company.
a contract between each member and the company. The legal implications of these documents may be
discussed as to how far these documents bind:
1. Members to the company. The Memorandum and the Articles constitute a binding contract between
the members and the company [Hanuman Prasad Gupta v. Hiralal, A.l.R. (1971) S.C. 206]. The
effect of this is that each member is bound to the company as if each member has actually signed
the Memorandum and the Articles.
Borland's Trustee v. Steel Bros. & Co. Ltd., (1901) 1 Ch. 279. The Articles of a company as
altered provided that the shares of any member who became bankrupt should be sold to certain
persons at a fuir price. B, a shareholder, became bankrupt and his trustee in bankruptcy claimed
that he was not bound by the altered Articles. Held, the Articles were a personal contract between
B and the rest of the
members, and B and his trustee were bound.
 00

CONSTRUCTIVE NOTICE OF MEMORANDUM AND

ARTICLES
Every outsider dealing with a company is deemed to have
notice of the contents
nts of the Memor.
and the Articles of Association. These documents, on
registration
of public documents. This is known as constructive notice of
with the Registrar, assume Memorandum
ne the charsed
character
Memorandum and Articles.
Office of Registrar is a public office. The Memorandum and the
Articles are open and
It is the duty of every accessible to all
person dealing with a
company to inspect these documents and see that it is
the powers of the within
company to enter into the proposed contract. Likewise
registered with the Registrar, and particulars of charges registered with the special resolutions, whenn
documents, so that an outsider is on notice of their contents in the same Registrar, become pubic
way as he is of the Articles
the Memorandum [lrvine v. Union Bank and
of Australia, (1877) 2 App. Cas. 366].
Presumption that outsider has read Memorandum and Articles. Lord Hatherley observed in
this
regard in Mahony v. East Holyford Mining Co., (1875) L.R. 7 H.L. 869 as follows
But whether he actually reads them or not it will be
presumed that he has read them. Every
joint stock company has its Memorandum and Articles of Association.....open to all who are
minded to have any dealings whatsoever with the
company and those who so deal with them
must be affected with notice of all that is contained in these two
documents".
 DOCTRINE OF INDOOR MANAGEMENT
There is one mitation to the doctrine of constructive notice of the
Memorandum and the Articles of a
1n The outsiders dealing
company. The with the company
entitled to assume that as far as the internal
are
roceedings of the company are concerned everything has been regularly done. They aare presumed to
read read these documents
docu: and to see that the proposed dealing is not inconsistent therewith, but they
hav
are not bound to do more ; they need not inquire into the regularity of the internal proceedings as
red by the Memo
Memorandum and the Articles. They can presume that all is being done regularly. This
tian of the doctrine of constructive notice is known as the "doctrine of indoor management", or
limitat
the rule in Royal British Bank v. Turquand, or just Turquand Rule.
Thus, whereas the doctrine of constructive notice protects the company against outsiders, the doctrine
of indoor management seeks to protect outsiders against the company.
Roval British Bank v. Turquand, (1856) 6 E. & B. 327. The directors of a company had issued a
bond to T. They had the power under the Articles to issue such bond provided they were authorised
by a resolution passed by the shareholders at a general meeting of the company. No such required
resolution was passed by the company. Held, T could recover the amount of the bond from the
company on the ground that he was entitled to assume that the resolution had been passed.
The gist ofthe rule is that persons dealing with limited liability companies are not bound to inquire
into the of the internal proceedings and will not be affected by irregularities of which they had
regularity
no notice.
The rule is based on public convenience and justice
documents. They are open to inspection by
First, the Memorandum and the Articles are public
An outsider is
everybody. But the details of internal proceedings are not open public inspection.
to
but not what may or may not have taken place
presumed to know the constitution of a company,
Within the doors that are closed to him.

creditors of a limited liability company

is not a particularly happy one : it would
Secondly, the lot of
the authority of the ofticers to act
De unhappier still the company could escape liability by denying
if
on its behalf.

EXceptions to the Doctrine of Indoor Management

constructive
company has actual
or
.
Knowledge of irregularity. Where a person dealing with a
claim the benefit under the
of the internal management, he cannot
regards
notice irregularity as
of the internal
e of indoor management. He may
in some cases be himself a part
procedure. 62. Company 4
& Co. Ltd, A.I.R. (1936) Bom.
T.R. Prat (Bombay) Lid. v. E.D. Sassoon down in the Articles for
B mortagage of its assets. The procedure laid
Cnt
money to Company on a
were the same. Held,
with. The directors of the two companies
uch transactions was not complied
Une lender had notice of the irregularity and
hence the mortgage was not binding.
could borrow
Co., (1888) 38 Ch. D. I56. The directors ofa company
HOward v. Patent Ivory But for any
shareholders in general meeting.
any amount up to £ 1,000 without the approval of the
consent ofthe shareholders
in general meeting. The
obtain the
dmount beyond £ 1,000 they had to
an amount in excess of the borrowing
powers of the
CCtors themselves lent to the
company
shareholders in general meeting. Held, the directors had the
of the
npany without the consent the company was liable to
them only for 1,000.
C e of the internal irregularity and hence
J0

could discover the irregularity if he had

2. Negligence. Where person dealing with a company
a
of indoor management. The protection
made proper inquiries, he cannot claim the benefit of the rule
the contract are so suspicious
of the rule is also not available where the circumstances surrounding
as to invite inquiry, and the outsider dealing
with the company does not make proper inquiry.
The plaintiff, in this case
Anand Bihari Lal v. Dinshaw & Co., A.I.R. (1942) Oudh 417.
accountant. Hela, the transfer was void as
accepted a transfer of a company's property from its
accountant's authority. The plaintiff
such a transaction was apparently beyond the scope of the
accountant by the company.
should have seen the power of attorney executed in favour of the
relies upon a document that
3. Forgery. The rule in Turquand's case does not apply where a person
can never be held bound for
tums out to be forged since nothing can validate forgery. A company

forgeries committed by its officers. The leading case on the point is:
Ruben v. Great Fingall Comsolidated Co.. (1906) A.C. 439. The secretary of a company
issued a share certificate under the company's seal with his own signature and the signature of a
director forged by him. Held, the share certificate was not binding on the company. The person
who advanced money on the strength of this certificate was not entitled to be registered as holder
of the shares.
4. Acts outside the scope of apparent authority. If an officer of a company enters into a contract
with a third party and if the act of the officer is beyond the scope of his authority, the company is
not bound.
Kreditbank Cassel v. Schenkers Ltd., (1927) 1 K.B. 826. A branch manager of a company
drew and endorsed bills of exchange on behalf of the company in favour of a payee to whom he
was personally indebted. He had no authority from the company to do so. Held, the company was
not bound.
 UNIT 413 MEETINGS AND RESOLUTIONS

Structure

13.0 Objectives
13.1 Introduction
13.2 Meaning of Meeting and its'Importance
13.3 Kinds of Meetings and their Inlportallce
13.4 Statutory Meeting
13.4.1 Purpose of Statutory Meeting
t, 13.4.2 Notice of Statutory Meeting
13.4.3 Statutory Report

Annual General Meeting

Extraordinary General Mceting
,Requisites of a Valid Meeting
Notice of Meetings
Quorum for Meetings
Proxies
Voting
Chairman
Resolutions
13113.1 Ordinary Resolution
13.13.2 Special Resolution
13.13.3 Resolution Requiring Special Notice

13.14 Minutes
13.15 ~ eUst Sum U P ,
13.16 Key Words
13.17 Answers to Check Your Progrcss
13.18 Terminal Questions

113.0 OBJECTIVES . .
I

After studying this Unit, you should be able to:'

@ explain the meaning of a company metting
discuss the importance of company meeting
@ explain the various types of. meeting
..
I @ list the requisites of a valid meeting
@ explain the rules regarding the notice and quorum
@ explain the different types of resolutions and the purposes for which they -can be
passed.

113.11. INTRODUCTION

'A company, being an artificial person, cannot act by itself like a hurndn being. The
.
business of the company is carried on by the elected representatives, called as
'directors'. The decisions are taken by the dl'rectors at the meetings of the Board. But
they cannot take decision on all matters relating to the wbrking of the company.
There are certain matters which are to be decided by the general body of shareholders:
'who arethe owners of the conlpany. For this purpose, the meetings of tWd shareholders
are held wherein decisions are taken by shareholders b)t heans of passing resolutions.
In this Unit, you will study the different types of meetings and fhe business transacted
therein. Theproviaivlhs of the Companies Act 1ays.downthe rules regarding the holding
and conduct of such meetings. You will also study the various types of resolutions and
the purposes for which they are required.

13.2 MEANING OF MEETING AND ITS IMPORTANCE

Meeting may generally defined as the gathering, assembly or coming together of two
or more persons for transacting any lawful business. For proper working of the .
company, it is necessary that the shareholders meet as often as possible and discuss
matters of mutual interest and take important decisions. Meetings piovide a place for
fruitful participation where free and frank discussion takes place. The decisions take11
at the meetings generally become acceptable and are met with least resistance.
To constitute a valid meeting there must be a€least two persons, because a meeting
cannot be constituted by one petson. But there are certain circumstances where one
person can constitute a valid meeting, they are:

a) Where one person holds all the shares of a particular class, he alone car1 constitute
a meeting of that class;
'

b) Where the meeting is called by an order of the Company Law Board, the Board
may direct that one rnember of the company present in person or by proxy shall
constitute a valid meeting.
Company mcetings play a sigriificant role in decision making process. They provide an
opportunity to shareholders to review the working of the company and take policy
decisions, thereby controlli~lgthe Board of directors. The direciors are duty-bound
to follow the decisions taken at the general meeting of shareholders. Meetings
constitute a very important aspect in the management and administration in the
company form of organisation.

.13.3 KINDS OF MEE'H'INGSAND THEIR IMPORTANCE

Company 'meetings can broadly be classified as follows

1) Meetings of Shareholders: Such meetings are also known as general meeting of

the members which are held LO exercise their collective rights. The meetings of
the sharek ers lnay again be of the foilowing lour types:
a) Statutory Meeti~rg;
b) Annual General Meeting;
c) Extraordinary General Meeting; al,c
d) Class Meeting.
2) Meetings of Directors: The directors are to act collcctively in the form of a board,
and the decisions are taken at the meetings of the Board of directors. ~ h e s e
meetings may again be of Lwo types:
a) ~ e e t i n g of
s the Board of directors; and
b) Meetings of the committee of directors.
3) Other Meetings: These meetings may be either of the following:
a) Meetings of debenture-holders;
b) Meetings of creditors;
 c) Meetings of creditors and contributories on the winding up of the Comp;iny

Figure 13.1 will help you in undent~ndir~g

the types of meetings:

MEETINGS
.1
. 1 1 .1
Shareholders Directors Others
1 -
1 1 .1 1
Statutory Annual Extra-Ordinary Class
General General Meetings
Meetings Meetings

Boardof Co~n~nittee
Directors . of Directors

J. J. J.
Debenture Creditors Creditors and
holders contributor

13.4 STATUTORY MEETING

This is the first meeting of the shareholders of a public company aria is held once in
the lifetime of any public company. According to Section 165 of the Companies Act,
every company limited by shares or limited by guarantee and having a share capital
must hold a general meeting of members of the company within a period of not less
than one month and not more than six months from the date on which the company
becomes entitled to commence business, This mceting is called as the 'statutory
meeting' and it must be specially stated so in thc notice calling it. A private company
is not required to hold a statutory meeting.

13.4.1 Purpose of Statutory Meeting

The primary objective of holding the statutory meeting is to inform the shareholders
about the facts relating to the formation of the company, shares taken up, money
received, contracts entered into, preliminary expenses etc. It gives an opportunity to the
members t o discuss matters relating to the formation of the company. This enables
them to know the position and future prospects of the company. This meeting cnables
the members to meet the directors and they can satisfy themselves that the money
subscribed by them is being properly used.

,13.4.2 Notice of Statutory Meeting

Statutory meeting is treated as a general meeting and as such 21 days clear notice in
writing must be given to all members of the company. In calculating 21 days, the date
on which it is served and the date of the meeting are excluded. A shorter notice will
be valid if consent is given by members holding at least 95 per cent of the paid-up
capital carrying voting rights, or representing at least 95 per cent of the voting power
(Section 171). The consent for a shorter notice may be given either at the meeting or
before the meeting.
Mvellng und Wlndlng Up The notice Inust expr'essly-state that the.meeting is the statutory meeting of the
company. A copy of the statutory report must also be sent alongwith the notice.

. 13.4.3
. Statutory Report
The Board of Directors is required to prepare a' report called thc 'statutory report'.
You have learnt that alongwith the notice convening thc meeting, this statutory rtport
should also be sent to each Member. If the statutory report is sent later, it will still
be treated asvalid if all the members entirlcd to attend and vote at the meeting agree
to it.

Contents of theShtutorp Report: According to Section 165(3) of the Companies Act,

the st'atutory report must give the following information:

i) The total numbcr of shares allotted, distinguishing those allotted as fully orpartly
paid up otherwise than in cash,'the extent to which they are partly paid up, thc
consideration for which they have been allotted and the total amount received
in cash;
ii) An abstract of receipts and payments of the company upto a date within seven
days of the date of the report and the balance of cash in hand;
iii) An account or the estimate of the preliminary expenses of the company (such
as legal charges, charg&sin connection with the preparation of memorandum
and articles of association, printing expenses, registration charges) showing
separately any commission or discount paid or to be paid on the issue or sale
of shares or debentures;
iv) Names, addresses and occupation of the directors, auditors, manager and
secretary. Changes, if any, in these respects, since the incorporation, are also
. required.to be given;
v) Particulars of any contract which are to be submitted to the statutory meeting
for approval. If any modification or proposed modification of a contract is to
be submitted for such approval, brief particulars of contracts and particulars of
modifications or proposed modiiication should also be given;
vi) The extent to which underwriting contracts have not been carried out, and
rqasons therefor;
vii) The arrears, if any, due on calls from directors and from the manager; and
viii) The particulars of any commission or brokerage paid, or to be paid, in connection
with the issue or sale of shares to any directbr or to the manager.
The report must be certified as correct by not less than two directors, including the
managing director, where there is one. -With regard to the shares allotted by the
company and the cash received in respect of such shares and the receipts and payments
is also required to be certified as correct by the auditors.
A certified copy.of the statutory report must be sent to the Registrar after sending
the report to themembers. At the colzlme~lcementof the statutory meeting, the Board
of dicectors shall produce a list of members showing their names, addresses and
occupations alongwith the number of shares held by them. This list shall remain open
and accessible to any member of the company during the continuance of the meeting.
The members present at the meeting are free to discuss any matter relating to the
formation of the company or arising out of the statutory report, whether previous
notice of the matter has been given or not. But only such resolutions'can be passed
-c$which notice has been given in accordance with the provisionsof the Act. If default
s!i:' made in filing the statutoryreport, or in holding the statutory meeting, every director
- and other officers in default shall be punishable with fine which may extend upto
Rs. 500. Further, the members have the right to file a petition to the court for
compulsory winding up of the cqmpany,, if the meeting is not held or the report is
not filed with the registrar.

Check Your Progress A

1) Define a meeting.
I . . . . . . . . . . . . . . . i......,......................l... ......................................................
 McCllngs and Kesolu~iuns.'

..........................................................................................................
.........................................................................................................
2) List the different types' of members' meeting.

............................... r.... ....................................

! I . . . . . . . . . . . . . .................
3) What is a statutory meeting?

4) When i$ a statutory meeting of a company required to be held?

5) What are the statutory requirements as to the length of the notice for statutory
meeting?

6 ) State whether the following statements are true or false, ,

i) A statutory meeting must be held by all companies.
ii) The statutory meeting of a public company must be held within six months
of the date of incorporation.
iii) The notice ofstatutory meeting must be accompanied bya statutoryreport.
iv) The statutory report must be certified as correct by not less than two
directors of the company including the managing director if there is one.
v) The members present at a statutory meeting are free to discuss any matter
relating to the company. .
vi) A copy of the statutory report must be filed with the Registrar before copies
thereof are sent to the members.
vii) The auditors must certify the report in respect of the shares allotted, cash
received on such shares and the receipts and payments of the company upto
a date within seven days of the report.
viii) If default is made in holding the statutory meeting, members have the right
- to file petition to the Court for compulsory winding up of the company.

13.5 ANNUAL GENERAL MEETING

The annual general meeti$ of thc company is an important means through which the
shareholders get the opportunity to exercise their power of control. It is at this meeting '
that the'director's retire'and seek re-election. The shareholders get an opportunity of
reviewing and evaluating the overall performance of the company during a year. The
shareholders can place their views before the management and can seek clarifications
on matters about which they arenat satisfied. Thus, younote that an annual general
'
meeting is very important. Unlike thestatutory meeting which is held only once in
 thc life-time of the company, thc annual general mceting is held every year
Every company, public or private, must in each calendar year, hold in addition to any
other meeting a general meeting as its annual general meeting and the notice must
specify that it is the annual general meeting.
The holding of an annual general meeting is a statutory requirement.

