COMPANY LAW

FORMATION OF COMPANY

Introduction

The history of India has been discussed widely on different platforms by historians, scholars,
analysts and researchers. Colonialism lasted for almost 200 years, and it left a wide impact on
the country as well as its people. The economic and social conditions that we live in presently
have been shaped by the historic changes that took place during the British Raj, and the laws
and policies we abide by today are an outcome of the colonial period India witnessed. Even
though there are arguments on how the British ruined the economic and socio-political
conditions of that time, there is no denying the fact that a large number of major advances in
India are a result of the British rule, and only under the British rule was it that India came to
be unified as one.

Be it the railways, or the postal system, or the various laws and policies that we still cling to,
the British regime provided a ground, when it left, no matter how uneven, on which the
leaders of our nation made our economy stand. Primarily, India was an agrarian economy,
and it still is, to a large extent, but the surge of corporate governance it has witnessed in the
past few decades is worth noticing.

Corporate governance, at present, is in the form of the Companies Act, 2013, in India, which
is an extensive statute that governs almost every aspect of company law in India. However,
this Act, as much as it is new, has its roots back in the time of the British Raj, and we shall
take a look at how the various Acts passed by the British before independence, and the Indian
Parliament after independence, shaped the company laws of India to become what it is today.

Early History of Company Law in India

The concept of good governance is not new to India. As early as third century B.C.E.,
Chanakya, the wazir for the kingdom of Pataliputra, promulgated the four-fold duties of a
king – raksha, palana, vridhhi and yogakshema, which largely correspond to the protection of
the wealth of shareholders in a company (raksha), maintaining the wealth of a company
through profitable ventures (palana), proper utilisation of the assets to boost wealth (vridhhi),
and safeguarding interests of the shareholders (yogakshema). Thus, the system existed, much
in an orthodox manner, which led to various kingdoms amassing wealth and prosperity due to
measures taken by their kings to ensure good governance.
Kautilya’s Arthashastra and Neetishastra, two golden books on economic administration and
political ethics, provide an insight into the early management practices, including CSR
(Corporate Social Responsibility).

The early agrarian economy consisted of units of familial ties, which usually consisted of two
patrilineal generations living together and co-operating for their economic benefit. Wealth
was collected and divided according to the share of each family member, and this system
came to be known as the Hindu Undivided Family (HUF) system. It still exists in certain
families, and has come to be regulated by Hindu personal laws.

Company Law in India During British Rule

East India Company’s rule was established in the country after the Battles of Plassey and
Buxar (1757 and 1764, respectively), but these companies were not what present-day
companies are composed of. East India Company, like its rivals of France and Portugal, were
trading companies that received an official declaration by the ruler of a territory, known as
the Royal Charter, which allowed trade to take place between the United Kingdom and India.
The East India Company received its first charter in 1600, and since then it firmly based its
ground in the Indian soil. But it was much later, in 1844, that the first Act by the British was
passed, regarding companies. It was known as the Joint Stock Companies Act, and it allowed
an organisation to be incorporated without a charter or sanction by the British Parliament. It
also established the Joint Stock Companies office. But the Act did not allow the facility of
limited liability to the members of a company.

Keeping this in mind, the British Parliament introduced the Limited Liability Act in 1855.
Further, the Act of 1844 was replaced with a more comprehensive Act of 1856, which
marked the beginning of company law in England. It introduced elements such
as Memorandum of Association and Articles of Association.

The Companies Act of 1862 incorporated all the elements of the previous Acts, and laid
down a single framework for the governance of the companies. Limited liability with
guarantee, as well as provisions of winding up were also incorporated. Alteration within the
object clause of the Memorandum of Association was prohibited. This Act provided the basis
for further enactments to come up.

The principal Act in England regarding the governance of companies came to be the
Companies Act of 1948, which included several other detailed elements related to Board of
Trade, accounts, public accountability etc.

In India, once the British Parliament assumed direct power after the Revolt of 1857, the Acts
of England were formulated in India keeping in mind the then prevailing socio-economic and
political environment. After the Joint Stock Companies Act was passed in India in 1857,
company laws in India underwent several amendments and enactments, because it was
somewhat difficult to apply the laws of England to India, clearly when the economic structure
and lifestyle of both the countries were different.

The Companies Act of 1866 brought with it provisions of incorporation, regulation and
winding-up, and included trading companies as well as other associations. It was replaced by
the Companies Act of 1913, which came to be the forerunner of the various legislations
passed in England.
Company Law in India Post-Independence Period

The Companies Act, 1913, continued well after independence, until our leaders realised that
it was high time the Act be revised. A committee was appointed by the government in 1950,
under the chairmanship of Shri H. C. Bhaba, which submitted its report in 1952. This report,
along with the Companies Act of England, 1948, led to the enactment of the Companies Act
of 1956, which came into force on April 1st, 1956, and repealed the previous existing laws.

The Companies Act of 1956 initially separated itself into 13 parts, consisting of 658 sections,
and 15 schedules. It remained in force for a long time and was amended in several instances
because growth in the corporate sector after independence saw a sudden boom. The Act went
on to comprise the provisions of shelf prospectus, audit committee, postal ballot etc., along
with establishing the National Company Law Tribunal (NCLT) and the National Company
Law Appellate Tribunal (NCLAT). In 2006, provisions of DIN and online filing of
documents came into practice.

Existing Company Law in India

The Companies Act of 1956 was undoubtedly a voluminous legislation. It demanded a repeal,
hence putting a new and more compact piece of legislation in its place, for which purpose the
J. J. Irani Committee was appointed. The then director of Tata Sons was appointed as the
head of the committee. The approach, in the beginning, was to liberalise the law and make it
more user-friendly, removing all the unnecessary clauses the previous Act contained. But
the Satyam Scam of 2009 shifted the focus to make the laws more stringent in order to
prevent misuse.

The recommendations made by the J. J. Irani Committee led to the enactment of the
Companies Act of 2013, which is the existing law on corporate governance in India. This Act
is rule based, which means that the Ministry of Corporate Affairs has retained certain powers
in itself, and may make rules regarding those provisions where the Act states so. These
powers are administered by the Regional Director and the Registrar of Companies.

This Act is divided into 19 Chapters and consists of 470 Sections and 7 Schedules. If
compared to the Companies Act of 1956, provisions have been reduced to a large extent,
which makes the Act reader-friendly. The major highlights of this Act are the provisions of a
woman director, CSR, class action suits, entrenchment clauses in AoA (Articles of
Association) and Key Managerial Personnel. It also introduced new terms such as OPC (One
Person Company), Dormant Company, Small Company, Associate Company etc.

Amendments to the Companies Act brought significant provisions, whilst removing or

detailing some of the existing ones. Overall, the Companies Act of 2013 is a culmination of
well-thought out processes and much debate, which has resulted in its effective
implementation.
Meaning of a Company

The word ‘company’ is derived from the Latin word (Com=with or together; panis =bread),
and it originally referred to an association of persons who took their meals together. In the
leisurely past, merchants took advantage of festive gatherings, to discuss business matters.

Nowadays, business matters have become more complicated and cannot be discussed at
festive gatherings. Therefore, the company form of organization has assumed greater
importance. It denotes a joint-stock enterprise in which the capital is contributed by several
people. Thus, in popular parlance, a company denotes an association of likeminded persons
formed for the purpose of carrying on some business or undertaking.

A company is a corporate body and a legal person having status and personality distinct and
separate from the members constituting it.

It is called a body corporate because the persons composing it are made into one body by
incorporating it according to the law and clothing it with legal personality. The word
‘corporation’ is derived from the Latin term ‘corpus’ which means ‘body’. Accordingly,
‘corporation’ is a legal person created by a process other than natural birth. It is, for this
reason, sometimes called an artificial legal person. As a legal person, a corporation can enjoy
many of the rights and incurring many of the liabilities of a natural person.

An incorporated company owes its existence either to a special Act of Parliament or to

company law. Public corporations like Life Insurance Corporation of India, SBI etc., have
been brought into existence by special Acts of Parliament, whereas companies like Tata Steel
Ltd., Reliance Industries Limited have been formed under the Company law i.e. Companies
Act, 1956 which is being replaced by the Companies Act, 2013.

Definition of a Company

Lord Justice Lindley has defined a company as,

“An association of many persons who contribute money or money’s worth to a common stock
and employ it in some trade or business; and who share the profit and loss (as the case may
be) arising therefrom”. L o r d L i n d l e y
Gower, L.C.B. in his book entitled The Principles of Modern Company Law gives an
interesting example. He says, ‘During the war all the members of one private company, while
in general meeting, were killed by a hydrogen bomb. But the company survived, not even a
hydrogen bomb could have destroyed it’.

In the legal sense in India, a company is an association of both natural and artificial persons
(and is incorporated under the existing law of a country). In terms of the Companies Act,
2013 (Act No. 18 of 2013) a “company” means a company incorporated under this Act or
under any previous company law [Section 2(20)].
In common law, a company is a “legal person” or “legal entity” separate from, and
capable of surviving beyond the lives of its members. However, an association formed not
for profit also acquires a corporate character and falls within the meaning of a company
by reason of a license issued under Section 8(1) of the Act.
The most striking characteristics and nature of a company are:

 Corporate personality

A company incorporated under the Act is vested with a corporate personality so it redundant
bears its own name, acts under a name, has a seal of its own and its assets are separate and
distinct from those of its members. It is a different ‘person’ from the members who compose
it. Therefore, it is capable of owning property, incurring debts, borrowing money, having a
bank account, employing people, entering into contracts and suing or being sued in the same
manner as an individual.

Its members are its owners however they can be its creditors simultaneously. A shareholder
cannot be held liable for the acts of the company even if he holds virtually the entire share
capital.

 Artificial Person

A company is created with the sanction of law and is not itself a human being, it is therefore,
called artificial; and since it is clothed with certain rights and obligations, it is called a
person. A company is accordingly, an artificial person thereupon the nature of company is
artificial too.

A Company is an artificial person created by law. It is not a human being, but it acts through
human beings. It is considered as a legal person which can enter contracts, possess properties
in its own name, sue and can be sued by others etc. It is called an artificial person since it is
invisible, intangible, existing only in the contemplation of law. It can enjoy rights and being
subject to duties.

 Limited Liability

The company being a separate person, its members are not as such liable for its debts. Hence,
in the case of a company limited by shares, the liability of members is limited to the nominal
value of shares held by them. Thus, if the shares are fully paid up, their liability will be nil.
So the nature of company is that its members have limited liability.

However, companies may be formed with unlimited liability of members or members may
guarantee a particular amount. In such cases, liability of the members shall not be limited to
the nominal or face value of the shares held by them. In case of unlimited liability companies,
members shall continue to be liable till each paise has been paid off. In case of companies
limited by guarantee, the liability of each member shall be determined by the guarantee
amount, i.e., he shall be liable to contribute up to the amount guaranteed by him.

In other words, a shareholder is liable to pay the balance, if any, due on the shares held by
him, when called upon to pay and nothing more, even if the liabilities of the company far
exceed its assets. This means that the liability of a member is limited.
  Perpetual Succession

An incorporated company never dies, except when it is wound up as per law. A company,
being a separate legal person is unaffected by death or departure of any member and it
remains the same entity, despite the total change in the membership. A company’s life is
determined by the terms of its Memorandum of Association.

The nature of a company may be perpetual, or it may continue for a specified time to carry on
a task or object as laid down in the Memorandum of Association. Perpetual succession,
therefore, means that the membership of a company may keep changing from time to time,
but that shall not affect its continuity.

The membership of an incorporated company may change either because one shareholder has
sold/transferred his shares to another or his shares devolve on his legal representatives on his
death or he ceases to be a member under some other provisions of the Companies Act.

Thus, perpetual succession denotes the ability of a company to maintain its existence by the
succession of new individuals who step into the shoes of those who cease to be members of
the company.

Professor L.C.B. Gower rightly mentions,

“Members may come and go, but the company can go on forever. During the war, all the
members of one private company, while in general meeting, were killed by a bomb, but the
company survived— not even a hydrogen bomb could have destroyed it”.

 Separate Property

A company is a legal person and entirely distinct from its members, is capable of owning,
enjoying and disposing of property in its own name. The company is the real person in which
all its property is vested, and by which it is controlled, managed and disposed of. So one of
the nature of company is that it has separate property from its members.

Lord Macnaghten in the famous case of Salomon v. Salomon & Co. Ltd. (1897) AC
22 observed that:

“A company is at law a different person altogether from the subscribers…..; and though it
may be that after incorporation the business is precisely the same as it was before and the
same persons are managers and the same hands receive the profits, the company is at law not
the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in
any shape or form, except to the extent and in the manner provided by the Act”.
The facts of the famous Salomon’s case were as follows:

Salomon carried on business as a leather merchant. He sold his business for a sum of £30,000
to a company formed by him along with his wife, a daughter and four sons. The purchase
consideration was satisfied by allotment of 20,000 shares of £1 each and issue of debentures
worth £10,000 secured by floating charge on the company’s assets in favour of Mr Salomon.
All the other shareholders subscribed for one share of £1 each. Mr Salomon was also the
managing director of the company. The company almost immediately ran into difficulties and
eventually became insolvent and winding up commenced. At the time of winding up, the total
assets of the company amounted to £6,050; its liabilities were £10,000 secured by the
debentures issued to Mr Salomon and £8,000 owing to unsecured trade creditors. The
unsecured sundry creditors claimed the whole of the company’s assets, viz. £6,050 on the
ground that the company was a mere alias or agent for Salomon.

Held: The contention of the trade creditors could not be maintained because the company
being in law a person quite distinct from its members, could not be regarded as an ‘alias’ or
agent or trustee for Salomon. Also the company’s assets must be applied in payment of the
debentures as a secured creditor is entitled to payment out of the assets on which his debt is
secured in priority to unsecured creditors.

Their Lordships of the Madras High Court in R.F. Perumal v. H. John Deavin, A.I.R. 1960
Mad. 43 held that “no member can claim himself to be the owner of the company’s property
during its existence or in its winding-up”. A member does not even have an insurable interest
in the property of the company.

 Transferability of Shares

The capital of a company is divided into parts, called shares. The shares are said to be a
movable property and, subject to certain conditions, freely transferable, so that no
shareholder is permanently or necessarily wedded to a company. When the joint-stock
companies were established, the object was that their shares should be capable of being easily
transferred, [In Re. Balia and San Francisco Rly., (1968) L.R. 3 Q.B. 588].

Since business is separate from its members in a company form of organisation, it facilitates
the transfer of member’s interests. The shares of a company are transferable in the manner
provided in the Articles of the company. However, in a private company, certain restrictions
are placed on such transfer of shares but the right to transfer is not taken away absolutely

Section 44 of the Companies Act, 2013 enunciates the principle by providing that the shares
held by the members are movable property and can be transferred from one person to another
in the manner provided by the articles.

If the articles do not provide anything for the transfer of shares and the Regulations contained
in Table “F” in Schedule I to the Companies Act, 2013, are also expressly excluded, the
transfer of shares will be governed by the general law relating to the transfer of movable
property.

Further, as of now, in most of the listed companies, the shares are also transferable through
Electronic mode i.e. through Depository Participants in dematerialized form instead of
physical transfers. However, there are restrictions with respect to transferability of shares of a
Private Limited Company which are dealt in chapter 2.

 Common Seal
Upon incorporation, a company becomes a legal entity with perpetual succession and a
common seal. Since the company has no physical existence, it must act through its agents and
all contracts entered by its agents must be under the seal of the company. The Common Seal
acts as the official signature of a company. The name of the company must be engraved on its
common seal.

A rubber stamp does not serve the purpose. A document not bearing a common seal of the
company, when the resolution passed by the Board, for its execution requires the common
seal to be affixed is not authentic and shall have no legal force behind it.

However, a person duly authorized to execute documents pursuant to a power of attorney

granted in his favour under the common seal of the company may execute such documents
and it is not necessary for the common seal to be affixed to such documents.

The person, authorized to use the seal, should ensure that it is kept under his personal custody
and is used very carefully because any deed, instrument or a document to which seal is
improperly or fraudulently affixed will involve the company in legal action and litigation.

Seal of company when to be used – The articles of association of the company provide for
putting the seal of the company on documents. Apart from those documents, the company
seal is to be put on power of attorney, deed of lease, share certificates, debentures, debenture
trust deed, deed of mortgage, promissory notes, negotiable instruments (except cheques),
agreement of hypothecation, loan agreements with banks and financial institutions, contract
of employment, guarantees issued by the company and all formal documents and documents
executed on stamp papers.

 Capacity to sue or be sued

A company is a body corporate, can sue and be sued in its own name. To sue means to
institute legal proceedings against (a person) or to bring a suit in a court of law. All legal
proceedings against the company are to be instituted in its name. Similarly, the company may
bring an action against anyone in its own name.

A company’s right to sue arises when some loss is caused to the company, i.e. to the property
or the personality of the company. Hence, the company is entitled to sue for damages in libel
or slander as the case may be [Floating Services Ltd. v. MV San Fransceco Dipaloa (2004)
52 SCL 762 (Guj)].

A company, as a person distinct from its members, may even sue one of its own members. A
company has a right to seek damages where a defamatory material published about it, affects
its business.

Where video cassettes were prepared by the workmen of a company showing, their struggle
against the company’s management, it was held to be not actionable unless shown that the
contents of the cassette would be defamatory. The court did not restrain the exhibition of the
cassette. [TVS Employees Federation v. TVS and Sons Ltd., (1996) 87 Com Cases 37].
The company is not liable for contempt committed by its officer. [Lalit Surajmal
Kanodia v. Office Tiger Database Systems India (P) Ltd., (2006) 129 Com Cases 192
Mad].

In Rajendra Nath Dutta v. Shibendra Nath Mukherjee (1982) (52 Comp. Cas. 293 Cal.),
a lease deed was executed by the directors of the company without the seal of the company
and later a suit was filed by the directors and not the company to avoid the lease on the
ground that a new term had been fraudulently included in the lease deed by the defendants.

Held that a director or managing director could not file a suit, unless it was by the company
in order to avoid any deed which admittedly was executed by one of the directors and
admittedly also the company accepted the rent. The case as made out in the plaint was not
made out by the company but by some of the directors of the company and the company was
not even a plaintiff. If the company was aggrieved, it was the company which was to file the
suit and not the directors. Therefore, the suit was not maintainable.

 Contractual Rights

A company, being a legal entity different from its members, can enter into contracts for the
conduct of the business in its own name. A shareholder cannot enforce a contract made by his
company; he is neither a party to the contract nor be entitled to the benefit derived from of it,
as a company is not a trustee for its shareholders.

Likewise, a shareholder cannot be sued on contracts made by his company. The distinction
between a company and its members is not confined to the rules of privity but permeates the
whole law of contract. Thus, if a director fails to disclose a breach of his duties towards his
company, and in consequence, a shareholder is induced to enter into a contract with the
director on behalf of the company which he would not have entered into had there been
disclosure, the shareholder cannot rescind the contract.

Similarly, a member of a company cannot sue in respect of torts committed against the
company, nor can he be sued for torts committed by the company. [British Thomson-
Houston Company v. Sterling Accessories Ltd., (1924) 2 Ch. 33]. Therefore, the company
as a legal person can take action to enforce its legal rights or be sued for breach of its legal
duties. Its rights and duties are distinct from those of its constituent members.

 Limitation of Action

A company cannot go beyond the power stated in its Memorandum of Association. The
Memorandum of Association of the company regulates the powers and fixes the objects of
the company and provides the edifice upon which the entire structure of the company rests.

The actions and objects of the company are limited within the scope of its Memorandum of
Association.

In order to enable it to carry out its actions without such restrictions and limitations in most
cases, sufficient powers are granted in the Memorandum of Association. But once the powers
have been laid down, it cannot go beyond such powers unless the Memorandum of
Association, itself altered prior to doing so.
  Separate Management

As already noted, the members may derive profits without being burdened with the
management of the company. They do not have effective and intimate control over its
working, and they elect their representatives as Directors on the Board of Directors of the
company to conduct corporate functions through managerial personnel employed by them.

