Compilation for Company Law using Generative AI

By- Parth Gupta- FPM Scholar(Public Policy & Economics Track), MDI

LinkedIn ID- www.linkedin.com/in/guptaparth0612

• This reading is not comprehensive and may not cover all relevant
aspects.
• This document may contain errors or inaccuracies.

Definition and Features of a Company

A company is a legal entity formed by a group of individuals to undertake a specific business

activity. It is an artificial legal person recognized by law, created through a process of
incorporation. Though a company is not a citizen, it enjoys a distinct legal status, enabling it to
engage in contracts, sue, and be sued in its name.

Key features of a company include:

1. Incorporated Association: A company comes into existence through registration

under relevant company laws, marking it as an association of persons recognized by
law.
2. Artificial Legal Person: A company is a creation of law, having rights and
responsibilities like a natural person, although it operates through its human agents
(e.g., directors).
3. Separate Legal Entity: Once incorporated, a company enjoys an identity distinct from
its shareholders and directors. It can own assets, incur liabilities, and enter into contracts
in its own name.
4. Perpetual Existence: A company continues to exist regardless of changes in
membership or management. It is unaffected by the death or exit of shareholders or
directors, making its existence perpetual.
5. Common Seal: Traditionally, companies used a common seal as a signature for
corporate acts. Today, the use of a common seal is optional in many jurisdictions, but
it symbolizes the company’s assent to contracts.
 6. Limited Liability: The liability of the company’s members is limited to the extent of
their shareholding or the amount they have guaranteed to contribute in case of winding
up.
7. Transferable Shares: The shares of a company are freely transferable unless
restrictions are imposed by the company's articles. This allows liquidity for
shareholders.
8. Separate Property: The property owned by the company is its own and not of its
members. Shareholders do not have any direct ownership over the company’s property.
9. Delegated Management: The management of the company is typically delegated to a
board of directors who act as agents and managers on behalf of the company’s
shareholders.

Corporate Veil and Lifting of the Corporate Veil

The concept of the corporate veil refers to the legal distinction between the company and its
shareholders, protecting them from personal liability for the company’s actions. The corporate
veil safeguards shareholders from the debts and obligations incurred by the company, confining
liability to the company itself.

However, in certain circumstances, courts or regulatory authorities may lift the corporate veil,
disregarding the company’s separate legal entity to hold its members or directors personally
accountable. Lifting the corporate veil exposes those behind the company’s facade and is
usually applied to prevent fraud or abuse of the corporate form.

Example:

In the case of Gilford Motor Co Ltd v Horne, the court lifted the corporate veil to prevent a
former director from using a newly formed company to circumvent his restrictive covenant,
finding that the company was merely a façade.

Grounds for Lifting the Corporate Veil

1. Fraud or Improper Conduct: When the company is used as an instrument for fraud
or to evade legal obligations, courts may hold the individuals behind it personally liable.
2. Protection of Revenue: The veil may be lifted if the company is used to evade tax or
other financial obligations.
 3. Enemy Character: During wartime, if a company is controlled by nationals of an
enemy country, the corporate veil may be lifted to treat the company as an enemy entity.
4. Sham or Façade: If a company is merely a sham used to conceal the true facts, courts
may disregard its separate entity to prevent injustice.
5. Avoidance of Legal Obligations: When a company is formed to evade legal
obligations, such as restrictions imposed by law or contracts, the veil may be lifted.
6. Single Economic Entity: Courts may disregard the separate legal entity in the case of
group companies operating as a single economic unit, treating them as one for legal
purposes.
7. Company Acting as an Agent or Trust: If a company is acting as an agent or trustee
for its members or another company, the veil may be lifted to hold those in control
liable.
8. Avoidance of Welfare Legislation: When a company is used to circumvent labor laws
or welfare legislation, the veil may be lifted to enforce such laws.
9. Public Interest: In cases where it is in the interest of the public or justice, the corporate
veil may be pierced to prevent misuse.

Statutory Grounds for Lifting the Corporate Veil

1. Reduction in the Number of Members: If the number of members of a private

company falls below two (or below seven for a public company) for a period exceeding
six months, and the company continues to trade, every person who knows of this fact
becomes jointly and severally liable for the debts incurred during that time.
2. Fraudulent Trading: Under company laws, if a company’s business is carried on with
intent to defraud creditors or for any fraudulent purpose, those involved in the
fraudulent conduct can be made personally liable.
3. Misdescription of the Company: If a company’s name is misdescribed in its dealings,
individuals who fail to properly describe the company’s name may become personally
liable for such acts.
4. Premature Trading: If a company commences business before it is entitled to do so
under the law, those responsible may be held liable for any debts incurred.
5. Failure to Refund Application Money: If the company fails to refund application
money when required, the directors may be held personally liable.
 6. Holding and Subsidiary Companies: Courts may lift the veil to treat a parent company
and its subsidiaries as a single entity if the group is used to manipulate the law or evade
responsibilities.

These statutory provisions reflect instances where the legislature deems it necessary to hold
individuals personally responsible for the actions of the company, ensuring accountability and
preventing abuse.

Classification of Companies under the Companies Act

Introduction

Under the Companies Act, 2013, companies can be broadly classified into three basic types
based on their structure:

1. Private Companies
2. Public Companies
3. One Person Company (OPC)

Classification on the Basis of Incorporation

Companies can also be classified based on how they are incorporated:

1. Chartered Company: Formed under a royal charter or special approval of a monarch

(rare and mostly historical, e.g., East India Company).
2. Statutory Company: Established by a special act of Parliament or state legislature,
with key characteristics:
o Owned by the State: The government holds ownership.
o Governance by Special Act: Operates under its own act rather than the
Companies Act.
o Immunity from Parliamentary Scrutiny: Some statutory companies are
immune from scrutiny unless provided in their governing act.
o Body Corporate: It has a separate legal existence.
o Distinct Relationship with Government: Operates semi-independently of the
government.
 o Independent Finances: Has its own finances and is distinct from government
revenue.
3. Registered Company: Formed by registration under the Companies Act. This is the
most common form of incorporation.

Classification on the Basis of Liability

Companies are classified according to the liability of their members:

1. Companies Limited by Shares: Liability of shareholders is limited to the amount

unpaid on their shares.
2. Companies Limited by Guarantee: Members guarantee a fixed sum to be contributed
in the event of winding up, usually found in not-for-profit organizations.
3. Unlimited Companies: Members have unlimited liability, meaning they are personally
liable for the company’s debts.

Classification on the Basis of Members or Size

1. Public Company:
o A company with a minimum of 7 members and no upper limit on membership.
o Shares can be freely transferred.
o Can issue shares or debentures to the public.
o Formation: As per Section 3(1) of the Companies Act, public companies must
meet certain requirements, such as issuing shares or debentures, and allowing
free transferability of shares.
2. Private Company:
o Minimum paid-up capital of ₹1 lakh as per the amendment in 2015.
o Membership is limited to 200 individuals (except in the case of One Person
Companies or OBCs).
o Restricts the transferability of shares.
o Prohibits any public invitation to subscribe for shares or debentures.
3. One Person Company (OPC):
o Defined under Section 2(62) of the Companies Act.
o Can be formed by a single person, with limited liability.
 o OPCs cannot be formed by holding companies, subsidiary companies, or
Section 8 companies (non-profit organizations), and they cannot be governed
by special acts.
4. Small Company: Defined under the Companies Act based on specific thresholds for
paid-up capital and turnover.
o Paid-up capital does not exceed ₹50 lakh or such higher amount as prescribed,
not exceeding ₹5 crore.
o Turnover of the company does not exceed ₹2 crore, with a ceiling of ₹20 crore
if prescribed.