Following are the rules regarding annual general meetings:

i) The first annual meeting of the company must be held within a period of
18 month5 from the date of its incorporation, and'if such a general meeting is
held within that period, ~tshall not be necessary for the cotnpany to hold any
annual general meeting in the year of its incorporation or in the following year.
For example, a company is incorporated on 5th October, 6989 and holds its first
annual general meeting 10th March, 1991 (i.e. within 18 months of incprporation),
then it necd not hold any other annual gc~leralmeeting in 1990 and 1991. But
from the year 1992onwards, itmust hold such a mcetjng in every calendar year.
ii) The gap between two annual general meetings must not exceed 15 months. Thc
Registrar may, however, for any special rcason extend the above time by a period
not exceeding three months.
iii) At least 21 clear days' noticc of thc mecting in writing must bc given to every
shareholder, directors and auditclrs of the company, A shorter notice may also
be given if it is agreed to by all the mcmbcrs cntitled to vote at the meeting.
iv) The annual general meeting of the company must be called on a working day
during business hours either at the registered office of the company or at some
other place within the city in which thc registered office of the company is situated.
Thus, no mecting can be called on a public holiday, for example on 15th August,
2nd October and 26th January. If any day is declared by the Central Government
to be a public holiday after the issue of notice convening the annual general
meeting, it shall not be deemed to be a public holiday and the mceting could be
held on that day as scheduled.
v) 'The Board of directors can cancel or postpone the holding of the mecting on
the schedul~ddate, but this power should be exercised by the Board bonafide
and for proper reasons. Thc better course for the Board will be to hold the
meeting and then have the matter decided by tlie meeting.

Cornseqalences of not holding Annual General Meeting

You learnt that holding of the annual general meeting is a statutory requirement. If
a company makes adefault in holding the annual gerieral meeting in accordance with
the provisions of Section 166 of the Companies Act, the following two conscquences
will follow:
i) Any mclnbcr oi' the cornparry can apply to the Company Law Board for calling
Ihc meding. On \uch i\pplic:ttion, the Company Law Board may order the calling
of the mceting, or it may issue directions for calling the meeting, which may even .
include a direction that one person present in person or proxy shall constitute the
annual general meeting. A mecting called by the order of the Company Law
Board shall be deemed to be annual gcneral meeting of the company.
ii) The company and every officer of the company in default shall be punishable with
fine upto Rs. 5,000 and if the default continues, with a further fine upto Rs. 250
for every day after the first day of default during which the default continucs.
The Business to be Transacted: According to Scction 173 of tlie Companies Act, at
the annual general meeting ordinary business is to be transacted. Any other business
can also be transacted at the annual general meeting, but that will be termed as 'special
business'. Thus, the annual general meeting can transact both ordinary and special
business. The following ordinary business is generally transacted at every annual
general meeting:
i) the consideration of the accountq, balance sheet and the reports of the Board of
directors and auditors;
ii) the declaration of dividend;
iii) the appoin nent of directors in the places of those retiring; and
, iv) the appointment of the auditors and fixing their remuneration.
 Mccl~ngsand Resoluuons
If any other bdsiness (otherthan those ~nentioncdabove) is to be transacted at the
a n ~ u ageneral
l meeting, it shall be treated as special business. Special business can
be transacted a[ npnual general meeting provided the articles of association do not
pfukiblt It and the notice of the meeting mentions it as special business,
You shouldnote that the ordinary business rcquircs an ordinary resolution, while tlie
special business may be passed by an ordinary resolution or special resolution as '

required by the Act.

yqu will study the details of ordinary and special resolutions later in 13.12 of this Unit.
* .

13.6 ,..EX'B'RAOR4aHNPLRUGENERAL MEETING .

All general meelings of a company ~ t h e than

c the statutory and annual general meeting
'
are called 'extraordinary meetings'. Extraordinary general meeting is a meeting which
is held between two annual general meetings. These meetings are called in emergencies
or on special occasions: This meeting is called to discuss some urgent special business
whichcannot ,be postponed till the next annual general meeting, for example, alteration
in the memorandum or articles of association, reduction of capital, issueof debentures
etc. All business transacted at such mekting is deemed to be special business.
An extraordinary general meeting ]nay be called by
a) Bpard of directors on its own motion;
bj the Board of directors on the requisition af mombcrs; or
c) the requisitionists themselves; or
d) the Company Law Board.
a) .By the Board of Di~ectors:Clnusc 48 o f ' ~ a b 1 A
e states that "the Board may,
whenever it thinks fit, call an extraordinary general ~neeting."However,the Board
bas to gass the resolution for convsning such meeting.
b) By the Board on requisltion: According to Section 169 of the Act, the Board of
directors must call an extraordinary general meeting of the company on the
requisition of required number of members. The requisition letter for calling this
meeting must be signed by members holding BJ least one-tenth of the paid-up
capital and having a right to vote QII the matter of requisition. In the case of a
company having no s h a r capital,
~ it must be signed by those members who have
at least one-tenth of the total voting' power.
The requisition must state the purpose for which the meeting is requisitioned and it
must be deposited at the registered office of the company. You should note that only
such matter can be taken up at the qeeting which is specified in the requisition.
On receipt of ava\$rgquifiition, the Board of directors should, within 21 days, move
t ~ ~ an meeting
li and the meeting must actually be held within 45 days of the date of
deposit of the requisition. A notice of 21 clear days is necessary for calling the
extraordinary general meeting. A duty has been imposed on the management to
disclose, in an eqplqnatory statement all material facts relatirig t o every special business
\g enable the members to form a judgement on the business.

c) Ry the Requiqitianist: If the Board of directors fails to call tlie meetirlgwithin 21

days and the meeting is not held within 45 days of the deposit of the requisition,
the requisitionists may themselves proceed to all the meeting. But the
requisitionists must hold the meetingwithin three months from the deposit of the
. requisition. Such meeting must, as nearly as possible, be held in the manner as
called by the Board of directors. When the requisitionists themselves call a
meeting, they may recover the reasonable expenses incurred from the company,
and the company may deduct such amount from the amount of remuneration
'
payable to the directors in default.
, If the meeting is called by requisit&nists, it can only transact the special,business
for which it has been expressly convened. The'resnlutions, which are properly
passed at such requisitioned meeting, shall be binding upon the company.
d) By the Company Law Board: Under Section 186 of 'the Act, the Cornpan) Law
 Board is empowered to call, hold or conduct such a meeting, if for any reason it
is impracticable to call or conduct an extraordinary general meeting. The term
'impracticable' means not possible to call, hold or conduct themeeting in
accordance with the provisions of the Act and Articles, for example, if the meeting
cannot be called because of €he rivalry of two groups.
The Comparfy Law ~ o a r may d order for the calling, holding and conducting such
a meeting either on.its own motion o i on the applicatioh of any director of the
company or of any member of the company who would be entitled to vote at the
meeting. The Company Law Board should use this power sparingly and on being
convinced that it is in the larger interest of tlse company. W i l e calling a meeting,
the Company Law Board may give such directions as it thinks fit, including the
direction, that one member present in person or by proxy would constitute the
quorum.
Like any other general meeting, the notice of the extraordinary general meeting must
also begiven at least 21 days before the date of the meeting specifying the date, time '

and place of the meeting. The notice must also specify the special business to be b
transacted at the meeting. You should note that unlike an annual general meeting,
extraordinary general meeting may be held on any day including a public holiday. The
meeting may be held at a place other than the registered office of the company or ?
even outside the city in which the registered office is situated.

Check, Yoor kcagsess B

1) What is in annual general meeting?
'

..........................................................................................................

2) What is the purpose of holding annual general rneeting?

t . .
3) What business is usually transacted at the annual general meeting of a company?

4) What is an extraordinary general meeting?

..........................................................................................................
5) Who can call an extraordinary general meeting?
..........................................................................................................

..........................................................................................................
' 6j What is theminimum llulnber of members who can requisition an extraordinary
. .
 ,.
general meeting?

7) State whether the following statements are True or False.

i) The time interval between two annual general meetings shall not exceed fifteen
months.
ii) The first annual general meeting must be held witliin fiiteen months from the
date of its incorporation:
iii) An annual general meeting may be called by giving a notice shorter than 21
days if all members entitled to vote give their consent.
iv) Declaration of dividend is an item'of ordinary business.
v) Onehundred members of a company can requisition an extraordinary meeting.
vi) In an extraordinary general meeting of a company all business transacted is
deemed to be special business.,
vii) The requidtionists may themselves convene an extraordinary general meeting
within six months of depositing the requisition.
viii)An extraordinary general meeting can be called on a public holiday and at a
place other than the registered office of the company.
. -.
. -

13.7 REQUISITES OF A VALID MEETING

he decisions taken at the general meeting shall be valid and binding only if the meeting
itself has been properly called and conducted. ~n~ iGegularity in calling or conducting
the meeting shall invalidate the proceedings of the meeting. The company' meetings
must be conducted in accordance with the rules and regulations laid down in the Act
(Sectidn 171 to 186) and the articles of association. ,The following are the requisites
of a valid meeting:
1) Proper Authorlty:.The.rneeting shall be valid only whenit is called by a proper
authority. The proper authority to convene the meeting is the Board of directors.
The Board of Directors should pass a resolution at its meeting to call the general
meeting, otherwise the notice calling the qeeting will become invalid and the
proceedings of the company shall not be effective (Harban V. Phillips). Thus, a
notice issued by the secretary without the authority.of a resolution of the board
is patently invalid.
Though the Board of directors is the authority to convene a general
meeting, but under certsii'n circumstances the meeting may be called by
requisitionists or by the Company Law Board.
2) Proper Notice: 'Notice' means an advance intimation of the meeting so as to
enable the person concerned to prepare himself for it. A proper notice should be
given to every member, auditors, directors of the company and to every such
person who is entitled to attend the meeting. The notice must beclear and should
state the purpose for which the meeting is called. The notice must be in writing
and it must be @ven at least 21 clear days before the date of the meeting,
You should note that deliberate omission to skrve notice to one or more memb.. !s
will invalidate the meeting. But an accidental omission will not render the meeting
invalid. Similarly, the non-re&ipibf the notice will not affect the validjty of the
meeting. The notice must state the date, time and place of meeting.
3) Quorum: Quorum means the minimum numbers'of members whose prebence is
necessary at the meeting for transacting the business df thk company. In the
absence of a quorum, no meeting.can be he1:' * ..)
resolution
I passed at a meeting
without quorum shall be invalid.
2s
,~&ts+p rd WI* UP . 4) Chairman: ' ~ v egeneral
r~ meeting of the company should be presided over by a
chairman. The chairman has to be there to conduct the meeting In a proper and
smooth manner. The articles usually drovide the mode of appointment of the
chairman of a meeting. ,
If the articles do not otherwise, the members who are personally present
at the meeting shall elect one of themselves to act as the chairman of the meeting.
The chairman should act bonafide and in the interest of the company, he must
act in an impartial manner.
5) Properly Conducted: It is essential that the business at the meeting must be
conducted according to rules. Company meetings are held for discussing particular
issues relating to the company" working and taking a decision on the same. The
matter should be placed in the form of a resolution, it should be discussed
thoroughly, amendments to it should be carefully considered and then it should
be decided by voting by show of hands or poll.
6) Proper Rhcord: A proper record of the proceedings should be kept in the Minutes
Book. Every company is required to maintain minutes of the proceedings of every
general meeting and nieetings of the Board and its Committees. When the minutes
are confirmed and signed by the chairman, they are acceptable in a court of law
as evidence of the proceedings.

.13.8 NOTICE OF MEETINGS

The normal rule for any meeting of shareholders of a public company is that the
meeting should be called by giving a notice of not less than 21 clear days.
'However, a private company may provide in its articles for a shorter notice. The
ess'entials of a valid notice are:
a) It must clearly state the date, time and place of the meeting as also the purpose.
of the meeting,
b) The notice must be issued on the authority of a resolution of the Board of
directors. .
c) Tht: notice should be signed by a person authorised by the Board. Usually, a
director of the Board or the company secretary would sign the notice.
d) It must be sent to all persons who are entitled to receive the notice.
,The words "clear days notice" indicate that the day of serving the notice and the day
of meeting areexcluded. Thus in normal practice, 21 clear days would mean 23 days.
Further, if the notice is to be sent by post, another 48 hours are to be added to the
23 days. Thus the notice must be sent at least 25 days before the date of the meeting.
.A shorter notice can also be given. In the case of annual general meeting, all the
members should consent to the shorter notick and in the case of any other meeting,
members holding not less than 95% of the paid-up share capital or voting rights should
consent to it. The consents can be given either before or at the meeting, and has to
be given in the prescribed form.

Persons Entitled to Notice ,

The persons who should be sent the notice of any general meeting are:
a) Every member of the company;
b) Persons entitled to a share in consequence of the death or jnsolvancy of the
member;
c) Auditors of the company for the time being; .
, d) Public trustees in respect of holdings to which Section 153B is applicable.
Further, if the notice pertains to the meeting of a particular class of shareholders, then ,
it should be sent only to the shareholders of that class.

. . 13.9 QUORUM FQR MEETINGS '

. .
A quorum is the minimum number of persons who must be present in order to constitute
.a valid meeting.,If there is no quorum, the meeting shall not be valid and the busiriess
 k valid meeting. If the quorum is not present, the meeting shall not be valid and tn
transacted at such meeting will be invalid. The main purpose of having a quorum is
to avoid decisions being taken at a meeting by a small minority which may not be
acceptable to the vast majority of members.
Generally, the quoruin is fixed by the articles of the company. According to Section
174of the Companies Act, unless the articles provide for a larger number, five persons
personally present (and not by proxy) in the case of a public company and two persons
personally present in the case of any other company, shall constitute the quorum for
a general meeting of the company.
If within half an hour from the time appointed for holding a meeting of the company, I
,
stand dissolved (Section 17413). -
a quorum is not present, the meeting, if called upon the requisition of members, shall
.
In any other case, if there is no quorum within half an hour frdm the tike fixed .
for hblding the meeting, the meeting shall stand adjourned to the same day in the.
next week, at the same time and place, o r to such other day and at such other time
and place as the Board may determine.
'
If at the adjourned meeting also, there is no quorum within half an hour from i
the time appointed for holding the meeting, then the members present shall form the
quorum. But you must remember that there must be at least two persons to hold the
meeting.'These provisions are also applicable to private companies, if the articles do
not provide otherwise.
According to Article 49 of Table A , the quorum must be present at the time when
. the meeting begins and proceeds, to take up business. It means that the quorum must,
be present at the beginning of the meeting and it need not be present throughout o r
' "at the-timeof taking votes on any resolution. But as regards the meetings of the Board
of directurs,, the quorum must be present throughout the meeting. You should note
that a quorum is presumed unless it is questioned at the meeting.

13.10 PROXIES

The term 'proxy' is used both for the person who is authorised to act and vote for
another at a meeting of the company and the instrument through which such a person
is named and authorisedntoattend the meeting. Section 176 of the Companies Act,
states that any member of a company who is entitled to attend and vote at a meeting
of the company, is entitled to appoint another person as his proxy to attend and vote
instead of himself. Thus, any person may-be appointed as a proxy whether he is a
..member of the company or not.
Unless the articles prdvide otherwise : (a) a proxy cannot be appointed in the case of
a company having no share capital and (b) a member of a private company cannot
appoint more than one proxy to attend on the same occasion.
The instrument appointing a proxy must be in writing and signed by the appointer or .
his attorney duly authorised in writing and must be stamped. The instrument appointing
a proxy should be deposited with the company forty eight hours before the
commencemeht of the meeting. Any provision in the articles of the company requiring
the proxy form to be deposited earlier than 48 hours will be invalid.
The proxy has no right to speak at the meeting, but he cgn put questions in writing
' and sending the same to the Chairman for answer. For each meeting a separate proxy . \
is required. A proxy can demand a poll and unless the articles otherwise prpvlde a
-
proxy is not allowed to vote except on a poll. ,

Every notice of a meeting must clearly state that a member is entitled to appoint a
proxy and that the proxy need not be-a member. If default is made, every officer in .
default i+hallbe punishable with fine upto Rs. 500. But no invitation to appoint any
person as prody be made at the expense of the company and in case any such in~itation
is issued, the officer in default will be liable to fine upto Rs. 1,000.
Every member entitled'to vote at a meeting of the company is entitled to inspect the .
proxies depusited at any time during the business hours. You must 'remember that a . ,27
c'- .' .-,
Mmtingv and Winding Up proxy is aJways revocable, but it can be revoked before the proxy has voted. For
revoking'the proxy, the company must be informed. Death or insanity of a member
appointing the proxy revokes the proxy, but proper intimation to the company is
necessary. If the member appointing the proxy personally attends and votes at the
meeting, the proxy shall stand revoked.