In other words, the company is administered and managed by its managerial personnel. (xi)
Voluntary Association for Profit

A company is a voluntary association for profit. It is formed for the accomplishment of some
stated goals and whatsoever profit is gained is divided among its shareholders or saved for
the future expansion of the company. Only a Section 8 company can be formed with no profit
motive.

 Termination of Existence

A company, being an artificial juridical person, does not die a natural death. It is created by
law, carries on its affairs according to law throughout its life and ultimately is effaced by law.
Generally, the existence of a company is terminated by means of winding up. However, to
avoid winding up, sometimes companies adopt strategies like reorganization, reconstruction,
and amalgamation.

ADVANTAGES OF THE COMPANY

The establishment of a Company by an entrepreneur enables him to achieve advantages as

compared to that of other forms of business which include sole trading concerns, partnership
firms and such. Some of the advantages of establishing a company are listed below:

1. Availability of large amount of Resources and Economies of Scale in Production

Sole Trading Concerns and Partnership firms suffer due to low resources and are mostly in
need of funds. The company enables investment from an unlimited number of shareholders
(in public company). The requirement of larger funds can be solved through increasing the
number of shareholders. Joint Stock Companies are a go-to choice for large scale businesses.

The higher amount of resources in production enables the company to enjoy economies of
scale by reducing the cost of production. As such the companies earns higher profit due to its
large margin between the cost of the production of the product and the selling price of the
product.

2. Restriction on Liability

The liability of the shareholders in the Company is generally limited. There exist companies
with unlimited liability too. However, compared to sole trading concerns and partnerships
where there exists unlimited liability, the companies fare better in inviting funds. As the
liability of any such person is limited to the amount that is invested.

3. Management

Companies enjoy an isolated management from that of ownership. They are managed by the
Board of Directors who are democratically elected. These are qualified people who have
sound knowledge and experience with respect to managing the company as well as the field
in which the business is operating.

4. Unaffected Existence

The company’s existence is not affected as in the manner of the other forms of business
where the death of the owner leads to varied consequences on the ownership and continuity
of business. There may be several members of the company who come and go, but the
company enjoys a separate legal existence bound to continue till there is an end initiated
through legal means

5. Transferability of Shares

The shares of the company held by the shareholders can be easily marketed in the Stock
Market. The restrictions are high in other forms of business. This feature of transferability
also increases the habit of investment in people.

6. Research and Training

Companies have higher resource funds available and ability to afford to employ specialized
individuals. They do research on a large-scale and the expense will not be too high for the
company as compared to sole trading and firms. Through research, the company can level up
in its business and also invest inadequate training of employees.

7. Spreading of Risk

Risk is a part and parcel of any business. However, a company is not discouraged to
undertake risks in business because the sharers of the risk are high in number. This makes the
risk seem insignificant. But for sole trading concerns, any risk that ends up in loss will be a
make or break situation.

8. Societal Development

Companies enable a concentrated usage of resources and mobilize the savings of the
community in order to provide back to society products and services that fulfill their demands
and wants. The Corporate Social Responsibility of the Companies also brings out social
benefits for the community.[3]

DISADVANTAGES OF The COMPANY

Though this business type has a lot of advantages as stated above it does not mean that it does
not have shortcomings. The shortcomings of a company as a type of business is mentioned
below:

1. The procedure for setting up a company is cumbersome. It involves a number of stages

starting from the promotion which is an expensive job. The shares are to be sold in the
stipulated time. The legal formalities are extensive too.

2. The ownership and management are held in different hands. The personal interest in the
growth of the business is sometimes absent amongst members of the Board. Minority
shareholders do not have much of a say in the decision of the management.

3. Production Companies more or less are involved in processes that have negative
externalities on the environment and society.

4. The monopoly of certain business in a particular product or service area pose entry barriers
to new entrants and sometimes being the dominant player of the market, the company tends
to exploit customers

5. The long hierarchy of the organization delays the decision process, the non-transparency of
business secrets cannot be maintained as there are a lot of members involved.

6. The directors sometimes work towards the furtherance of their own interests. Policies
formed by such members become detrimental for other divisions of the company.

7. The government involves highly in the internal and external activities of the company
through regulations, laws, and compliances as there is a high amount of public money
invested in the business. The company at times has to focus on these excessive regulations
and is delayed in achieving its objectives.[4]

Types of companies on the basis of size or number of members in a company

Private company

According to Section 2(68) of the Companies Act, 2013 (as amended in 2015), “private
company” is defined as a company having a minimum paid-up share capital as may be
prescribed and which, by its articles, restricts the right to transfer its shares. It can have a
maximum of 200 members. As per this Section, the private company consists of the
following rules:

 A private company needs to have a certain minimum amount of money invested in

its shares. This amount is determined by the Act, but previously it was specified as
one lakh rupees or a higher amount as prescribed by the government, but after the
amendment made in the year 2015, it was omitted.
 In a private company, the rules called Articles of Association (AoA) restrict how
shares can be sold or transferred to others. This means shareholders cannot freely
sell their shares to anyone outside the company without following specific
procedures outlined in the company’s AoA.
 Typically, a private company can have a maximum of 200 members. However,
there is an exception for one-person companies, which can have only one member.
If multiple people jointly own shares, they count as a single member.
 Employees and former employees who still hold shares are not counted in this
limit.
 Private companies cannot publicly invite people to buy their shares or other
securities. They cannot advertise or solicit the general public to invest in their
company. These rules are designed to provide certain benefits and protections to
shareholders while also regulating the operations of the company. They ensure that
private companies operate within a controlled environment and maintain a close-
knit structure.

Advantages of private company

A private limited company enjoys the following advantages:

 Owners have more control over decision-making and operations since there are
fewer shareholders.
 Private companies have greater flexibility in terms of management structure,
business strategies, and financial decisions.
 There is less public scrutiny compared to public companies; therefore, it allows for
greater privacy in financial matters and business operations.
 Private companies can often act more swiftly in response to market changes or
business opportunities without the bureaucratic processes required by public
companies.
 Private companies can focus on long-term growth strategies without the pressure
of meeting short-term quarterly earnings expectations.
 A private company can be formed merely by two persons. It can start its business
just after incorporation and doesn’t have to wait for the certificate of com-
mencement of business.
 There are comparatively fewer legal formalities that are to be performed by a
private company as compared to a public company. It also enjoys special
 exemptions and privileges under the company law. Thus, it can be concluded that
there is greater flexibility in operations in a private company.
 In a private company, fewer people are to be consulted. The core people of the
company who are to make decisions have a closer relationship (so to speak) and
thus a better mutual understanding; hence, obtaining consent is usually not a
problem, therefore making the process of making decisions faster.
 A private company is not required to publish its accounts or file several docu-
ments. Therefore, it is in a much better position than a public company when it
comes to the maintenance of business secrets.
 The same core people with close relations continue to manage the affairs of a
private company. Due to their close relations, the continuity of policy can be
maintained, as there is mutual trust and a low dispute attitude.
 There is a greater personal touch with employees and customers in a private
company. There is also a comparatively greater incentive to work hard and to take
initiative in the management of business.

Disadvantages of private companies

 Private companies may find it challenging to raise capital since they cannot sell
shares to the public. They rely on personal savings, bank loans, or investments
from a smaller pool of investors.
 Without access to public markets, private companies may face constraints in
expanding their operations or undertaking large-scale projects.
 Private companies may have limited access to specialised skills and resources
compared to larger public companies.
 Since private companies often have limited resources and access to capital, they
may face a higher risk of failure, especially during economic downturns or market
disruptions.
 Exiting or selling shares in a private company can be more difficult and may
require the agreement of all shareholders. Thus, it makes it more challenging for
investors to realise their investment.

Public company

Section 2(71) of the Companies Act, 2013 defines a “public company” as a company that is
not classified as a private company and has a minimum paid-up share capital as prescribed by
law. As per this Act, a public company consists of the following aspects:

 As per Section 3(1) of the Companies Act 2013, a public company must have a
minimum of seven members, and there is no restriction on the maximum number
of members. As per Section 149(1) of the Act, a public company consists of a
minimum of 3 directors.
  As per Section 4(1)a of the Act, a public company having limited liability must
add the word “limited” at the end of the name. The shares of a public company are
freely transferable.
 A public company differs from a private company in various ways. Unlike private
companies, which have restrictions on share transfers, public companies have
more flexibility in trading their shares and can have a larger number of
shareholders. This distinction impacts how the company operates, its governance
structure, and its obligations to shareholders and regulatory authorities.
 Earlier, public companies were required to have a certain minimum amount of
money invested in their shares. This is known as the paid-up share capital. The law
sets the minimum threshold at five lakh rupees, but the government may prescribe
a higher amount. This requirement ensures that public companies have sufficient
financial backing and stability to operate on a larger scale. However, the minimum
requirement of paid capital of five lakh was omitted in the Amendment Act of
2015.
 If a company is owned by another company that is not private, such as a public
company, even if it is still considered private according to its own rules, it is
treated as a public company.

Advantages of a public company

 Public companies can easily raise funds by selling shares to the public through the
stock market; this will facilitate their ability to expand and undertake activities like
research. Thus, investors can easily buy and sell parts of a public company on the
stock market. Hence, this makes it easier for investors to get in and out whenever
they need.
 Public companies have more opportunities to team up with or buy other
companies, which helps them to expand and do different things.
 Public companies are usually bigger and more noticeable, so they can offer better
jobs and pay.
 They have greater access to mergers, acquisitions, and partnerships, which can
help them grow and diversify their business.
 Public companies are more visible; hence, they can offer better job opportunities
and pay.

Disadvantages of a public company

 It’s harder to start a public company because one needs to create and file a detailed
document called a prospectus, and rules must also be followed when giving out
shares.
 Public companies have many directors and managers. Decisions are made in
meetings, which can take a long time.
  Public companies must share lots of documents with the government. Their
financial information is made public. So, keeping business secrets is tough.
 Public companies must follow many rules. The government controls them a lot.
This will limit the flexibility.
 In public companies, the owners and managers are often different. Paid managers
may not have a strong reason to work hard. Further, it’s hard to maintain close
relationships with customers and employees. Sometimes, there are conflicts
between shareholders, lenders, and managers.
 Shares of public companies are traded every day. Some people may try to make
quick money by gambling on these shares. This may have an impact on smaller
shareholders.
 The people who own parts of the company, called shareholders, often want quick
financial growth. They might push for quick profits, even if it means sacrificing
long-term growth.

 When a company goes public, it loses some control. Shareholders and market
expectations start to affect decisions, and the original owners might have less
opportunity.
 Public companies might get sued by shareholders or government regulators, which
can cost a lot and impact the company’s reputation.
 Public companies might face lawsuits from shareholders or regulators; this will be
more costly and adversely impact the company’s reputation.
 Some investors might try to influence the company’s decisions to serve their own
interests; this can create conflicts and cause disruptions in how the company
operates.

Small company

Section 2(85) of the Act defines ‘small company’ as a type of company that is not a public
company. There are two main things that determine a small company, which include:

 Paid-Up Share Capital: This is the total value of shares paid to shareholders. This
amount should not be too high. It used to be fifty lakh rupees, but now it can be
higher, up to ten crore rupees or five crore rupees.
 Turnover: This is the total revenue a company makes from its business activities.
In small companies, the turnover for the previous year should not be too high. It
used to be two crore rupees, but now it can be up to four crore rupees or forty crore
rupees.

Exceptions

There are some exceptions to the above mentioned amount criteria. The companies stated
below are exempt from such requirements, which include:
  Holding or Subsidiary Companies: These are companies owned or controlled by
another company, known as a holding company, which manages and controls its
subsidiaries.
 Section 8 Companies: These are non-profit companies formed for specific
purposes.
 Companies Governed by Special Acts: These are companies governed by special
laws for particular sectors.

One Person Company

The Companies Act, 2013 also provides for a new type of business entity in the form of a
company in which only one person makes the entire company. It is like a one man-army.
Under Section 2(62), One Person Company (OPC) means a company that has only one
person as a member. Features of OPC include:

 One person can set up and run the whole company as both the owner and director.
 While an OPC can have up to 15 directors, only one person can own it.
 At least one director must be an Indian resident who has lived in India for at least
182 days in the last financial year.
 No minimum capital is needed to register an OPC. The owner can invest as much
as they want, and government fees are based on this.
 The owner’s liability is limited to the capital they have invested. This means their
personal belongings are safe if the business faces losses or debts.
 OPCs are great for small businesses and startups with turnover below Rs. 2 crores
and capital investment under Rs. 50 lakhs.
 Only Indian citizens can register an OPC. Foreign investment is not allowed,
ensuring full ownership by Indian residents.
 The company’s name should include “One Person Company” in brackets as
per Section 3(1)(c) of the law.

Members and directors

 As per Section 3(1)(c), OPC can have only one member.

 As per Section 152(1), the individual member is deemed the first director until
other directors are appointed.
 As per Section 149(7), an OPC can have a minimum of one director and a
maximum of fifteen directors, and a special resolution must be passed by the OPC
in order to exceed fifteen directors.
An OPC must select one person as a ‘Nominee’ who will take over in case the sole member is
unable to run the OPC due to reasons like death or incapacity. The nominee will:
  Become a new member of the OPC.
 Receive all the shares in the OPC.
 Be responsible for all the liabilities of the OPC.
The nominee’s consent to act as a nominee must be obtained and submitted to the Registrar
of Companies (RoC) at the time of incorporation, along with the Memorandum of
Association (MoA) and Articles of Association (AoA).

Advantages of OPC

 Setting up an OPC is relatively easy and requires only one person to start.
 An OPC offers limited liability protection to its owner; accordingly, personal
assets are not at risk in the case of business debts.
 The owner has complete control over the company without sharing decision-
making power with anyone else.
 An OPC is seen as its own legal entity, separate from its owner. This makes it look
more credible and makes it easier to get funding.
 Compared to bigger companies, OPCs usually have fewer legal rules to follow and
less paperwork to deal with, making it simpler to run the business.
 OPCs might enjoy tax benefits and incentives from the government, which can
save money on taxes.
 Since there is only one owner, decisions can be made easily without needing to
consult or get approval from others. This makes it easier to adapt to changes in the
market.

Disadvantages of OPC

 Only one person can own an OPC, which might cause difficulty in growing and
getting investments compared to larger companies with multiple owners.
 OPCs are owned by just one person and have to deal with a lot of legal paperwork
and rules, which can be more complicated compared to businesses.
 Some people might think OPCs are less stable or reliable than bigger companies
with more owners.
 OPCs have to appoint someone else to represent them, which might bother
entrepreneurs who want to make all the decisions themselves.
 With just one owner, OPCs might find it hard to get enough money, expertise, or
connections, making it tough for them to grow.
 If something happens to the owner, like if they get sick or pass away, it can be hard
to figure out what to do with the OPC next, especially if there is no plan in place.
 Selling or giving away an OPC can be complicated and might scare off potential
buyers or investors because of all the legal stuff involved.
Types of companies on the basis of control

Holding company

A holding company is a company that owns one or more other companies. These other
companies are called subsidiary companies because they are controlled by the holding
company. So, the holding company is like the parent company, and the subsidiaries are its
smaller companies. Such a type of company, directly or indirectly, via another company,
either holds more than half of the equity share capital of another company or controls the
composition of the Board of Directors of another company.

Definition of holding company

Section 2(46) of the Companies Act, 2013 defines a holding company as “ a holding
company, in relation to one or more other companies, means a company of which such
companies are subsidiary companies.”

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.

Types of holding companies

In general, these companies can be bifurcated into the following types:

 Pure: A pure holding company only owns shares in other companies and does not
do any other business.
 Mixed: A mixed holding company not only owns other companies but also does
its own business.
 Immediate: An immediate holding company owns another company, even if it is
already owned by someone else.
 Intermediate: An intermediate holding company is both a holding company and a
subsidiary of a larger corporation. It might not have to share financial records like
a regular holding company.

Merits of a holding company

 A holding company owns different businesses, so if one business faces problems,

the others can step in to help, lowering overall risk.
 By managing everything together, a holding company can save money on things
like purchasing supplies or advertising because they buy in bulk for all their
businesses.
  A holding company can choose where to invest money, people, and technology to
help its businesses grow and succeed.
 Sometimes, a holding company can pay less in taxes because it can balance out
profits and losses between its businesses, potentially reducing its tax bill.
 A holding company can control its different businesses while still allowing them to
make their own decisions. This gives it flexibility in how it operates.

Demerits of a holding company

 Managing many different businesses can be challenging, and it will slow down
decision-making processes.
 Holding companies have to follow rules for each business they own, which can be
a lot of work and cost money to ensure compliance.
 If one business owned by the holding company faces financial trouble, it can affect
the other businesses, potentially amplifying the problem.
 Sometimes, the holding company’s objectives might clash with the goals of its
businesses, which may lead to disagreements and conflicts in decision-making.

Subsidiary company

A subsidiary company is a company that is both owned and controlled by another company.
The owning company is called a parent company or a holding company. The parent of a
subsidiary company may be the sole owner or one of several owners of the company. If a
parent or holding company possesses complete ownership of another company, that company
is referred to as a “wholly-owned subsidiary.” There is a difference between a parent
company and a holding company in terms of operations. A holding company doesn’t have its
own operations but owns most of the shares and assets of its subsidiary companies. It is
basically a company that operates a business and also owns another business, known as the
subsidiary. The holding company runs its own operations, while the subsidiary might engage
in a related business. For example, the subsidiary might handle owning and managing the
holding company’s property assets to keep their liabilities separate.

Definition of subsidiary company

As per Section 2(87) of the Act, a subsidiary company is a company that is controlled by
another company, called the holding company. Accordingly, a company that operates its
business under the control of another (holding) company is known as a subsidiary company.
Examples include Tata Capital, a wholly-owned subsidiary of Tata Sons Limited. This
control can happen in two ways:

 The holding company controls who sits on the subsidiary company’s Board of
Directors.
 The holding company owns more than half of the total shares of the subsidiary
company.
Even if the control is exercised through another subsidiary company of the holding company,
the subsidiary is still considered part of the group. For instance, if the holding company’s
subsidiary controls the Board of Directors or owns more than half of the shares in another
company, that company becomes a subsidiary too.

Types of subsidiary company

In general, the subsidiary company can be divided into the following categories:

 Wholly owned subsidiary company: A wholly owned subsidiary is a company

where the holding company owns all of its voting power. This means that 100% of
the subsidiary’s shares are held by the holding company.
 Deemed subsidiary company: A deemed subsidiary is a company considered to
be under the control of a holding company, even if that control comes from another
subsidiary of the holding company.

Types of companies on the basis of ownership

On the basis of ownership, companies can be divided into two categories:

Government company

“Government company” under Section 2(45) of the Companies Act, 2013 is essentially
defined as “any company in which not less than 51% of the paid-up share capital is held by
the Central Government, or any State Government or Governments, or partly by the Central
Government and partly by one or more State Governments, and includes a company which is
a subsidiary company of such a Government company.” The definition ensures that any
company falling within the ambit of equal to or more than 51% ownership by the central
government, any state government or governments (including more than one state’s
government), or a combination of central and state ownership, is recognized as a government
company. Further, this classification extends to subsidiary companies that are under the
control or ownership of such government companies.

Some examples of government companies are National Thermal Power Corporation Limited
(NTPC), Bharat Heavy Electricals Limited (BHEL), Steel Authority of India Limited, etc.

Overview of government companies

Government companies have to follow all the rules of the Companies Act, unless there are
specific exceptions. They can be registered as either private or public companies, but their
names must end with ‘limited.’ In the names of government companies, the word ‘STATE’ is
allowed. When it comes to transferring shares or bonds in government companies, certain
formalities, like executing transfer documents, are not needed when transferring securities
held by government nominees. These companies can accept deposits up to a certain limit, and
their annual general meetings must be held during business hours and on non-national
holidays. A government company gives its annual reports, which have to be tabled in both the
House of the Parliament and the state legislature, as per the nature of ownership.