Classification on the Basis of Control

1. Holding Company: A company that holds the majority of shares or controls the board
of directors in another company (subsidiary).
2. Subsidiary Company: Controlled by a holding company either through shareholding
or management control.
3. Associate Company: A company in which another company holds a significant
influence, but not control, typically through owning 20% or more shares.

Classification on the Basis of Ownership

1. Government Company: A company in which 51% or more of the paid-up capital is

held by the central or state government, or partly by both.
2. Foreign Company: Incorporated outside India but has a place of business in India and
conducts business there.
3. Association Not for Profit: Incorporated under Section 8 of the Companies Act for
charitable, educational, or other socially beneficial purposes. Members do not receive
profits from the company.
4. Investment Company: Primarily engaged in investment activities such as acquiring
securities for profit.
5. Dormant Company: A company that is registered but is not currently carrying out any
significant accounting transaction, typically to hold assets or intellectual property.

Public Financial Institution (Section 2(72) of the Companies Act)

Public financial institutions are those notified by the Central Government as financial
institutions, including institutions like LIC, IFCI, and IDBI, playing a significant role in
financial markets.

Incorporation and Documentation of a Company

Incorporation of a company is the process by which a company is formed and registered as a

legal entity, separate from its owners. This involves drafting key documents like the
Memorandum of Association (MoA) and Articles of Association (AoA), filing the
incorporation application with the Registrar of Companies (RoC), and complying with legal
formalities under the Companies Act, 2013.

Promoter: Definition and Functions

A promoter is an individual or group of individuals responsible for forming and setting up a

company. They are involved in the idea conception, bringing together financial resources, and
preparing the necessary legal documentation to register the company.

Functions of a Promoter:

1. Idea Generation: Conceiving the idea of a business venture and deciding the nature of
the company.
2. Feasibility Study: Conducting market research, technical, financial, and economic
feasibility studies.
3. Funding: Bringing together capital, negotiating with investors, and arranging financial
support.
4. Drafting Documents: Preparing and submitting necessary documents like the MoA,
AoA, and other agreements.
5. Appointing Professionals: Appointing legal, financial, and other professionals to
handle legal compliance and technical details of incorporation.
6. Registering the Company: Submitting required documents to the RoC for registration
of the company.
7. Initial Management Setup: Nominating directors, shareholders, and establishing the
first board of directors for managing the company post-incorporation.
Legal Position of a Promoter

A promoter holds a unique position during the incorporation of a company. Legally, they are
neither agents nor trustees, but they occupy a fiduciary position toward the company being
formed. This fiduciary duty requires promoters to act in the best interest of the company and
its stakeholders, without personal gains through unfair means.

• Not an Agent: A promoter acts for a company that is yet to be formed, and hence there
is no principal-agent relationship since the company does not legally exist during
promotion.
• Not a Trustee: Although a promoter holds responsibilities akin to those of a trustee,
especially in terms of honesty and fairness, they are not a trustee in the legal sense
because the company (beneficiary) does not exist during promotion.
• Cestui que trust: The relationship between a promoter and the company is often
compared to that of a cestui que trust (the beneficiary in a trust) and the trustee, where
the promoter must prioritize the company’s interests.

Promoter's Contract and its Ratification

A promoter's contract refers to agreements or contracts entered into by promoters on behalf

of the company before it has been legally incorporated. Since the company does not legally
exist at the time these contracts are made, the company cannot be bound by them unless certain
steps are taken post-incorporation. This raises questions about the legal liability of the
promoter and the possibility of ratification or novation of such contracts by the company after
incorporation.

Legal Position of Promoters Regarding Pre-Incorporation Contracts:

Promoters, when entering into contracts on behalf of the company prior to its incorporation,
are personally liable because:

1. No Legal Existence of the Company: The company, being non-existent before

incorporation, cannot be a party to the contract at that time. Therefore, it cannot assume
the rights or liabilities of the contract.
 2. No Ratification by the Company: A company, once incorporated, cannot
automatically ratify contracts made by the promoters before its legal existence.
Ratification is a principle of agency law, which requires a principal to exist at the time
the contract is made. Since the company did not exist, the promoter cannot be
considered an agent.

Novation of Promoter’s Contract:

Novation is a legal concept under which a pre-incorporation contract can be substituted by a

new contract after the company’s incorporation, with the consent of all parties involved. In this
process:

• The company replaces the promoter as a contracting party.

• The old contract (pre-incorporation contract) is discharged, and a new contract is
created between the company and the third party.
• This releases the promoter from personal liability once novation is completed.

Section 15(h) of the Specific Relief Act, 1963:

This section provides that specific performance of a pre-incorporation contract can be

enforced against the company if:

• The contract entered into by the promoters was warranted by the terms of
incorporation.
• The company has accepted the contract after its incorporation, whether explicitly or
impliedly.

In other words, the contract must be consistent with the objectives of the company as stated in
the Memorandum of Association (MoA), and the company must demonstrate an intention to
adopt the contract post-incorporation.

Important Considerations:

1. Promoter’s Personal Liability: Unless novation occurs, promoters remain personally

liable for any pre-incorporation contracts they enter on behalf of the company.
 2. Company’s Adoption: For the company to adopt the contract post-incorporation, it
must accept the contract's terms through an act or conduct that implies consent, such as
executing the contract or benefiting from it.
3. No Automatic Transfer of Liability: Merely incorporating the company does not
automatically transfer the liabilities of pre-incorporation contracts from the promoter
to the company.

Example Scenario:

If a promoter enters into a lease agreement for office space on behalf of a company that is yet
to be incorporated, the promoter is personally liable for that lease. After the company is
incorporated, it can accept and novate the lease, thereby substituting itself for the promoter in
the contract. Once this novation happens, the promoter is relieved of personal liability.

Duties and Responsibilities of a Promoter

A promoter plays a crucial role in the formation of a company and is bound by specific duties
and responsibilities to ensure transparency, fairness, and integrity during the process. They owe
fiduciary duties to the company and its prospective shareholders. Here is a detailed overview
of the duties, liabilities, and rights of a promoter.

Duties of a Promoter

1. Not to Make Direct or Indirect Profit at the Expense of the Company:

o The promoter must not use their position to derive any secret profit or benefit
from the company.
o Any personal gains must be fully disclosed, and the promoter must act in good
faith for the company’s interests.
2. Not to Sell Property to the Company without Full Disclosure:
o If a promoter sells personal property to the company, they must disclose any
personal interests in the transaction and the profit made. Failure to do so could
lead to personal liability for any loss incurred by the company.
3. Not to Change the Objects of the Company After Raising Funds from the Public:
 o If the company has raised funds from the public for specific purposes as
mentioned in its Memorandum of Association, the promoter must not change
these objectives. Changing the company’s objectives without proper
authorization can be considered an abuse of public trust.
4. To Appoint Directors in Case of Vacation of Office by All Directors:
o In case all directors vacate office, it is the promoter’s responsibility to appoint
new directors to ensure continuity of management.
5. To Appoint Directors in Case of Resignation by All Directors:
o If all the directors of a company resign, it becomes the promoter’s duty to take
necessary steps to appoint new directors to avoid any managerial crisis.
6. To Cooperate with the Liquidator During Winding Up:
o During the winding-up process, the promoter must cooperate with the liquidator
by providing necessary documents, information, and assistance to ensure the
company is dissolved properly and all debts are settled.