You have learnt that the business of the company is trans'acted at meeting. A motion
becomes a resolution when it is duly passed at the meeting. The shareholders have
the right to discuss every proposed resolution and propose amendments therein. After
the motion isdiscussed, it is put to vote. The voting may be (a) by show of hands or
(b) by taking a poll.
a) 'BYshow of hands: At any general meeiing, a resolution put to vote is decided first
by show of hands. On a show of hands, each member shall have one vote. Unless the
articles otherwise provide, proxies are not entitled to vote in case of such voting, The
chairman counts the hands 'for' and 'against' a resolution and declares the result and
when it is recorded in the minutes it becomes a conclusive proof of the fact. However,
the dissatisfiedshareholders may challenge the validity of the passing of the resolution
or they may demand a poll.
b) By taking a Ibll: If there is dis~itisfactio~
about the result of voting by show of
hands a poll can be demanded. The chairman on his own motion may demand for the
'
poll. The poll may also be demanded even before the declaration of the result on a
.' show of hands.

In the case of a public company having a share capital, a poll may be demanded by
any member present personally or through proxy and holdirig shares having not less
than one tenth of the total voting power or, on which not less than Rs. 50,000 has
been paid-up. In the case of a private company having share capital, a poll may be
demanded by one member personally present or by proxy if seven such members are
personally present in the meeting or by two members if more than seven members
are present. Yo6 should note that as soon as a demand for poll is made, all decisions
taken by voting by show of hands stands cancelled.

'
In a poll, the voting rights of a member are in proportion to his share of the paid-up
equity capital of the company. If the'articles so provide, members holding shares on
which calls are in arrear or in regard to which the company has rilght of lien, may not
be allowed to vote in a poll.
I

The demand for poH may be withdrawn at any time by the person o; persons who
made the demand. When more than one resolution is put to vote, poll shpuld be taken
on each separately. A poll demanded on the questionof adjourrnmexnt of the meeting .
.must be taken immediately and in all other cases, the chairman must take poll withir
48 hours of the demand for poll.
The chairman of the meeting shall appoint two scrutineers to scrutinitrethe votes given
on the poll, and to report thereon to him. Out of the two scrutineers, at least one
shall be the member of the company but he should not be an officer oa an employee
of the company. The result of the poll shall be deemed to be a decision of the meeting
on the resolution on which the poll was taken.

13.12 CHAIRMAN

Chairman is the person who has been designated or elected to preside over and conduct
the proceedings of a meeting. A chairman is necessary for conducting a\ meeting
properly. He is the chief authority in the meeting, he is'the umpire of, debates and he
regulates the meeting.
28 *-.. themode of app-ointmentof the chairman of a meeting, But
.Articles usually provide
 if there is nothing in the articles, the members personally present at the meeting shall Meeling~sed Remlullon~

elect one of themselves to be the chairman of the meeting. If a poll is demanded on

the election of the chairman, it must be taken forthwith and a chairman is elected for
the purpose. You should note that these provisions as given in Section 175 of the Act
are applicable only if there is no provision in the articles.'
Z:;ulations 50 to 520f Table A state the rules regarding the a pp oint m ent bf chairman.
The articles usually provide at the general meetings of the company. If there is no
such chairman or if he is not present within fifteen minutes of thetime fixed for holding
the meeting, or is unwilling to act as chairman of the meeting, the directors present
shall elect one of their member to be chairman of the meeting. If'at any meeting no
director is willing to act as chairman or if no director is present within fifteen minutes
of the time fixed for holding the meeting, the mernbers present shall choose onc of
themselves as the chairman.
The chairman has prima facie authority to decide all questions which arise at a meeting
and which require decision at the time. I-Ie has the power to give his ruling on points
of order, to expel any unruly member, to adjourn the meeting if it becomes impossible
to conduct the meeting smoothly, to regula'te the taking of poll, to sign and date the
proceedings of the meeting. If so authorised by the articles, the chairman may give
his casting vote to decide the issuc where the mernbers are equally divided for and
against the resolution.
The chairman must see to it that the proceedings o f the meeting are conducted
according to the rules, that proper order is maintained at the meeting, that proper
opportunity is given to menhers to express their views. He should see that the voting
is fair and the sense of the ~neetingis properly ascertained on each and every motion.
Hc must act bonafide at all times and in the interest of the company.

13.13 RESOLUTIONS

Decisions of the members at a general meeting are expressed by way of resolutions.

At the meetings a definite proposdl in the form of a 'motion' isplaced, it is discussed
thoroughly and finally is gut to vote. When the motion is gassed by a majority, it is
calied a resolution. In simple words, resolution means the decision taken at the
mceting.
The Companies Act provides for three types of resolutions that may be passed at the
general meeting of a company-(i) Ordinary resolution; (ii) Special resolution; and
(iii) Resolution requiring special notice.

,.
Anordinary resolution is one which is passed by a simple majority, that is to say that
the votes cait in favour of the resolution excecd the votes cast against the resolution.
For example, if at a meeting where, say, 81 members cast their votes in a manner that
41 cast votes in favour and 40 against the motion, the ordinary resolution is said to
be taken as passed. The voting may be either by show of hands or by poll. An ordinary
desolution is required to pass the annual accounts, to declare dividend, to appoint
auditors, to elect directors, to issue shares at a discount etc.

13.13.2 Special Resolutions

A special resolution is one which is required for transacting special business and is
required to be passed by a thrce-fourths majority. The voting may be either by show
of hands or by polls. In determining the three-fourths majority, all the votes cast by
members, whether personally or by proxy, are considered.
According to Section 189(2) of the Companies Act, a resolution shall be a special
resolution when :

i) the intention to propose the resolution as a special resolution has been duly
specified in the notice calling the general meetings;
ii) the notice hass befn duly given of the general meetings; and
 Mu
U w sad Wlndilg UP iii) the votes cast by members in favour of the resolution are not less than three
times the numbei of votes cast against the resolution.
The special resolution is necessary to transact importan? business. The articles of the
company may specify purposes for which a special resolution is required. The
Companies Act has also expressly required the passing of special resolution on certdq
matters. The following are some of the instances where special resolutions are
necessary:
Y

i) to alter the memorandum of association;

ii) to alter the articles of association;
iii) to create reserve capital;
iv) to reduce capital;
v) to pay interest out of capital;
vi) to allow a director to hold office of profit in the company;
vii) for voluntary winding up of the company.

13.13.3 Resolution Requiring Special Notice

A resolution requiring special notice is, in fact, not a type of resolution, but is a kind
ofordinary resolution for which aprior notice of intention to move the resolutian has
to be given to the company. With regard to certain matters, a special notice is required
to be given of a resolution to be moved at a meeting of the co.mpany. The object is
to give members sufficient time to consider the proposed resolution. Where special
notice of a resolution is required by the Act or the articles, the notice of the intention
to move the resolution must be given totbe corvpany at least 14full days before the
date of the meeting. On receipt of such a notice the company must give notice of the
resolution to the members at least seven days before the meeting either individually
or through an advertisement in a newspaper having an appropriate circulation or in
any other mode allowed by the articles.
According to the Companies Act, a resolution requiring special notice is required to
t transact the following business: .
i) to :remove a director 'before the expiry of his term;
ii) to'appoint an auditor in place of the retiring auditor;.
iii) to appoint a new director ,!i place of the removed director;
iv) to phss a resolution that retiring auditors shall not be reappointed.

- - - \ .

The Companies Act, provides that every company must keep the minutes of the
meetings containing a fair and correct summary of all proceedings of the meetings.
The minutes of a meeting should be recorded within 30 days of the meeting in the
books called the minute book, kept for the purpose. Each page of the minute book
should be initialled and last page signed and dated by the chairman of the meeting:
The minutes duly signed by the chairman are presumptive evidence that the meeting
was duly called and held and all proceedings duly camed out. The minutes book
should be kept in the safe custody so as to avoid any tempering of the same. The
minutes of a general meeting should also be signed within 30 days of the meeting, by
'
thechairman of the meeting or any other authorised person. The minutes book relating
to the general meeting is open to inspection of any member of the company without
. charge during business hours at least for 2 hours.
Further, a member of the company is entitled to be furnished withiq Seven days of
his iequest with a copy of any minutes of the general meeting o q payment of such
sum as may be prescribed for every 100 words o r part thereof. .-
' .
Check ~ * ' u r ' P r ~ e s s ' ~ ,. ' . , . .' ,
. .
1) What is meant by 'notice' of a meeting?
.........................................................................................................
. . .
I ..................................................................r......r...............~.~II.,r.....
. , ~ , . .
,..
30
 2) To whom the notice of meetings must be sent?

......................................................................................................
3) Define 'Quorum'.

4) What is the quorum for the general meeting of members?

' 5) What do you understand by 'proxy'? .

.,
,

.......................................................................................................

6) When should 3 p r ~ x ybe deposited with thc company? .

,.!',,............!1~....:.............................................................................
.,.
i ..
7) What is 'poll'?

.......................................................................................................
.
3 ) what is a resolution? -

.......................................................................................................
... . . . . .

What is q ~~eci,al'~esolution?

List three instancgb vhi,ck require a specjnl resnlqtian?

......' . ' . . ' " . ' . ' . . . . ' , , , , f , ~ , ~ I ! . . . . , ' .............................................................
. . . . . . . . .
,. . . . . . . . . . . . . . .

.......................................................................................................
.~,.. ,. . ,

...:...................................................................................................
What is a resolution requiring sp,ecial npticc!?
 .......................................................................................................
12) Why is a chairman necessary for a meeting o f a company?

13) State whether the following statements are True or False.

The quorum at a general meeting of a public company is the personal
prcsentc of three me&ers and in caseof a private company thc personal
presence of two members.
ii) For the purposes of quorum, only members present in person and not by
proxies, are to be counted.
iii) One person cannot constitute qllorum l~nderany circumstances.
i v) The proxy must be a mcmber of the company.
v) A proxy can speak at a general meeting and cast his vote on a sllow of hands.
vi ) A resolution put to vote at ageneral meeting shall be decided on a show
of hands in the first instance.
vi i) A poll can be demanded by any ten members of the company.
viii) 4n ordinary resolution is passed by a simple majority.
'

ix) A special resolution is passed by a two-thirds majority.

x) A.special resolution is required to be passed for changing thc name of a
company.
xi) An ordinary resolution is necessary for issuing shares at 21 discount.
xii) For appointing another director in place of the removed director, 4
resolution requiring special n ~ t i c eis necessary.

13.15 LET US SUM UP

The general meetings of members are of great importance in the working of the
c6mpany.The members in ttiegcneral meetings givc the guidelines to the directors for
carrying on the business of thc company.
The meeting of the members cantbeof three types: (a) statutory meetings (b) annual
general meeting (c) extraordinary general meeting.
Statutory meeting is the first meeting of the shareholders of a public company and is
held only once in thc life-time of the company. Thi /meetingmust be held not earlier
'r
than one month and not more than six months a ter the date on which it became
entitled to commence business. At least twenty one days clear notice must bc given
'and the notice must be accompanied by a statutory report. This report contains all
'
the necessary information ip regard to the formation of the company. The main purpose
of holding this meeting is to inform the sharehdders about thc progress of allotting '

' the shares and the position of the company.

,
An annual general meeting is required t o be held each year to transact ordinary
business, such as presentation of audited accounts, declaration of dividends.
appointment of directors and auditors. The first annual general meeting must be held
within aperiod of not more than 18 manths from the date of incorporation. The time
. gap between two annual general meetings must not be more than I5 months. Evcry
person entitled to receive the notice, must get a notice at least 21 clear days before
the date of the meeting.
Any meeting other than the statutory and an annual general rn-ceting is called an
extraordinarygeneralmeeting. Such meetings may be convened at an.y time to transact
some urgent businesswhichcannot be postponed till the next annual general meeting.
32 ' Such meeting can be convened by the directors either on their own motion or on
requisition from members or by the requisitionists themselves on the failure of the
Board to call the meeting or by the Company Law Board.
Unless the articles provide for a larger number, the quorum shall be two members

.-
personally present in the case of a private company and five members personally
present in'tne is of a public company.
Members of a company having share capital have a statutory right to appoint proxies.
A proxy need not be a member of the company. A proxy cannot speak at the meeting
but he can vote at a poll. The voting at the general meetings may be either by show
of hands or by taking a poll.
The decisions in meeting are taken in the form of resolutions. Tilere are three types
of resolutior~s:(i) ordinary, (ii) special, and (iii) resolution requiring special notice.
Ordinary resolution is one which is passed by simple majority of votes of members
present in the meeting. A n ordinary resolution is needed to transact ordinary business,
for example, to pass annual accounts, declare dividend etc.

,Special resolution is one where it is specifically mentioned in the notice calling the I
meeting. Such a resolution can be passed only by three-fourths majority. Special
resolution is necessary for altering the memorandum, for reducing share capital, for
creating reserve capital, for paying interest out of capital etc.
A resolution requiring a special notice is one where the mover of the resolution is
required to give notice to the company at least 14 days before the date of the meeting
abc.-"+ intention to move the resolution. A special notice is rkquired before moving
a resolution for removing a director before the expiry of his term, for appointing
another person as a director in .place of the removed director, for providing that the
retiring auditors shall not be reappointed etc.

13.16 KEY WORDS

Meeting: A n assembly of two or more persons for transacting some la\Lful business.
Statutory Report: A report containing vital information about the information of the
company.
Notice: An intimation in writing about the date, place and time of the meeting.
Quorum: Minimum number of members who must be present at a meeting to transact
a. business.
Agenda: Matters .to be discussed at the meeting.
Chairman: The person who presides over the meetings.
Motion: A proposal put before the meeting for considerqtion.
Resolution: When a motion is duly passe(', it becomes a resolution or decision.
.Proxy: A authority to represent and vote for another person at a meeting.
Poll: A method of voting where a member rkcords the number of votes in proportion .
to equity shares held by him.
Minutes: Written record of the proceedings of a meeting.

13.'17 ANSWERS TO CHECK YOUR PROGRESS

A 6 i) False ii) False iii) True

iv) True v) False , vi) False
vii) True viii) True -
B 7 i) True ii) False iii) True
iv) True v) False vi) True
vii) False viii) True ,
Mcctings nnd Winding Up
C 13 i) False ii) True iii) False
iv) False v) False vi) True
vii) False viii) True ix) False
x) True xi) True xii) True

13.18 TERMINAL QUESTIONS

What are the different types of meetings of a company? Explain the purpose of
holding such .meetings.
What are the requisites of a valid meeting?
What is a statutory meeting? When is it held? What business is transacted at
such meeting?
What is a statutory report? What it must contain?
What is 'notice' of a meeting? Explain briefly the rules regarding the notice of '
general meeting.
What is the significance of annual general meeting? What business is generally
transacted at such meetings?
How an extraordinary general meeting be convened?
What is a 'special resolution'? For what purposes are such resolutions necessary?
Is a special resolution and a resolution requiring special notice something?
Indicate four instances where special notice is necessary.
What do you mean by 'quorum'? What happens if there is no quorum at a
meeting?
Write an explanatory note on proxies.
-- ,:.. I -.

. .