In the director’s report of government companies, certain clauses about policies on director
appointments and remuneration do not need to be included, as these requirements are relaxed
for government companies. A subsidiary of a government-owned company is also considered
a government company. These companies, managed by the government, have both
government and private individuals as shareholders. They are sometimes called mixed-
ownership companies. As per Section 188, the requirements for seeking approval for
contracts or arrangements between government companies or between a government
company and another entity have been relaxed. As per Section 188(1), transactions between
two government companies or between an unlisted government company and another entity
do not need special resolution approval, provided the administrative ministry or department
gives prior approval.

Features of a government company

There are several features of a government company that are helpful in increasing the
potential and efficiency of the company to a great extent.

Separate legal entity

Perhaps one of the most important features of a government company is that it is a separate
legal entity, which helps a government company to deal with many legal aspects. One main
legal aspect is the non-dependence on any other body. In legal terms, as it is a separate entity
in itself, this makes the system more fluent and efficient.

Incorporation under the Companies Act 1956 & 2013

A government company is incorporated under “the Companies Act, 1956 & 2013”. This
gives government companies boundaries to work within, and hence it profits the end-users of
the services as there are fewer chances of fraud or improper working. Also, the employees get
better working conditions and are not exploited, as they have the law as their backup to
protect them.

Management as per provisions of the Companies Act

Management in a government company is governed and regulated by the provisions of the
Companies Act. This makes sure that employees are not exploited and overburdened. This
further ensures the smooth functioning of the company.

Appointment of employees
The appointment of employees is governed by the MoA and AoA (Memorandum of
Association and Articles of Association). This ensures a fair appointment on the basis of
meritocracy, and people don’t misuse their contacts and enter government companies.
Fund raising
A government company gets its funding from the government and other private
shareholdings. The company can also raise money from the capital market. Hence, a
government company has several fund raising mechanisms, which helps it to be financially
less burdened as finances in a government company can be raised in a lot of ways.

Merits of government companies

 Government companies have the freedom to make decisions independently. This

autonomy allows them to respond quickly to changes in the market or in their
operations.
 Government companies play an important role in ensuring that the local market
remains fair and competitive. They do this by controlling certain aspects of
business activities, such as pricing or quality standards, to prevent unfair practices
like monopolies or price gouging.
 Government companies can bring together different strengths and resources to
solve the complex problems of private companies. Private companies sometimes
face challenges like not having enough money or struggling to achieve their goals.
Government companies often have access to additional funding or resources that
private companies may lack. By joining with government companies, private
companies can benefit from the financial support, expertise, and networks of
government companies to overcome obstacles.

Limitations of a government Companies

 Government companies usually have to face a lot of government interference and

the involvement of too many government officials. Hence, it has to go through lots
of checks in order to make a stable decision. Governmental decisions are usually
late as they follow an elaborate procedure before actual implementation.
 These companies evade all constitutional responsibilities by not answering to the
parliament because they are financed by the government.
 The efficient operations of these companies are hampered, as the board of such
companies comprises mainly politicians and civil servants, who have special
emphasis and interest in pleasing their political party’s co-workers or owners and
are less concentrated on the growth and development of the company. They
(politicians and civil servants) are essentially focused on their promotions, which
are essentially in the hands of their seniors; hence, they keep on pleasing their
seniors. In order to please their seniors, they usually make the wrong decisions too.

Non-Government Company

All other companies, except the government companies, are known as non-government
companies. They do not possess the features of a government company, as stated above.
Associate companies

According to Section 2(6 of the Companies Act, 2013, when one company owns at least 20%
of the shares of another company, the second company is considered an “associate company”
of the first one. For companies say X and Y, X in relation to Y, where Y has a significant
influence over X, but X is not a subsidiary of Y and includes a joint venture company. Here
X is an associate company. Wherein;

1. The expression “significant influence” means control of at least twenty percent of

total voting power, or control of or participation in business decisions under an
agreement.
2. The expression “joint venture” means a joint agreement whereby the parties that
have joint control of the arrangement have rights to the net assets of the
arrangement.
If a company is formed by two separate companies and each such company holds 20% of the
shareholding, then the new company shall be known as an associate company or joint venture
company. The Companies Act 2013, introduced for the first time the concept of an associate
company or joint venture company in India through Section 2(6). A company must have a
direct shareholding of more than 20%, and an indirect one is not allowed. For example, A
holds 22% in B and B holds 30% in C. In this case, C Company is an associate of B but not
of A.

Foreign companies

A foreign company, as per Section 2(42) of the Companies Act, means a company or a
corporate body that is incorporated outside India which either has a place of business in India
whether by itself or through an agent, either physically or through an electronic mode, and
conducts any business activity in India in any other manner.” The definition states that the
company has some kind of physical location or representation in India. It could be an office, a
store, a factory, or any other place of business. This presence could be established directly by
the company itself or indirectly through an agent. Additionally, having an online presence or
conducting business electronically also counts. For Section 2(42) of Companies Act, 2013,
and Rule 2(c) of the Companies (Registration of Foreign Companies) Rules, 2014, ‘electronic
mode’ means conducting activities electronically, regardless of whether the main server is in
India. This includes:

 Business transactions between businesses and consumers, exchanging data, and

other digital supply transactions.
 Accepting deposits, subscriptions in securities, or offering securities in India or to
Indian citizens.
 Financial settlements, online marketing, advisory and transactional services,
managing databases, and supply chains.
 Online services like telemarketing, telecommuting, telemedicine, education, and
research.
  Any related data communication services, whether using email, mobile devices,
social media, cloud computing, document management, or voice and data
transmission.
Provided that offering securities electronically, subscribing to them, or listing securities
in International Financial Services Centres under the Special Economic Zones Act, of 2005,
is not considered ‘electronic mode’ for the purposes of the Companies Act, 2013.

Foreign companies can register in India through various means, including:

 Private Limited Company: This is the quickest option. Foreign nationals can
establish a private limited company, allowing up to 100% Foreign Direct
Investment (FDI) under the automatic route.
 Joint Venture: Foreign entities can partner with local firms in India through a
joint venture. A joint venture agreement outlines terms and must comply with legal
standards.
 Wholly-Owned Subsidiary: Foreign nationals or companies can invest 100% FDI
in an Indian company, creating a wholly-owned subsidiary.
 Liaison Office: This office facilitates communication between the foreign
company and Indian entities. Expenses are covered by the parent company through
foreign remittances.
 Project Office: For specific projects awarded by Indian companies, foreign
companies can set up project offices. Approval from the Reserve Bank of India
may be necessary.
 Branch Office: Large foreign businesses can establish branch offices in India,
provided they demonstrate profitability and meet certain criteria.

Dormant Company

A dormant company is a type of company that is inactive or not doing any business activities
for a certain period. In other words, a company may be considered dormant if it has not
carried out any business operations or significant transactions for a specific period, typically
two consecutive financial years or If a company has not filed its financial statements or
annual returns for two consecutive years, it might also be labelled as dormant.

Being dormant does not mean the company has shut down. It is still registered, but it is not
actively engaged in any business activities. Companies may become dormant for various
reasons, such as waiting to start a new project, holding assets, or temporarily pausing
operations. It is defined as an ‘inactive company’ under the Companies Act 2013. Even
though a company is dormant, it still has some responsibilities. It needs to maintain a
minimum number of directors, file certain documents, and pay any required fees to keep its
dormant status. A dormant company can become active again by applying to the registrar and
fulfilling the necessary requirements, such as submitting financial documents and paying any
outstanding fees.
Definition

As per Section 455 of the Companies Act 2013, an ‘inactive company’ is one that has not
done any business or significant transactions or filed financial documents for the past two
years. A ‘significant accounting transaction’ is any transaction except for a few specific ones,
like paying fees to the government or maintaining office records.

Registration of a dormant company

 If a company hasn’t been active and wants to be officially recognised as ‘dormant,’

it can apply to the registrar, the official in charge of company registrations, in a
specific way.
 The registrar will review the application and, if everything checks out, grant
‘dormant’ status to the company. They will provide a certificate to confirm this.
 The registrar will keep a list of all dormant companies.
 If a company hasn’t filed its financial documents for two years in a row, the
registrar will send a notice. If the company still doesn’t comply, it’ll be listed as
dormant.

Requirements to maintain dormant status

A dormant company must have a minimum number of directors, submit certain documents,
and pay a fee to the registrar to maintain its dormant status. If it wants to become active
again, it can apply and fulfil the necessary requirements.

Merits of the dormant company

 Dormant status allows the company to remain registered and legally existent
without actively engaging in business operations. This means the company can be
revived and used in the future without the need for re-registration.
 Dormant companies can hold assets such as properties, intellectual property rights,
or investments without the need for an active business operation.
 By maintaining dormant status, the company can retain its business name,
preventing others from registering a company with the same name during the
dormant period.
 Reviving a dormant company is generally simpler and faster than incorporating a
new company. This allows for a quicker resumption of business activities when
needed.
 Keeping the company dormant instead of closing it down entirely helps preserve
its reputation and goodwill in the market.
 Dormant status provides flexibility for future business ventures or projects. The
company can be activated when there is a need to engage in business activities
without the need for a new incorporation process.
Nidhi companies

Nidhi companies are a type of Non-Banking Financial Institution (NBFC) recognized under
the Companies Act, 2013, primarily dealing with lending and borrowing within their
members. Nidhi companies are mutual benefit societies, meaning they are owned by their
members who contribute to and benefit from the company. The core activity of a Nidhi
company is to cultivate the habit of thrift and savings among its members and to lend funds to
them for their mutual benefit.

Section 406 of the Act deals with the power of the Central Government to modify the
application of the Companies Act to Nidhi companies. Accordingly, this section states that:

 A Nidhi is a company formed with the goal of encouraging thrift and savings
among its members. It collects deposits from and lends to its members only, for
their mutual benefit, and follows rules set by the Central Government.
 The Central Government can decide which provisions of the Companies Act
should or should not apply to Nidhi companies. It can specify exceptions,
modifications, or adaptations for these companies through notifications.
 Before issuing such notifications, a draft must be presented to both Houses of
Parliament for review. This draft must be available for a total of thirty days during
parliamentary sessions. If both Houses agree to disapprove the notification or
suggest modifications within this period, the notification won’t be issued or will be
issued in a modified form.

Characteristics of the Nidhi companies

 Nidhi companies cannot deal with any other type of financial business except
lending and borrowing among their members. They are not allowed to deal with
the public.
 To become a Nidhi company, one needs to register as a public company under the
Companies Act, 2013, and meet certain criteria set forth by the Ministry of
Corporate Affairs.
 Nidhi companies need to comply with specific regulations outlined by the
government to maintain their status and function as per the law. Membership in a
Nidhi company is limited to individuals only. Other types of entities, like
companies or trusts, cannot become members.
 Nidhi companies cannot accept deposits or loans from people who are not their
members, ensuring that their activities are focused solely on the mutual benefit of
their members.
Introduction
The doctrine of lifting the corporate veil means ignoring the corporate nature of the body of
individuals incorporated as a company. A company is a juristic person, but in reality it is a
group of people who are the beneficial owners of the property of the corporate body. Being
an artificial person, it (company) cannot act on its own, it can act only by natural persons.
The doctrine of lifting the veil can be understood as the identification of the company with its
members. The company is equal in law to a natural person. This is one of the cornerstones of
Indian Company Law and has been followed since 1897.

In the case of Salomon Vs. Salomon & Co. Ltd. 1897 it was considered from the Justice
point of view “a company is a legal person distinct from its members. This principle is
regarded as a veil/curtain/shield but not a wall between the company and its members. The
effect of this principle is that there is a fictional veil and is permitted to look at the person
behind the veil.”
According to this principle, when a company has been formed and registered under the
Companies Act, all dealing with the company will be in the name of the company and the
person behind the company will be disregarded however important they may be.

Meaning & Definition Of Corporation Veil

A corporate veil is a legal concept that separates the acts done by the companies and
organizations from the actions of the shareholders. It protects the shareholders from being
liable for the actions done by the company. This is not an absolute right the court depending
on the facts of the case can take the decision whether the shareholder is liable or not.

According to the Cambridge Dictionary, “Shareholders may hide behind the corporate veil,
assured that their liability does not extend beyond the value of their shares”.
According to the definition of Black Law Dictionary, “piercing the corporate veil is the
judiciary act of imposing liability on otherwise immune corporate officers, Directors and
shareholders for the corporation’s wrongful acts.”
Aristotle says, “when one talks of lifting status of an entity corporate veil, one has in mind a
process whereby the corporate is disregarded and the incorporation conferred by statute is
overridden other than the corporate entity an act of the entity.”
Company As A Corporate Personality
Corporate personality is the reality expressed by the law that a company is perceived as a
legal entity distinct from its members. A company with such recognition and personality will
be considered as a separate legal entity having an independent legal existence from the
members of the company. A company is known by its own name and has its own rights,
duties, obligations, and liabilities. Therefore, there is a clear difference between the company
and its members, this is commonly called a Corporate Veil as discussed above.

The separate legal entity is the basic feature on which company law is premised. Establishing
how a company comes into existence and how it is managed and functioned all depends on
the legal entity of the company. The concept of a separate legal entity is not new and
contrastingly there are many cases and litigation on this topic and on its jurisdiction. There
are two very important judgments on separate legal entities, one of them is Salomon vs
Salomon and Lee vs Lee, both cases are foreign but are applicable and accepted universally.
In both these cases it was held that ” The Company was a separate person member, and It
has an identity different from its members and therefore, the unsecured creditors were
to be paid at priority from the secured debentures”. This Judgement is very important
with respect to Indian companies act as it lays the precedent that a company has a separate
legal entity and it can enter into contracts with its own members.
Circumstances under which the Corporate Veil can be Lifted
There are two circumstances under which the Corporate Veil can be lifted. They are:

1: Statutory Provisions
2: Judicial Interpretations

Statutory Provisions
Section 5 of the Companies Act, 2013- This particular section characterizes the distinctive
individual engaged in wrongdoing or a conduct which is held to be wrong in practice, to be
held at risk in regard to offenses as ‘official who is in default’. This section gives a rundown
of officials who will be at risk to discipline or punishment under the articulation ‘official who
is in default’ which includes within itself, an overseeing executive or an entire time chief.
Section 45 of the Companies Act, 2013- Reduction of membership beneath statutory limit:
This section lays down that if the individual count from an organization is found to be under
seven on account of a public organization and under two on account of a private organization
(given in Section 12) and the organization keeps on carrying on the business for over half a
year, while the number is so diminished, each individual who knows this reality and is an
individual from the organization is severally at risk for the obligations of the organization
contracted during that time.
In the case of Madan lal v. Himatlal & Co. the respondent documented a suit against a
private limited company and its directors because he had to recover his dues. The directors
opposed the suit on the ground that at no time did the company carry on business with
individual count which was to go below the statutory minimum and in this manner, the
directors couldn’t be made severely at risk for the obligation being referred to. “It was held
that it was for the respondent being dominus litus, to choose the people himself who he
wanted to sue.”
Section 147 of the Companies Act, 2013 Misdescription of name: Under sub-section (4) of
this section, an official of an organization who signs any bill of trade, hundi, promissory note,
check wherein the name of the organization isn’t referenced in the way that it should be
according to statutory rules, such official can be held liable on the personal level to the holder
of the bill of trade, hundi and so forth except if it is properly paid by the organization. Such a
case was seen on account of Hendon v. Adelman.
Section 239 of the Companies Act, 2013
Power of inspector to explore affairs of another company in the same gathering : It gives
that in the event that it is important for the completion of the task of an inspector instructed to
research the affairs of the company for the supposed wrong-doing, or a strategy which is to
defraud its individuals, he may examine into the affairs of another related company in a
similar group.
Section 275 of the Companies Act, 2013
Subject to the provision of Section 278, this section provides that no individual can be a
director of in excess of 15 companies at any given moment. Section 279 furnishes for a
discipline with fine which may reach out to Rs. 50,000 in regard of every one of those
companies after the initial twenty.
Section 307 & 308 of the Companies Act, 2013 Section 307 applies to each director and
each regarded director. The register of the shareholders should contain in it, not just the name
but also how much shareholding, the description of shareholding and the nature and extent of
the right of the shareholder over the shares or debentures.
Section 314 of the Companies Act, 2013

The object of this section is to restrict a director and anybody associated with him, holding
any business which provides compensation if the company supports it.

Section 542 of the Companies Act, 2013

Pretentious Conduct: If over the span of the winding up of the company, it gives the idea
that any business of the company has been continued with goal to defraud the creditors of the
company or some other individual or for any deceitful reason, the people who were
intentionally aware of this and still agreed to the carrying on of the business, in the way
previously mentioned, will be liable on a personal level without incurring the liabilities of the
company, and will be liable in a manner as the court may direct.
In Popular Bank Ltd, it was held that the Section 542 seems to leave the Court with
attentiveness to make an assertion of risk, in connection to ‘all or any of the obligations or
liabilities of the company’.
Judicial Proceedings
Subhra Mukherjee v. Bharat Coking Coal Ltd.
In this situation, Hoax or façade is being talked about. A private coal company sold its real
estate to the spouses of executives before nationalization of the company. Truth be
told,archives were tweaked and back-dated to corroborate that the deal of the selling of the
real estate to the wives of the directors was before nationalization of the company. Where
such exchange is claimed to be a hoax and deceitful, the Court was supported in piercing the
veil of incorporation to discover the genuine idea of the exchange as to realize who were the
genuine parties to the deal and whether it was real and in good faith or whether it was
between the married couples behind the façade of the different entity of the company.

Bajrang Prasad Jalan v. Mahabir Prasad Jalan

This case is about a Subsidiary Holding Company. The court, to consider an objection of
mistreatment held that the corporate veil can be lifted in the instances of not simply of a
holding company, but also its subsidiary when both are belonging to the parent organisation.

N.B. Finance Ltd. v. Shital Prasad Jain

In this case, the High Court of Delhi allowed to the offended party organization a stay order
which restrained the company of the defendant from alienating the properties that they owned
on the ground that the defendant had borrowed money fraudulently from the plaintiff
companies and the defendant had purchased properties in the name of the defendant
companies. The court in this case did not award protection under the piercing of the corporate
veil.

Jones v. Lipman
In this case, the merchant of a real estate property tried to dodge the particular execution of a
contract for the clearance of the land by passing on the land to a company which he shaped
for the reason and along these lines, he attempted to abstain from finishing the property deal
of his home to the offended party. Russel J. depicting the company as a “devise and a hoax, a
veil which he holds before his face and endeavors to stay away from acknowledgment by the
eye of equity” and requested both the litigant and his company explicitly to fulfil the
obligations of the contract to the offended party.

Exceptions Of Lifting Of Corporate Veil

The corporate veil of a company will be lifted only in exceptional cases such as follows;

Under statutory provisions:

Reduction of number of members below statutory minimum

In the case of a public company with less than seven members and three directors and
In the case of a private company with less than 2 members and 2 directors. Severally liable
for the payment of whole debts of the company contracted during that time and may be
severally sued thereof.

Failure to refund application fee

Under Section 39 of the Companies Act, 2013 the director of the company shall be jointly
and severally liable to repay that money with interest at the rate of 6% per annum from the
expiry of the 133 days if they fail to repay the application money without interest within 120
days when the company fails to allot shares.
Mis-description of company’s name
Under Section 12 of the Companies Act, 2013 if an officer of a company signs, or
authorizes to be signed, on behalf of the company, any bill of exchange, hundi, promissory
note, endorsement, cheque or order for money or goods wherein its name is not mentioned,
apart from penal liability, the officer becomes personally liable on those instruments.
Fraudulent Trading
Under Section 339 of the Companies Act, 2013 every person knowingly a party to the
carrying on of the business in the manner aforesaid, shall be punishable with imprisonment
for a term which may extend to two years or with fine which may extend to fifty thousand or
with both.
Holding and Subsidiary Company
Separation is ignored for the purpose of group accounts.

For investing in a company’s ownership

Under Section 216 of the Companies Act, 2013 the central government may appoint
inspectors to investigate and report on the membership of any company for the purpose of
determining the true persons who are financially interested in the company and who control
its policy. Thus the central government has authority to ignore the corporate veil.

Promotion of a Company

It is the first stage in the formation of a company. It begins with a person or a group of persons
having thought of or conceived a possible future business opportunity and then taking an
initiative to give it a practical shape by way of forming a company. Such a person or a group of
persons who proceed to form a company are known as promoters of the company.