Liabilities of a Promoter

1. Liability for Misstatement in the Prospectus:

o If a promoter includes false or misleading information in the prospectus to
induce the public to subscribe to shares, they are liable for any losses incurred
by the subscribers.
2. Liability for Fraudulently Inducing to Invest:
o Under Section 36 of the Companies Act, 2013, if a promoter fraudulently
induces someone to invest in the company by misrepresenting facts, they can be
held liable for compensation and may face criminal charges.
3. Liability for Contravention of Private Placement Norms:
o If a promoter fails to comply with private placement norms, such as offering
securities without proper approval, they can be held liable for penalties and legal
action by regulatory authorities.
4. Liability During Rehabilitation and Revival of Companies:
o During the rehabilitation or revival of a company, promoters are expected to act
responsibly. If they are found to have mismanaged or neglected the company's
affairs, they may be held liable for the company’s failure.
 5. Liability for Misrepresentation of Facts:
o If a promoter misrepresents or conceals important facts during the formation or
promotion of the company, they are liable for damages to the company or to
third parties who have relied on these facts.
6. Liability for Breach of Duty:
o Any breach of the fiduciary duty of care, loyalty, and good faith toward the
company will hold the promoter personally liable for losses sustained by the
company or its shareholders.

Rights of a Promoter

1. Right to Receive Preliminary Expenses:

o A promoter is entitled to be reimbursed for the preliminary expenses incurred
during the formation of the company. This includes legal fees, registration
charges, and other setup costs.
2. Right to Recover Proportionate Amount from Co-Promoters:
o In the case of multiple promoters, each promoter has the right to recover a
proportionate share of the expenses and liabilities incurred during the promotion
from co-promoters.

Conclusion

A promoter holds a fiduciary position and is bound by law to act in the best interest of the
company and its shareholders. While they play a critical role in establishing the company, their
actions are subject to scrutiny, and any breach of duty can result in significant legal and
financial consequences. At the same time, promoters are also entitled to certain rights, such as
reimbursement for expenses incurred in the promotion process.

Detailed Procedure to Form a Company in India

The formation of a company in India is governed by the Companies Act, 2013. It involves a
series of legal steps to ensure the company is properly registered and complies with the
requirements set out by the Ministry of Corporate Affairs (MCA). The process involves several
key stages, from obtaining a name approval to the final incorporation of the company.

Here’s a detailed step-by-step guide on the procedure to form a company in India:

1. Choose the Type of Company

The first step is to decide the type of company to be formed. The most common types of
companies under the Companies Act, 2013, are:

• Private Limited Company (PLC)

• Public Limited Company
• One Person Company (OPC)
• Limited Liability Partnership (LLP)
• Section 8 Company (Non-profit organization)

Once the type of company is selected, the rest of the process can be tailored accordingly.

2. Obtain Digital Signature Certificate (DSC)

Since the registration process is online, a Digital Signature Certificate (DSC) is required for
at least one of the proposed directors and shareholders. DSC is necessary for filing various
electronic forms on the MCA portal.

• A DSC can be obtained from certified authorities (such as eMudhra, Sify, or NIC).
• Documents required: PAN card, Aadhar card, passport-sized photograph, and proof of
residence.

3. Obtain Director Identification Number (DIN)

The next step is to obtain the Director Identification Number (DIN) for the proposed
directors of the company. The DIN is a unique identification number that allows an individual
to act as a director for any company.

• DIN can be obtained by filing SPICe+ (INC-32) form or DIR-3 form if applying
separately.
• Required documents: PAN card, Aadhar card, and proof of identity and address.

4. Name Approval through RUN (Reserve Unique Name)

Before incorporation, the proposed name of the company must be approved by the Registrar of
Companies (RoC). The RUN (Reserve Unique Name) service is used for this purpose.

• The applicant can propose two names in order of preference.

• The proposed name should not be identical or similar to any existing company or
trademark.
• The name must reflect the nature of the business and comply with naming guidelines
provided by the MCA.

Once the name is approved, it will be reserved for 20 days (for a new company) within which
the incorporation process must be completed.

5. Drafting Memorandum and Articles of Association

The next step is to prepare the Memorandum of Association (MoA) and Articles of
Association (AoA), which are the constitution and internal rules of the company.

• Memorandum of Association (MoA): It defines the objectives, powers, and scope of

activities that the company will undertake.
• Articles of Association (AoA): It contains rules and regulations for the management
and operation of the company.
These documents are critical, as they define the framework within which the company will
operate.

6. Filing the SPICe+ Form for Incorporation

The incorporation process in India is now facilitated through a consolidated form

called SPICe+ (Simplified Proforma for Incorporating Company Electronically). SPICe+
is a single integrated form that covers multiple services.

SPICe+ has two parts:

• Part A: Name reservation for the new company.

• Part B: Incorporation of the company along with applications for PAN, TAN, GST
registration, EPFO, and ESIC.

To file SPICe+, the following documents are required:

• Memorandum of Association (MoA)

• Articles of Association (AoA)
• Proof of registered office address (utility bill, rent agreement, or ownership document)
• Proof of identity and address of directors and shareholders
• Declaration by the directors and shareholders (in Form INC-9 and DIR-2)

Once the form is submitted online, the system will generate the PAN and TAN of the company
automatically.

7. Payment of Registration Fees

The next step is to pay the required registration fees for company incorporation. The fees vary
based on the authorized capital of the company. The MCA portal calculates the fees
automatically during the filing of the SPICe+ form.
8. Certificate of Incorporation (CoI)

Once the SPICe+ form and accompanying documents are filed and verified, the Registrar of
Companies (RoC) will issue the Certificate of Incorporation (CoI) if everything is in order.
The CoI includes:

• The name of the company

• Corporate Identification Number (CIN)
• Date of incorporation
• PAN and TAN of the company

The company is legally formed and can commence its business activities from the date of
incorporation mentioned in the CoI.

9. Opening a Bank Account

Once the Certificate of Incorporation is issued, the company can open a bank account in its
name. The bank will require the following documents:

• Certificate of Incorporation
• Memorandum and Articles of Association
• PAN and TAN of the company
• Proof of identity and address of directors
• Board resolution authorizing the opening of the bank account

10. Compliance Post-Incorporation

After incorporation, the company needs to comply with several post-incorporation

requirements, such as:

• Issue of Share Certificates: Share certificates must be issued to the shareholders

within 60 days from the date of incorporation.
 • Statutory Registers: The company must maintain statutory registers like the register
of members, directors, charges, etc.
• Commencement of Business (Form INC-20A): For companies incorporated with
share capital, a declaration for the commencement of business must be filed with the
RoC within 180 days of incorporation. The declaration is submitted in Form INC-20A.
• Compliance with GST, EPFO, and ESIC: If applicable, the company must comply
with Goods and Services Tax (GST), Employees' Provident Fund Organization (EPFO),
and Employees' State Insurance Corporation (ESIC) requirements.
• Board Meetings: The first board meeting must be held within 30 days of incorporation.

Conclusion

The incorporation of a company in India is now simplified through digital platforms, with the
SPICe+ form consolidating many services into one. However, careful compliance with each
step, from obtaining the DSC to filing the post-incorporation documents, is essential to ensure
a smooth registration process.