Note: These questions will help you to understand the unit better. Try to write
answers for them. But do not submit your answers to the University.;These
are for your practice only.
 UNIT 11 DIRECTORS
Structure
Objectives
Introduction
Definition of a Pirector .
Position of Directors
Number of Directors and Directorships
Oualifications of a Director
Disqualifications of Directors
Appointment of Directors
Vacation of Office by Directors

11.9 Removal of Directors

11.10 Powers of Directors
1 1 . I 1 D'uties of Directors
11:lI.l Statutory Duties
11.1 1.2 Get$~qf uties
11,12 Liabilitigs of aif.gc(ors
11.13 Meetings of Dlycactors '
11.14 Let Us Sum Up
11.15 KeyWords
11.16 Answers to Check. Your Progress
11.17 Terminal Questions

.A
;:! +uq#,g el\3 8 qhqu\d
this, ~ bc able to:
define a director
. .
explain the legal position of directors
3 de~~rihpi.
the qualifications and disqualificatiqns of a directq
? qplain the yrqqd,qre of qRppin!ment o$ directors
list t h circuyglppces
~ yhzg the diyector'q offin falls vacant
., , ,.

explain the mode of removing a director

describe the powers, duties and liabiIiiies of directors
@ explain the rules relating to the meetings af'directo;

-
11.1 INTRODUCTION
In Unit 10 you learnt abopt the membership of acompany. You know that the number
of members of a-company is 1spaIly large and are spread all over the country. Hence,
they elect some petsqns toqqnage this affairs of the Fompany. 8uch persons are known
'as directors who are responsible mainly for determining the business policies and
directing and cqqtrolhing thf: overall affairs of the company. In this unit you will learn
the legal position' of directors, their qualifications a ~ disqualifications,
d the method of
their appointment, and their pqwers avd duties, and liabilities.
 -

11.2 DEFINITION 0k'A DIRECTOR

The directors are the pPM'ciii's ~ l c c t e dby t ~ sharehalkikrs
c to direct, conduct, manage or
supervise the aftairs of the compariy. THty manage and Control the overall affairs of the
,company. The day to day working of the compady is Itft to other managerial perso11
appointed for the purpose.
Section 2(13) of ihe Cohibanies Act defihes a director as "any person occupying the
positiod of director by whatever name called." This is an inclusive and not an exhaustive
definition. To explain the meaning of the term 'director' we can say that dikectois atk
the individuals who direct, control, manage or superintend the affairs of a comparljl.
According to explanation 1 to Section 303 of the Act, any person, in accordance witH
whose directions or instructi~iis,the Boarkl of Directors of a tompany is accustomed to
act, shah be deemed to be dikector of the corhpany. If a person perfortris the functiMHs
of a director, he will be deemed tb be a director, even if he is not so designrited. ~ h u k .
it is immaterial by what name be is called. However, the experts who give professiaHdl
advice, shall not be deemed to be directors.
You should note that only an individual can be appointed as a director. According to
Section 253 of the Act no body cotporate, association, of Miin shall be appoihted as d
dlrect'or of a company.

11.3 POSITION OF DIRECTORS

It is not easy to explain the legal position of the directots because the same have not
been defined by the companies Act clearly. Bowen L.J. observed "directors are
described sometimes as agents, sometimes as trustkes and sometimes as managing
partners. But each of these expressions is used not as exhaustive of their powers and
respofisibilities, but as indicating useful points of view from which they may, for the
moment and fot the partitular pbrpbse, be considered." Thus, the real position of a
director is not merely that of an agent, or trustee of managing partner, but a
combination of all these positions. Let us now discuss their position under various
headings as follows:
As Agents?The compady being an artificial person cannot manage its affairs on its own.
It has to be entrusted to some human agency known as directors. They are elected
representatives of the shareholders and may be termed as agents of the company. The .
relationship between the company and its directors is that of principal and agent,
Therefore, the general principles of the law of agency govern the relations of the
compdny and its directors. As agents, it is their duty to carry on the business with
reasonable care and diligence. They must act within the authority conferred upon them
by the Act, memorandum and articles and while entering into contracts on behalf of the
company within the scope of this authority, they will bind the company. In other words,
if they act beyond the scope of their authority, they will be held personally liable.
However, you should note that the acts done beyond the powers of the directors may
be ratified by the shareholders in general meeting of the company provided such acts
are notbeyond the powers of the company.
To bind the company, the directors must act in the name of the company. Directors are
the agents of the company and not of the individual shareholders.
It is, however, not correct to say that directors are the agents of the company because
agents are not elected but appointed and secondly, the agents have no independent
powers while the directors have independent powers on certain matters.
AsTrustees: The 'trustee' means a person who holds and manages the property for the
benefit of other persons. Though in the strict legal sense, directors are not the trustees
of the company, but, t o some extent, they have been treated as trustees of the company.
They are the custodians of the money and properties of the company and as such are
responsible for the proper use of such money and property. If they misuse the money
or property, they have to refund or re-imburse the same.
 The dirccrors must cxcrcisc rhcir powcrs in good faith and for the bcnefit of the
company, and not for their own hcncfit. The directors stand in a fiduciary capacity in
relation to the company. The same degree o f integrity arid standard of conduct is -.
expected from the directors as it is expectrd from a trustee. You should note that : ,,

directors are trustees for the company and not of individaal shareholders.
However, you should remember that directors are not the trustees in the strict sense.
because unlike a trustee a director does not enter into contracts in his own name. Ho
- enters into contracts for the company of which he ISa director and he does not hold any
property in trust, because the property is held by the company in its own name.
As Managing Partner: Directors have heendescrihed as the managing partners because
on the one hand. they are entrusted with the management and control of the affairsof
thec6mpanies. and on the other hand, they are theshareholdersof h e company. They
manage the affairs of the company tor their own henefit as a shareholder and for the
general benefit of the company.
But they are not managing partners in the strict sense. because the liability of the
director is limited to the value of shares held by him whereas the liability of a partner is
unlimited. Further, unlike a partner, a director has no authority to bind the other
directors and shareholdcrs.
As Employees: Directors are the elected representatives of the shareholders. As such,
they are not employees or servants of thc company; But under :I special contract with
the companya director may hold a salar'ied cmploynicnt in t h e c o ~ i i ~ a and
n y in that cast
he will bc treated a5 an ernployce o r servant of thc company and he will cnjoy all the
rights available to an employee.
Thus. it is clear from the abovr discussion that directors a r e neither the agents, nor the
trustees, nor managing partners, nor employees of the company. In fact, they combine
inthemselvesall these positions. They stand in a fiduciary position towards tllc company
in respect of their powers and capital under their control.

11.4 NUMBER OF DIRECTORS AND DIRECTORSHIPS

T h e Companies Act has fixed the minimum number of directors which a company must
have. According t o Section 252 of the Act:
a) every public company shall have at least three directors, and
b) every other company shall have at least two directors.
The Companies Act has prescribed only the minimum number of directors but issilent
on the maximum number of directors. Subject to this statutory m ~ n i m u mthe , articles
of association of a company may prescribe the minimum and maximum number of
directors for its Board of directors. Within the limits laid down in its articles, the
company can increase o r decrease the number of its directors, by passing an ordinary
resolution in the general meeting [Section 258). s
. .
If a public company or a private company which is a subsidiary of a public company
wishes to Increase the number of directors beyond the limit laid down in the articles, it
can d o so only with the approval of the Central Government. However, if the increase
in the number of directors does not make the total number of directors more than
twelve, the approval of the Central Government will not be necessary [Section 2591.
Number of Directorships: A person cannot be a director In more than twenty companies
at the same time. If a person is alrcady holding the office of director in twenty
companies and is appointed a s a director in some other company, then in such a case
the new appointment shaH not be effective unless within fifteen days of such
appointment he has vacated his office in any one of the companies in which he was
already a director. His new appointment shall become void if he fails to make a choice
within the said fifteen days.
While calculating the number of twenty companirs, thc folloiiitlg shall he exclucted:
i) a n unlimited company;
) a private company which is neither a subsidiary nor a holding company of a public
company;
iii) an association not carrying on business for profit;
iv) alternate directorships.
+ny person who holds officeor acts as a director of more than twenty companies, shall
.be punishable with fine which may extend to Rs. 5,000 for each company after the first
twenty companies.

11 .S QUALIFICATIONS OF A DIRECTOR
The Companies Act does not lay down any academic qualification for appointment as
acompany director. The Act does not lay down any share qualifications for a person to
be a director. A director need not hold any shares and need not be a member of the
company. However, the articles of association of the company usually provide for the
share qualification of a director. Such shares are known as qualification shares. The
directors are required to have these shares so that they also have some financial stake
in the company. Reghlation 66A of Table A provides that a director must hold at least
one share. The articles specify the number or value of shares to constitute qualification
shares.
Where the articles provide for qualification shares, a director must obtain qualification
shares within two months of his appointment. Any provision in the articles requiring a
person to hold qualification shares within a period shorter than two months of his
appointment shall be void. You should note that it is not necessary that a person nus st
acquire qualification shares before his appointment.
The nominal value of the qualification shares must not exceed Rs. 5,000 or the nominal
value of one share where it exceeds Rs. 5,000. Any provision in the articles which
requires a director to take qualification shares of more than this amount, shall be
invalid.
The holder of a share warrant shall not be deemed to be holder of the shares specified
in the warrant [Section 270(4)].
If a director does not acquire the qualification shares within two nionths of his
appointment or thereafter does not possess sucli shares of any time, his office shall
automatically become vacant. Further, he shall be punishable with fine whicli may
extend to Rs. 50 for every day from the date of expiry of two months upto the date he
acted as a director. I

The qualification shares may be obtained by.him either directly from the company or
from the market.
"-4

The provisions regarding qualification shares do not apply to (i) technical directors
unless expressly provided in the articles; (ii) directors representing special interest;
(iii) directors appointed by Central Government and (iv) in the case of 3n independent
private company.

11.6 DISQUALIFICATIONS OF DIRECTORS

'

The circumstances in which a person canhot be appointed as a director of a company

are listed in Section 274 of ttie Companies Act. A person shall not be capable of being
appointed director of a company if:
i) he has been found to be of unsound mind by a competent court;
ii) he is an undischarged insblyent;
iii) he has applied to be adjudicated as an insolvent and his application is pending;
iv) he has been convicted by a court of any offence involving moral turpitude ahd
sentenced to imprisonment for not less than six months and a period of five years
has not elapsed since the expiry of his sentence;
 v) he has not pilid any call in respect of the fiharesof the company held by him, whether
alone or jointly with others, and six montha haveelapsed from the last day fixed for
the payment of the call;
. vi) he has been disqualified by an order of the Court under Section 203, of an offence
in relation to promotion, formation or management of-the company of fraud o r
misfeasalhce in relation to the company.
The Central Oovernrnent may, by notification in the Official Gazette, remove the
disqualifications listed under clause (iv) and (v) above.
A private company which is not a subsidiary of a public company may, by its articles,
provide for additional grounds for disqualification. Thus, a public company o r a private
company which is a subsidiary of a public company cannot provide for additional
disqualifications in its articles.

Check Your Progress A

1) Define a director.

........................................................................................................
*.
L
2) Enumerate the positions in which a director acts.

..........................................................................................................
3) What is the minimum number of directors in a public and a private company?

..........................................................................................................
4) What d o you mean by 'share qualification' of a director?

5) How can a company increase the number of directors?

6) List four cases when a person becomes disqualified for appointment as director of a
company.

7) State whether the following statements are True or False.

i) Every public company must have at least five directors and every other
company at least three directors.
i Only an individual can be appointed as the director of a company.
iii) Directors are trustees for the company and not for individual shareholders or
for third persons who have entered into contracts with the cdrnpany.
iv) A company may increasior reduce the number of directors, within the Limits
fixed by its articles, by passing a special resolution in the general meeting.
 v) A person can be a director in more than twenty companies at the same time. Directors

vi) Directors must obtain qualificiition st~arcswithin three months of their

appointment.
vii) If a company proposes to incrcast: the total nur~lbci-ofdirectors beyond'twelve,
it must ht: approved by the Ceniral Govcrn~nent.
viii) A PCISOII wlio fails to pay the calls in respect of shares held by him for more
than six months, cannot be appo~ntedas a director of the company.

-
11"7 APPOINTMENT OF DIRECTORS

You know that only individuals can be appo~ntcdas directors of tho company. Any
prmnl wwBm is iscompetent to corltrract and who 1~01ds%hequalificatitanshares is r!igiblt* for
oipgliiii~ntnenew?a.sli director oftllae contrapauny. K4ircctors may be appointed in any of the
fo[lowiragways (i) by the art~cles;(ii) by the shareholders in thc general mecting;
(iii) by the Board of directors; (iv) by Lhr Cmtral Govertiment and (v) by third parties.
Let us now discuss thcm iil detail.
1) By Articles: The names of the first directors are usually given in the articles of the
canagany. In c%sethey are not nzlraied in the articles then the subscribers to the
n~emorandumare deemed to be the first directors of the company and they shall
hold office until the directors are appointed at the lirst annual general meeting.
A person cannot be appointed as director by articles, o r named as a director, or
nan~edas a proposed director in the prospectus unless hc or his authorised agent
i) has signed and filed with the Registrar his consent irr writing to act assuch director;
and
ii) has either (a) signed the mcnlorandum for his qualification shares; or (b) taken
the qualification shares from the company and paid or agreed to pay for them; or
(c) signed and filed with t l ~ eRegistrar an undertaking in writing to take from the
company his qualification shares and pay for them; or (d) filed with the Registrar an
affidavit that his qualification shares, if any, are registered in his name.
The above restrictions, however, do mot apply to (i) a company not having a share
capital; (ii) a private company; (iii) a compally which was il private company before
becoming a public company; (iv) a company which issues a prospectus after the
expiry of one year from the date on which the colnpany became entitled to
commence business.
2) By Shareholders: in Genera! Meeting: The first directors of the company shall
hold the office till the first annual general meeting. According to Section 255 of the
Act, directors of a public conlparly muse be appointed every year in its annual
general meeting. Unless the articles provide for retiretalent of all the diiectors at
every annual general meeting, at least two-thirds of the total number of directors
must retire by rotation. Thus, only one-third can be the penmianent or non-retiring
or ex-officio directors.
At every subsequent annual general meeting, out of the two-thirds directors liable
to retire by rotation, one-third or the number nearest to one-third must retire. The
directors who have been longest in office sirice their last appuin~iiientshall retire,
but in case if the dare of appointnie~itis the salrne, the retirement will be determined
by an agreement arnong thein and if there is no agreement, it shall be deler~ninedby
draw of lots.
The retiring directors are eligible for re-election. If a person other than a retiring
director wishes to contest the election for directorship, he must give a notice in
writing to the company at least fourteen days before the mceting. The compaliy is
then required to inform the members either by individual notices or by
advertisement of at least seven days before.the meeting about such a candidature.
'Id the vacancies cotald not be filled up in the annual general meeting, the m e t i n g is
 adjourned for the next week to be heldat the same time and at the same place. If at
the adj0urne.d meeting also the place of the retiring director is not filled up and that
meeting has not expressly resolved not to fill the vacancy, then the retiring directors
shall be deemed to have been re-appointed as directors.
It should be noted that the appointment of each director in the general meeting.mustt
be made by a separate resolution, unless the meeting unanimously decides
otherwise. In other words, two or more directors cannot be appointed by one
resolution.
3) By Board of Directors: The Board of directors may also appoint directors in the
following cases:
i) Additional Directors: The Board of directors may, if authorised by the articles,
appoint additional directors. But care should be taken to see that the total
number of directors including the additional director must not exceed the
maximum number fixed by the articles. Such an additional director shall hold
ofice only upto the date of the next annual general meeting.
ii) Alternate Mreetor: The board may appoint the alternate direct~rif the articles
authorise such an appointment. An alternate director is appointed to act in
'
place of a director who remains absent for more than three months from the
state in which the meetings of the Board are ordinarily held. Such an alternate
directorshall holdoffice till the time when the original director (in whose place
he was appointed) returns or on the expiry of the original director's term.
iii) Casual Director: Jf the office of any director falls vacant for some reason before
the expiry of his term of office, such a casual vacancymay be filled by the Board
of directors according to the regulations of the articles. Such a vacancy may be
caused by death, resignation, insanity, insolvency etc. The person who is
appointed by the Board to fill up the casual vacancy, shall hold the office only
upto the date upto which the director in whose place he is appainted, would
have held the office.
4) By Central Government: To safeguard the interest of the company, or its
shareholders, or the public, the Central Government may appoint such number of
directors as the Company Law Board may, by order in writing, specify. Such
directors are appointed to prevent oppression and mismanagement of the affairs of
thecompany. Thecompany Law Board may pass such an order on a reference made
to it by the Central Government, or on the application of at least one hundred '

members, or of member holding at least ten per cent voting rights. Such directors
are not required to hold qualification shares and they are not liable to retire by
rotation. However, such directors can be removed by the Central Goverqrnent at
any time and appoint some other person in his place.
5) By Third Parties: The articles of the company may authorise the third parties to
appoint persons on the Board of directors as their nominee. But the number of
directors so nominated must not exceed we-third of the total number of directors.
The term 'third parties' here means the debentureholders, financial institutions or
banks, etc., who have lent money to the company. The idea behind such
appointment is to ensure that the money lent is used only for the purposes for which
it has been lent. Such directors are not liable to retire by rotation.
You have learnt that for the'appointment of every director, a separate resolution has
to be passed..Norrnally, they are elected by a simple majority. As a result it is
possible that the minority of the shareholders may not be in a position to send their
. representativeon the Board of directors. Therefore, Section 265of the Act provides
them an opportunity to have their representative on the Board. This is done by
adopting the system of proportional representation. The articles may have a
provision to this effect by which not less than two-third of the total number of
directors of the company be appointed by the single transferable vote, or by a system
of cumulative voting or otherwise. Such appointments may be made once in three
years and any casual vacancy may be filled up by the Board of directors.
 11.8 VACATION OF OFFICE BY DIRECTORS
According to Section 283 of the Companies Act, the office of a director shall become
vacant if -
i) he fails to obtain or ceases to hold the qualification shares;
ii) - he is found to be of unsound mind by a competent court;
iii) he applies to the court to be adjudged an insolvent;
iv) he is declared insolvent;
v) he is convicted of any offence involving moral turpitude and sentenced to six
mcnth's imprisonment;
vi) he fails to pay any call for six months on shares hold by him;
vii) he absents himself from three consecutive meetings of the Board of directors or
from all the meetings of the Board for a continuous period of three months,
whichever is longer, without obtaining leave of absence from the Board. But if this
absence is not deliberate (he might be ill) then it will not result in the vacation of
office;
viii) he accepts a loan or any guarantee or security for a loan from the company without
the previous aeproval of the Central Government;
ix) he fails to disclose to the Board his interest in any contract entered into by the.
company as required by Section 299;
x) he becomes disqualified by an order of the court under Section 203 which restrains
fraudulent persons from managing the affairs of companies;
xi) he is removed by an ordinary resolution of the company;
xii) he had been appointed a director by virtue of his holding any office and he ceases
to hold such office;
xiii)' he is convicted of an offence in connection with the inspection of books of accounts
and other re,cords by the Registrar.
A private company which is not a subsidiary of a public company may, by its articles,
provide for additional grounds on which the office of a director shall fall vacant.
The grounds mentioned above for vacating the office of director apply to all companies
Tpublicor private. On the happening of anyof the above events, the director will have .
to vacate the office. These rules are applicable,to all directors by whomsoever .
appointed and for whatever period appointed. The Board has no power to waive the
event or condone the act.
11.$.1 Retirement of a Director *

,You know that two-third of the directors are liable to retire by rotation and if a director
retires at aniannual general meeting and is not re-elected, he ceases to hold the office.