Promoters not only conceive a business opportunity but also analyze its prospects and bring
together the men, materials, machinery, managerial abilities and financial resources that are
necessary for the formation and existence of the company.

Browse more Topics under Formation Of A Company

 Incorporation and Commencement

Functions of a Promoter
(i) Identification of Business Opportunity
The promoter first identifies a potential business opportunity. This opportunity may be regarding
the production of a new product or service or making a product available through a different
channel than before or production of an old product with new updated features or any other such
opportunity having an investment potential.

(ii) Feasibility Studies

The promoter after having conceived a business opportunity analyzes the opportunity to see
whether it is feasible, technically as well as economically. All identified business opportunities
cannot be converted into real projects.

Therefore, the promoters undertake detailed feasibility studies so as to investigate all aspects of
the business that they intend to begin with the help of various tools like a study of the market
trend, industry trend, market survey, etc. and with the help of specialists like engineers,
chartered accountants etc. A venture is only feasible when it passes all the three below
mentioned tests.

 Technical feasibility: Sometimes an idea may be good and unique but technically
not possible to execute because the required raw material or technology may not
be easily available. Every business requires funds.

 Financial feasibility: Sometimes it may not be feasible to arrange a large amount

of funds needed for the business in the limited available means. Also, financial
institutions may hesitate to grant huge amounts of loan for the new businesses.

 Economical feasibility: A business opportunity may be technically and

financially feasible but not economically feasible. It may not be a profitable
venture or may not yield enough profits. In such a case, the promoters refrain
from starting the business.
(iii) Name Approval
Once the promoters have decided to launch a company next step is to select a name for the
company and get it registered with the registrar of companies of the state in which the registered
office of the company is to be situated. An application with three names, in the order of their
priority, is filed with the registrar to get the name approved.

(iv) Fixing up Signatories to the Memorandum of Association

The promoters decide upon the members who will be signing the Memorandum of Association
of the proposed company. Usually the signatories of the memorandum are the first Directors of
the Company. However, the written consent of the persons signing the memorandum is required
to act as Directors and to take up the qualification shares in the company.
(v) Appointment of Professionals
Promoters are also required to appoint certain professionals. These professionals help them in
the preparation of necessary documents that are required to be filed with the Registrar of
Companies such as mercantile bankers, auditors, lawyers, etc.

(vi) Preparation of Necessary Documents

The promoters are required to prepare necessary legal documents that have to be submitted to
the Registrar of the Companies for getting the company registered. These documents are return
of allotment, Memorandum of Association, Articles of Association, consent of Directors and
statutory declaration.

Pre-Incorporation Contracts

Before a company commences business, it has to enter into several contracts and incur
several initial expenses to get started. Contracts which are entered into by promoters with
parties to acquire either some property or right for and on behalf of a company which is yet to
be formed are called as ‘pre-incorporation contracts’ or ‘preliminary contracts’.

An agreement made by a person for a company which is not yet into existence at the time of
signing of such agreement is called a pre-incorporation contract.

The person who enters into a pre-incorporation agreement is usually called the Promoter.
Promoter is a person who initially gets the idea of the formation of a company. The
Companies Act however defines promoter as a person who is so named in the prospectus of
the company, who has control over the affairs of the company and according to whom the
directors of the company act.

Legal status of Pre-incorporation contract

Legal status of a pre-incorporation contract is not at all easy to define in specific terms. If
considered as per the definition of contract under the Contract Act, it is necessary to have at
least two parties to constitute a valid contract so as to enter into a contract with each other. As
the general principle is that no contract exists if one party to the contract is not in existence at
the time of entering the contract. This in turn leads to that a company cannot enter into a
contract before it comes into existence. A company is said to be existing only after it has been
duly incorporated. This is one such facet of a pre-incorporation contract

However, it may be argued that, the pre-incorporation contract is entered into by the
promoters on behalf of the company, representing the company. But here too, there is a catch.
The promoters enter into the contract as agents of the company. The question which arises is
if the principal i.e. the company, itself, is not into existence, how can it have authority to
appoint agents to act on behalf of it?

So, its the promoters, and not the company, who become personally liable for all contracts
entered into by them even though they claim to be acting for the prospective company.
But, u/s 230 of the Indian Contract Act, an agent does have authority to personally enforce
contracts entered by himself on behalf of the principal and he also is not personally bound for
them if it is very clearly stated by him about his being not liable under the contract. So if this
principle is applied, the contract becomes in fructuous as neither of the parties is liable under
the contract.

However, u/s 15 (h) and 19 (e) of the Specific Relief Act of 1963, lies the solution to our
problem.

According to Section 15(h) of the Specific Relief Act, specific performance of a contract can
be obtained by any party or a representative on behalf of the principal, when the Promoters of
a company enter into a contract before the company’s incorporation and when such a contract
is warranted under the company’s incorporation terms.

Similarly, under Section 19(e) of the Specific Relief Act if the newly incorporated company
has accepted the pre-incorporation contract and has communicated its acceptance to the other
party, relief against parties can be claimed under subsequent title.

Therefore, pre-incorporation contracts can be enforced in India by:

(i) Incorporating the contract in the terms of incorporation,

(b) By entering into a new contract with the other party or the Promoter,

(c) By expressly or impliedly accepting the benefits of the pre- incorporation contract.

These provisions, in a way deviate from the common law principles to some extent, which
make pre-incorporation contracts valid under section 15. Except as otherwise provided by
this Chapter, the specific performance of a contract may be obtained by–
(a)any party thereto;
(b) the representative in interest of the principal, of any party thereto

How does a company ratify a pre incorporation contract under Indian law?

It is a universal and wide known fact that the company is considered to be a separate legal
entity and all the members of the company are separate from its members. Since a company
is an artificial person and separate from its members, therefore it can enter into its own
contracts and on the property in its own name.
Company being an artificial person who is not born at the time of the incorporation, it cannot
enter into any agreement before incorporation.
It is the time where the work of the promoter comes into the picture where he is responsible
and obliged to bring the company into the legal existence.
Now, therefore, in order to ensure that the company is successfully brought into existence and
is running smoothly and fulfilling its obligations, the promoter has to enter into some
contracts on behalf of the company.
Such contracts are called the contracts formed before the incorporation stage or the
Promoter’s Contract. Such contracts cannot be ignored before the incorporation of the
company and are inevitable for the registration and are therefore recognized under The
Companies Act, 2013 and The Specific Relief Act, 1963.
Promoter’s Liability during Incorporation

Although the Promoters of the Company act as the agent of the company to represent their
interest but the unique thing is that the Principal is not in existence while registration.

Therefore, it becomes all the more important for the promoter to act diligently because due
to non-existence of the principal the contracts are not binding on the company or third parties.

Therefore, the validity and enforceability of pre-incorporation contracts lie in Section 15 and
Section 19 of the Specific Relief Act, 1963.

Section 15(h) of the Specific Relief Act, 1963 if we go by the definition of this, it expressly
states that the contracts incorporated before the incorporation stage are entered into by the
promoters of the for the very purpose and utility of the company and subject to terms of
incorporation of the company, the company may ask for specific performance from the third
party.

However, this condition can only be applied if, after the registration/incorporation, the
company has expressly demonstrated acceptance of those contracts, and communicated such
contracts to the third party concerned. Under identical circumstances the other party to the
contract under Section 19(e) of The Specific Relief Act, 1963may enforce specific
performance against the company.

Accordingly, in order for the company to enforce the contract against the other party to
contract, the members must ratify the contract followed by a communication of acceptance.

The company may not receive any benefit from such a contract unless the contract is
accepted by the company and the promoters would be personally liable for the contracts.

Responsibilities of Promoter: For Non-Disclosure:

The promoters have a responsibility to make sure there is full disclosure at the time of
making the contract, otherwise the company may either:

 Revoke the contract and can recover the price of the contract, or
 Recover the profit even through rescission is not claimed or not possible,
 In case of any breach of the fiduciary duty which the promoter was obliged to, the
company has a right to claim damages.

Liabilities under Companies Act.

Section 56 of Companies Act, 2013 – Promoters liable in case of non-compliance.

This section states that all the matters and the reports relating to incorporation are to be
mentioned in the prospectus. If there is any non-compliance in these provisions, the promoter
would be held liable.

Section 62(1)(C) – Liability for false statements

Promoter of the company is held liable if there are any mis-statements published on the basis
of which people subscribe to the securities of the company, in a good faith. False statements
may lead to any of the below-mentioned situations:

 The allotment of the securities may be set aside.

 May be sued for the damages and compensation.
 The promoter may also be charged with criminal liability, if need be.
Section 63 – Punishment for deceiving public

This section lays down the punishment for the promoter. If the promoter deceives the public
with false and mis–leading statements in the prospectus he shall be liable for punishment.
The punishment set is 2 years of imprisonment or fine which may extend to 50,000 INR or
both. However, the promoter is always given an opportunity of being heard.

Section 478 – Liability for fraud during incorporation or promotion of company

Section 478 applies at the time of winding up of the company wherein the court or the
liquidator may report any sort of fraud at the time of incorporation or the promotion of the
company, then the promoter, as well as other officers or directors, shall also be liable.

Section 543 – Consequences in case of breach of duty

If the promoter of the company has retained any property of the company during the time of
incorporation, the members of the company have a right to sue the promoter.

ow to ratify pre-incorporation contracts?

As it is rightly said, it is inevitable to ratify the contracts for the purpose of its enforcement
by a company. For the purpose of such acceptance or ratification, the promoters can follow
either of the following methods:

1. Accept the contracts by passing a resolution by accepting the contracts and all other
actions which were undertaken or did by the promoters in order for the incorporation
of the company.
2. Novation of Contracts-
Novation of a contract basically means the substitution of existing contract with a new
contract either between the same parties or different parties. The most important
aspect, however, is the old contract being discharged. On completion of novation of
contract, the new contract would be binding the parties. In this way, novation of a
contract provides a new opportunity to replace the liabilities of the promoters with
that company.
While executing contract on behalf of company, some also mistake to contract in name of
company even before it is incorporated. Let us analyze its validity too.

 Company is artificial person which comes into existence after completion of

incorporation process. Unless a company is born, it cannot execute any agreement or
be a party of contract. Therefore, such contracts entered in name of company are not
valid due to its non-existence. Enforceability of such contracts would be questionable
and may also be denied. Hence, it is preferable to enter into contract as promoter of
 the company with condition as to incorporation of company. Such contracts can be
enforced by the company if it is accepted as discussed above.

Definition of Memorandum of Association

Section 2(56) of the Companies Act, 2013 defines Memorandum of Association. It states that
a “memorandum” means two things:

 Memorandum of Association as originally framed;

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

 Memorandum as altered from time to time;

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

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

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

Meaning of Memorandum of Association

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

It is mandatory for every company to have a Memorandum of Association which defines the
scope of its operations. Once prepared, the company cannot operate beyond the scope of the
document. If the company goes beyond the scope, then the action will be considered ultra
vires and hence will be void.

It is a foundation on which the company is made. The entire structure of the company is
detailed in the Memorandum of Association.

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

 The MOA of a company contains the object for which the company is formed. It
identifies the scope of its operations and determines the boundaries it cannot
cross.

 It is a public document according to Section 399 of the Companies Act, 2013.

Hence, any person who enters into a contract with the company is expected to
have knowledge of the MOA.

 It contains details about the powers and rights of the company.

Under no circumstance can the company depart from the provisions specified in
the memorandum. If it does so, then it would be ultra vires the company and void.

Format of Memorandum of Association (MOA)

According to Section 4 of the Companies Act, 2013, companies must draw the MOA in the form
given in Tables A-E in Schedule I of the Act. Here are the details of the forms:

 Table A: Form for the memorandum of association of a company limited by

shares.

 Table B: Form for the memorandum of association of a company limited

by guarantee and not having a share capital.

 Table C: Form for the memorandum of association of a company limited by

guarantee and having a share capital.

 Table D: Form for the memorandum of association of an unlimited company.

 Table E: Form for the memorandum of association of an unlimited company and

having share capital.
Learn more about Articles of Association here

Content of the MOA

The following information is mandatory in an MOA:

Name Clause

1. For a public limited company, the name of the company must have the word
‘Limited’ as the last word

2. For the private limited company, the name of the company must have the words
‘Private Limited’ as the last words.
This is not applicable to companies formed under Section 8 of the Act who must include one of
the following words, as applicable:
  Foundation

 Forum

 Association

 Federation

 Chambers

 Confederation

 Council

 Electoral Trust, etc.

Registered Office Clause
It must specify the State in which the registered office of the company will be situated.

Object Clause
It must specify the objects for which the company is being incorporated. Further, if a company
changes its activities which are not reflected in its name, then it can change its name within six
months of changing its activities. The company must comply with all name-change provisions.

Liability Clause
It should specify the liability of the members of the company, whether limited or unlimited.
Also,

1. For a company limited by shares – it should specify if the liability of its

members is limited to any unpaid amount on the shares that they hold.

2. For a company limited by guarantee – it should specify the amount undertaken

by each member to contribute to:
i. The assets of the company when it winds-up. This is provided that he
is a member of the company when it winds-up or the winding-up
happens within one year of him ceasing to be a member. In the latter
case, the debts and liabilities considered would be those contracted
before he ceases to be a member.

ii. The costs, charges, and expenses of winding up and the adjustment of
the rights of the contributors among themselves.
Capital Clause
This is valid only for companies having share capital. These companies must specify the amount
of Authorized capital divided into shares of fixed amounts. Further, it must state the names of
each member and the number of shares against their names.
Association Clause
The MOA must clearly specify the desire of the subscriber to form a company. This is the last
clause.

For One-Person-Company
The MOA must specify the name of the person who becomes a member of the company in the
event of the death of the subscriber.

Keep in mind the following aspects before submitting the MOA:

1. Print the MOA

2. Divide it into paragraphs

3. Number the pages in sequence

4. Ensure that at least seven people sign it (2 in the case of a private limited
company and one in case of a One Person company).

5. Have at least one witness to attest the signatures

6. Enter particulars about the signatories and witnesses like address, description,
occupation, etc.

A few things to remember

 A company can subscribe to an MOA through its agent

 A minor cannot sign an MOA. However, the guardian of a minor, who subscribes
to the MOA on his behalf, will be deemed to have subscribed in his personal
capacity.

 Companies can attach additional provisions as required apart from the mandatory
ones mentioned above.

Meaning of Articles of Association

Under Indian Company Law, the Articles of Association is a legal document that outlines the
rules and regulations governing the management and operations of a company. It is a key
document that defines the internal rules and procedures for the company’s shareholders,
directors, and officers, as well as the company’s relationship with its stakeholders.

The Articles of Association must be drafted and filed during the incorporation process of the
company. It includes various provisions, such as the company’s name, its registered office
address, the objectives of the company, the rights and obligations of its members, the number
of directors and their powers and duties, the rules for conducting meetings, and the procedure
for issuing and transferring shares.
In addition, the Articles of Association also specify the procedures for resolving disputes
between the company and its shareholders or between the shareholders themselves. They may
also include provisions relating to the appointment and removal of directors, the distribution
of profits and losses, and the winding up of the company.

It is important to note that the Articles of Association are legally binding on the company and
its members and must be adhered to at all times. Any changes to the Articles of Association
must be approved by the shareholders through a special resolution and filed with the
Registrar of Companies.

Definition of Articles of Association under the Companies Act, 2013

The Companies Act, 2013 provides a detailed definition and provisions related to the Articles
of Association in Section 2(5) and Section 5 respectively.

According to Section 2(5) of the Companies Act, 2013, the Articles of Association refers to
the document containing the rules and regulations that govern the management of the
company’s affairs.

Section 5 of the Companies Act, 2013 specifies that the Articles of Association must be in
accordance with the provisions of the Act and must be signed by each subscriber to the
memorandum of association in the presence of at least one witness who attests the signature.
The articles must also be printed and divided into paragraphs and numbered consecutively.

Furthermore, the Act specifies that the articles may contain provisions for the management of
the company’s business, the regulation of its affairs, the conduct of its shareholders and
directors, and other matters incidental to the company’s operations.

The articles may also provide for the transfer and transmission of shares, the appointment and
removal of directors, the payment of dividends, and the winding up of the company.

Nature and Content of Articles of Association

The Articles of Association is a legal document that governs the internal rules and
regulations of a company. The nature and content of the AoA may vary from company to
company depending on their specific requirements and business objectives. However, certain
essential elements must be included in the AoA as per the Companies Act, 2013. The
following are some of the essential aspects of the nature and content of the AoA:

Nature: The AoA is a binding document that sets out the rules and regulations for the
management and operation of the company. It outlines the rights, duties, and obligations of
the company’s directors, shareholders, and officers.

Content: The AoA typically contains the following elements:

a. Name and registered office of the company

b. Objects and purpose of the company

c. Share capital and shareholding pattern

d. Articles relating to the issue and transfer of shares

e. Powers and duties of the directors

f. Rules for holding meetings, quorum, voting, and resolutions

g. Provisions for appointment and removal of directors

h. Provisions for appointment of auditors and their remuneration

i. Procedure for winding up of the company

Flexibility: The AoA can be amended from time to time to suit the changing needs and
circumstances of the company. However, any amendments to the AoA must comply with the
provisions of the Companies Act, 2013.

Legal implications: The AoA is a legally binding document and is enforceable in a court of
law. It provides clarity to the company’s shareholders, directors, and officers on the
procedures and rules they must follow when conducting business activities.

Forms of Articles of Association (AOA)

The forms for Articles of Association (AOA) in tables F, G, H, I, and J for different types of
companies have been mentioned under Schedule I of the Companies Act, 2013. AOA must be
in the respective form.
 Table F- AOA of a company limited by shares
 Table G- AOA of a company limited by guarantee and having a share capital
 Table H- AOA of a company limited by guarantee and not having a share capital
 Table I- AOA of an unlimited company and having a share capital
 Table J- AOA of an unlimited company and not having a share capital

Difference Between Memorandum and Articles of Association

BASIS FOR ARTICLES OF

MEMORANDUM OF ASSOCIATION
COMPARISON ASSOCIATION

Meaning Memorandum of Association is a document Articles of Association is a

that contains all the fundamental document containing all the rules
information which are required for the and regulations that governs the
incorporation of the company. company.

Type of Information Powers and objects of the company. Rules of the company.
contained

Status It is subordinate to the Companies Act. It is subordinate to the

memorandum.

Retrospective Effect The memorandum of association of the The articles of association can be
company cannot be amended amended retrospectively.
 BASIS FOR ARTICLES OF
MEMORANDUM OF ASSOCIATION
COMPARISON ASSOCIATION

retrospectively.

Major contents A memorandum must contain six clauses. The articles can be drafted as per
the choice of the company.

Obligatory Yes, for all companies. Only a private company is

required to frame its articles
while a public company limited
by shares can adopt Table F in
place of articles.

Compulsory filing at Required Not required at all.

the time of
Registration

Alteration Alteration can be done, after passing Alteration can be done in the
Special Resolution (SR) in Annual General Articles by passing Special
Meeting (AGM) and previous approval of Resolution (SR) at Annual
Central Government (CG) or Company General Meeting (AGM)
Law Board (CLB) is required.

Relation Defines the relation between company and Regulates the relationship
outsider. between company and its
members and also between the
members inter se.

Acts done beyond Absolutely void Can be ratified by shareholders.

the scope

Doctrine of Ultra Vires under Companies Act

Companies have to borrow funds from time to time for various projects they are engaged
with and one cannot imagine running a company without borrowing, as it is an indispensable
part of day-to-day transactions.

However, there are certain restrictions to these borrowings and if a company goes beyond
these restrictions it is deemed as ultra vires.

The Doctrine of ultra vires1 may be a fundamental rule of Company Law. It states that the
objects of a corporation, as laid out in its Memorandum of Association, are often departed
from only to the extent permitted by the Act.
Hence, if the company does an act, or enters into a contract beyond the powers of the
administrators and/or the corporate itself, then the said act/contract is void and not legally
binding on the company.
The term Ultra Vires means ‘Beyond Powers’. In legal terms, it’s applicable only to the acts
performed in excess than the legal powers of the doer.
 This works on an assumption that the powers are limited in nature. Since the Doctrine of
ultra vires limits the corporate to the objects laid out in the memorandum, the corporate can
be:

 Restrained from using the funds for other purposes other than those specified in the
memorandum
 Restrained from carrying out any other trade work other than that specified.
A company cannot sue an ultra vires transaction and it cannot be sued too. If it offers or
supplies any goods or services or lends money on an ultra vires contract, then the company
cannot obtain any payment.