1. Pre-Incorporation Contracts:

• Definition: Pre-incorporation contracts are agreements made by the promoters on

behalf of the company before it comes into legal existence.
• Legal Status: These contracts are generally considered void and inoperative against the
company since the company does not exist legally at the time the contract is made.
• Promoter's Liability: The promoters who enter into pre-incorporation contracts are
personally liable unless the company, after incorporation, explicitly adopts or ratifies
the contract.
• Example: In Kelner v. Baxter, the promoters entered into a contract for the purchase of
goods before the company was formed. The court held the contract void against the
company, and the promoters were personally liable since the company could not have
entered into a contract before its incorporation.

2. Provisional Contracts:
 • Definition: Provisional contracts are agreements made by the company after
incorporation but before it has received the certificate to commence business (if
applicable).
• Legal Status: These contracts are not binding until the company has fulfilled the
statutory requirements to commence business. Once the company becomes entitled to
start its business, these contracts become binding.
• Example: A newly incorporated company with share capital cannot legally commence
business until it has filed a declaration under Section 11 of the Companies Act. Any
contracts made in this provisional period remain unbinding until this declaration is filed.

3. Ordinary Contracts:

• Definition: Ordinary contracts are agreements entered into by a company after its
incorporation and once it has the legal capacity to act.
• Legal Status: These contracts are fully binding and enforceable against the company
as it is a recognized legal entity at this stage.
• Example: A contract for the purchase of machinery entered into by an incorporated
company that has received the necessary certifications is a valid, enforceable contract.

4. Pre-Incorporation Contracts for Companies with Share Capital:

• Pre-Incorporation Contracts: Contracts made on behalf of the company before

incorporation are void and unenforceable unless adopted by the company after its
formation.
• Provisional Contracts: Contracts made after incorporation but before filing the
required declaration of business commencement are provisional. These contracts
remain ineffective until the company files the declaration and verifies its registered
office.
• Ordinary Contracts: Once the company files the prescribed declaration, contracts
entered are valid and enforceable.

5. Pre-Incorporation Contracts for Companies Without Share Capital:

• Pre-Incorporation Contracts: The legal status remains the same—void unless ratified
or adopted by the company after incorporation.
 • No Provisional Contracts: Unlike companies with share capital, there is no provisional
period for such companies. Once they are incorporated, they can commence business,
and ordinary contracts are valid thereafter.

6. Ratification of Pre-Incorporation Contracts:

• Ratification: If the company, after incorporation, avails the benefits of a pre-

incorporation contract, it may ratify the contract either explicitly or implicitly.
• Example: If a company receives goods based on a pre-incorporation contract, and then
decides to keep the goods, this could be viewed as ratification, making the contract
binding on the company. However, the company is not bound to do so.

7. Doctrine of Ultra Vires:

• Definition: Contracts made by a company beyond its powers (i.e., not in line with its
objectives as stated in the Memorandum of Association) are termed ultra vires and are
void.
• Example: If a company incorporated to manufacture furniture enters into a contract to
start a food processing unit, this would be ultra vires and void.

Case Example:

• Kelner v. Baxter: In this landmark case, a contract made by promoters before the
incorporation of the company was deemed void against the company. The promoters,
who entered into the contract, were held personally liable. This case underscores that
pre-incorporation contracts cannot bind a company that did not legally exist when the
contract was formed.

8. Discussion Point:

• Were A, B, and C (the promoters in the Kelner v. Baxter case) personally liable to pay?
Yes, they were, since the contract was made on behalf of a company that did not exist
at the time of the agreement. Without explicit ratification by the company, promoters
are personally liable.
This refined and structured breakdown provides clarity on the various types of contracts made
before and after incorporation, supported by examples and case law.

1. Doctrine of Ultra Vires:

• Definition: The doctrine of ultra vires refers to acts that are beyond the scope of powers
granted to a company under its Memorandum of Association (MoA). Any contract or
transaction that exceeds the company’s stated objectives or powers is considered ultra
vires and void.
• Example: If a company incorporated to manufacture furniture decides to start a food
processing business, such an action would be considered ultra vires.

2. Section 186 of the Companies Act, 2013:

• Purpose: Section 186 governs loans, investments, guarantees, and securities by a

company.
• Key Provisions:
1. A company cannot give loans, guarantees, or provide security exceeding 60%
of its paid-up share capital and free reserves or 100% of its free reserves unless
approved by a special resolution in a general meeting.
2. Details of such transactions must be disclosed in the financial statements.
3. Defaulting companies cannot make investments through layers of investment
companies.

3. Difference Between Ultra Vires the Company vs Intra Vires the Company but Ultra
Vires the Director:

• Ultra Vires the Company: When a company engages in an act that is beyond the
objectives stated in its MoA, the act is considered ultra vires the company. These
actions are void ab initio and cannot be ratified.
o Example: A real estate company entering into the business of automobile
manufacturing without amending its MoA.
 • Intra Vires the Company but Ultra Vires the Director: An act that falls within the
company’s objectives (intra vires) but was performed by the directors without the
required authority or proper approval is considered ultra viresthe director. In this case,
the company can ratify the act.
o Example: A director entering into a contract to purchase raw materials without
board approval can be ratified by the company if it is in line with the company's
business.

4. Effect of Ultra Vires Act:

• Void Ab Initio: Ultra vires acts are void from the beginning. No legal relationship is
created between the company and the third party involved.
• No Ratification Possible: Since the contract is beyond the company's powers, it cannot
be ratified even by unanimous consent of all shareholders.
• No Legal Relationship by Ultra Vires Borrowing: If a company borrows money for
purposes not outlined in its MoA, the loan is considered ultra vires, and the lender
cannot recover the money from the company.

5. Personal Liability of Directors:

• Directors who act beyond their authority (ultra vires) may be personally liable for the
loss caused to the company or third parties.
• Example: If a director enters into an ultra vires contract, they can be held personally
responsible for compensating the third party involved.

6. Right of the Company on Acquired Property by Ultra Vires Act:

• If a company acquires property through an ultra vires act, the company can retain the
property as long as it does not contradict the doctrine of ultra vires.
 • Example: If an ultra vires contract results in the acquisition of machinery, the company
may use or sell the machinery, but the contract itself remains void.

7. Injunction:

• Shareholders may seek an injunction to prevent the company from engaging in ultra
vires acts. The court can issue an order to stop the company from entering into an
unlawful contract or transaction.
• Example: Shareholders of a healthcare company may obtain an injunction to stop the
board from using company funds to invest in real estate.

8. Memorandum of Association (MoA):

• Nature of the Document: The MoA defines the scope of a company’s activities,
powers, and limitations. It acts as a charter document outlining the fundamental
parameters within which the company can operate.
• Content of the Document: The MoA contains the following clauses:
1. Name Clause: Specifies the legal name of the company.
§ Example: XYZ Furniture Pvt. Ltd.
2. Registered Office Clause: States the location of the company’s registered
office.
§ Example: The registered office is located in Mumbai, Maharashtra.
3. Objects Clause: Outlines the objectives for which the company is formed.
Actions outside these objectives are ultra vires.
§ Example: The object is to manufacture furniture.
4. Liability Clause: Defines the liability of members. It can either be limited by
shares or by guarantee.
§ Example: Liability of members is limited to the unpaid amount of
shares held by them.
5. Capital Clause: Specifies the company’s authorized share capital. This clause
can be altered under Section 61 of the Companies Act.
 § Example: The authorized share capital is ₹1 crore.
6. Declaration of Subscription Clause: States that subscribers have agreed to
take shares and sign the memorandum.