11.8.2 Resignation by a Director

A director may resign in accordance with the rules laid down in the articles. If the
I articles contain no such rule, he can resign at any time by giving areasonable notice to
the company, it is immaterial whether the company accepts his resignation or not. A
resignation once made will take effect immediately when the intention to resign is made
clear. A resignation cannot be withdrawn, except with the consent of the company
concerned.
The resignation letter should be sent to the company at the registered office of the
company. The resignation should preferably be in writing,'but sometimes even oral
resignation may be effective, for example, if it is made at the general meeting of the,
company.

ill- EMOV OVAL OF DIRECTORS '

A director can be removed from o k c e before the expiry of his term by (a) shareholders;
or (b) Central Government; or (c) Company Law Board. Let us now discuss them in
detail.
a) Removal of Shareholders: A company may remove a director by giving a special
notice and passing an ordinary resolution. However, they cannot remove (i) director
appointed by the Central Government; (ii) a life time director in a private company;
(iii) a director representing special interests e.g., creditors or debentureholders; and
(iv) a director elected by proportional representatiorl.
Special notice of fourteen days must be given for the resolution to remove a director a t
any meeting. On receipt of such a notice, the cunlyany must forlhwith send a copy
thereof to the director concerned, who has a right to be heard on the resolution at the
meeting.
If the director concerned has sent a written represelltation to the company, the
company may send a copy of the same to all the members. If the representation could
not be send because of the shortage of time, it may be read at the meeting.
A vacancy created by the removal of a director may be filled up by the appointment of
another director in this place provided special notice of such appointment has been
given to members. A director so appointed shall hold office only for the remaining
period of the director removed. Such a vacancy can also be filled up a casual vacancy.
A removed director cannot be reappointed, but he can claim compensation for loss of
office.
(b) Rcmoval by Central Government. The Central Government may remove a director
on the recommendation of the Company Law Board. The Central Government
may referthe matter to the Company Law Board if it feels that the person has been
guilty of fraud, misfeasance, negligence or breach of trust, or that the business of
the company has not been conducted according to prudent comtnercial principles
o r the company is managed by such a person in such a manner as to cause o r likely
to cause serious injury to trade, industry or business. If the Compariy Law Board is
satisfied, itshall recommend the removal ofsuch director. The director so removed
shall not hold the office of a director or any other office connected with the conduct
and management of the affairs of the company for a period of five years. However,
the Central Government may, with the previous concurrence of the Company Law
Board. remit o r reduce this period.
A director who isso removed is not entitled to any compeosat~onfor lossof office.
c) Removal by Company Law Board. The Company Law Board is also empowered to
remove the director on an application made to it for prevention of oppression or
mismanagement. Such a person cannot be appointed in any managerial capacity in
the company for a period of five years, Also he cannot sue the company Cor
compensation for loss of office.

Check Your Progress B

1) How are the first directors of a public company appointed?

........................................................................................................
2) Who are rotational directors?

......................................................................................................
.....................................................................................................
3) w h a t do.you mean by an alternate director?
4) When can the Central Government appoint a director'?
.........................................................................................................
.........................................................................................................
..........................................................................................................
5 ) List four grounds when the office of a director falls vacant.
..........................................................................................................

6) How can the shareholders of a company remove a director'?

7) State whether the following statements are True or False.

1) The first directors are usually named in the articles.
ii) Unless the articles provide for the retirement of all directors at every annual
general meeting, at least one-third of the total number of directors are liable
to retire by rotation.
, iii) A retiring director cannot be re-appointed.
iv) An alternate director can hold office upto the next annual general meeting.
v) The office o f a director falls vacant if he fails to obtain his qualification shares
within two months of his appointment.
vi) The office of the director does not become vacant if he fails to disclose his
interest in any contract with the company before the ~ o a r d .
vii) A resignation by a director is effective immediately when the intention to
resign is made clear.
viii) A director cannot be removed before the expiry of his term of office.
ix) A director who is removed by Company Law Board is not entitled to any
compensation for loss of office.
x) I f a new director is to be appointed, a notice in writing shall be given to the
company at least twenty me days before the meeting.
. -. -

11.10 POWERS OF DIRECTORS - -

You know that the directors are appointed to manage and supervise the overall affairs
of the company. Therefore, the Board of directors has the power to do all such things
which the company is authorised or empowered to do. The directors derive their powers
from the memorandum 01- articles of the company and from different provisions of the
Companies Act., 1956.
Section 291 of the Act provides that, subject to the provisions of the Act, the Board of
directors of a company shall be entitled to exercise all such powers, and do all such acts
and things, as the company is authorised to exercise and do. Thus, the Board of ,
directors cannot exercise such pr,wcr\ which can only be exercised by the company in
the general meeting.
The powers of the company are thus divided into two parts: (i) powers to be exercised
by the Board of directors, and (ii) powers to be exercised by shareholders in a general
meeting. withinsthelimits laid down by the Act and the articles, the powers of the
directors are supreme and the shareholders cannot alter or restrict their powers by
passing a unanimous resolution. The shareholders can amend the articles or take steps
to remove the directors or refuse to re-elect director whose actions they disapprove and
appoint other persons replacing them.
 Directors are required to act collectively in the form of Board. Directors individually
cannot take any deiision regarding company's affairs, decisions must be taken at the
meetings of the Board or by circulation of proposal among the members of the Board.
But the Board has the power to delegate authority in certain respects to a n individual
director or t o a committee of directors.
Though; the shareholders cannot generally interfere or restrict the powers of the
directors, but, in the following exceptional cases, the general meeting of shareholders
may exercise powers conferred on the Board of directors:
i) where the directors act maJa fide and against the interest of the company, for
example, when their personal interest clash with their duty towards the company;
ii) where the Board of directors for some valid reasons become incompetent to act, for
example, all the directors are interested in a particular transaction;
iii) where rhere is deadlock in management i.e., the directors are unwilling to exercise
.I their powers, for example, when the directors are equally divided and, therefore;
cannot come to any decision.
Powers to be exercised by Board only: According to Section 292 the following powers
can be exercised by the Board only by means of resolutions passed at meetings of the
Board:
a) the power to make calls;
b) the power to issue debentures;
c) the power to borrow money otherwise than on debentures; ,
d) the power to invest the funds of the company; and
e) the power to make loans.
The first two powers cannot be delegated by the Board to any committee but the
remaining three powers can be delegated to any committee or sub-committee, if any.
However, such delegation can be-made by the Board by passing a resolvtion at the
meeting of the Board.which must specify the nature and extent of power w5ich can be
exercised by the delegate. The shareholders, in general meeting, can impose .
restrictions o r conditions on the exercise by the Board of any of the above powers.
Other powers to be exercised at Board Meetings. In addition to powers to be exercised
at Board meetings under Section 292, there are some other powers which can be
exercised only at a meeting of the Board, they are as follows:
i) the power to fill up the casual vacancies on the Board;
ii) the power of sanctioning a contract on which a director is interested;
iii) the power to appoint o r employ a person as managing director o r manager, if he IS
already a managing director or manager of another company;
iv) the power of making investments in shares or debentures of companies under the
same management;
V) the power of receiving notice of disclosure of shareholdings by directors and
persons deemed'to be directors; '
vi) the power to make declaration of solvency in the case of member's voluntary
winding up.
Among the above-mentioned powers, the powers under clause (iii) and (iv) are to be
exercised by the Board with the consent of all the directors present i.e., unanimously.
You should remember that each director shall have only one vote and all matters will
be decided [except (iii) and (iv)] by simple majority of votes. A director cannot appoint
a proxy to attend and vote at the meetings of the Board.
Powers to be exercised with the sanction in general meeting: Section.293 of the Act
imposes certain restrictions on the powers of the Board of directors. There are certaih
powers which can be ex'ercised by @e Board of directors only with the consent of the
company in the general meeting, they are:
i) the power t o sell, lease or otherwise of the company's
q
undertaking;
ii) the power to remit or give time for the repaymenqof any debt due by a director;
iii) the power t o invest, otherwise than in trust securities, the compensation received
for compulsory, acqujsition of 'the company's ,undertakings or property;
 iv) the power to borrow lnoney in excess of the total ot the paid-'up cdplial ui L r l ~
company and its free reserves; and
v) the power to cmtribute toany charitable or other funds not directlyconnected with
- the b'r.%inessof the company or the welfare of the employees beyond Rs. 50,000 in
a year vl J per cent of the average net profits for the last three financial years,
whichever is greater.
In case the directors sell or lease the company's property without obtaining the consent
in the general meeting, the title of the buyer or other person who buys or takes a lease
in good faith and after exercising due care and caution, will not be affected. Besides,a
company whose ordinary business is to sell or lezse property is not governed by this
rule. You should note that the above restrictions are not applicable to an independent
private company. It should also be noted that as regards contributions to National
Defence Fund or any other fund approved by the Central Government for the purpose
of national defence, Section 293-B empowers the Board of directors to make such
contributions without any limit dnd without obtaining the sanction of the company in
general meeting.
Other restrictionson the powers of the Board: In addition to the restrictions imposed by
Section 293, there are two more restrictions:
i) Restriction on making political contributions: According to Section 293-A,
Government companies and companies which have been in existence for less than
three financial years ars prohibited from making political contributions. Any other
,:-~pany may contribute any amount or amounts directly or indirectly to any
political party or for any political purpose to any person. The amount of such
contribution must not exceed five per cent of its average net profits during the three
immediately preceeding financial years. Further, for making such contributions, a
resolution authorising such contribution, should be passed at the meeting of the
Board of directors.
Every company is required to give the necessary information in its profit and loss
account regarding the amount of contribution and the name of the party or the
person to whom the amount has been given.
ii) Restriction on appointment of sole selling or buying agents: The Board can appoil,t .
a sole selling or buying agent of the company for any area only after obtaining the
sanction in the general meeting of the company and the appointment can be made
only for a term not exceeding five yeais at a time.
Managerial Powers of Directors
The directors are the elected representatives of shareholders and are entrusted with the
power to manage the affairs of the company in the best interest of shareholders. The
Baard of directors has the following managerial powers:
i) power to make contracts with third parties on bqhalf of the company;
ii) power to recommend dividends;
iii) power to allot, forfeit and transfer shares of the company;
iv) power to appoint director to fill up the casual vacancy;
v) power to take decision regarding the terms and conditions for the issue of
debentures;
vi) power to appoint managing director, manager or secretary of the company;
vii) power to form policy and issue instructions for the efficient running of the
business; and lastly
viii) power of control and supervision of work of subordinates.

1111 DUTIES OF DIRECTORS -

You have learnt that directors of a company occupy an important positioq in the
management of the company and they have vast powers, However, it isexpected of
 Directors then1 to exercise these powers for the public good and protect and safeguard the
interests of the company and shareholders.
The duties of directors depend upon thc nature anc.1size of the cornpany. While
discharging their duties, they must comply with the provisions of the articles and the
Companies Act. The diaties given in the articles will certaialy vary from company to
company. A director is not hound to give continuous attention to the affairs of the
company, his duties are of an intermittent nature, to be performed at periodical board
meetings.
The duties of directors call broadly be classified under the followia~gtwo heads:
1) Statutory duties; and
2) General duties.

P 1. P I. 1 Shtutory Doties
Some of the statutory duties of directors are:
i) Every director must disclose his shareholdings in the company [Sec. 3081.
ii) Every director rnw disclose his personal ir~terestin contracts to be entered into
by the company [Sec. 2991.
iii) Directors must not receive any loan from a public compnriy or its subsidiary of
which he is a director in contravention of Section 295.
iv) To hold statutory and annual general meetings and lay before the cornpany a
Balance Sheet and Profit and Loss Account and other reports.
v) T o convene extraordinary general meeting on the requisition of the specified
number of members.
vi) Directors must not.receive rernuneration.in contravention of Section 309 read
with Section 198.
vii) T o file with the Registrar the reports and resolutions as required by the Act.
viii) T o maintain books and registers required under the Act and articles.
.ix) T o perform all such duties as required under the Act and articles.

11.11.2 General Duties

There are some duties of a general nature which every director must discharge. The
following are some of the general duties:
i ) Duty of good faith: The directors occupy a fid ~ c ~ aposition
ry in a company.
Fiduciary position means a position of trust and confidence. Therefore, directors
must act honestly and diligently in the interest of the company and shareholders.
They must not make any secret profits from their dealings with the company. If a
director makes some secret profits by utilising his position, he shall be liable to
account for it.
ii) Duty of reasonable care: The directors shotild discharge their duties with reasonable
care. The degree of care expected from him is the same as is reasonably expected
from persons of their knowledge and status. If the directors fail to exercise due care
and skill in the performance of their duties, they shall be liable for negligence. But
they cannot be held liable for mere errors of judgement.
iii) Duty to attend the Board Meetings: The duties of directors are of an intermittent
nature t o be performed at periodical board meetings. Therefore, it is the duty of
every director to attend such meetings. Although a director is not expected to
attend all the meetings of the Board, but if he fails to attend three consecutive
meetings or all meetings of the Board for a consecutive period of three months
(whichever is longer) without obtaining permission, his office shall automatically
falls vacant.
iv) Duty not to delegate: The directors must perform their duties personally. They are
appointed because of their skill, competence and integrity, therefore, the maxim
delegatus non potest delegare (a delegate cannot delegate further) is applicable to
them. But ifpermitted by articles of the company, the directors can delegate cel tam
64 functions to the extent permitted by the Act of the articles.
 y disclose interest: he fiduciary position of a director requires him to disclose
v) ~ u t to .
to the Board his personal interest in any contract to be entered by the company.
This is necessary to prevent any conflict between the personal interest of the
. director and his duties towards the company. It should be noted that there is no ban
on company entering into a ccintract in which a director is interested. What is
required is that he must disclose this interest.