Although if a lender lends some money to a company which has not been extended, the
lender can stop the company from parting with it via an injunction. The lender has this right
because the company does not own the money as it is ultra vires to the company and the
lender is till the owner of the money.

Also, if a company borrows money in an ultra vires contract to repay a legal loan; the lender
is entitled to recover the loan from the company. Sometimes an act which is ultra vires can be
normalised by the shareowners of the company, for example

 If an act is ultra vires the power of directors, then the shareowners can ratify it.
 If an act is ultra vires the Articles of the corporation, then the company can alter the
Articles.

Origin of the Doctrine of Ultra Vires

The doctrine of ultra-vires was first time seen in the classic case of Ashbury Railway
Carriage and Iron Co. Ltd. v. Riche, (1878) L.R. 7 H.L. 653, which was decided by the House
of Lords.

In this case the company and M/s. Riche entered into a contract in which the company agreed
for the financial construction of railway line.

Later on the directors abandoned the contract on the grounds of it being ultra-vires of the
memorandum of the company. Riche filed a suit for recovering its damages from the
company.

According to Riche, the words “general contacts” 2 in the objects clause of the company
meant any kind of contract.
Thus, according to Riche, the company had all the powers and authority to enter and perform
such kind of contracts.
Later, the majority of the shareholders of the company ratified the contract. However,
directors of the company still refused to perform the contract as according to them the act was
ultra-vires and the shareholders of the company cannot ratify any ultra-vires act.
When the matter went to the House of Lords, it was held that the contract was ultra-vires the
memorandum of the company, and, thus, null and void.

Term “general contracts” was interpreted in connection with preceding words mechanical
engineers, and it was held that here this term only meant any such contracts as related to
mechanical engineers and not to include every kind of contract.
They also stated that even if every shareholder of the company would have ratified this act,
then also it had been null and void as it was ultravires the memorandum of the company.
Memorandum of the company cannot be amended retrospectively, and any ultra-vires act
cannot be ratified.

What is need for doctrine of ultra vires?

The main objective of it is that it assures the creditors and the shareowners of the company
that the funds of the company will be utilized for the objectives mentioned in the company’s
memorandum and not for any other purpose.

If the assets of the company are wrongfully applied and used then it may result in the
insolvency of the company, which in turn means that the shareowners of the company won’t
be paid.

Thus it prevents a company from such a situation and draws a clear line beyond which the
directors of the company are not authorised to act.

Difference between ultra vires and an illegal act:

An ultra vires act is completely different from an illegal act. People often mistakenly use
them as synonyms, which they aren’t.

An act which is beyond the objectives of the company and not mentioned in the
memorandum of the company is termed as an ultra vire act; whereas an act which is an
offence in itself and draws civil liabilities or is prohibited by law is termed as an illegal act.
Anything which is ultra-vires may or may not be illegal, but both of such acts are void-ab-
initio.

The doctrine of ultra-vires in Companies Act, 2013:

Section 4 (1)(c) of the Companies Act, 2013, states that all the objects for which
incorporation of the company is proposed any other matter which is considered necessary in
its furtherance should be stated in the memorandum of the company.

Whereas Section 245 (1) (b) of the Act provides to the members and depositors a right to file
a application before the tribunal if they have reason to believe that the conduct of the affairs
of the company is conducted in a manner which is prejudicial to the interest of the company
or its members or depositors, to restrain the company from committing anything which can
be considered as a breach of the provisions of the company’s memorandum or articles.

Basic principles of Doctrine of Ultra Vires:

1. Shareowners cannot sanction an ultra vires act or contract even if they wish to do so.
2. Where one party has entirely performed his part of the contract, reliance on the
defense of the ultra-vires was usually precluded in the doctrine of estoppel.
 3. When both the parties have entirely performed the contract, the contract cannot be
attacked on the basis of this doctrine.
4. Any of the parties to the contract can raise the defense of ultra vires.
5. If a contract has been partially performed but the performance was insufficient to
bring the doctrine of estoppel into action, a suit can be brought for the recovery of the
benefits conferred.

Development of the Doctrine of Ultra Vires

Eley v The Positive Government Security Life Assurance Company, Limited, (1875-76)
L.R. 1 Ex. D. 88:

It was held that the articles are not a matter between the company and the plaintiff and that
they may either bind to the directors, but they do not create any contract between the plaintiff
and the company.

The Directors, &C., of the Ashbury Railway Carriage and Iron Company (Limited) v
Hector Riche, (1874-75) L.R. 7 H.L. 653.

The objectives of the company as per the memorandum was to supply and sell some material
which was to be required for the construction of railways. Here the contract was for
construction of the railways, which was contrary to them. As the contract was ultra-vires, it
was held that it cannot not be sanctioned even by the assent of all the shareowners. If the
sanction had been granted by passing a resolution before entering into the contract that would
have been sufficient to make the contract intra-vires. However, in this situation, a sanction
cannot be granted with a retrospective effect as the contract was ultra-vires the memorandum.

In Shuttleworth v Cox Brothers and Company (Maidenhead), Limited, and Others,

[1927] 2 K.B. 9:

It was held that if a contract is subject to the legal powers of alteration contained in the
articles and such alteration was made in good faith and for the benefit of the company then it
would not be considered as a breach of the contract and will be held valid.

Case Laws relating to Doctrine of Ultra Vires

In India the first concept of ultra vires was noticed in the case of Jahangir R. Modi vs
Shamji Ladha , where the plaintiff had purchased 600shares in a company and the
defendant(directors of the company) had also purchased some shares in the same company.
The memorandum of the company did not allow the members to sell or purchase any shares
of the company. The plaintiff sued the directors of the company and asked for the
compensation for the purchase of the shares from the court. The Bombay High Court held
that “a shareowner can maintain an action against the directors of the company to compel
them to restore to the company the funds to it that have been employed by them in a
transaction that they have no authority to enter into, without making the company a party to
the suit”.

Doctrine of Indoor Management in Company Law

What is Doctrine of Indoor Management in Company Law?

The Doctrine of indoor management protects the rights of third parties dealing with a
company or corporation. It essentially states that if someone is dealing with a company in
good faith and on the assumption that the company’s internal affairs and procedures are being
properly followed, they should not be held responsible for irregularities within the company’s
internal management.

In other words, the Doctrine of indoor management in Company Law allows third parties,
such as customers, suppliers or anyone entering into contracts or transactions with a
company, to rely on the external representation and documentation of the company without
needing to investigate or inquire into the company’s internal affairs. If a company’s external
documents, like contracts, appear valid and proper, a third party can assume that the
necessary internal processes have been followed.

Importance of Doctrine of Indoor Management

The Doctrine of indoor management in Company Law is crucial in modern business

transactions as it provides legal protection to innocent third parties dealing with companies. It
allows individuals and entities to rely on external representations and documents of a
company without delving into its internal management.

Doctrine of indoor management fosters trust, streamlines commercial interactions and

promotes economic activity. It strikes a balance between safeguarding the interests of
companies and ensuring that those dealing with them are not unduly burdened with verifying
internal procedures.

By offering this protection, the doctrine maintains the fluidity of business transactions,
encourages investment and facilitates the growth of the corporate sector, ultimately
contributing to the stability and prosperity of the business environment.

Position under the Indian Companies Act, 1956

Under the Indian Companies Act, 1956, the principles akin to the Doctrine of indoor
management are reflected in Section 290. This section deals with the validity of acts carried
out by directors of a company. It stipulates that acts performed by a person in the capacity of
a director will be considered valid, even if it is later discovered that their appointment was
invalid due to disqualification or any defect or if it was terminated in accordance with the
provisions of the Act or the Articles of Association of the company.

However, there is a limitation outlined in the section, stating that this provision does not
validate any acts performed by a director after it has become known to the company that their
appointment is invalid or has been terminated.

In essence, Section 290 of the Indian Companies Act, 1956, aligns with the principles of
protecting third parties who deal with the company in good faith and are not expected to
investigate the internal management of the company.

Judicial Interpretation of Doctrine of Indoor Management in Company Law

The interpretation of the Doctrine of indoor management in Company Law by the courts is
seen in light of its underlying purpose. In the business world, it’s essential to protect all
parties involved in contractual relationships. While this doctrine primarily aims to protect
outsiders dealing with a company, its more significant purpose is to encourage investments in
the business sector, thus balancing business and the economy.

In the case of Dey v. Pullinger Engg Co., Justice Bray rightly pointed out that the wheels of
commerce wouldn’t turn smoothly if outsiders engaging with companies were compelled to
investigate the company’s internal procedures and workings to ensure nothing is amiss.

Furthermore, in the case of Morris v. Kanssen, Lord Simonds stated that people in the
business world would be hesitant to engage in transactions with companies if they had to
delve into the intricacies of the company’s internal operations.

Investors are more likely to invest in companies when they feel secure in all aspects. If
investors lack this security, companies may struggle to attract investments, which can have a
negative impact on the overall economy. Therefore, the protection afforded to investors under
this doctrine is a crucial step in promoting trade and commerce.

Origin of Doctrine of Indoor Management in Company Law

The doctrine of indoor management in Company Law, famously known as ‘Turquand’s

Rule,’ has its origins in the landmark case of Royal British Bank v. Turquand (1856) 6
E&B 327. Here’s a summary of the case:

The company’s Articles allowed for borrowing money through bonds, but it required a
resolution passed in a General Meeting.

The directors obtained a loan without passing the resolution. When the loan repayment
defaulted, the company was held responsible.

Shareholders contested the claim due to the missing resolution. The court ruled that the
company was liable because those dealing with the company could reasonably assume that
the necessary internal procedures were followed.

This legal principle of indoor management in company law was further affirmed by the
House of Lords in Mahony v. East Holyford Mining Co. [1875] LR 7 HL 869. In this case,
the company’s Articles specified that cheques should be signed by two directors and
countersigned by the secretary.

It later emerged that neither the directors nor the secretary who signed the cheque were
properly appointed. The court ruled that the recipient of such a cheque was entitled to the
payment because the appointment of directors is considered part of the company’s internal
management and those dealing with the company are not expected to inquire into such
matters.

The stance taken by the House of Lords in Mahony v. East Holyford Mining Co. is
consistent with Section 176 of the Companies Act, 2013, which states that defects in the
appointment of directors do not invalidate their actions.

The doctrine of indoor management in Company Law protects third parties who enter into
contracts with a company from any irregularities in the company’s internal procedures.
Third parties typically cannot discern internal irregularities within a company, so the
company is held liable for any losses they may incur due to these irregularities.

In contrast, the Doctrine of Constructive Notice primarily safeguards the company against
claims by third parties, while the doctrine of indoor management protects third parties from
company procedural issues.

Exceptions to the Doctrine of Indoor Management in Company Law

The doctrine of indoor management, which is over a century old, has gained significance in
today’s world where companies play a central role in economic and social life.

However, it has evolved to accommodate certain exceptions to prevent it from favouring

outsiders to the detriment of companies. Here are some of these exceptions:

Knowledge of Irregularity
When an outsider entering into a transaction with a company has either constructive or actual
notice of irregularities related to the company’s internal management, they cannot seek
protection under the doctrine of indoor management. In some cases, the outsider might be
involved in the internal procedures themselves.

For example, in the case of T.R. Pratt (Bombay) Ltd. v. E.D. Sassoon & Co. Ltd., where
Company A lent money to Company B for mortgaging its assets, but the proper procedure
outlined in the Articles was not followed and both companies had the same directors. The
court held that the lender was aware of the irregularity, making the transaction non-binding.

Another example is when two directors, X and Y, approve a transfer of shares, but it turns out
that X was not validly appointed and Y was disqualified due to being the transferee. If the
transferor of the shares knew these facts, the transfer of shares would not be binding.

Forgery
The doctrine of indoor management in Company Law does not apply when an outsider relies
on a document that is forged in the name of the company. A company cannot be held liable
for forgeries committed by its officers.

For instance, in the case of Ruben v. Great Fingall Ltd., the plaintiff received a share
certificate issued under the company’s seal. The certificate had been issued by the company’s
secretary, who had forged the signatures of two company directors and affixed the company’s
seal. The plaintiff argued that whether the signatures were forged or genuine should be
considered an internal management matter, making the company liable. However, the court
ruled that the doctrine of indoor management does not extend to cover forgeries. Lord
Loreburn explained that outsiders dealing with companies are not obligated to inquire into the
company’s internal management and are not affected by irregularities of which they are
unaware.

There are additional exceptions to the doctrine of indoor management, which have evolved
over time to address specific situations and ensure a balanced approach to legal protections:
Negligence
If an outsider entering into a transaction with a company could have discovered irregularities
in the company’s management through proper inquiries, they cannot seek protection under
the doctrine of indoor management. Similarly, if the circumstances surrounding the contract
are highly suspicious and invite inquiry and the outsider fails to make appropriate inquiries,
the remedy under this doctrine may not be available.

For instance, in the case of Anand Bihari Lal v. Dinshaw & Co., the plaintiff accepted a
transfer of a company’s property from the company’s accountant. The court held the transfer
void because it was beyond the scope of the accountant’s authority and the plaintiff should
have checked the power of attorney granted to the accountant by the company.

Acts Beyond Apparent Authority

Acts performed by a company officer that exceed their apparent authority will not make the
company liable for any resulting defaults. The doctrine of indoor management in Company
Law may not provide a remedy if the officer’s actions are outside the authority that could
reasonably be assumed from their position. The outsider can only sue the company under this
doctrine if the officer has the delegated power to act in such a manner.

For example, in the case of Kreditbank Cassel v. Schenkers Ltd., a branch manager
endorsed bills of exchange in the company’s name in favour of a payee to whom he was
personally indebted, without any authority from the company. The court held that the
company was not bound by this act. However, if an officer commits fraud within their
apparent authority on behalf of the company, the company may be held liable for the
fraudulent act.

The same principle applies in the case of Sri Krishna v. Mondal Bros. & Co., where the
manager of the company had apparent authority to borrow money but did not place the
borrowed amount in the company’s strongbox. The court held that the company was bound to
acknowledge the debt due to the creditor’s bona fide claim resulting from the fraudulent acts
of the company’s officer.

Representation Through Articles

This exception is somewhat complex and controversial. Articles of Association often contain
clauses related to the “power of delegation.” In cases where the Articles authorise directors to
borrow money and delegate this power to one or more of them, a company can be bound by a
loan even if a specific resolution wasn’t passed directing such delegation.

For example, in the case of Lakshmi Ratan Cotton Mills v. J.K. Jute Mills Co., a director
of the company borrowed money from the plaintiff. The company argued that it was not
bound by the loan because there was no resolution directing the delegation of borrowing
power to that director. However, the court held that the company was indeed bound by the
loan since the Articles of Association authorised such delegation of authority.

Examples of Doctrine of Indoor Management in Company Law

Example 1: ABC received a cheque from XYZ company and the cheque was issued in
violation of the Xyz company’s Articles of Association because the directors and the
secretary who signed the cheque were not properly appointed, ABC is entitled to relief. The
irregularity in the appointment of directors is considered an internal management matter of
the company. According to the doctrine of indoor management, a person dealing with the
company is not required to inquire into such internal management issues. Therefore, ABC
can seek relief and the company must pay the amount of the cheq

PROSPECTUS AND STATEMENT IN LIEU OF PROSPECTUS

INTRODUCTION

When a company chooses to offer its securities for the general public, it is quite a difficult
task for the future subscribers to just blindly trust them and subscribe to it.

So for a clarity and to make this process easier, a company issues a document prior to or at
the time of issue of securities.

This document is therefore known as prospectus. On the other hand, statement in lieu of
prospectus is a less detailed document than prospectus and is issued when the prospectus
cannot be issued. For a better understanding of both the concept let us study them differently
so that we will able make out the difference and uses of both the documents.

PROSPECTUS

DEFINITION OF PROSPECTUS

The definition of Prospectus is provided under Section 2(70) of the Companies Act, 2013. It
means “any document described or issued as a prospectus and includes:

 a red herring prospectus referred to in Section 32 or

 shelf prospectus referred to in Section 31 or
 any notice, circular, advertisement or other document inviting offers from the public
for the subscription or purchase of any securities of a body corporate.”[1]

CONTENTS OF PROSPECTUS

Section 26 of the Companies Act, 2013 provides for the contents which a prospectus should
contain. Following are the matters which should be stated in the prospectus:

 DATED AND SIGNED

 a prospectus which a public company or any person issues shall bear the date and the
signature
 shall contain information and reports related to financial information provided by
Securities and Exchange Board after consulting State Government.
 A declaration that the provisions of this Act has been complied with.[2]
 Issuance of prospectus for shares or bonds

The issuance of a prospectus or an application form for shares or bonds to current

shareholders or bondholders of the company is pursuant to Section 26(1)(a)(ii). The issuance
of prospectus or application forms for transferable securities previously issued, traded or
listed on recognized exchange are also exempt from their application. [3]

 FILING TO REGISTRAR
Before the date of publication a prospectus shall not be issued unless a copy of the same is
filed to the Registrar bearing the signatures of directors or proposed director or Attorney
which was duly authorized in this behalf.[4]

 STATEMENT BY EXPERT: NOT INCLUDED

A statement allegedly made by an expert cannot be included in in a prospectus prepared in

pursuance to Section 26(1) unless the expert person is or was not involved in any kind of
management of the company. Along with it the expert has also provided with its written
consent without withdrawing it till it reaches to the Registrar.[5]

 DOCUMENTS ATTACHED AND VALIDITY OF PROSPECTUS

A prospectus should specify that a prospectus copy is delivered to the Registrar and along
with it, it should be specified that any other document was attached which such copy or not.
[6] After delivering the copy to the Registrar if within 90 days the prospectus was not issued
then it should be considered as invalid.[7]

 PUNISHMENT

Where the issuance of prospectus is done by contravening any of the provisions under this
Act then the person shall be punished with fine of minimum amount of 50,00 with a
maximum limit of 3,00,000 and where someone had the knowledge before issuing such
prospectus that it is contravening the provisions of the stated section then also the punishment
would remain same.[8]

KINDS OF PROSPECTUS

Under the Companies Act, 2013 basically four types of prospectus are mentioned which are
as follows:

1. DEEMED PROSPECTUS

The Companies Act, 2013 provides for the deemed prospectus under Section 25. A document
containing offer for sale of securities which the company allots or agrees for its allotment
keeping in mind that such securities shall be offered to the public for sale, such document is
known as Deemed prospectus. Also such document shall be signed by at least one half of the
partners of the firm and two directors.

If the following conditions are fulfilled it is assumed that the securities wer offered for sale
only:

 When the allotment by the company is made or they agree for the allotment, the offer
for sale of securities shall be made within 6 months,
 The whole consideration with regards to those securities have not been received on
the date when offer is made.

 SHELF PROSPECTUS
Shelf prospectus refers to a prospectus in which securities are not issued at one time but in
parts and which does not require any further prospectus with such securities. It is filed with
the Registrar during the first offer of the securities. This prospectus shall be valid for a
maximum period of one year. Several prospectus is not required for further issuance of
securities. When such prospectus is filed, a information memorandum with the following
information should be provided with it and that too before the issuance of further offer:

 Information regarding any charge created,

 Any modification in the financial position, etc.[9]

The above information memorandum along with the shelf prospectus will be deemed to b a
prospectus.[10]

 RED HERRING PROSPECTUS

Red Herring Prospectus refers to a prospectus which does not provide for the quantum and
the price of securities. It is issued before a prospectus is issued and that too before 3 days of
the offer and the opening of subscription list.[11]

 ABRIDGED PROSPECTUS

It is a kind of prospectus defined under the Companies Act, 2013. It refers to a memorandum
mentioning the prominent features of such prospectus which the Securities and Exchange
Board can state in any of its regulations.[12]

STATEMENT IN LIEU OF PROSPECTUS

If a public company does not invite the public to subscribe to its stock, but instead seeks to
raise funds from the private sector, it does not need to publish a prospectus.