9. Procedure for Alteration of Memorandum (Section 13):

1. Change of Name:
o Requires a special resolution (Section 13(2)).
o Effect of Change: The company’s identity remains intact, but it must notify
stakeholders and update legal proceedings.
o Example: Pioneer Protective Glass Fibre (P) Ltd. v. Fibre Glass Pilkington
Ltd.
o Pending legal proceedings in the old name will continue under the new name.
2. Altering the Registered Office Clause:
o Within the same state: Requires a special resolution (Section 12).
o From one state to another: Requires a special resolution and approval from
the Central Government (Section 13(4)).
3. Alteration of Objects Clause:
o Requires a special resolution.
o If the company raised money from the public and has unused funds, it must
publish the details and give dissenting shareholders an opportunity to exit.
4. Alteration of Liability Clause:
o Alteration of this clause requires a special resolution under Section 13(1).
5. Alteration of Capital Clause (Section 61):
o The company can increase its authorized share capital.
o Options: Consolidate and divide, convert shares into stock, sub-divide shares,
or cancel unissued shares.
o Example: A company with authorized share capital of ₹1 crore decides to
increase it to ₹2 crores by passing a special resolution.

10. Subscription Clause:

 • Rule 13 of the Companies (Incorporation) Rules, 2014 requires the memorandum to be
signed by each subscriber.
• For illiterate subscribers: The contents of the memorandum must be read and
explained to them.
• For corporate subscribers: The memorandum must be signed by authorized
representatives.
• For foreign nationals: If residing outside India, subscribers must follow the prescribed
formalities for signing the memorandum.

Articles of Association (AoA)

1. Nature of the Document:

• The Articles of Association (AoA) is a document that outlines the internal rules and
regulations governing the management, operations, and administration of a company.
It serves as a contract between the company and its shareholders and also among the
shareholders themselves. While the Memorandum of Association (MoA) defines the
company’s structure and objectives, the AoA regulates how these objectives are to be
achieved.
• Statutory Basis: The AoA is prepared under the Companies Act, 2013, and must
comply with the Act and the company's Memorandum.
• Example: If the MoA specifies the object of a company is to engage in the
manufacturing of electronics, the AoA will detail the process for appointing directors,
holding meetings, and managing day-to-day activities related to this object.

2. Content of the Document:

The AoA typically contains the following key sections:

1. Share Capital: Specifies the company’s share capital structure, classes of shares, rights
of shareholders, and conditions for the issuance and transfer of shares.
 o Example: AoA may state that preference shareholders have priority in receiving
dividends over ordinary shareholders.
2. Shareholder Rights: Defines the rights and obligations of shareholders, including
voting rights, dividend entitlements, and participation in the company’s decisions.
o Example: A shareholder holding 10% of equity can call for an extraordinary
general meeting as per the AoA.
3. Directors’ Powers and Duties: Specifies how directors are appointed, their powers,
responsibilities, qualifications, and removal process.
o Example: The AoA might state that directors are to be elected annually and that
they need approval from shareholders to make major financial decisions.
4. Meetings: Outlines rules for general meetings and board meetings, including quorum
requirements, voting procedures, and methods of conducting meetings (physical or
virtual).
o Example: An AoA may require at least 50% of the directors to be present for a
board meeting to make binding decisions.
5. Dividends: Details the distribution of dividends and profits to shareholders.
o Example: The AoA may provide that dividends will only be declared if a certain
minimum profit level is achieved in a financial year.
6. Winding Up: Defines procedures for winding up the company in case of liquidation or
dissolution.
o Example: In the event of winding up, the AoA may specify how remaining
assets will be distributed among creditors and shareholders.

3. Alteration of the Articles:

• Procedure for Alteration: Articles of Association can be altered by passing a special

resolution (Section 14 of the Companies Act, 2013). A special resolution requires
approval by at least 75% of the shareholders present and voting at a general meeting.
• Limitations: The AoA cannot contain provisions that conflict with the Memorandum
of Association or the Companies Act.
• Steps for Alteration:
1. Board of Directors calls for a meeting and proposes changes to the AoA.
2. A special resolution is passed in a general meeting.
 3. Filing of the altered AoA with the Registrar of Companies (ROC) within 30
days of passing the resolution.
• Example: A company may alter its AoA to allow for electronic voting during board
meetings.
• Case Example: In Walker v. London Tramways, it was held that a company can amend
its articles unless the amendment amounts to fraud or is contrary to the law or
memorandum.

4. Articles & Memorandum – The Relationship:

• Memorandum of Association (MoA) is the company’s charter and outlines its

objectives, whereas the Articles of Association (AoA) regulate the internal affairs of
the company.
• Hierarchy: The MoA prevails over the AoA. If there is a conflict between the
provisions of the MoA and AoA, the MoA will take precedence.
• Nature:
o MoA: Defines the company’s purpose, and limits its activities to those
objectives.
o AoA: Provides the rules for managing and governing the company’s affairs.
• Example: If the MoA states that the company’s primary business is manufacturing toys,
the AoA may lay down how directors are elected, how shareholder meetings are
conducted, etc. However, if the AoA attempts to allow the company to start a business
unrelated to toys, it would be invalid.

5. Legal Effect of the Articles and Memorandum:

• Binding on Members: The AoA binds the company and its shareholders as if it were
a contract between them. Similarly, the MoA binds the company and the public by
defining the company’s limits and scope of action.
• Example: If the AoA specifies that directors need shareholder approval for major
financial transactions, shareholders can sue directors if they fail to seek approval.
 • Impact of Ultra Vires: Any act or contract that is ultra vires the MoA (i.e., beyond the
scope of the company's objectives) is void ab initio. However, acts or contracts that are
intra vires (within the scope) but violate the AoA may still be rectifiable by the
shareholders.
o Example: If a director enters into a contract not authorized by the AoA but
within the scope of the MoA, the shareholders can ratify the action if they wish.

Examples of Articles of Association Clauses:

1. Transfer of Shares: The AoA might state that shares cannot be transferred without the
approval of the Board of Directors.
2. Proxy Voting: The AoA may allow shareholders to vote at general meetings through
proxies.
3. Quorum for Meetings: The AoA may specify that the quorum for a board meeting is
two directors.
4. Dividend Declaration: The AoA might specify that dividends cannot exceed a certain
percentage of the company's profits.

6. Practical Example: Differences Between MoA and AoA:

• MoA: A company’s MoA states that its object is the manufacturing of textiles.
• AoA: The company’s AoA provides the procedure for transferring shares and
appointing directors.
• Alteration of MoA: If the company wants to start manufacturing electronics, it would
need to amend its MoA by passing a special resolution and obtaining approval from the
Registrar.
• Alteration of AoA: If the company wants to change the voting process for board
meetings, it would only need to alter the AoA, which requires passing a special
resolution at a general meeting.
 Aspect Memorandum of Articles of Association
Association (MoA) (AoA)
Defines the company’s Governs internal
Contents constitution, objectives, and management and operational
limits. rules.
Alteration More difficult to alter; Easier to alter; requires only
requires special resolution a special resolution.
and external approvals in
some cases.
Control on Each Other Supreme document; Subordinate to the MoA;
overrides the AoA in case of cannot override or expand
conflict. MoA limits.
Scope Defines the external limits Governs internal procedures
and objectives of the and management.
company.
Treatment of Acts Beyond Acts ultra vires the MoA are Acts ultra vires the AoA can
Scope void ab initio and cannot be be ratified by shareholders if
ratified. intra vires the MoA.