11.12 LIABILITIES OF DIRECTORS

The liabilities of directors can be discussed under various heads.
1) Liability as shareholder: The director's liability as shareholder is usually the same as
that of any other shareholder. But a company may alter its memorandum and make
the liability of all or any of the directors unlimited. This, however, will be effective
only if the concerned director has given his consent to it. Further, the directors are
liable to pay the calls whenever made, within the permissible time. If calls are in
arrear for more than six months, he shall have to vacate the office of director.
2) LiabiBIyt to outsiders: Directors act for the company, as such they cannot be held
personally liable to outsiders for any acts done by them on behalf of the company.
They would, however, be personally liable to outsiders in the following
circumstances:
i) When they enter into contracts in their own names and not in the name of the
'

coinpany. For example, when they sign a negotiable instrument without

mentioning the name of the company, they shall be personally liable.
ii) Where the directors act ultra vires the company i.e., beyond their powers, in
such a case company will not be liable but directors will be liable to thelr parties
for breach of implied warranty of authority.
iii) Where they have permitted the issue of a prospectus which contains
misstatements or which does not present the true position, the directors shall be
personally liable.
iv) Where the directors fail to return the application money within the specified
time, if the minimum subscription is not subscribed.
v) Where there is irregular allatment of shares,
vi) Where the directors act fraudulently, for example, when they purchase gaods
or incur liability at a time when they know that the company will never be liable
to pay the amount,
3) Liability to Company: Directors have some duties towards the company by virtue of
their office. The directors are liable to the company in the following cases:
i) Uitra vires Acts: Directors are personally liable to the company for.ultra vires
acts i.e., acts which are beyond their powers. For example, if they pay dividends
.out of capital, they will be liable to the company f6r any loss or damage suffered
due t o such ultra vires acts.
ii) Negligence: If the directors perform their functions in a negligent manner, they
incur personal liability to the company. They are, however, not liable for errors
of judgement.
iii) Breach of trust: The directors occupy a fiduciary position towards the company.
They must act honestly and in the interest of the company. If the directorsmake
some secret profits or use the company's property for their personal use, then
they shall be liable to the company.
iv) Misfeasance: The misfeasance means wilful misconduct or wilful negligence
resulting in some loss to the company. The company can take action against the
directors for damages in case of misfeasance.
4) Criminal liability: If the directors fail to comply with the provisionsof the Act, they
incur criminal liability involvlng fine or imprisonment or both. Some of the
provisions of the At under which the directors incur criminal liability are:
 i) Issue of a prospectus contalnlng an untrue statement.
ii) Fa~lureto deposit application money in a schedule Bank.
iii) Fraudulently inducing persons to invest money in the company.
'iv) Accepting deposits or inviting any deposit in excess of the prkscrihed limit.
v) Destruction, multilation, alteration or falsification of any books, papers o r
documents.
vi) Failure to file annual returns.
vii) Default in holding the annual general !:I c.ting.
viii) Granting loans to directors without thl ,~pprovalof Central Government.
ix) Failure to maintain proper accounts etc.
Liability for acts of co-directors: A director is not liable for the acts of his co-
directors unless he was a party to it. A director is not the agent of his co-directors.
H e cannot be held liable on the ground that he ought to have discovered the fraud.
But a managing director or the chairman signingthe accounts without understanding
its implications cannot escape liability.

11.13 MEETINGS OF DIRECTORS

You have learnt that directors exercise their powers collectively at periodical meetings
of the Board. The rules relating to meetings of directors we following:
I

i) A meeting of the Board of directors of every company must be held once in every
three calendar months and at least four such meetings must be held every year. Tht
Central Government may, however, by notification in the Official ~ a z e t t eexempt
;
any class of companiesfrom the above mentioned rule. This has been done to help
small sized companies where it is not necessary to hold meeting once in every three
months.
Though the Act does not state anything about the place where the meetings of the
Board should b e held, but since register of contracts and other books are kept of
the registered office, the intention is that such meetings should be held at or near
the place of the registered office of the cornany.
ii) Notice of every meeting of the Board m ~ sbe t given in writing to every director in
India at his usual address, The Act prescribes na particular f o r h of notice or made c
of service or length of period of notice. Thus even a few minutes notice wauld be
sufficient. The failure to give notice to any director renders the meeting invalld.
iii) -The quorum for a meeting of the Board of directors of a company shall be one-third
of its total strength (any fraction to be rounded off as one) or two directors,
whichever is higher. If at any time there are some interested directors whose
number exceeds or is equal to two-thirds of the total strength, theh the remaining
'
directors who are not interested shall form the quorum during that time, provided
their number is not less than two. In a Board meeting quorum must be present
throughout the meeting and not merely at the commencement of the meeting,
iv) If a meeting of the Board could not be held for want of quorum, it shall stand
adjourned till the same day in the next week at the same time and at the same place.
If that day happens to beapublic holiday, then it will be held on the next following
day, which IS not a public holiday.
v) It is essential that all the proceedings of every meeting of the Board should be
recorded in writing in a book called the minute book. Minutes of every meeting
must be signed by the chairman in whose presence those resolutions were passed or
by the chairman of the next succeeding meeting. As per Section 289, the resolution
may also b e passed by circulation.

Check Your Progress C

1) How do the directors of a company exercise their powers?
 ..........................................................................................................
2) List four powers of directors which can he exercised only at Board meetings. '

3) Name four important duties of a director.

.........................................................................................................
4) Wllo is an 'interested director'?

5) What are the legal rules as regards the frequency of Board meetings?

6) what is the quorum in a director's meeting?

. .
..........................................................................................................

7) State whether the following statements are True or False.

i) The directors of a company have the power to do all such acts as the company .
is authorised to do.
ii) The power to issue debentures can be exercised only with the consent of
shareholders in general meeting.
iii) The Board has the pow& to recommend the rate of dividend to be declared by
the company.
iv) Casual vacancies can be filled up by the Board of directors.
v) The director can remit or give time for the repayment of any debt due by a
director,
vi) A director must always act in the general interest of thecompany.
vii) A director interested in a contract must disclose hisinterest in such contract at
the general mekting of shareholders.
viii) A meeti;lg of the Board of directors must be held at least once in every four
months and at least three such meetings must be held in every year.
ix) The quorum for a Board meeting is one-third of its total strength or two
directors, whichever is less.

1114 LET US SUM UP

Since a company is an artificial person created by law, it can act only through human
agents. These agents are known as directors. The directors collectively are called as
'Board of Directors'. Directors are the persons, who are responsible for directing,
controlling the overall affairs of the company.
A public company must have at least three directors, and every ather company must
have at least two diiectors. A public company which is subsidiary of a public company
cannot have more than twelve directors unless the Central Government gives
permission for more. No individual can be a director of more than twenty companies at
the same time.
All persons appointed as directors of the company must file with the Registrar their
consent in writing to act as such. A director is required to have qualification shares so
long he continues to be a director. The value of the qualification shares must not exceed
Rs. 5,000 or the value of one share where it exceeds Rs. 5,000.
Dirsctor's legal position is quite interesting- sometimes they act as agents of the
company, sometimes as trustees and sometimes even as managing partners of the
company. They are also treated as officers of the company.
A person who is competent to contract can become a director. But a person of unsound
mind, undischarged insolvent, persons convicted for moral turpitude and sentenced to
six months imprisonn~entare disqualified to act as directors.
Directors can be appointed by articles, by share holders in general meetings, by the
Board, by the parties and by Central Government. Thc directors may be appointed on
the basis of proportional representation.
The office of the director shall fall vacant on various grounds, such as if he fails to obtain
qualification shares within two months o r ceases to hold qualification shares, his calls
are in arrears for six months, he deliberately fails to attend three consecutive meetings
without obtaining permission, he fails to disclose his interest in any contract etc.
The directors of a company can also be removed by shareholders, by Central
Government and by Company Law Bohrd.
The Act has given wide powers to directors which must be exercised by them in good
faith and for the benefit of the company. There are certain powers which can be
exercised by them only at the meetings of the Board and certain powers can be exercised
by them with the consent of the shareholders in general meeting.
The directors are liable to the company for negligence, breach of trust, for ultra vires
acts and for wilful misconduct. The directors are liable to third parties in some cases
e.g., when he acts in his own name, for misstatements in the prospectus etc. The
directors also incur criminal liability for non-compliance of the various provisions of the
Act.
!
#' !

10.15 KEY WORDS

Director: One who performs the functions of a director.
Trustee: One who holds some property in trust for the benefit of anoth . erson or
A

persons.
Share Qualification: The minimum number of shares, e pired to be held by the director
so long he is a director.
Casual Vacancy: A vacancy caused by the death, insanity or insolvency of a director
Alternate Director: A director who is appoiilted in place of the original director.
Rotational Director: Directors who are liable to retire by rotation.
Ultra-vires the company: Beyond the powers of the company.
Misfeasance: Wilful misconduct o r wilful negligence.
Criminal Liability: Punishment by way of fine or imprisonment or both.
Quorum: Minimum number of persons physically present to transact a legally binding
business.
11.16 ANSWERS TO CHECK YOUR PROGRESS
A 7 i) False ii) True iii) True iv) False v) False vi) False
vii) Tra; viii) True
B 7 i) True ii) False iii) False iv) False v) True vi) False
vii) True viii) False ix) True x ) False
C 7 i) True ii) False iii) True iv) True v) False vi) True
vii) False viii) False ix) True

11.17 TERMINAL OUESTIONS

1) Who are the directors of a company? How are they appointed?

2) Explain the rules regarding the number of directors and directorships.
3) Discuss the legal position of directors.
4) What restrictions have been imposed by the Companies Act in respect of
appointment of directors?
5) Explain the qualifications and disqualification for the office of a director.
6) What is meant by qualification shares? Is i t necessary to be a shareholder or to
acquire qualification shares before acting as a director?
7) What are the circumstances when the office of a director shall become vacant'?
8) How can a director be removed from office before the expiry of their term of office?
9) Discuss the powers and duties of directors.
10) Explain the liability of directors towards the company and third parties. Can a
director be held liable for criminal liability?

r
11) Write an explanatory note on meetings of directors.

Note: These questions will help you to understand the unit better. Try to write
answersfor them. But d o not submit your answer to the University, These
are for your pract,ice only.

SOME USEFUL BOOKS

Bagarial, Ashok K.1990 Company Law. Vikas Publishing House Pvt. Ltd., New Delhi
(Chapter 7-9).
Chawla, R.C. and K.C. Garg, 1990. Mercantile Law. Kalyani Publishers, New Delhi
(Chapter 7-9) of Sec\ion on Company Law.
Kapoor, N.D. 1990. Elements of Company Law. Sultan Chand and Sons, New Delhi
(Chapter 6-8).
Kuchhal, M.C. 1990. Modern Indian Company Law. Shree Mahavir Block Depot,
Delhif (Chapters 8-14).
 U'NIT 14 WINDING UP

14.0 Objectives
14.1 Yntroduction
14.2 Meaning of Winding Up
14.3 Winding Up and Dissolution
14.4 Modes of Winding Up
14.5 Compulsory Winding Up
14.5.1 Grounds for Compulsory Winding Up
14.5.2 Who can File a Petition?
14.5.3 Commencement of Winding U p
14.5.4 Consequences of the Winding U p Order
14.5.5 Conduci of Winding U p

14.6 Voluntary Winding Up

14.6.1 Members' Voluntary Winding U p
14.6.2 Crcditors' Voluntary Winding U p
14.6.3 Co~lscquencesof Volu~~tary Winding U p . .
14. I Astinction Between Members' and Creditors' Voluntary Winding.Up
14.8 Willdii~gUp Under Supervision of the Court
14.9 Let Us Sum Up
.14.10 Key Words
14.11 Answers T o Check Your Progress
14.12 Terminal Questions

14.0 OBJECTIVES

After studying this Unit, you should be able to:

explain,the meaning of winding up.
@ distinguish between winding up and dissolution
@ describe the different types of winding up
list the grounds for compulsory winding up
@ describe the consequences of winding up
@ explain the rules regarding voluntary winding up
distinguish between members' and creditors' voluntary winding up,

14. P INTRODUCTION -
YOUhave learnt that a company is an artificial person created i by law and as such its
life can be ended only by a legal procedure. Winding up is a means by which a company
is dissolved. A company shall cease to exist only when it is dissolved. There are three
ways in which a company may cease to exist in the eyes of law, they are:
a) Under a scheme of reconstruction and amalgamation, a conlpany may be dissolved
by order of the court without being wound up (Section 394);
b) When the company becomesa defunct company, the Registrar may remove the
name from the Register of Companies (Sec. 560);
c) Through winding up process.
- -
,Ip this Unit you will study thddifferellt types of winding up, the grounds for winding
Meetings and Winding Up ' u p and the consequences of winding up.

14.2 MEANING OF WINDING UP

0

The winding up is the process o i putting :an end to the life ~e5fthe company. During
this process the company ceases'to carry on its normal business, the assets s f the
company are sold and the proceeds are uti!ised in paying off the debts and liabilities.
If any surplus is left, it is paid back to the menlbers in proportion to their contribution
* to the capital of the company. Am administrator, called a liquidator, is appointed and
he takes control of the company, collects its assets, pays its debts and distributes the
surplus, if any, among the members. Thus, with the winding up, a coinpnny ceases to
be agoing concern, all its operations come to a halt. You should note that tl~cprocess
of winding up begins only after the co~rrtpasses the order for winding up and till such
an order is passed there is no winding up.
Further, a company may be unable to pay its debts but it cann?t be adjudicated
insolvent
. - .. as the law of insolvency does not apply to csmp:inies. Only individuals can be
declared insolvent, not a body corporate. In such a case, a company can only be wound
. ..
up.

14.3 .WINDING UP AND DISSOLUTION

Winding up and dissolution of the company are not the salne thing. A company is not
dissolved immediately, on the commencerpent of winding up proceedings. Winding
up is the prior stage and dissolution is the nexk On dissolution, the name of the
company is struck off by the Registrar from the ~ e ~ i s tofe rCompanies i.e. it ceases
to exist. While on winding up, the Companies' name is not struck off from the register.
The legal entity of a company 'remains even after the commencement of winding up
and it can be sued in a court of law. Dissolution is the final stage of the Company's
winding yp process. But a company can be dissolved without winding up under certain
circumstances such as when it merges with another company.
The main points of difference between winding up and dissolution are as follows: ,

i) In winding up the assets of the company are sold and the proceeds are utilised
in paying off the debts and other liabilities of the company. It is the first stage
of terminating the lifeof a company. While the dissolution is the next stage and
after this the company ceases to exist.
ii) The winding u p proceedings are carried out by a liquidator of the company while
in case of dissoilution no such proceedings are carried out.
iii) Creditors can prove their debts in the winding up but not in the dissolution of
t h e company.
iv) In the cases of winding up it is not always necessary to obtain an order of the
court because voluntary winding up may take place, but for dissolution of the
company, the order of the court is essential.
From the above discussion it should be clear to you that winding up and dissolution
of a cornpan-y is not the same thing.
..

, .

14.4 MODES OF WINDING UP

Under Section 425 of the Companies Act, ncompany may be wound up in any of t h e
following ways:
1) Compulsory winding'up by the Court.
2) Voluntary winding ui>. It may further be:
7
a) Members Voluntaq winding up; or
b) Creditors' Voluntary winding up.
3) Voluntary winding up under the supervision of the court.
 1
Let us now discuss these modes'one Isy one In detail.

Che winding up of a company by an ortlcr of the court is known as compulsory winding

up. Section 433 of the Act contains the cases wherc the Court may order for the
winding up of a company on a petition alihmitted to it.

'The company may .be wound.up. by the Court under the following circunlstances:
i) Special Resnlutiosa 19y the Company: If the company has passed a special
resolution to the effect that the company be wound up by the court. The resolution
may be passed for any reRsc?n whatocver.. In such cases, the court may ordcr
the winding up r:9f the company c.11 n pstitioii submitted to it. Rut the Court's
power is discretionary, that is, it naay ncrt pa:^ an order for winding up even if
th.=company has so resolved if 'such wirniliilty, up would I?e detriniental to tile
iriterests of the company o'r pa.tlalic.
This mods, of wirrdinp up is not very popular as members' voluntary winriling up
is preferable because there the interference of t%wC O L I L ~ Iea~~t. 4"

ii) DeE~aaElin~ k'koffdihapsctktlntory meell~ag:You know that :! p!.?blirr.company must hold

fhc: rtr!tc!ory 11:c;eting \vi?hi.n.s h mc!,r!thsof c~btaInaEngrllc to commence
cd:.r~i?i!::~tt;
b~asinessand file ".~c <k&utc?ry , ., Ti' tit: r:cmp;lny makes
rcport 7,viEIi CBL: re,:lc;tr:_?r.. .
any dch'~tai8tin lacrldirrg the statutr.z?y meeting I:& filit~glh:? C!.:PDI.I with the
registrar, the court rnay order the winding 11)) or?I 1: .:!'t.ic?i~ of r.Re registrar or of
a contrtnbutory. If apetition is filed by anyotlnrrr p::s:on, c.g, a crediwr, it must
tircn be presented before the <,expiryof fou~:trcndays after the last day on
which the statutory meeting ought to hz,v!vebeer1 held (Sec. 43917). However, the
court is not bound to order for winding up on this ground. It may instead order
the cohpany to file the statutory report or. hold the statutory meeting,

iii) Paillase ta collnmreanlcre business: Ilh the company fails to commence~usiness

within
one year of its incorporation, or suspends its busincss for a whole year, the court
may order the winding up of thc company only when it is satisfied that the
company has no intention of carryir~gon business o r is unable to carry on its
business. Where the delay in comtnencir~gthe business or suspension of business
is due to temporary reasons and there are reaso~lableprospects of the company
starting business within a reasonable time, the court shall not pass the winding
up order.
Sometimes, a company niay have :inuri?hrr of busincss units. In such acase an
interesting question may arise as to wlict her tile suspension of any one business
unit is avnlid ground for winding up of the cotnpany'? The matter is to be decided
by the Ci>urt.Even if the busincss in all the units has becn suspended, thc court
may not order winding up if ii is satisfied that therc are chances of the company
resuming its busii~ess.
iv) Reduction in membership: If the number ofmernbers is reduced, in the case of
a public minyany, below seven and in the ca$eof a private company, below two,
the court may order the winding up of the company. ,
v) Inability pl? pay dkhts: Inability to pay debts means that the, company is not in a
positiora to hnnnrlr its monetary cr>hmitmra~t.i i.e, its existing assets :Ire not'
sufficicrlt to ciisrhorge its existi~lgliabilities. I? such a situation, the court may
order the winding up of the company.
According t o Section 434 ofstheCompanies Act, a cornp:m:y ::hall be deemed to be
unable to pay its debts in tbe followin!: circumstances:
a) .If a creditor to whom the cotnpany is indebted fora sum exceeding Rs. 500 has
served a demand notice on the company requiring the company to pay the sum
 due and the company has for three weeks thereafter neglected t o pay'or o t h e r h e
satisfy him. For calculating the period of three weeks the days on which the
demand notice is despatched and served should be excluded; or
b) If a creditor has obtained a decree from the court for the payment of his debts
by the company, and the company fails to satisfy in full this decree in favour of
a creditor; or
. c) if the court is satisfied that the company is uhable to pay its debts taking inti
account the company's contingent and prospective liabilities. This means the
commercial insolvency of the company, a situation where the company is unable
to meet its current liabilities. The mere fact that the company is incurring losses or
, running in continuous losses does not mean that it is unable to pay its debts. Also
the excess of liabilities over assets alone does not mean that the company is unable
to pay its debts.
The 'court may order winding up on this ground only when:
i) the debt owned by the company is undisputed, for a definite sum and is payable
immediately;
ii) the creditors' right to the debt is clear and undisputed, and
iii) the company has neglected to pay without sufficient cause or excuse.