In this case, promoters are required to create a draft prospectus, a “statement in lieu of
prospectus”. Under the Companies Ordinance, if a public company does not issue a
prospectus of incorporation, it must file a statement in lieu of the prospectus with the
company register.

The Prospectus Replacement Statement is defined as a public document prepared in Schedule

Two of the Corporate Regulations by such a corporation that does not issue a prospectus to
the Registrar of its preparation prior to the allotment of shares of the Bonds, and be signed by
each of the persons named therein”.[13]

This is a statement that the company with a registered capital of makes to the Registrar for
registration at least three days before the first allotment of shares or bonds under the
following conditions:

 if the company does not issue a prospectus; or

 When a company publishes a prospectus but has not allotted any of its shares offered
for public subscription

The Declaration must be signed in lieu of a prospectus by each person appointed therein as a
director or proposed director of the Company. According to Section 69 (1), if the company
 that is required to publish a prospectus does not comply with this obligation, it cannot
allocate any shares. [14]

MATTERS CONTAINED IN THE STATEMENT IN LIEU OF PROSPECTUS

 Company Name.
 The company’s share capital is divided into ordinary shares and the nominal value of
one share.
 Description of the proposed activity and prospectus.
 Name, address, description and duties of proposed or appointed directors, officers,
delegated counsel and company secretaries.
 Provisions for the appointment and remuneration of the foregoing corporate
representatives.
 Voting rights at company meetings.
 Number and amount of shares and debentures agreed to be issued.
 Names, occupations and addresses of sellers of goods purchased or offered for sale by
the company.
 Amount to be paid in cash, stocks or bonds to each real estate seller.[15]

STATEMENT IN LIEU OF
BASIS PROSPECTUS
PROSPECTUS

A prospectus provides for the information regarding the It is used in some particular situation when
Object
securities of a company. the other prospectus cannot be used.

Matters A prospectus provides with a detailed information It contains less detailed information as
contained related to the company. compared to the prospectus.

A prospectus is generally issued by a company which is It is issued by a company which is already

Issue
newly going public or offering new securities. trading in the market.

No such approval is required here to issue

Approval It requires approval from securities commission.
statement in lieu of prospectus.

Distribution It is generally distributed to the potential investors. It is not distributed very widely.

Usually it is prepared at the time or before the offering

Time It can be prepared or distributed any time.
of securities.

It is used for purposes which are not so

Use It is used to gather investment through securities.
formal.[16]
SHARE AND SHARE HOLDER

Introduction

With the impetus in the practice of corporate laws, it has become necessary to know some
basic laws concerning a company. One such law is the Companies Act, 2013 (hereinafter
referred to as “Companies Act”). Nonetheless, a mere study of the Companies Act would not
suffice and a Corporate Lawyer needs to be updated with the latest Rules as well as
Amendments concerning the Companies Act. Therefore, every law student must be aware of
certain basic terms that are used in connection with a Company. In this article, we will be
understanding the meaning of share capital, shares and it’s types.

What is Share Capital of A Company?

Although most companies have share capital, it is not an essential ingredient in the
incorporation of a Company.

For instance, it could be a company limited by guarantee. The Share Capital of a company is
usually divided into shares of equal amounts.

The maximum Share Capital of a Company must be mentioned in the Memorandum of

Association (hereinafter referred to as “MOA”) of the said Company and is referred to as the
Company’s authorised capital.

This is also referred to as its nominal capital and the company cannot raise more capital than
its authorized capital. In order to exceed the authorized capital amount, the MOA must be
amended accordingly.

Nonetheless, the Company may issue an amount smaller than the Authorized Share Capital
and this is known as its Issued Share Capital.

Therefore, the amount that is issued from the Authorized Share Capital is known as its
Issued Share Capital. Furthermore, it is not necessary that the entire Issued Share Capital
might be taken up and that is why only the part that is subscribed to is known as the
Subscribed Share Capital.

The part of the Subscribed Capital that the company calls up for payment is known as the
called up share capital. The part that is not called up for payment is the uncalled capital.

By passing the Special Resolution, the uncalled Capital can be transformed into reserve
share capital. Subsequently, the part of the called up capital that the shareholders actually pay
is called the paid up share capital, while the unpaid part is referred to as its unpaid capital.
What is a ‘share’ as per Companies Act, 2013?

The capital of the company seldom comprises of a ‘single unit’, in fact, it comprises of
numerous indivisible units. These units are of a specific amount.

Therefore, when a person purchases such a unit or several units, he purchases a certain
defined percentage of the share capital of the company.

In this case, he becomes one of the many shareholders of that company. The Companies Act
has provided an extremely vague and ambiguous definition to share and defines it as ‘a share
is share in the Share Capital of the company’.[i] Although there are various ways of looking
at this, a share is not merely a sum of money, but a clear depiction of interest a shareholder
hold’s in a company.

What is a ‘share’ as per Sale of Goods Act, 1930?

Section 2 (7) of the Sale of Goods Act, 1930 (hereinafter referred to as “Sale of Goods Act”)
defines goods as movable property that does not include actionable claims and money, but
includes shares and stocks. Nonetheless, it cannot be solely regulated as per the Sale of
Goods Act simply because it has been regarded as a movable property.

Is a Share Certificate the same as a Share?

At times, shareholders tend to confuse share with a share certificate. It is pertinent to note that
there lies a thin line of difference between an actual share that makes a part of the share
capital and a share certificate. As per the provisions of the Companies Act, a share certificate
acts as a prima facie evidence of the title of the shareholder to the shares or stock.

A share can either remain a part of Company’s share capital or be owned by a shareholder.
Even when the share is owned by a shareholder, it forms a part of the company. Section 44 of
the Companies Act, 2013 mentions that a share is a movable property transferable in the
manner provided by the articles of the company.

On the contrary, section 46 states that share certificate means a certificate, under the
common seal of the company, specifying any shares held by any member. A similar
distinction was drawn between a share and share certificate in Shree Gopal Paper Mills Ltd.
v. CIT.[ii]
Types of Shares as per Companies Act, 2013
As per Section 43 of the Companies Act, the share capital of a company limited by shares
shall be of two kinds i.e., equity share capital or preference share capital, unless otherwise
provided by MOA or Articles of Association (hereinafter referred to as “AOA”) of a private
company.

1. Preference Shares

Preference shares are the shares where shareholders get a preferential dividend. The dividend
may consist of a fixed amount that is payable to preference shareholders.

As the name suggests, the preference shareholders get a ‘preference’ over the equity
shareholders in receiving dividends. At times, the equity shareholders may not even receive
profits. The dividend amount paid to them may be calculated at a fixed rate.

The preference shareholders vote only on such resolutions that directly affect their rights as
preference shares and a resolution for the winding-up of the company or for the repayment or
reduction of its equity or preference share capital.

Nonetheless, where the preference dividend is not paid for two years or more, the preference
shareholders get voting right on every resolution placed before the company. Voting rights of
a preference shareholder, on a poll, shall be in proportion to his share in the paid-up
preference share capital of the company.

Furthermore, during the winding-up of the company the preference shareholders get a right to
be paid, i.e., amount paid up on preference shares must be paid back before anything is paid
to the equity shareholders. Preference shares can be bifurcated into six kinds, namely,
cumulative preference shares, non – cumulative preference shares, participating preference
shares, non – participating preference shares, redeemable preference shares and non –
redeemable preference shares.

Cumulative Preference Shares And Non Cumulative Preference Shares

There may be times when the company does not generate profits and therefore fails to give
dividends. Preference shareholders who own cumulative preference shares can be paid from
the profits made in the subsequent years for the current year’s dividends that are in arrears.

Until it is fully paid, the fixed dividend keeps on accumulating. The non-cumulative
preference share gives the right to its holder to a fixed amount or a fixed percentage of
dividend out of the profits of each year.

If no profits are available in any year or no dividend is declared, the preference shareholders
get nothing, nor can they claim unpaid dividends in the coming year.
Preference shares are cumulative unless expressly stated to be non-cumulative and the same
was held in Foster v. Coles[iii] where it was observed that mere deletion of the word
cumulative would not render the preference shares non – cumulative.

Participating Preference Shares And Non-participating Preference Shares

The shares which are entitled to a fixed preferential dividend are known as Participating
preference shares. Additionally, they have a right to participate in the surplus profits along
with equity shareholders after dividend at a certain rate has been paid to equity shareholders.

For example, after 20% dividend has been paid to equity shareholders, the preference
shareholders may share the surplus profits equally with equity shareholders.

Again, in the event of winding-up, if after paying back both the preference and equity
shareholders, there is still some surplus left, then the participating preference shareholders get
additional share in the surplus assets of the company.

Unless expressly provided, preference shareholders get only the fixed preferential dividend
and return of capital in the event of winding-up out of realised values of assets after meeting
all external liabilities and nothing more.

It is pertinent to note that Participating Preference Shareholder’s right to participate shall be

provided either in the MOA or AOA or by virtue of their terms of issue.

Reedeemable Preference Shares And Irredeemable Preference Shares

Although equity shares are not redeemable, as per section 55 of the Companies Act,
preference shares can either be redeemable or irredeemable. Redeemable preference shares
refer to those shares where the shareholders can be repaid after an estimated period of time.

This act of repayment is referred to as redemption of preference shares. Therefore, in cases

where the shareholder is issued a redeemable preference share, they are entitled to receive
that amount after the completion of the stipulated period.

Where the amount cannot be redeemed even after the completion of the stipulated period,
such shares will be referred to as irredeemable preference shares. According to Section 55 of
the Companies Act, a company that is limited by shares cannot issue redeemable preference
shares.

Nonetheless, it may only issue redeemable preference shares if authorized by the AOA of the
said company, and are liable to be redeemed within a period that does not go beyond 20 years
from the date of their issue.
However, subject to certain conditions given in the provisions of the Companies Act and the
Rules and Regulations, a company may issue such preference shares for infrastructure
projects for a period exceeding 20 years.

2. Equity Shares

The most common kind of shares that we hear about on a daily basis are equity shares. Equity
shares are defined as those shares that are not preference shares, this simply means that shares
which do not enjoy any preferential right in the matter of payment of dividend or repayment
of capital, are known as equity shares.

After the rights of preference shareholders are done, the equity shareholders get their share in
the remaining amount of distributable profits of the company. But there may be times when
the company may not accrue any profits as dividend to its equity shareholders even when it
has distributable profits.

The dividend on equity shares is not fixed and may differ every year depending on the profits
available. Equity shareholders of a company limited by shares get a right to vote on every
resolution placed before the company and their voting rights on a poll are in proportion to the
share in the paid-up equity share capital of the company. But if the MOA or the AOA of the
company allows it provide differential voting rights it may do so.

Sweat Equity Shares

According to section 54 of the Companies Act, a company can issue sweat equity shares.
These equity shares are issued by a company to its own employees or directors.

Such shares are generally issued at a discount. Such shares might also be issued for
consideration other than cash like for rendering know how or making some Intellectual
Property Rights available for the company, etc.

All limitations, restrictions and other provisions that are applicable to equity shares are also
applicable to sweat equity shares. Sweat equity shareholders rank pari passu with regular
equity shareholders.

3. Bonus Shares

Bonus shares are always issued to existing members. According to Article 63, a company is
free to issue fully paid up bonus shares to the members out of its Securities Premium
Account, its free reserves and Capital Redemption Reserve Account.

In Standard Chartered Bank v. The Custodian[iv], the court stated that such kind of shares
can be described as a distribution of capitalized undivided profit. Furthermore, the Court
added that when bonus shares are issued, there is an increase in the company’s capital due to
transferring the amount from the company’s reserve to the Capital Account of the company.
This results in additional or extra shares being issued to the shareholders. In the
aforementioned case, the Supreme Court even went on to state “A bonus share is a property
which comes into existence with an identity and value of its own and capable of being bought
and sold as such.”

Shareholders’ Rights

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

1. Appointment of directors

Shareholders play an important role in the appointment of directors. An ordinary resolution is

required to be passed by the shareholders for the appointment. Apart from this, shareholders
can also appoint various types of directors. They are:

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

2. Legal action against directors

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

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

Shareholders also have a right to appoint the company auditors. Under Companies Act 2013,
the first auditor of the company is to be appointed by the board of directors. Further the
shareholders at the annual general body meeting at the recommendation of directors and audit
committee. The appointment is generally done for five years and further can be ratified by
passing a resolution in the annual general body meeting.

4. Voting rights

Shareholders also have the right to attend and vote at the annual general body meeting. Every
company registered in India should comply with the provisions of the Companies Act 2013.
It is mandatory for every Indian company to hold an annual general meeting once in every
year. The meeting can be held anywhere at the head office of the company or any other place
as given by the company. At the meeting, there are various mandatory agendas which are to
be discussed. These include the adoption of financial statements, appointment or ratification
of directors and auditors etc.

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

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

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

5. Right to call for general meetings

Shareholders have the right to call a general meeting. They have a right to direct the director
of a company to can all extraordinary general meeting. They also can approach the Company
Law Board for the conduction of general body meeting, if it is not done according to the
statutory requirements.
 6. Right to inspect registers and books

As shareholders are the main stakeholders in a company, they have the right to inspect the
accounts register and also the books of the firm and can ask questions about the same if they
feel so.

7. Right to get copies of financial statements

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

8. Winding up of the company

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

Other Shareholders’ Rights

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

Shareholders’ Duties

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

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

Concept of allotment of shares

Before diving deep into the topic of allotment of shares it is necessary to understand what
allotment really means. The allotment is the allocation of a portion of shares to an
underwriting participant during Initial Public Offering (IPO). When the shares allotted to the
underwriting form, the remaining shares are allotted to other forms that participate in the
same.

The process of appropriation of a certain number of shares and distribution among those who
have submitted the return applications of shares is known as allotment of shares. Companies
Act 2013 incorporated therein forms allotment of shares that are listed on NSE and BSE or
any other stock exchanges in India. Other regulations that are applicable for subsidiaries of
listed companies include the provision of SEBI Act, 1992 and Securities Contract Regulation
Act, 1956.

Allotment of shares is basically creating and issuing a new number of shares by the company
to the new or existing shareholders. The purpose of allotting new shares is to bring new
business partners.

General principles as to allotment of shares

An allotment to be effective has to comply with the requirements of the law of contract
relating to the acceptance of an offer.

 Allotment by proper authority

An allotment should be made by a resolution of the Board of directors. The Allotment is the
primary duty of the directors and this duty cannot be delegated except in accordance with the
provisions of the articles.

 Within reasonable time

allotment should be made within a reasonable period of time otherwise the application fails.
Reasonable time should remain a question of fact in each case. The interval of six months
between application and allotment has been held unreasonable. If the reasonable time
expires Section 6 of the Contract Act applies and the application must be deemed to be
revoked.

 Must be communicated

The allotment should be properly communicated to the applicant. Posting of a properly

addressed and stamped letter of allotment is sufficient communication, even though the letter
is lost or held up.

 Absolute and unconditional

Allotment should be absolute and should be according to the terms and conditions of the
application if any.

Provisions of Companies Act relating to issue and allotment of shares

1. A public company should file a prospectus or declaration in lieu of a prospectus

inviting offers from the public for the purchase of shares.
2. After reading the prospectus, the public applies for the company shares in printed
forms. The company can ask the issue price to be paid in full, together with the
application money or to be paid in instalments as share application money, share
first call, second call, etc. The application money must be paid at least five percent
of the nominal value of the share.
3. The Allotment of shares cannot be made unless the minimum amount that is the
minimum subscription stated in the prospectus is subscribed or applied. The
minimum subscription should be mentioned in the prospectus.
4. The share application amount should be deposited in the bank which can be
operated by the company only after the commencement certificate.
5. The company has to return and refund the entire subscription amount instantly if
90% of the issue amount is not achieved by the company within 60 days. For
further delay, which is beyond 78 days, the company has to pay 6% interest per
annum.
After allotment of shares, the company can call for the full amount or instalments which are
due on shares from the shareholders according to rules mentioned in the prospectus. Usually,
the articles of the company include provisions regarding calls. If there are no such provisions
then the following provisions are applicable:

1. No call should be for more than 25% of the nominal value of each share.
2. The interval between two calls should not be less than a month.
3. At least 14 days should be provided to each member for the call mentioning the
amount, date, and place of payment.
4. Calls should be made on a uniform basis on the entire body of shareholders falling
under the same class.

Procedure of allotment of share

The general procedure that is accepted in the law of contract also applies to the allotment of
shares. These are:

 The resolution of the board of directors must be done prior to allotment. The
directors cannot be delegated this duty and it becomes very important that a valid
resolution is passed by the board for allotment in a valid meeting. (Portuguese
consolidated copper mines 1889)
  According to Section 6 of the Indian contract Act, 1872, it is important that the
allotment of shares is done within a reasonable period of time but this reasonable
time varies from case to case. The refusal to accept the shares by the applicant is
the choice of himself if the allotment is made after a very long time to him. The
same thing happened in the case of Ramsgate Victoria Hotel Company v.
Montefiore 1866, wherein the allotment of the share was made at an interval of six
months between application and allotment and it was held unreasonable.
 Moreover, the allotment must be unconditional and absolute and must be allotted
on the same terms upon which they were agreed upon during the acceptance of the
application.
 Acceptance is the key to allotment and without acceptance of valid allotment
cannot be made just on an oral request.

Statutory restrictions on the allotment of shares

 Minimum subscription and application money (S-39) – The first essential

requirement for a valid allotment is that of minimum subscription. The amount of
minimum subscription has to be declared in the prospectus at the time when shares
are offered to the public.
 Shares cannot be allotted unless at least so many amounts have been subscribed
and the application money, which must not be less than 5% SEBI may decide the
various percentage of the nominal value of the share, has been received in by
cheque or other instruments.
 It has been established by various cases that it is a criterion to valid allotment that
the entire application money should be paid to and received by the company by
cheque or other instruments.
 If the shares allotments are made without application money being paid it is
invalid. If the minimum subscription has not been received within thirty days of
the issue of the prospectus, or any such period as specified by SEBI the amount
has to be returned within such time and manner as prescribed. [S-39(4)]
Application money can be appropriated towards allotment or it has to be returned
or refunded.

1. Return of allotment [S.39 (4)] – A return of allotment has to be filed with the
registrar in the prescribed manner whenever a company makes an allotment of
shares having a share capital.
2. Penalty for default [S. 39 (5)] – In case of default, the company and its officer who
is in default are liable to a penalty for each default of Rs 1000 for each day during
which the default continues or Rs 1,00,000 whichever is less.

 Shares to be dealt in on stock exchange [S.40] – Every company aiming to offer

shares or debentures to the public by the issue of the prospectus has to make an
application before the issue to any one or more of the accepted stock exchanges for
permission for the shares or debentures to be dealt with at the exchange.
 The need is not merely to apply but also to obtain permission. In the prospectus,
the name or names of the stock exchanges to which the application is made must
be stated.
This requirement is precedent for listing that the application money is deposited in a separate
bank account which will be used only for adjustment against allotment of shares if the shares
have the permission to be dealt with in the specified manner in the prospectus.

Hence the money will be used for the repayment to applicants within the time specified by
SEBI if the company has not been able to allot shares for any other reasons. [S. 40 (3)]. The
object of the section is that it will help shareholders to find a ready market so that they can
convert their investment into cash whenever they like. In the Supreme Court case Union of
India v. Allied International Products Ltd, this objective of the section was explained.

 Over-subscribed prospectus- Where the permission of stock exchange being

granted and the allotment being valid the prospectus gets oversubscribed, the
oversubscribed portion of the money received has to be returned to the applicants
within the same specified period.

Meaning and definition of company meetings

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

Why are company meetings held

Before we read about the types of company meetings, let’s take a look at why exactly
company meetings are conducted.

Control management function

Company meetings play a crucial role in controlling the management functions of a

company.