Legal Effect of the Memorandum and Articles

1. Legal Effect Between the Company and its Members

• Binding Contract: The Memorandum of Association (MoA) and Articles of
Association (AoA) create a binding contract between the company and its members.
• Rights and Obligations: Members are bound by the provisions of the MoA and AoA.
They have a right to enforce the company’s adherence to these documents.
• Example: If the AoA outlines that dividends must be paid annually, members can
enforce this.

2. Legal Effect Between Members Themselves

 • Mutual Obligations: The AoA establishes a legal relationship between the members
of the company in relation to the internal management of the company.
• Example: A provision in the AoA dictating voting rights binds all members equally in
voting matters.

3. Legal Effect Between the Company and Outsiders

• Company Not Bound to Outsiders: The MoA and AoA do not create a legal
relationship between the company and third parties (outsiders). Outsiders cannot
enforce provisions of these documents.
• Example: A supplier cannot enforce a clause in the AoA about the payment of
directors, as they are not a member of the company.

Constructive Notice of Memorandum and Articles

• Concept: The doctrine of constructive notice implies that all persons dealing with a
company are presumed to have knowledge of the contents of its MoA and AoA, as these
documents are publicly filed.
• Effect: Outsiders cannot claim ignorance of any restrictions or limitations contained in
the MoA or AoA when transacting with the company.
• Example: If a company’s MoA restricts it from borrowing money, a lender cannot
argue that they were unaware of this restriction. They are deemed to have constructive
notice.

Doctrine of Indoor Management

• Concept: While outsiders are presumed to know the company's public documents
(constructive notice), they are not required to ensure that the internal procedures of
the company have been followed. This is known as the doctrine of indoor
management.
• Effect: Outsiders can assume that internal processes required under the MoA or AoA
have been properly carried out unless they are aware of any irregularities.

Exceptions to the Doctrine of Indoor Management

1. Where the Outsider Had Knowledge of Irregularity:
o If the outsider had actual knowledge of the irregularity, they cannot rely on the
doctrine of indoor management.
o Case: Howard v. Patent Ivory Co.
§ A director had knowledge of an internal procedural flaw but proceeded
with a transaction, and the court held the transaction as invalid.

2. No Knowledge of Memorandum and Articles:

o The doctrine of indoor management cannot be invoked if the outsider is unaware
of the MoA and AoA provisions.
o Case: Rama Corporation v. Proved Tin & General Investment Co.
§ An outsider who failed to verify the company’s authority under its MoA
was denied protection under the doctrine.

3. Forgery:
o The doctrine of indoor management does not apply if the company's internal
procedures have been forged.
o Case: Kreditbank Cassel v. Schenkers Ltd
§ The company’s secretary forged documents to execute a transaction, and
the court ruled that the outsider could not rely on the doctrine since
forgery invalidated the action.

4. Negligence:
o An outsider cannot rely on the doctrine if they failed to perform due diligence
or acted negligently in verifying the authority of company officers.
o Case: Anand Behari Lal v. Dinshaw & Co. (Bankers) Ltd.
§ The court held that a third party who failed to investigate whether an
agent had authority to enter into a transaction acted negligently and was
not entitled to rely on the doctrine.

5. Doubt About the Existence of an Agency:

o If the outsider suspects or should reasonably doubt the existence or authority of
the agent, they cannot rely on the doctrine.
 o Example: A third party who deals with a purported agent without verifying
whether they are legally appointed cannot rely on the doctrine.

6. Requirement of Fulfilling a Pre-Condition:

o The doctrine does not apply if the company’s MoA or AoA require specific
conditions to be fulfilled before a transaction can occur, and the outsider is
aware of these conditions.
o Example: If the company’s AoA requires a shareholder’s approval before
entering into a loan agreement, and this condition is not met, the outsider cannot
enforce the agreement.

Board of Directors and Company Management & Administration

1. Directors and Their Appointment

• Definition: Directors are individuals appointed to manage the affairs of a company.

They act as agents, trustees, and representatives of shareholders.
• Appointment Process:
o Directors are generally appointed by the shareholders in the general meeting
or by the board in cases of casual vacancies.
o First Directors: Named in the Articles of Association or appointed by
promoters.
o Subsequent Directors: Appointed by shareholders through an ordinary
resolution at the Annual General Meeting (AGM).

2. Positions of Directors

• Executive Directors: Full-time employees of the company, involved in day-to-day

management.
• Non-Executive Directors: Not involved in daily operations but help with strategic
guidance.
 • Independent Directors: Not related to company stakeholders, providing an impartial
perspective.
• Managing Director: Has substantial powers of management and is responsible for the
company's operations.
• Chairman: Heads the board of directors' meetings and general meetings of the
company.

3. Number of Directorships

• As per Section 165 of the Companies Act, 2013, a person cannot hold office as a
director in more than 20 companies at the same time, out of which only 10 can be
public companies.

5. Vacation of Office and Removal of Directors

• A director must vacate their office if:

o Disqualified under Section 164.
o They incur disqualification during their tenure.
o They absent themselves from all board meetings over a consecutive 12-month
period.
o They resign voluntarily or are removed by shareholders via ordinary
resolution.
• Removal of Directors: Shareholders can remove a director before the expiration of
their term under Section 169, following a special procedure.

6. Managerial Remuneration

• Section 197 governs the remuneration paid to directors, including managing and
whole-time directors.
 • The total remuneration payable by a public company should not exceed 11% of the net
profits, unless the company passes a special resolution.
• The Act limits the individual remuneration to 5% for managing directors and 10%
for others if there is more than one.

7. Loans to Directors

• Section 185 restricts companies from providing loans to directors or any entities in
which directors have significant interest, except in certain prescribed cases.
• Exceptions: Loans to managing or whole-time directors as part of employment terms
or for fulfilling their duties are permitted under certain conditions.

8. Meeting of Board

• Companies must hold a minimum of four board meetings each year, with a gap of
no more than 120 daysbetween two consecutive meetings.
• The quorum for a meeting is typically one-third of the total number of directors
or two directors, whichever is higher.

9. Powers and Duties of Directors

• Powers: Directors have authority over decision-making, including investments,

borrowing, and entering into contracts.
• Duties:
o Fiduciary Duty: Act in the best interest of the company and its stakeholders.
o Duty of Care: Exercise reasonable care, skill, and diligence in managing the
company.
o Duty to Avoid Conflicts: Ensure there is no conflict of interest between
personal and company interests.
10. Contracts in Which Directors Are Interested

• Disclosure of Interest: Directors must disclose any direct or indirect interest in a

contract or arrangement made by the company.
• Approval: Such contracts must be approved by the board and noted in the company's
records.
• Section 188 of the Companies Act, 2013 regulates related party transactions involving
directors.

11. Liabilities of Directors

• Civil Liability: Directors can be held personally liable for any loss incurred due to
breach of duty or negligence.
• Criminal Liability: Directors may face penalties or imprisonment for contravention of
statutory duties, such as non-compliance with tax regulations or fraud.
• Liability in Fraud: Directors are personally liable for fraudulent acts under Section
447 of the Companies Act, 2013.