Where the sole purpose of the petition is to put pressure on the company for the
repayment of a debt, the court shall not pass an order for winding up.
vi) Just and equitable: Where the court i~satisfied, on the facts and circumstances ,
of thecase, that it is just and equitable for the companjl to be woun'd up; it may
pass an order for the winding up of the company. Under this clause, the court
has very wide discretionary powers. What is 'just and equitable' depends upon
the facts and circumstances of each case.
Some of the instances under which the court has ordered winding up on the
ground of being 'just and equitable' are as 4n'det.i -
i) When the main object of the company has failed or has become substantially
impossible to be carried out.
, ii) When there is a complete deadlock in the management of the company, for . '
example, where two directors holding equal voting rights become so hostil'e that
they would not talk with each other, it amounts to deadlock in the management.
iii) When shareholders holding majority voting power adopt an oppressive attitude
towards minority shareholders.
iv) When the object for which the company was formed is fraudulent o r illegal or
it becomes illegal subsequently.
A

v) When the business cannot be carried on except at a loss, i.e. where there is no
I
reasonable hope of running business at profit.
vi) When it is only a 'bubble' company and it has no property or business to carry on.
, vii) When there has been gross mismanagement and misuse of funds by the directors
of a private company or complete lack of confidence in the management.
I
~ o u s h o u l dhowever,
, note that relief under just and equitable clause is in the nature
bf last resort when other remedies are not effective enough to protect the general
interest by the company.

.14.5.2 Who can File a Petition?

According to Section 439 of the Companies Act, a petition for compulsory winding
bp may be filed by anyone of the following:
I) By the Company: A petition can be filed by the company itself for winding up,
when a special resolution to this effect has been passed in the general meeting
of the company. Therefore, the directors or the managirlg director cannot file
such a petition of their own.
U) By the creditors:A creditor can file a petition to the court, if he can prove that
the company wuld not pay his debt of Rs.500 or more within three weeks of
making the demand. The term creditor includes a secured creditor, a
 dcbentureholder, a prospective creditor and any Central or S&te Government
or local authority to whom any tax etc. is due. A secured creditor holding ample
security will fail to obtain the windingworder, if the petition is not supported
by other creditors. The creditors' petition will not be taken up if the claim of
the creditors has become .time barred under the Limit~tionAct.
iii) B i contributories: The term 'contribut'ory' means a person who is liable to
contribute to-the assets of the company in the event of its being wound up. A
contributory isentitled to present2 petition for winding up even though he may
be the holder of fully paid-up shares or that the company may have no assets at
all, or may have no surplus assets left for distribution among the members after
paying off the liabilities.
,
Any contributory may present a petition for winding up where the ground for
winding up is that the number of members is reduced below the statutory limit.
But a petition on any other ground can be presented only by the
a) original allottee or who has acquired shares through transmission or b) by
the person who has been the registered holder of the shares for atleast six months
during rhe eighteen months immediately preceding the petition.
iv) By the ~ e ~ i s t & After
r: obtaining the previous sanction' of the Central ,
9 '
Government, t l ~ Registrar
e can file the petition for winding up of the company
on the following grounds:
a) if default is made in holding the statutory meeting o r filing the statutory ,

report; . ,

b) if the company fails to commence business within one year of its

incorporation or suspends the business for a whole year;
c) if the number of members falls below the statutory limit;
d) if the company is unable to pay its debts;
e) if the court considers it just and equitable.
The registrar can present the petition on the ground that thecompany is unable
to pay its debts, only if it appears to him from the balance sheet of the Company
or from a special auditors' or inspectors' report that the company is unable to
pay its debts.
\

v) By any person authorised by the Central Government: If the business of the

company is being csnductcd to defraud its creditors, o r members or any other
person, as disclosed by the report of inspectors appointed to investigate the
affairs of the company, the Central Government may authorise any person to
file apetition for winding up of the company. Usually, the registrar is authorised
to present the petition.

. 4

14.5.3 Commencement of Winding Up

When a winding up order is issued by the court against a company, the winding up
does not commence from the date of the order but it commences from an earlier date.
According to Section 441 of the Companies Act, the winding up of a company by
court shall be deemed to commence at the time when the petition for winding up is
presented. But where before the presentation of a petition for winding up, if acompany
has passed a special resolution for winding up, then the winding up shall be deemed
to. have commenced at the time of passing of the resolution.
If a winding up order has been made.on more than one petition, the winding up shall
commence from the date of the presentation of, the earliest petition.
Sometimes, legal proceedings might be pending against the company. Before passing
the winding up order, the court may, on an application made by the company or any
creditor or any contributory, issue orders staying further proceedings on such terms
as it thinks fit. In case a suit or proceeding is pending in the Supreme Court or in any
High Court, the application for stay is to be made in the concerned court in which '
.
'
the suit or proceeding is pending.
LPuwerof Court on hearing petition: According to Section 443 of the Companies Act,
on hearing up a winding up petition,-tbe,CouG m_ay:
 a) dismiss it, with or w~tholitcosts; or
b) adjourn the hearing conditionally or unconditionally; or
c) make any interim order that it thinks fit; or
d) make an ordrr for winding-up the company with or without costs, or any other
h t h i it tllijrks [it.

L4,5,4 Consequences of the Winding Up Order

i) kftcr th:: i:i.~irt!las made the winding ap order, it must immediately sent
infon.natit:!n>: ; the official liquid;;;oi and the Registrar.
ii) me pc.titic:n:;r ;!,?d ths: corn[)anyis rrquired to file with the Regi5i1;lr 3 certified
c u i , ~0.; the &er within thirty days (:I$ the making of the order. The R.eziserar
'

~,+lill
then notify in the Official Gazeticc that such an. order has hecn r:-::r.-l::.
,

iii) n e , wihdingmq,o:del.shali be cfct:gae:j to ?c a ns::ic:: of di:;chesge 1:; ?1:.;. ~'ffi,;;,::?:;

and employees of the company, cjiccpt wiien iiac b ~ s l i l t 7of~ ihe ~ ciiii.ij;>r;;j i!;
contintled
iv) NQ.s.,i.t or cxher legal proceeding ;igainst the company could be commenced oa
l~r:::i;c&d \vilh after the inaking qf a wir~dingup order, except with the leave
: aal'iqjectts :;ach ternls and conditions as the court may impose.
of the c ~ i i : !ai;d
v) The windjrlg rjrdes uperates in favour of all the creditors and all the
contributors, as if it iiad been made on a joint petition of creditors and
contriburuf es.
vi) The powers,of the Board ilfEjrectnrs l;.:ili tenninabe and the same will mow vest
in the official liquidator. Thc offii:i:~I liq~uidatol.,sl-rali by virtue of his office,
hccomc the liquidator o f the company.
vii) Ail dei?ts, inclalding thiisr. payable ;?t sonlc fmtus.e dsnc:, become payable
ii;.li.frc:diatcly.
viiij 'lxe @oilitissuiilg up the i~i,~dh:.il$ 0rci~:rshr!ll h:iv% [lie ri;g:ii. Bir uI:;::,;li. 0f"r:y
new or pending suit against thrr i:cPiilpaay. Any suit,or ~>roc.k.e$4c~!yir..;< p:::i:-?.in~
I:,

in another court sllall ::lso bc l.ranxfcrred t!j the co:rrt ',.ijlli~l?

:ins is;::ed th:: 'i,:!ilj~lir:i;
up orders.
ix) All the property of the company shd.1 be under the i:!!.$:cj~j)i ; t ~ d~ ~ ? i P r ; tc.$ \ ?hr!
liqzidator.

14.5.5 Conduct' of Winding Up

The winding up proceedings are conducted by the official liquidator and his powers
are subject to the control of the Court. He' may also apply t6 the cow? f3n.b ! j b ~ ~ i i i , , ! l ~ AT

:in any particular matter in wia~dingup.

8. '

The company is required to ?,nbmitwithin 21. days of f.k.rc:or.i'!r;rol\;j?,irrt4ingup :)i. within

such time not exceeding 3 months as cxrendecl by the cov.rt, s Siabemci~% of Aff:~:nin.s Y

containing particulars regarding the asscts of thc co~srpany,its debts 2nd. liabilities,
particulars of. creditors along with details of sccusity, if any. a:td particulars df 'dcbis
due to the company. This statement is required to be verified byvan affidavit of one
or more directors of the company and also by the Manager, Secretmy or Chief Officer
of the company. . .

The official liqui,dator shall submit aeprellmlnary report to the court based on the
Statement of Affairs.
. -
Once assets of the company are realised and contrihvtionx from thc contributorics
have becn rcceived ihc liabilikiesof tPae conpan:] are to be discharf:ed. .4ccoicling to
the provisionsof the Act, ove:tddingpreferential payments itre. to be made first, tha'n
the preferential payments a~lrdthen the other credirors. Any surplus after discharging
all debts and liabilities will be distributed amongst the contributories pro rata.
A 'contributory' means every person liable to contribute to thc assets of the company
in the event of it being wound up and inclu~iesh(j1de.r~of fully paid ..iiares, though
the liability of a contributory extends only i~ptothe arnourlt r e m t i i ~ ~uupaid
i ~ ~ g on the
L
shares held by him.
The liquidator is required to present an acc.:ount of his receipts z11d payments t,.~thp
court twice a year and also file with the Court a duly audited st::tement with respect
40 to the procsedings and position of the liquidation e v e y year.
When the affairs of the company have been completely wound up or when the court'
is of the opinion that the liquidator cannot proceed with the winding up for want of
*fundsand assets i;~*for
any ottier reason, the court shall make an order of dissolution
of the c: &npanv.
'l'he dissolsli'ion puts an end to the exislence of the company, and the Registrar strikes
off the name of the company from the Registrar of Companies. 'The co~npanystands
dissolved from the date on which the order is made by the court.

Check Your Progress A

1) What do you ,nean by 'windirig up' of a company'?

.........................................................................................................
..........................................................................................................

2) What is meant bydissolution of a company?

3) .List the different mbdes of winding up a public company.

................................................. .......................................................
\

4) List the four grounds when a company could be wound up on the ground of 'just
and equitable'.

.........................................................................................................
5) When does compulsory winding up commence? . .

6j What is the effect of the winding up order o the officers and employees of the
company?
 _1,. I..... ... ...............................................................................................

, ,
. .

8 ) State whether the following statements are True or False:

i) A company may be wound up if the members pass an ordinary resolution
to this effect.
ii) If a company makes a default in holding the statutory meeting the court
must order for its winding up.
iii) The court may order for the winding up of a company if it is unable to pay
its debts.
iv) If a company does not commence business within one year from its
incorporation, the court must order its winding up.
v) The court may order for winding up of a company if the number of its
members falls below the statutory limit.
vi) The employees of the company can also file a petition to the court for
winding up of the company.
vii) A company is deemed to be unable to pay its dcbts if it fails to pay a creditor
to whom it owes a sum exceeding Rs. 500 within three weeks'of the demand
for payment.
viii) A secured creditor cannot file a petition for winding up of the company.
ix) Winding up commences froin the date of the winding up order.
x) When a winding up order has been made, no suit o r legal proceeding can
be commenced against the company'without thc leave of the court.

14.6 VOLUNTARY WINDING UP

You have learnt about the winding u i of a company by an order of the court. The
company can also be wound up without the intervention of the court, and this is termed
as 'voluntary winding up'. The voluntary winding up means winding up, without the
intervention of the court, by members o r creditors themselves. In voluntary winding
up, the members and creditors are left free to settle their affairs without going to the
court, although they may apply to the court for directions o r orders, if and when
necessary.
Section 484 of the Companies Act specifies the circumstances in which the company
may be wound up voluntatily.
These are:
1) By passing an ordinary resolution in the following cases:
a) where the period, if any, fixed for the duration of the company by the articles
has expired; or
b) where the articles provide that the company is to be dissolved on the occurrence
of any event and if that event has occurred,
2) By passing a special resolution that the company be wound up voluntarily. When
a special resolution is passed by the members to wind up the company, it is not
necessary to give any reasons for doing so. When a company passes a special
resolution for voluntary winding up, it must within 14 days of the passing of the
resoluti'on give notice of the resolution by advertisement in the Official Gazette,
and also in some newspaper circulating in the district where the registered office
of the company 'is situated.
You should note that a voluntary winding up is deemed t o commence at the time
when the resolution for voluntary winding up is pa.ssed (Section 486).
Voluntary winding up of the company is of two types, namely:
a) Members' voluntary winding up, and
b) Creditors' voluntary winding up.
, k t us now discuss them one by one in detail.

14.6.1 ~ e m b e r sVoluntary
' Winding Up
The members' voluntary winding up is possible only in case when the company is
 solvent and is in a position to pay all its debts in full: ~ e m b e r svoluntary
' winding up
is possible in cases where a declaration of solvency is made by the company and is
delivered to the Registrar for registration.
Declar&*ionof Solvency: Where it is proposed to wind up a company voluntarily, the
Declaratia, ! dt solvency is to be made by all the directors (if there are only two directors)
or by the majority of the directors (if there are more than two directors). The .
declaration must be made at the meeting of the Board and must be verified by an
affidavit.
The declaration must state that the directors have made a full inquiry into the affairs
of the company and that they have formed the opinion that the company has no debts,
or that it will be able to pay its debts in full within such period not exceeding three
years from the commencement of winding it.
The declaration shall be effective only if it is made within five weaks immediately
before the date of the passing of the resolution for winding up the company and is
delivered to the Registrar for registration before that date. The declaration must be
accompanied by a copy of the report of the auditorsof the company on the.profit and
loss account and the balance sheet of the company and also a statement of the assets
and liabilities as at the latest practicable date immediately before the making of the
declaration.

Cnnduct of Winding Up

The company in a general meeting, shall appoint one or more liquidators and fix his
remuneration and liquidator so appointed will take charge only after his remuneration
is fixed. The company is required to give notice to the Registrar of the appointment
of the liquidator within 10 days of such appointment. ,
The powers of the Board of Directors shall cease on the appointment of a liquidator
except when the company or the liquidator sanctions their continuance.
If the company is unable to pay or in the opinion of the liquidator will not be able to
pay its debts in full within the period stated in the declaration of solvency, the liquidator ,

should immediately call a meeting of the creditors and place before them a s'tatement
of the assets and liabilities of the company. In such casel, the winding up will proceed
in the manner of'creditors' winding up.
If the liquidation continues for more than one year, the liquidator should'c~ll a meeting ' ,
of the shareholders at the end of each year and place before them an account of his
acts and dealings and the progress of winding up during the year. Where the companf
in liquidation proposes to sell its business or property ti> another company, the
liquidator may receive shares o r other interest in the other company (transferee) as
consideration for distribution among the members of the company (transferor
company) but he can do so only on the authority of a special resolution of the.company.
If any member of the transferor company does not agree to the special resolution, he
may require the liquidator either to abstain from carrying the resolution o r to purchase
his interest at an agreed price.