Control the affairs of the company

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

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

1. Inquiring regarding the affairs of the company,

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

Types
Meetings can be of different types, namely:

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

General notes

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

Importance of company meetings

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

1. Introducing changes in the company,

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

Components of a valid company meeting

A company meeting generally consists of the following:

Participants

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

Chairman

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

Secretary

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

Invitees

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

Material elements

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

1. The sitting arrangement,

2. The materials for writing, etc.

General provisions to know about conducting valid company meetings

Proper authority to convene meetings

In order for a meeting to be regarded as valid, it must be called by a proper authority, like the
board of directors. In a valid board meeting, the decision to convene a general meeting and
issue notice in this regard must be taken by passing a resolution.

Notice

For a meeting to be conducted properly, a proper notice must be issued by the proper
authority. It means that such a notice must be drafted properly according to the provisions
laid down under the Companies Act, 2013. Also, such a notice must be duly served on all the
members who are entitled to attend and vote at the meeting. Moreover, the valid notice of the
company must specifically mention the place, the day, the time, and the statement of the
business to be transacted at the meeting.

Quorum

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

Agenda

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

Minutes

The minutes of the meetings contain a just and accurate summary of the proceedings of the
meeting. Minutes of the meetings have to be prepared and signed within 30 days of the
conclusion of the meeting. Further, the minutes books must be kept at the registered office of
the company or any place where the board of directors has given their approval.
Proxy

The term ‘proxy’ can be used to refer to a person who is chosen by a shareholder of a
company to represent him at a general meeting of the company. Further, it also refers to the
process through which such an individual is named and permitted to attend the meeting.

Resolutions

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

1. Ordinary resolution, and

2. Special resolution.

Types of company meetings

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

1. Meetings of shareholders or members

2. General meeting which is further divided into:
 Statutory meeting,
 Annual General Meeting,
3. Extraordinary General Meeting.
4. Class meeting.
5. Meetings of Directors
 Board of directors meeting,
 Committee of directors meeting.
6. Other meetings that are categorised as:
 Debenture holders meeting,
 Creditors meeting, and
 Creditors and contributors meeting.

General meeting

The general meeting is subdivided into three categories. Let us have a look at the nitty-gritty
of each of them.
What is statutory meeting
A statutory meeting is a type of general meeting that must be held by every company limited
by shares and every company limited by guarantee with a share capital within not less than a
month and not more than six months from the date it was incorporated. Private companies
are exempt from conducting a statutory meeting. In this meeting, a report known as the
‘statutory report’ is discussed by the directors of the company.

Which companies do not need to conduct a statutory meeting

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

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

What is notice of the meeting

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

What is statutory report

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

What are the particulars of a statutory report

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

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

What is the procedure to carry out a statutory meeting

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

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

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

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

 Shares taken up,

 Money received,
 Contracts entered into,
 Preliminary expenses incurred, etc.

4. The members or shareholders also have the opportunity to carry out a discussion
on several business ideas and ways to prosper the business, along with the future
prospects of the company.
5. Moreover, if a decision is not reached at the statutory meeting, an adjournment
meeting is called.
6. According to Section 433 of the Companies Act, 1956, if the company errs in
submitting the statutory report or in conducting the statutory meeting within the
specified time, it may be subjected to winding up.
7. However, the court, instead of directly winding up the company, has the authority
to instruct the company to submit a statutory report and conduct a statutory
meeting, along with levying a fine on the individuals who erred in conducting the
meeting.
What will be the effect of non-compliance with the provisions on conducting a statutory
meeting
The following are the repercussions of not complying with the provisions on conducting a
statutory meeting:

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

Extraordinary general meeting

Basis Annual general meeting (AGM)
(EGM)

An annual general meeting, commonly An extraordinary general

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

Similarly, EGMs are applicable

Applicability AGMs are applicable to all the companies.
to all companies.

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

An AGM is held to serve the following

purposes: Electing the directors of the Whereas, an EGM is to be held
Purpose company,Passing of annual for any matter for which a proper
accounts, Declaring the dividends, notice is given.
and Appointing auditors.

The board of directors, along

Who may call such a The board of directors has the authority to
with requisitionists, have the
meeting? call such a meeting.
authority to call such a meeting.

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

Annual General Meeting (AGM)

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

Purpose of conducting an annual general meeting

The main purpose of conducting an AGM is to transact the ordinary business of the
company. Ordinary business includes the following:

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

Importance of conducting an annual general meeting

Under corporate law, an annual general meeting is regarded as one of the most important
institutions for protecting the members of the company. It is at this meeting— even though it
is held only once in a fiscal year- that the members of the company get the opportunity to
question the management on matters relating to the following:

1. The affairs of the company,

2. The business of the company, and
3. The accounts of the company.
It is only at this meeting that the members of the company have the chance not to re-elect
those directors in whom they have lost faith or confidence. Further, as auditors also retire at
this meeting, members of the company have another opportunity to think about the re-
election of these auditors.

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

The three rules of conducting an annual general meeting

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

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

Notice of conducting the annual general meeting

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

1. All the members of the company, including the legal representatives of a deceased
member and the assignee of an insolvent member.
2. The statutory auditors of the company.
3. All the directors of the company.
The notice can be sent either by speed or registered mail or even through electronic means
like email.

Date, time, and place of conducting an annual general meeting

Usually, an annual general meeting can be conducted at any time, provided it is during
business hours (between 9 am and 6 pm) and the day of the meeting is not a national holiday.
Now, talking about the location of the meeting, it can be held either at any pre-decided place
within the area of the jurisdiction of the registered office or at the registered office itself.

Meetings of Directors- Board of directors

Board meetings

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

1. The first board meeting has to be conducted within a span of thirty days from the
date of incorporation.
 2. In addition to the above meeting, every company has to hold a minimum of four
board meetings annually, and there shall not be a gap of more than one hundred
and twenty days between consecutive two meetings.

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

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

Purpose of holding a board meeting

Board meetings are held for the following purposes:

1. For issuing shares and debentures.

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

Notice of board meetings

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

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

Requisites of a valid company meeting

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

1. The meeting is convened by proper authority.

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

Committee of directors

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

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

Other meetings

Debenture holders meeting

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

Meetings of debenture holders are conducted in accordance with the provisions laid down in
the debenture trust deed. The rules and regulations mentioned in the trust deed are related to
the following:

1. Notice of the meeting,

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

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

Creditors meeting

Meetings of creditors is a term used to describe a meeting setup by the company to conduct a
meeting of the company’s creditors. Under the Company Act, 2013, companies are not only
entrusted with the power to negotiate with creditors but also set up a procedure to do so. Such
meetings are always arranged in matters where a creditor decides to voluntarily wind up.
Moreover, Section 108 of the Companies Act, 2013, discusses the holding of meetings of
creditors. It also states that meetings be held in accordance with the provisions laid down
under the following sections of the said Act:

1. Section 109 that discusses demand for poll,

2. Section 110 that talks about postal ballot, and
3. Section 111 that has provisions in relation to the circulation of members’
resolutions.
In the creditors meeting, the creditors can decide to either approve, amend, or reject the
repayment plan. Further, the resolution professional must make sure that any sort of changes
or modifications suggested by the creditors of the company are approved by the directors of
the company before carrying out that particular change. Furthermore, the resolution
professional also has the authority to adjourn the meeting of the creditors for a period of not
more than seven days at a time.

Notice of meetings of creditors

If a company is voluntarily winding up, a meeting of creditors must be called to propose a

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

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

Procedure for conducting a company meeting

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

Obligation of the board of directors

While conducting a meeting, the board of directors must submit a statement on the position of
the company’s affairs along with a list of the company’s creditors and the estimated amount
of their claims. The director who is entrusted with the duty to conduct the meeting of
creditors or who is in charge of the same must attend the meeting and hold it at the same
time.

Next course of winding up of the company

Based on the decision that occurr ed at the meeting of creditors, the company shall decide its
next course of action. The decision could be one of the following:
 1. The company would wind up on a voluntary basis if all the parties agree to it
unanimously.
2. In case the company is not able to repay all the debts from the assets sold in the
voluntary winding up of the company, then a resolution can be passed from
winding up the company by involving the tribunal.

Passing the notice of resolution

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

Organs of the Company

The Board of Directors is the primary organ of any company. The directors and the managers
direct and control the company.

Board of Directors

Every company is required to have a Board of Directors that consists of individuals as

directors and should have-

 A minimum number of three directors if it is a public company and two directors

in the case of a private company and one director in case of a One person
company;
 maximum of fifteen directors are required.
A company can appoint more than fifteen directors after passing a resolution. Such a class of
companies shall have at least one woman director.

Every independent director is required to be in the first meeting of the Board in which he is
participating as a director. After that, the director may attend the meetings every year or
whenever there is any change in the circumstances which may affect his status as an
independent director.

The Board of Directors of a company may exercise the following powers on behalf of the
company by the resolutions passed at meetings of the Board which are-

(a) to make calls on shareholders for money unpaid on their shares;

(b) to authorize buy-back of securities under Section 68;

(c) to issue securities, including debentures, whether in or outside India;

(d) to borrow monies;

(e) to invest the funds of the company;

(f)) to approve financial statement and the Board‘s report;

(g) to diversify the business of the company;

(i) to approve amalgamation, merger or reconstruction;

(j) to take over a company or acquire a controlling or substantial stake in another company;

Directors
A director is not a servant of any master, they are rather the officers of the company. A
director is, in fact, a director or controller of a company and he manages all the affairs of the
company. However, a director can work as an employee in a different capacity. For
instance, Lee v. Lee’s Air Farming Ltd.

Directors are basically registered under the companies act and are duly appointed by the
company to direct and manage the business of the company. They are sometimes described as
agents, as trustees and sometimes as managing partners.

Legal position of directors

It is really difficult to explain as to what is the exact legal position of directors in a company.
There are certain explanations given by the judges for defining directors, sometimes as
agents, sometimes as trustees, and sometimes as managing partners.

They are the persons who are duly appointed by the company for the purpose of directing and
managing the company’s affairs. All the expressions to which directors are referred, like
agents, trustees, etc., are not exhaustive of their powers and responsibilities.

It was observed in the case of Ram Chand & Sons Sugar Mills Pvt. Ltd. v. Kanhayalal
Bhargava(1966), that it is really difficult to exactly explain the legal position of directors in a
company. Judges have summarised it as a multi-dimensional position which is held in the
capacities of an agent, trustee, or manager, even though these terms don’t hold the same
meaning in a true legal sense.

Directors as agents

In the eyes of law, directors are termed as the agents of the company. It was recognized in the
case Ferguson v. Wilson, 1886. In this case, F(plaintiff) had an option to subscribe for some
shares of the company and therefore he applied for them. The directors of the company
allotted the whole of the shares that are authorized capital to other people including
themselves.

Later on, the option which was given to F was of no worth and he sued W who was one of
the company’s directors to transfer some of his shares to him and pay damages. However, the
claim of F failed because the directors were only acting as agents of the company and are not
responsible for personal liability.

However, the directors are not completely like agents as agents are appointed but directors
are elected. Directors are more like managing partners.

The court said that the company is not a person, it acts through directors and in regards to this
it is the case of principal and agent.

Directors are the agents of the company and he conducts the business. They act on behalf of
the company and he makes the company liable not himself.

In other words, directors cannot be held personally liable for any default of the company. The
responsibility of an agent compels the directors to conduct the business of the company in the
same way as agents do.

They should handle the work with care, skill, and diligence. They are accountable for all the
assets of the company that is under their control and the profits from the company’s assets.

Directors cannot deal with the company’s affairs on their own and they are required to
disclose their personal interest if they have any in the transactions of the company. Directors
represent the shareholders to conduct the business of the company on their behalf.

Directors perform many roles in a company like allotment of shares, raising of loans and
investment of funds in the company.

But, directors cannot bind other shareholders unlike partners.They are elected and can also
retire.

Directors as trustees

Directors are also described as trustees of the company. They must account for all the money
over which they have control. Directors must act and deal with the benefit of the company.
They should exercise with honesty and it should be in the interest of the company as they
occupy a fiduciary position. They are trustees of-

 Money and property of the company that are under their control.
 The powers that are entrusted to them.
Directors are the trustees of the company and not of individual shareholders. This principal
came in the case of Percival v. Wright, 1902.

In this case, the directors purchased the shares of the company but before this company’s sale
was undergoing without disclosing this. The plaintiff claimed that this non-disclosure was a
breach of contract and fiduciary trust. It was held by the court that no fiduciary duty exists.
Hence, the directors were not bound to disclose.

A trustee is the owner of the property and deals with it as principal. He also deals as an owner
and a master. On the other hand, the director is not the owner of the property and is only the
agent of the company.

Personal liability of the organ

According to the Companies Act, 2013 a director is liable for any loss, damages or costs
suffered by the company either direct or indirect consequence, he or she will be liable if they
have breached certain provisions of the company.

Appointment - Casual vacancies

A casual vacancy occurs when the director’s office is vacated before the expiry of the term of
the director. Such a vacancy can be filled by the procedure or the process prescribed by the
articles. If any clause is absent in the articles then the power is given to the directors so that
he can fill the vacancy at the board meeting. The person who has been appointed by this
procedure, hold the office until the expiry of the period for which the outgoing director would
have held the office.

Additional directors

Considering the powers of the directors, additional directors can be appointed by the board.
There can be an addition to directors but total members of the directors should not exceed the
maximum limit as mentioned in the articles. If the strength of directors is below the minimum
limit of the members then the addition of directors is valid.

However, the additional directors can hold the office only up to the date of the next meeting
which is held annually. The additional director is exempted to fulfill the requirement of
consent under Section 264.
Appointment by Central Government

The central government has the power to appoint directors for the purpose to prevent
mismanagement under Section 408. This power is applied when a petition has been filed to
the National Company Law Tribunal to prevent mismanagement.

Consent to act as directors

Every person who has appointed as director shall furnish a consent in writing to the company
as such in Form DIR-2. The director must submit such consent with the registrar in Form
DIR-12 within thirty days(30 days) of the appointment of the director.

Qualifications of directors

Share qualification

The articles of the company provides that every director should hold a certain number of
shares. Such shares are known as qualification shares. A director must obtain the required
number within two months of the appointment.

If a director is not appointed as a director he cannot be compelled to obtain qualification

shares. Also within a period shorter than two months of the appointment, he cannot be
compelled to obtain the qualification of shares.

The value of the qualification shares cannot be more than five thousand rupees except when
the nominal value of the share is more than the amount of the share. A director can hold only
shares and not share warrants. A director may suffer if he fails to obtain his qualification
shares as advised. He can suffer in two ways:

 His office can fall vacant.

 He will be liable to pay a penalty if he continues to act as a director. The director is
required to hold the shares in his own right.

Disqualifications

The minimum requirements for the eligibility of members are laid down in Section 274. A
person is not capable of being appointed as a director in some cases that follow:

 When the person is of unsound mind and he is certified by the court.

 A person who is unable to pay his debts and it cannot be covered by his assets and
he(director) has initiated proceedings against him.
 When the director is adjudicated as insolvent.
  When the director has been sentenced to imprisonment of at least six months for
the offense that involves morally wicked behavior and five years have not passed
from the date of expiry of the sentence.
 When he has not paid for call of his shares for six months.
 Where he has been disqualified for preventing fraudulent persons under Section
203.
If a private company is not a subsidiary of a public company can further add to
disqualifications. In other words of the Supreme Court, a public company and its subsidiaries
cannot add or increase any other disqualifications.

Removal of directors

A company may remove a director who is not a director appointed by the tribunal
under Section 242, before the expiry of the period of his office. But it is important to hear his
side to give a reasonable opportunity. A special resolution is required to remove a director
under the section or to appoint any other director in place of the director so removed.

Removal by shareholders

As per Section 242, a company can remove a director before the expiration of his period of
office. A special resolution is required to remove a director under the section or to appoint
any other director in place of the director so removed.

Removal by Central Government

A director can be removed by the Central Government, Companies Act enables the Central
Government to remove managerial personnel from office on the recommendation of the
Company Law Board. The Government can make a reference to the Company Law Board
when needed. The power of Central Government can be exercised in removal of directors if:

 The managerial personnel is guilty of fraud, misfeasance or persistent negligence

in carrying out legal obligations or breach of trust.
 The business of the company is not conducted in agreement with sound business
principles.
 If the person has conducted business with the intention to defraud or the purpose is
unlawful subject to public interest.

Removal by Company Law Board

When an application is sent to Company Law Board to prevent mismanagement it may

terminate or set aside any agreement of the company with a director or managing director.

Resignation
The provisions of resignation in a company is mentioned in Section 318 in which no director
is entitled to compensation if he resigns his office. If there is a provision for resignation in the
articles but if there is no provision resignation will take effect in agreement with terms.
Notice can be oral or written. A director can effectively resign even if no other director is in
office but a director cannot evade his obligations even if he has resigned.

Once a director has given the notice of resignation to the company he cannot be entitled to
withdraw that notice. But withdrawing the notice must be with the consent of the company
exercised by the managers.

Powers of directors

Section 291 says the board of directors of a company is entitled to exercise all the powers as
the company is authorized to do. The powers of the directors are co-extensive with those of
the company mentioned in the memorandum and articles of the company. The director has
almost all the power once he is elected for the operations of the company until he is removed.
However, there are two important restrictions on the powers of the directors.

1. When the board is not competent to do what the act, memorandum, and articles
require that is done by the shareholders in general meeting.
2. The directors are required to act according to Act, memorandum, articles and other
regulations that are consistent with the general meeting.

Statutory provisions

Under statutory provisions, company is an artificial legal person having a legal and
independent existence in the eyes of law. Being an artificial person, it has no mind and cannot
act on its own.

Audit Committee

A public company with share capital is required with not less than five crores rupees. It is
required to constitute a committee of the board of directors is known as the Audit Committee.
Membership- Not less than three directors and such number of other directors as the board
may determine. Two-thirds of the members must be directors other than the whole time
managing directors. The committee is required to act in accordance with the terms specified
by the board in writing. The members need to elect a chairman from the committee itself.

The internal auditors and the director in charge of the finance department shall attend and
participate in meetings of the audit committee but they do not have the right to vote. The
committee is required to discuss with auditors on a regular basis about internal control
systems. The committee observes and reviews half-yearly and annual financial statements
before they submit to the board.
Duties of directors

The powers vested with the directors should be regulated not only for public good but also for
the protection of the investors.

Duty of good faith

Directors must act honestly, without negligence and in good faith in the bona fide best
interests of the company. The presumption is that a Director, acting within his or her
authority, has acted in good faith.

Liability for breach of trust

Initially, the duties of directors were not enacted by the statute. They were inherited from the
common laws which mean developed through cases. But now legislation of companies of
some countries have taken steps to remove this tradition. In a company the director stands in
a fiduciary relationship towards the company and should have utmost good faith towards the
company. The company demands that the directors should act honestly and with the greatest
good faith in their duty. When a director earns a bonus from the other company by providing
a business facility to the company, the director can be held liable for the profits although the
company could not have earned the bonus.

Trading in corporate control

In the case of Regal (Hastings) Ltd v Gulliver, the plaintiff company was the owner of a
cinema in Hastings. The directors wanted to acquire two more cinemas in Hastings. After
acquiring cinemas, they would sell the whole property. The purpose was to acquire new
cinemas and offered a lease of two cinemas. The landlords required a guarantee of rent by the
directors. The intention was that the plaintiff company should hold all the shares in the
subsidiary.

It was held that the directors other than chairman were in a fiduciary relationship and
therefore liable to repay the profit they have made on the shares. The solicitor was not liable
because he was not in a fiduciary relationship.

The plaintiff company had to establish two things:

 The directors were related to the affairs of the company and said to be in course of
management and in the utilization of their opportunities and special knowledge as
directors.
 What they did should result in profit for themselves.
Misuse of corporate information

If the director exploits any unpublished and confidential information of the company, it is a
breach of duty and the company can ask the director to make good its loss. Any knowledge
generated by the company is the company’s property commonly known as intellectual
property. Profit margins, turnover of the business, list of customers and any personal use of
such knowledge equivalent to misappropriation of property. The use of the company’s
information can be restrained by an injunction.

Competition by directors

As such, there is no competition amongst the directors.