12. Validity of Acts of Directors

• Even if a director's appointment or election is found invalid later, the acts done by them
in good faith during their tenure remain valid under Section 176.

13. Disabilities of Directors

• Incapacity: Directors who are mentally incapacitated, or declared insolvent, are

disqualified from acting as directors.
• Conflict of Interest: Directors must not act in situations where their personal interests
conflict with their duties to the company.
14. Managing Director and Manager

• Managing Director: A director with significant management powers delegated by the

board, responsible for the day-to-day operations.
• Manager: Similar to a managing director, but may not necessarily be a board member.
A manager oversees the administration of the company's affairs.

Retirement of Directors by Rotation and Vacancy-Section 152 of the Companies Act,

2013:

• Retirement by Rotation:
o In a public company, at least two-thirds of the directors are to be appointed by
the shareholders in a general meeting, with the remaining one-third being the
directors appointed by the board of directors. Out of the directors appointed by
the shareholders, one-third are required to retire by rotation at each annual
general meeting (AGM).
o The directors who are to retire by rotation are those who have been in office the
longest since their last appointment. They are eligible for reappointment.
• Vacancy:
o If a vacancy arises due to the retirement of a director by rotation, the vacancy
can be filled by reappointment of the retiring director or by appointing a new
director through a resolution passed at the AGM.
o If the vacancy is not filled at the AGM, the board of directors may fill it by
appointing a director to the vacant position.

2. Disqualification of Directors (Section 164)

o Section 164 of the Companies Act, 2013:

• Disqualifications:
o Conviction: A person is disqualified from being appointed as a director if they
have been convicted of any offense involving moral turpitude and sentenced to
imprisonment for not less than six months, unless they have been granted a
pardon or the conviction has been overturned.
o Defaults in Payment: A person is disqualified if they are declared insolvent
and their insolvency has not been discharged.
 o Involvement in Fraud: A person is disqualified if they have been found guilty
of fraud, misfeasance, or breach of duty, or if they are prohibited from being a
director under any court order.
• Non-filing of Financial Statements: A person is disqualified if they are a director of a
company that has not filed financial statements or annual returns with the Registrar of
Companies for any continuous period of three financial years.

3. Appointment of Women Directors-Section 149 of the Companies Act, 2013:

• Mandatory Appointment:

o Public Companies: Every listed public company and every other public
company with a paid-up share capital of ₹100 crore or more or a turnover of
₹300 crore or more must appoint at least one woman director.
o Private Companies: The provisions are not mandatory for private companies,
unless they fall under the criteria mentioned for public companies.
• Vacancy:
o If a woman director resigns or is otherwise removed, the company must appoint
a new woman director within six months from the date of vacancy to comply
with the statutory requirement.
o In summary, the Companies Act provides a structured approach for the
retirement of directors by rotation, addresses the circumstances leading to
disqualification of directors, and mandates the appointment of women directors
in certain public companies while stipulating guidelines to handle vacancies in
such positions.

Appointment of Directors

Alternate Director (Section 161(2))

• Authorization: The Board of Directors must be authorized by the Articles of

Association or a general meeting to appoint an alternate director.
• Absence Requirement: The original director for whom the alternate is appointed must
be absent from India for a period of not less than three months.
 • No Dual Role: The alternate director cannot be the person holding an alternate
directorship for any other director in the same company.
• Criteria for Independent Directors: If the alternate director is appointed for an
independent director, they must meet the criteria specified for independent directors.
• Term Limitation: The alternate director's term cannot exceed the period permissible
for the original director.
• Reappointment: In the event of the retirement of directors, the reappointment must
apply to the original director, not the alternate.

Example: If a director, A, is going abroad for six months, the Board can appoint an alternate
director, B, to act in their place. However, B cannot already be an alternate director for someone
else in the same company.

Nominee Director (Section 161(3))

• Appointment: The Board can appoint a director nominated by any institution under a
law or agreement, or by the Central or State Government due to its shareholding in a
government company.
• Articles of Association: This appointment is subject to the company's articles.

Example: If a company has a significant shareholding from a government body, the

government might nominate a director to represent its interests.

Appointment of Directors to be Voted Individually (Section 162(1))

• Individual Voting: Each director must be elected by a separate resolution in a general

meeting.

Example: When electing new directors, each candidate must be voted on individually, rather
than as a group.

Additional Director

• Appointment: The Board may appoint additional directors if authorized by the

company's articles. These directors hold office until the next AGM.
Example: If the company’s articles allow, the Board may appoint an additional director who
will then be ratified or removed at the next AGM.

2. Independent Directors

Criteria (Section 149(6))

• Integrity and Expertise: Must be of integrity and have relevant industrial expertise.
• No Promoter Relations: Must not be a promoter or related to a promoter.
• No Material Relationship: Must not have any material or pecuniary relationship with
the company, its promoters, directors, or its subsidiaries/associates.
• Relatives: Relatives should not have had significant pecuniary relationships with the
company.

Example: An independent director should not have been a major supplier to the company or
have any substantial financial transactions with it.

Minimum Number (Section 149(1))

• Listed Companies: At least one-third of directors should be independent.

• Public Limited Companies (Rule 4):
o Paid-up capital of ₹10 crore or more
o Turnover of ₹100 crore or more
o Loans/borrowings/debentures/deposits exceeding ₹50 crore

Example: A listed company with a board of nine directors must have at least three independent
directors.

Code of Conduct (Section 149(8))

• Schedule IV: Specifies the code of conduct for independent directors, including duties
and responsibilities.

Remuneration (Section 149(9))

• Payment: Independent directors are to be paid remuneration as per the company's

policy, but not more than what is prescribed.
Term of Appointment (Section 149(10))

• Duration: Independent directors are appointed for a term of five years.

• Reappointment (Section 149(11)): After serving a term, they cannot be reappointed
for another five years without a three-year break.

Liability (Section 149(12))

• Scope: Independent directors are not liable for the company’s actions, provided they
have acted with due diligence.

Retirement by Rotation (Section 149(13))

• Non-Applicability: Independent directors are not subject to retirement by rotation.

Example: Independent directors do not have to retire annually like other directors.

3. Board Meetings

Frequency and Participation (Section 173)

• Frequency: The Board must meet at least once every quarter, with a minimum of four
meetings per year.
• Notice: At least seven days' notice must be given for board meetings.
• Participation: Directors can participate in meetings through video conferencing or
other electronic means.

Frequency for Specific Companies:

• One Person Company: Must hold meetings at least once in every six months.
• Small Company: At least one meeting per half of the financial year.
• Dormant Company: The board must meet once in two years.

Section 174

• Quorum: The quorum for a board meeting is two directors or one-third of the total
number of directors, whichever is higher.
• Failure: If there is no quorum, the meeting is adjourned.
Example: If a board meeting is scheduled with four directors, the quorum is two directors.

Section 175(1)

• Powers: The Board has the authority to delegate powers to committees or individual
directors as deemed appropriate.

Example: The board may delegate the authority to a finance committee for budget approvals.

Section 197

• Remuneration: Specifies the limits on managerial remuneration, including the overall

ceiling and specific provisions for managerial personnel.
• Approval: The remuneration must be approved by shareholders.

Example: A company must obtain shareholder approval for the remuneration of its CEO,
which should not exceed the statutory limits.