Final Meeting and Dissolution

When the affairs of the company are fully waund up i.e. when all the assets have been
disposed off and re.alised and'all debts and liabilities have been discharged, the
liquidator shall call a general meeting of the company and lay before it the accounts
of winding up to show how the winding up has been conducted and the property of
the comp.my dealt with. This is the final meeting of the company. l a

A copy of these accounts is to be sent to the official liquidator and the Registrar within i
one week after the meeting. The official liquidator would then scrutinike the books
- and papers of the company and shall report to the court. If the report or the official
liquidator shows that the affairs of the company were conducted properly, then the
company shall be deemed to be dissolved from the date of submission of report t o the
court. I .

If the report reveals that the winding up affairs wkre conducted in a manner prejudicial
to the members' interest or public interest, the court shall direct the official liquidator 43
 to make further investigations, after which. the court Inay either dissolve the cornpany
or make any other order, as it deems fit.

14.6.2 Creditors' Valuntdry Wlndinag Up

..
This type of winding up takes piar:c when ii-;:: cdi.lip;iny is llOt i l l 2 p0SItloi.i to pay its
debts in full and wllere 3 declaration of soivi:ricy has not bt::.tn rniidc. 111 this type of
winding up, since the interest & ;t.:r.: c ci:ii;l~;:.:.; i.: inv;::lvt'd, ihcy 31.t:eivcn the powers
to corltrol and supervise the winding l a p OK t!-se'c!?rnpar~j'.
Thevarious statutory provisiorls gover~lislgsirclr :r winding clp 1z:~:yt)r discns:,cd under
thc following heads:

The company nlusi call a rnceting of the creditors to lie held either on the same day
on which the mectilrg of thc coinilpaily is to be held or on rhc day foli~i\~ii~g the day
when the me~llhc~s is i~,:ld lo ;,ass 3 ri.:;oiution for wluiltrrry rviatdirug up. TI);?
:T~cc~~.P!-;
Board of Direcco;..;shall lay Gr.f[rictht. rredi tors :l full slarerr;ci:u-rlc j f tile p;ositifin of the
&air:; of tlie c"n;pmy tugetj~tlwith a list uf tlrc ca,c;aSIEturs < ~ .tkl<;f C : O I T ~ ~ U I ~and
; ! the
estimated clniuunt daf their claims.

Appointment of LZ+nicizrkliu'
The creditors ;tiid thc rmec~bers,at their I I C S ~ C C ~ ~ Vii~ectdngs,
C: may nominhte a person
to be thc Ik~uiii:itor,W!.nr;.cthe ~r,i:ilabc:.> ii;a'$cri<>iiii;i.ili~~atcd
ar~yperson,the nominee
of the creditors, s h d be the licluidatua..Where dij'fei.e~~t persons have been nominated
by the creditors and neernbcrs, thc: creditors' aloriiinee sllall be the liquidator.

/.
9. ,..
The creditors a t tht: nieeting may appoint a comrnittec of inspection consisting of not
more than five persons to which the company may also appoint five rnemt~ers.In case
of any difference of opinion as to the norninecs t o the Comznittee of Inspection, the
court shall settle the matter.
I
The remuneration of the liquidator shall be fixed' by the COT or the Creditors, failing
which, it shall be determined by the court.
The Boards' powers shall cease on the appointment of the liquidator. However, the
COI, or if there is no such committee, the creditors in general meeting may sanction
the continuance of the Board's.powers.
I
7
The liquidation would proceed in the same manner as in the case of members voluntary
I winding up. In addition to the final meeting of the members, a meeting of the creditors
shall also be called'before the company is dissolved.
I

General Provisions with respect to Member's VoluntPry Winding up and Creditors'

I
Voluntary Winding up

Statement of Affairs

The ~ o a r of
d Directors is required to submit a statement as to the affairs of the
company, to the liquidator which should state the following pc~rticularsand is to be
verified by one or more directors and manager, or secretary or other Chief Officer of
'the company:
j) assets of the company-cash a11dbank biilanczs and negotiable securities to be
stated separately,
ii) debts and liabilities of the company,
iii) names andaddresses of creditors indicating the amount of secured and unsecufed
debts.
iv) debts due to the company, persons from whoin they are due and the amount
likely to be realised.
(v) Such other infomation as may be required.
 Liquidator's Power . . Winding Up

The liquidator has the same powers as that of the official liquidator in compulsory
winding up. Whereas the official liquidator requires the sai~ctionof the court in certain
cases, the liquidator in case of members' voluntary winding up would require the
sanction of the members/company and in case of crcditors' voluntary winding up, of
the court of the committee of inspection or the creditors.
In addition, the liquidator would also have thc power of the court to settle the list of
contributories, making calls and calling general meetings of the company. You should,
however, note that the exercise of powers by the liquidator shall be subject to the
control of thc court.

Conduct of Winding Up
The Court has the power to remove a liquidator and appoint the official liquidator or
any other person as the liquidator in place of the removed liquidator. You should
note, that a body corporate is not qualified for appointment as a liquidator of a company
in a voluntary winding up.
The liquidator shall within 30 days after his appointment, publish in the Official Gazette
and deliver to the Registrar for registration a notice of his appointment in the form
prescribed.
Thc liquidator or any contributory or creditor may apply to the court to determine
any question arising in the winding up of the company.
In a voluntary winding up, the liquidator is an agent of the company and not a trustee
for shareholders or creditors. H e is the custodian of the property of the-'company.
His functions include taking into custody the property of the company, selling the
same, instituting and defending suits in the name and on behalf of the company,
keeping proper books and recording proceedings at meetings find to have them audited,
calling meetings of the cammittee af ipspection, members a ~ creditors.
d As an agent
of the company, Ltn individual shareholder o r creditor canngt sue him for delaying .
payments etc, except in oases of deliberate misconduct. In apy case, the suitable
remedy is to seek a court ~ r d e iq
r reference to hi8 conduct.
I

' 14.6.3 ons sequences of Voluntary Winding Up

You know that the voluntary winding up commences from the date of the passing qf
the resolution to that effect. This date is important because it helps in determining
the liability of past mcmbers, The consequences of voluntary winding up can be
. I
surnmarissd as following:
i) From the commencement of voluntary winding up, the company ceases to carry
t on its business, except so far as may be ~equiredfor the beneficial. winding up
thereof. It means that the corporate entity of the company shall continue until
the dissolution of the company.
ii) With the appointment of liquidator, all the powers of the Board of Directors,
managing orwhole-time director shall came to an end. But with the approval of
the general mecting, or the liquidator or the creditors or the committee of
inspection, the directors etc. may continue to exercise their powers.
iii) Voluntary winding up does not always mean a notice of discharge to its
employees, e.g., if it is done to effect amalgamation. But winding up on grounds
of insolvency will mean discharge of its employees.
iv) After the order has been made, na suit or ather legal proceeding can be
commenced or if pending at the date of the winding up order can be proceeded
with against the company except with the leave of the caurt,
v) Any transfer of shares in the company and any alteration in the status of the
members of the company made after the commencement of the winding up shall
be void unless it is done with the sanction of the liquidator.
vi) Every notice, invoice, order, business letter issued by or on behalf of the company
a or liquidator of the company bearing the name of the company shall contain a
statement that the company is being wound up.
45.
 Meetings and Wlndlnp Up
14.7 DISTINCTION BETWEEN MEMBERS' AND
CREDITORS' VOLUNTARY WINDING UP

From the following table, you can very well understand the main points of difference
between members' 'and creditors' voluntary winding up:

. MEMBERS'VOLUNTAR'I W I N DI N G U P CREDITORS' V O L U N T A R Y W I N D I N G U P
-

1) This takes place only when the company is in a I ) This takes place only in cases when the cornpan\
position to pay its debts. not In a poh~tionto pay itsdehts.

2) The directors must file a 'declaration o f solvency' 2) rhe u l ~ e ~ \drenot

lo required to file any suer.
with the registrar. declara* 0
3) Only the general meeting of members iscalled. 3) A meet^. I> :)editors must he ciillcd imrned~atel
after t;- t q o f the members.
4) The liquidator is appointed by themembers. 4) If the urr d1.u and the company nominate
d~fferentpenonsas liquidator. the person
nom~nateglby Lreditors~llaIIhe the Ilquidator,
5) There is nocommittee of inspection. 5) A mrnni~tptc of inspection is usually appointed
to ass~st!ht I~quidator.
6) The liquidator can exercisepowers with the 6) I hc l i ~ l ~ ~ l d acan
t o rexercise powcrs wit11 thc
sanction of spkcial resolution of the company. sanction qf tl~ecourt,o r committee of inspeetio~~
orof a mtetingof creditors.
7) Winding up proceedings are controlled by .7) Wind1r.g up proceedings are controlled by
members. creditors.
8) Meeting of members is called on the completion 8) Meeting of members andcreditors is called on the
of winding up proceedings. completion of winding up proceedings.

14.8 WINDING UP UNDER SIJPERVISION OF THE

COURT
You have learnt that a company can be wound up without the intervention of the
court, but voluntary winding up, may be under the supervision of the court. At any
time after the company has passed a resolution for voluntary winding up, the court.
may make an order that the voluntary winding up shall continue but subject to the
supervision of the court. When the voluntary winding up is in progress and if any
creditor or contributory or the liquidator is not satisfied, they may apply to the court
for winding up under the supervision of the court. ~ u c h ' a norder is passed by the
Court on any of the following grounds:
a) the liquidator is partial or negligent in collecting the assets; or
b) the majority is playing fraud with the minority; or
c) the rules regarding winding up of a company have not been fully complied with.
In such cases, the court may make an order that the winding upof the colnpaliy shall .
continue subject to the supervision of the court and on such terms and conditions as
it thinks fit. The most important effect of the supervision order is that is gives the
court the necessary jurisdiction over suits and legal proceedings as in the case of
compulsory winding up under order of the court.
Generally, the liquidator appointed in voluntary winding up is allowed to continue,
but the court may appoint one or more additional liquidators. The court may remove
any liquidator sa appointed and fill any vacancy occasioned by the removal or by
death, or resignation. The court may also appoint or remove a liquidator on an
application made the Registrar in this behalf, The liquidator so appointed shall have
the same powers and duties as in the case of appointment of liquidators in a voluntary
winding up.
a The court will have all the powers as it has in the case of compulsory winding up such
as, stayingof suits and other legal proceedings, making calls etc. :though the'winding
LIPremains a voluntary winding up.
Section 527 of the Companies Act empowers the court topass an order for compulsory
46
-
 willding u17 in c a w o I ' ~ ~ c csuperseding
d. the order of winding up under its supervision.
1" case ol' winding up undcr the supervision of the court, when the affairs of the
con.lpany have heen cornpletcly wound up and the liquidator has submitted his report
to the court recommending dissolution, the court shall pass an order dissolving the
company. The company is treated as having been dissolved from the date of the order
of the court.

' Check'Your Progress B

1) What is meant by voluntary winding up?

.........................................................................................................
2) List the two circumstances when a company may be wound up voluntarily.

.........................................................................................................
3) What is meant by 'declaration of solvency'?

.........................................................................................................
3) When does the voluntary winding u p commences?

.........................................................................................................
5 ) What is meant by Creditors'voluntary winding up?

5 ) Give two irhportant points of distinction between members' and credit ~ r s '
voluntary winding up.

.........................................................................................................
.....................................................................................................
7) What is windLlg u p under t h e supervision of the court?
 . . ....,

hleclinp\ md Winding 1 p '8) State whether the following statements are True or False:
i) . A company may be wound up voluntarily by passing a resolution at-the
meeting of Board of Directors.
ii) A company may, at any time resolve by passing a special resolution to be
wound up voluntarily.
iii) If the articles have fixed the duration of the company, the company shall
stand dissolved automatically on the expiry of the said period.
i v) A copy of the resolution passed for voluntary winding up at the creditorTk
meeting, must be filed with the Registrar within fourteen days of the passing
thereof.
v) Voluntary winding up commences from the date of the passing of the
resolution to thatkffect.
vi) . The remuneratio~lfixed for the liquidators in voluntary winding up cannot
be increased in any circumstances.
vii) The creditors may, if they think fit, appoint a committee of inspection
consisting of not more than five members.
viii) Winding up of a company under supervision of the court presupposes a
voluntary winding up of the company.

14.9 LET US SUM UP

A company being a creation of law, can come to an eqd ,by the process of law. This
process is known as winding up. A company may be wound up inonc of the following
ways: .
i) Winding up by court;
ii) Voluntary winding up; and
iii) Voluntary winding up under the supervision of thc court.
The voluntary winding up may be cither (a) members' voluntaty winding up or
(b) creditors' voluntary winding up.
A company may be wound upcompulsorily by court (i) if a special resolution to this
effect is passed; (ii) if default is made in holding-the statutory meeting or filing the
statutory report; (iii) failure to commence businesswithin 9ne year of its incorporation;
(iv) the number of members falling below the statutory minimum limit; (v) if the
company is unable to pay its debts; (vi). any.other ground which is just and equitable.
A petition for winding up can be presented (a) by the company; or (b) by creditors;
or (c) by contributories; or (d) by the Registrar; or (e) by any person authorised by
the Central Government.
4

In voluntary winding up, the company and.its creditors are left free to settle their
. affairs without going to the court, although they may apply to the court for directions
or orders if and.when necessary.
A company may be wound u? voluntarily (a) by passing an ordinary resolution;
(b) by passing a special resolution. '. o
In the case of members' voluntary winding up, the majority of the directors make a
declaration of solvency duly verified by an affidavit, that the company has no debts
or that it will be able to pay itsdebts in-fullwithin three years from the commericemelit
of winding up.
' .
In the case of Creditors' voluntary winding up, there is no need of declaration of
solvency and the resolution for winding up is moved by creditors. It is generally done
when the company is unable to pay its debts.

When voluntary winding up is in progress and if any creditor or contributory or

liquidator is not satisfied with:he winding up proceedihgs, he may apply to the court
48 requesting for winding up under the supervision of the coprt.
 Wlndln~Up

14.10 KEY WORDS

Winding up: A process by which the life of the company comes to an end.
~isso1utiofi"iie conlpany ceases to exist.
Just and Equitable: Any ground, which in the opinion of the court, is reasonable and
in the interest of the concerned parties.
Statement of Affairs: A statement containing particu!ars regarding the assets of the
company, its creditors, debtors etc.
Liquidator: A person who helps the court to complete the liquidation proceedings.
Committee of Inspection: A committee appointed to act.with the liquidator.
Declaration of solvency: A declaration made by majority of directors at a meeting of
the board, declaring that the company has no debts or that it will be able to pay them
in full within three years from the commencement of winding up.

14.11 .ANSWERS TO CHECK YOUR PROGRESS

A 8 i) False ii) False iii) True

iv) False v) True vi) False
vii) True viii) False ix) False
X) True
B 8 i) False ii) True iii) False
iv) False v) True vi) True
vii) True viii) True

14.12 TERMINAL QUESTIONS

1) What do you understand by winding u p of a company?

How is it different from dissolution of a company?
2) What is compulsory winding up? Under what circumstances can a company be
compulsorily wound up by the court?
3) Who may present a petition for winding up? a

4) What are the consequences of a winding up order by court?

5) What is meant by 'declaration of solvency'?
6) When and how can a company be voluntarily wound up? State briefly the
consequences of such winding up.
7) Explain the circumstances when the court will consider winding upof the company
to be just and equitable.
8) Explain briefly the provisions of the Companies Act as applicable to Creditors'
Voluntary winding up.
9) What are the consequences of a whdingeup order?
10) Distinguish between members' voluntary winding up and creditors' voluntary
winding up.
11) Write a note on committee of inspection.

Note: These questions will help you to understand the unit better. Try to write
: answers for them. But d o not submit your answers t o the University. These

are for your practice only.

SOME USEFUL BOOKS
Bagarial, Ashok K: 1990. Company Law. Vikas Publishing House Pvt. Ltd.,
New Delhi (Chapters 1-4)
Chawla, R.C. and K.G. Garg, 1990. Mercantile Law. Kalyani Publishers,
New Delhi (Chapters 12, 17 of Section on Company Law)
Kapoor, N.D.1990. Elements of Company Law. Sultan Chand and Sons,
New DeIhi (Chdpters 17, 18, 24) ,
Kuchhal, M.C.1990. Modern Indian Company Law. Shree Mahavir Book Depot.
Delhi (Chapters 14, 15, 21)
NOTES