Summary

• Alternate Directors: Appointed when the original director is absent for a specified
period.
• Nominee Directors: Appointed based on legal or government nominations.
• Independent Directors: Must meet specific criteria and serve under particular terms.
• Board Meetings: Must be held with proper frequency, notice, and quorum.

These sections collectively ensure proper governance and operational efficiency within
companies, emphasizing the importance of independent oversight and the structured
appointment and functioning of directors.

1. Managerial Remuneration

Maximum Ceiling (Section 197)

• Public Companies:
o The total remuneration paid to all managerial personnel (including directors)
must not exceed 11% of the net profit of the company in that financial year.
 o If the company wishes to exceed this limit, it must obtain approval from the
shareholders at the Annual General Meeting (AGM).

Example: If a public company earns a net profit of ₹10 crore in a financial year, the maximum
managerial remuneration payable without AGM approval is ₹1.1 crore.

Remuneration in Case of No or Inadequate Profit (Schedule V)

• No Profit or Inadequate Profit:

o If a company has no profit or its profits are inadequate, it can still pay
managerial remuneration as per the limits specified in Schedule V.
o Schedule V prescribes the limits and conditions under which managerial
remuneration can be paid, which usually includes a minimum level of
remuneration and compliance with certain conditions.

Example: If a company has no profit, it can still pay a fixed remuneration to its managers as
specified in Schedule V, which provides a framework for such situations.

Remuneration Drawn in Excess of Prescribed Limit

• Recovery:
o Any remuneration paid in excess of the limits specified under Section 197 or
Schedule V must be recovered from the concerned managerial personnel.

Example: If a director receives ₹1.5 crore in a year but the limit is ₹1 crore, the excess ₹50
lakh must be recovered from the director.

Remuneration to Directors in Other Capacity

• Additional Remuneration:
o Directors can receive additional remuneration for services rendered in a
capacity other than that of a director. This must be disclosed and approved by
the Board and/or shareholders as required.

Example: A director might be paid additional fees for serving as the chairman of a committee
or for providing consultancy services.
Remuneration from Holding or Subsidiary Company

• Disclosure and Approval:

o Any remuneration received by a director from a holding or subsidiary company
must be disclosed and approved by the Board of the respective company.

Example: If a director is also on the board of a subsidiary company and receives remuneration
from both companies, the payments must be disclosed in the financial statements.

2. Removal of Directors (Section 169)

General Provision

• Removal by Shareholders:
o Shareholders can remove any director before the expiry of their term, except:
§ Directors appointed by the Tribunal under Section 242 for prevention of
oppression and mismanagement.
§ Directors appointed under the principle of proportional representation
under Section 163.

Example: If a director is not performing as expected, shareholders can pass a resolution to

remove them, except if the director was appointed by the Tribunal or based on proportional
representation.

Special Notice (Section 169(2))

• Notice Requirement:
o A special notice of 14 days must be given to the company before a resolution to
remove a director can be passed.
• Procedure:
o The company must notify all shareholders of the proposed removal, provide the
director with a reasonable opportunity to be heard, and publish the notice in
newspapers.

Example: If a shareholder wants to propose the removal of a director, they must give a 14-day
notice, and the company must inform all shareholders and give the director a chance to respond.
Appointment of Director in Place of Removed Director

• Filling the Vacancy:

o A new director can be appointed to fill the vacancy created by the removal,
either at the same meeting or subsequently.

Example: If a director is removed, the company can immediately appoint a new director to fill
the position or do so at the next AGM.

3. Recovery of Remuneration (Section 199)

• Unauthorized Remuneration:
o Remuneration paid to a director or managerial personnel beyond the limits
prescribed by law or not authorized by the Board must be recovered.

Example: If a director received remuneration without proper authorization or beyond the

statutory limits, the company must recover that amount from the director.

4. Central Government or Company to Fix Limit with Regard to Remuneration (Section

200)

• Regulatory Powers:
o The Central Government or the company (through its articles) can fix limits
regarding the remuneration of directors and managerial personnel.
o The limits set by the Central Government are typically more detailed and might
involve additional compliance requirements.

Example: The Central Government may issue regulations that set specific caps on
remuneration for certain types of companies, which the company must adhere to.

1. Meetings of the Shareholders

General Meetings

(i) Annual General Meeting (AGM) (Section 96)

 • Frequency:
o First AGM: Must be held within 9 months from the end of the first financial
year. No AGM is required in the year of incorporation.
o Subsequent AGMs: Must be held within 6 months from the end of each
financial year, ensuring the gap between two AGMs does not exceed 15 months.

Example: If a company's financial year ends on March 31, its first AGM must be held by
December 31 of the same year. Subsequent AGMs must be held by September 30 each year,
with no more than 15 months between AGMs.

• Business:
o Financial Statements: Consideration of financial statements and the Board of
Directors’ and auditors’ reports.
o Dividend: Declaration of any dividend.
o Directors: Appointment of directors to fill those retiring by rotation.
o Auditors: Appointment and fixing of the auditors' remuneration.

(ii) Extra Ordinary General Meeting (EGM) (Section 100)

• Purpose:
o EGMs are held to transact special business that cannot wait until the next AGM.
• Calling and Holding:
o By Board (Section 100(1)): The Board can call an EGM whenever required.
o By Requisition (Section 100(2)):
§ Company with Share Capital: Requisition must be signed by
shareholders holding at least one-tenth of the paid-up share capital with
voting rights.
§ Company without Share Capital: Requisition must be signed by
members holding at least one-tenth of the total voting power.
o Requisitionists (Section 100(4)): Requisitionists can call an EGM if the Board
fails to do so within 45 days of receiving the requisition.

Example: If shareholders owning 10% of the company’s paid-up capital request an EGM to
discuss a major decision, the Board must call the meeting within 45 days.
 o By Tribunal (Section 98): Not yet enforced. Once effective, the Tribunal will
have the power to order an EGM if it is in the interest of the company or its
members.

(iii) Class Meetings

• Purpose:
o Held to discuss and pass resolutions affecting a specific class of shareholders or
debenture holders.

Example: A class meeting might be held if the company proposes to change the rights attached
to a particular class of shares, such as altering dividend rights.

2. Meetings of the Directors

• Frequency and Notice:

o Board Meetings: The Board must meet at least once every quarter, and proper
notice of the meeting must be given to all directors.

Example: If the Board is scheduled to meet on October 1, notice should be provided at least 7
days in advance, and minutes of the meeting must be recorded.

• Business:
o The Board can discuss various matters such as company strategy, approval of
financial statements, and major business decisions.

3. Extension of Validity Period of AGM

• Approval:
o In special circumstances, a company may apply to the Registrar of Companies
for an extension of the AGM deadline.

Example: If a company faces unforeseen circumstances preventing it from holding an AGM

on time, it may seek an extension to hold the meeting later.

4. Default in Holding the AGM

 • Penalties:
o If a company fails to hold its AGM as required, it may face penalties, including
fines and other legal actions.

Example: If a company does not hold its AGM within the stipulated time frame, it may be
penalized by regulatory authorities.

5. Meetings of the Creditors

• Purpose:
o Creditors' meetings are held when a company is undergoing a financial
restructuring or insolvency process, or when certain decisions affect their
interests.

Example: During a corporate restructuring, a company might call a creditors' meeting to

discuss a debt restructuring plan or to seek approval for a scheme of arrangement.

These points provide a clear understanding of the types of company meetings, their procedures,
and examples to illustrate their application.