Duty of care

Duty of care refers to a fiduciary responsibility held by company directors which requires
them to live up to a certain standard of care. This duty—which is both ethical and legal
requires them to make decisions in good faith and in a reasonably prudent manner.

 Duty of care is a fiduciary responsibility held by company directors which requires

them to live up to a certain standard of care.
 The duty requires them to make decisions in good faith and in a reasonably
prudent manner.
 The duty of care also applies to other roles within the financial industry including
accountants, auditors, and manufacturers.
 Failure to uphold the duty of care may result in legal action by shareholders or
clients.

Liability for Negligence

The faithful director alone is not enough. A director has to perform his functions with
reasonable care. The work assigned to the director should be attended with due diligence and
caution. Every director should exercise the powers and discharge the duties of his work
honestly, good faith and in the best interests of the company.

Duty to attend board meetings

Directors are under an obligation to attend the board meetings under the articles or the
chairman of the board.

Liability for non-attendance

Duties of directors are not of continuous nature to be performed. In other words, they are not
bound to pay continuous attention to the affairs of the company. A director is not bound to
attend all the meetings of the company although he is under the obligation to attend in some
circumstances that are reasonable.
According to Section 283(g), a director can be vacated if he absents himself from three
consecutive meetings of the company or from all the meetings of the board, for three months
whichever is longer without the leave of absence. The habitual absence of the director can
become evidence of negligence on his part.

Duty not to delegate

Liability for co-directors defaults

A director has to perform his functions personally, they are bound by the maxim “ delegatus
non-potest delegare”. A delegation can be made to the extent to which it is authorized by the
Act or articles of association of the company. There should be certain duties which have
exigencies of business and left to some other officials. A proper degree of delegation and
division of responsibility is permissible but total responsibility cannot be delegated as this
would undermine the responsibility of the board of directors that is important for corporate
governance.

Duty to disclose interest

Every agent here director occupies a fiduciary position towards his principal. It is his duty to
see that his personal interest and duty to principal do not conflict. For efficient productivity,
the director should be free from any conflicting interests. The conflict arises when a director
is personally interested in a transaction of the company. In the case of Aberdeen Railway Ltd
v Blaikie, Blaikie had a conflict of interest as a director and chairman of the company of the
firm supplied office furniture to the company. Despite the fact that the price paid by the
company for furniture was fair, the company was entitled to set the contract aside.

Meetings of directors

The directors of the company have the right to exercise most of their powers at periodical
meetings of the board. In section 285 it is mentioned that the directors shall attend the
meeting of the board of directors at least once every three months at least four meetings in a
year. Notice of every board meeting has to be given in writing to directors who are present in
India.

Quorum

Quorum means the strength of members, so quorum of the board is one-third of its total
strength or two directors whichever is high. When this quorum cannot be formed, then the
number of directors who are not interested (not less than two) shall be the quorum. If the
quorum is not fulfilled in any meeting then it stands adjourned till the same day next week.
However, if the day is a public holiday, the meeting will be held at the next succeeding day
which is not a public holiday. The quorum cannot be dispensed because one of the directors
is abroad. A meeting attended by one director is held not to be valid.
For example, A company’s articles provided that the total number of directors was fifteen but
at the material time only six directors were in office, it was held that quorum meant only one-
third of six directors and therefore a meeting attended by two directors only was also
considered valid.

Register of directors

Every company should keep a register that contains particulars of the directors and
managerial personnel. The register will include the details of securities or bonds held by each
company. A return of the particulars and documents of the directors can be filed with the
registrar within thirty days(30 days) from the appointment of the director.

Register of directors

The first important register that is maintained is known as the Register of Directors. Every
company needs to maintain the registered office a register of directors, managing director,
managing agents, secretaries and treasurers, manager, and secretary. The register needs to
maintain the following particulars:

 The full name of the director and such details with the father’s name, and address.
A married woman, her husbands’ name, nationality of origin, his business and
particulars of any office held by the director in any other company and his date of
birth.
 In case any of the above offices are held by a body corporate then its corporate
name and registered office and details are required specified in the clause. The
details of each of the directors is necessary if the same body corporate holds the
office in some other company.
 If any of the above offices are held by a firm then the name of the firm should be
given and also the details specified in the clause, of each partner in the company.
 If any of the directors have been nominated by a corporate body, the name of such
a company should be given and the particulars of each of its directors.
If any director has been nominated by a firm, the particulars of such a firm should be given.

Oppression and Mismanagement

In Companies Act, 1956, the protection for the minority shareholders from oppression and
mismanagement have been provided under section 397 (An Application to be made to
company law board for relief in cases of oppression) and 398 (An Application to be made to
company law board for relief in cases of oppression).

therefore, right to apply to the company board for the oppression and mismanagement is
provided under the section 399, that is, meeting 10% of shareholding or hundred members or
one-fifth members limit. however, relevant government under their discretionary powers has
allowed any numbers of shareholders to apply for the company board for the relief under
Sections 397 and 398. Whereas, on the other hand, under Companies Act, 2013, the relief
from the oppression and mismanagement has been provided under Section 241-246.
in addition, under the section 245, companies Act, 2013, the new concept of class action has
been introduced which was non-existent in companies Act, 1956 wherein it provides for class
movement suits to be instituted against the company as well as towards the auditors of the
company.

Majority Rule
According to section 47 of the companies act, 2013, holding any equity shares shall have a
proper to vote in respect of such capital on every decision placed before the company.
Member’s proper to vote is recognized because the proper of assets and the shareholder can
also workout it as he thinks in shape consistent with his interest and preference.

A special resolution requires a majority of 3/4th of these votes at the meeting. consequently,
wherein the act or the articles require a unique resolution for any cause, a 3/4th majority is
important and a simple majority isn’t sufficient.

The resolution of a majority of shareholders handed at a duly convened and held general
meeting, upon any question with which the business enterprise is legally competent to deal, is
binding upon the minority and consequently upon the company.

The Principle of Non-Interference (RULE IN FOSS V. HARBOTTLE)

The principle that the will of the majority should prevail over the will of the minority in
matters of internal administration of the company was founded in the case of Foss v.
Harbottle which is today known as the rule in Foss v. Harbottle.

According to this principle, the courts will not, intervene at the instance of the shareholders,
in the management of a company it’s direct so long as they are acting within the powers
conferred on them by the articles of the company.

In nutshell, the company cannot confirm, Any act which is ultra vires the company or illegal,
Any act which is fraud on the minority, Any act passed with simple majority which requires
special majority, Any wrong act done by those who are in control, Any act infringes the
personal membership rights, Any act which amounts to breach of duty by directors, Any act
which amounts to oppression of minority or mismanagement of the company.

What is a Shareholder Agreement?

Put simply, a Shareholder Agreement is a legally binding contract that defines the
relationship between the shareholders and the company. So basically, the rights and the
obligations of shareholders are given in the said Shareholder Agreement and are protected by
them.

The Shareholder Agreement also protects the existing shareholder from situations when the
company’s management changes, or/and when the company is sold off to another and the
same shareholders remain, their rights are protected.

After learning that there are two types of shareholders- majority and minority, we found that
the minority holder is in a vulnerable position.
Letting the majority shareholder dictate the decisions of the company without realizing that
their action may not sync with the desire of the minority shareholders can lead to disputes. A
Shareholder Agreement can be used as an instrument to protect the minority as well as the
majority shareholders alike.

How does Shareholder Agreement protect the Minority Shareholders?

The presence of the Shareholder Agreement helps the minority Shareholders to influence the
function of a company. One can argue that the presence of Article of Association will protect
the Minority Shareholders too but since it can be easily amended by the Majority
Shareholders, there is no guarantee that they will not be abused.

The Companies Act 2013(to be known as the Act) has made efforts to safeguard the rights of
the minority shareholders. Let us mention in brief these rights that are mentioned in the Act
to protect the rights of the Minority Shareholders below:

1. Section 151 of the Act reserves the right to appoint Minority Shareholders
Directors: A Minority Shareholder Director is an independent director, and an
individual elected by the Minority Shareholders representing them. He/She will be
on the Board of their listed company. He will hold office for a term of three years
and cannot be re-appointed.
2. Section 241 and 242 of the Act reserve the right to apply to NCLT for oppression
and mismanagement: Oppression and mismanagement may come from the Board,
promoters, or the management team. Whenever Minority Shareholders face any
problems of being oppressed or/and mismanagement they can approach the
National Company Law Tribunal for expedient action.
3. Section 235 and 236 of the Act reserve the right to reconstruction and
amalgamation of companies: There is a fear amongst the Minority Shareholders
that during the process of amalgamation or reconstruction of companies, the
interest of Minority Shareholders may not be taken into consideration. However,
the addition of these provisions has helped to safeguard and assure the Minority
Shareholders that they are in safe hands.
4. Section 108 of the Act mandates certain companies to offer e-voting facilities to
shareholders to vote on shareholder meetings: We are familiar with the concept of
virtual/online work and online shopping, etc. This section provides a similar notion
for Minority Shareholders to attend the meetings and exercise their voting rights
without being physically present in meetings. So, even if they cannot be present in
meetings, they can still access their voting rights.
5. Section 188 of the Act talks about accepting mandates from the majority only
which talks about related party transactions, mandates companies to undertake
such transactions only after receiving approval from the majority of non-interested
parties.
6. Right to file a Class Action Suit: A class action suit is a suit where one person or
number of plaintiffs come together and file a suit against another party or person.
They will represent the entire interested group. In this case, the Companies Act,
2013 allows a group of Minority Shareholders (can include Majority Shareholders
too) combining with the lenders to approach the National Company Law Tribunal.
 The suit may be against the operations of the company, or the management, or the
board.
7. Adoption of Fair Mechanism: Shares need to be evaluated accordingly. To avoid
unfair valuation, a fair mechanism needs to be adopted. The Act of 2013 provides
for an independent Valuation Mechanism to protect the interest of the Minority
Shareholders. The Minority Shareholders can approach the NCLT should there be
any unfair means.

How does Shareholder Agreement protect the Majority Shareholder?

In any event, we are well familiar with the concept of majority rules. Whether in a political
election or any class of election or agreement. We are also aware that, to some extent, the
majority experiences supremacy over the minority.

Then why does the majority shareholder need protection in the Shareholder Agreement?
After familiarising ourselves with the minority rights and obligations, we are conscious that
they are protected not only by the Shareholder Agreements but also the provisions mentioned
in the Companies Act, 2013.

With this, it becomes difficult for the Majority Shareholder to tell or stop the minority
shareholder from doing certain things. There are situations when decisions taken by Majority
Shareholders are in the interest of the company, but the Minority Shareholders may not be on
board with it. In this case, the majority Shareholders can add a provision that drags the
minority shareholders to cooperate with them in the best interest of the company.

There may also be a situation when the minority shareholders will want to sell their shares,
however, the interested party, maybe a party that the Majority Shareholder may not want to
get involved with, such a situation like this case, the majority shareholders can stop the
minority shareholders from selling their share to the forbidden party.

INVESTIGATION INTO AFFAIRS OF COMPANY

What Are Corporate Frauds?

 Due to the severity and impact of corporate fraud on the financial health of a country,
the government has structured and imposed various rules and legislations governing
every aspect of a company from its incorporation to winding up and the investigation
of frauds is no exception.
 The Black’s Law Dictionary defines “fraud” as all acts, omissions & or concealment
which involve a breach of legal or equitable duty, trust or confidence justly reposed
and are injurious to another or by unconscientious advantage is taken by another.
 In simpler terms, an intention to deceive any person with the objective of securing an
unfair advantage can be termed fraud.
 It must be noted that whenever an allegation of fraud is raised, the source of such
information, details of information and details of fraud must be mentioned in the
pleading. As Delhi High Court has opined, any vague allegations in respect of fraud
will not be entertained until and unless it has been explicitly stated in pleadings.[6] It
 is a well-settled principle of law that any complaint of fraud failing to prove a prima
facia case is liable to be quashed.
Types of Corporate Frauds
There are several types of frauds committed by corporate entities –

 Accounting fraud
 Banking fraud
 Securities Fraud
 Misrepresenting financial statements
 Corruption
 Money Laundering
 Other Complex frauds (siphoning money to shell companies, tax evasions etc.)
To keep a check on dishonest and unscrupulous companies and to establish supervisory
control of the central government in the corporate world sections 206 to section 213 were
inserted in the companies act which lays down a detailed mechanism for initiating an
investigation into affairs of a company. The investigation into the affairs of a company can be
initiated on receipt of a complaint or Suo Motu by the Registrar of Companies or by the
Central Government. Additionally, the National Company Law Tribunal can also initiate an
investigation after a complaint is made to it by an aggrieved person under section 213 of The
Companies Act, 2013.

How does the Registrar of Companies (ROC) investigate Corporate Frauds?

 Based on the information furnished by the company or by the representation made by
a person stating that the business of the company is being carried on in a fraudulent,
unlawful manner or in contravention to the provisions of the Companies Act, the ROC
firstly will inform the company of the said allegation by written notice and call it to
furnish an explanation on the matter thereby providing it with an opportunity of being
heard[7].
 The ROC also has the power to call for any information, inspect books of accounts of
the company and conduct necessary inquiries and if a company fails to furnish the
required documents the officers at default are punishable for a fine up to 1 lakh[8].
 Further, after conducting necessary inspection and inquiry the ROC will submit a
report in writing to Central Government recommending further investigating giving
reasons for such recommendation[9].
 It must be noted that any aggrieved person can make representation before ROC by
filing an application highlighting all the information which prima facia indicates
frauds and unlawful activities undertaken by the company and its directors.
 Earlier under section 234(7) of the Companies Act, 1956 only a person interested
could make representation before the ROC and not any stranger, for instance, a rival
company or its director or members as such persons could not be said to have interest
in the company but under section 206(4) of the 2013 Act, the Registrar can act on the
representation made by “any person”[10]
What are the Powers of Central Government to Investigate Corporate Frauds?
The Central Government has the power to investigate the affairs of the company on-

 Receipt of Report from ROC as mentioned above or;

 When a special resolution is passed by a company, their affairs should be
investigated. or
 In Public Interest [11] or;
  When an order is passed by any court /tribunal in any proceeding that affairs of a
company must be investigated [12]and
 On request made by any department of Central Government or State of
Government [13]
The central government assigns the investigation to Serious Fraud Investigation Office
(SFIO). The SFIO under the direction of the Central Government firstly can submit an
interim investigation report thereafter the SFIO is required to file an investigation report after
the completion of the investigation [14].
After analyzing the investigation report and considering the legal advice, the central
government may order SFIO to initiate prosecution against the company and the officers of
the company who are directly or indirectly connected with the affairs of the company.
As per the provision of the act, the Central Government can order an investigation into affairs
of a company in the public interest, but these powers are discretionary in nature, “In order to
exercise this discretion reasonably and lawfully, the Central Government is required to
formulate an opinion that an investigation into the affairs of the company is necessary[15]–
 The opinion must be an honest opinion, rendered after bestowing sufficient
attention to the relevant material/circumstances available before the Central
Government
 The opinion must not be based on a wholly irrelevant or extraneous consideration.
 The materials/circumstances based on which the opinion to order an investigation
has been rendered, have to prima facie, show that the inferences drawn from the
facts in the materials/ circumstances led to conclusions of certain definiteness. In
other words, the existence of material for formation of an opinion is a sine qua non
and the same must be prima facie demonstrable, in case the opinion is challenged
before a Court of law
 The opinion formulated is not required to be a conclusive proof of the fact that the
conduct of the affairs of the company is prejudicial to the public interest, interest
of the shareholders, members, or any other persons, or contrary to the provisions of
law.”
Whenever there are serious allegations of misuse of public funds then there is substantial
public interest involved for which investigation must be held however, if there is a lack of
requisite material to arrive at the requisite opinion or record the necessary satisfaction that
there is public interest involved then it is safe for courts to quash and set aside the order of
such investigation. In past years SFIO has been entrusted with an investigation where an
exorbitant amount of money is collected from the public by such companies in the name of
investments, chit funds etc. and the same is siphoned off to offshore accounts.[18]
It must be noted that any person can approach the central government for reporting corporate
fraud by filing a serious complaint on the Ministry of Corporate Affairs web portal and such
complaints must contain all the details of fraud committed by the concerned company.

How to file a Complaint in NCLT for Initiating Investigation for Corporate Fraud
against a Company?
When there are circumstances which prima facia show that the business of the company is
being conducted –

 In a fraudulent or unlawful manner or persons concerned with the incorporation of

the company are guilty of misfeasance or misconduct.
 OR the members of the company have not disclosed all the information in relation
to the affairs of the company which they are legally bound to disclose.
An application can be filed with the National Company Law Tribunal with all the necessary
documents and information necessary to support the allegation and provide a good reason for
initiating an investigation into the affairs of the company. It must be noted that a complaint to
NCLT under section 213 can only be made

 In a company having share capital by more than 100 members or members

holding not less than 1/10 of voting powers
 In a company with no share capital by not less than 1/5 of members of total
members on the register of the company [19]
But as per the prevailing provision of the companies act, the NCLT on receipt of such
application or complaint on being satisfied that there are circumstances suggesting that
defraud etc. has been committed the NCLT can only refer the matter to the central
government for investigation they are not competent to straight away direct any investigation
to be conducted by SFIO.[20]
How are Accounting Frauds Investigated by National Financial Reporting Authority
(NFRA) ?
The central government has already structured and prescribed accounting standards to be
followed by companies and NEFRA being the government body which is set up under the
companies act is entrusted with the duty to establish a high quality of accounting and auditing
standards and supervise the accounting functions of companies. The authority is vested with
the power to investigate matters of professional or other misconduct committed by any
members or firms of Chartered accountants registered under the Chartered Accountants Act,
1949. The authority can initiate an investigation –

 When directed by Central Government

 Authority decides to undertake investigation due to irregularities in yearly
compliance by company
 Suo Motu after recording reasons in writing[21]
After investigating, if the authority is of the view that there has been a contravention on part
of the company, the authority refers the matter to the concerned division and show cause
notices would be issued by it thereby providing them with a fair opportunity to be heard. The
division must dispose of the show cause notices within a period of 90 days by commencing a
summary procedure. The order of disposing of can result into the following situations-

1. No action
2. Caution
3. The penalty [22] can be imposed-
4. Fine of Rs. 1,00,000/- extendable up to 5 times the fee received in case of
individual
5. Fine of Rs. 10,00,000/- extendable up to 10 times of fee received in case of firms
6. Debarment of the individual or firm
Any person or firm aggrieved from the penalty imposed by the division can appeal against
the order in Appellate Tribunal constituted by the central government i.e. NCLAT.[23]
How is an investigation initiated by the Enforcement Directorate in Cases of Corporate
Fraud?
The Enforcement Directorate (ED) generally deals with the offences under The Prevention of
Money Laundering Act, 2002 which cover all the persons who are directly or indirectly and
knowingly assist in concealment, possession, acquisition, or use of proceeds of crime. But in
the case of the Enforcement Directorate public cannot make complaints directly to the agency
they can either file an F.I.R which can be forwarded to ED or the Director of ED can Suo
Motu on basis of material available to him is of opinion that there is a cause of action can file
F.I.R and initiate investigation against the accused.

How is Investigation Initiated by CVC or CBI in Cases of Corporate Frauds?

The Prevention of Corruption Act is the principal act governing the laws relating to
corruption the act focuses on the offence of bribery or misconduct committed by a public
servant, but sections 9 and section 10 of the act also cover the circumstances when bribery is
committed by a commercial organisation. Section 9 and 10 specifically state that when an
offence under this act is committed by a commercial organisation such organisation will be
punishable with a fine whereas if it is proved that such offence was committed with consent
or connivance of any directors, manager, or any officer of organisation then they shall be
individually punishable with imprisonment for a term of 3 years extendable up to 7 years
with fine. It must be noted at this stage that-

 These agencies do not entertain anonymous and pseudonymous complaints;

 The Commission does not entertain complaints which are against private persons,
State Government officials, Members of Parliament or State Legislature, elected
representatives of other bodies, members of judiciary or officials of private
organisations. The Commission does not have jurisdiction over them[24]
Therefore, in order to initiate investigation in such cases the complainant must include the
name of the public servant to whom the bribe was given by the concerned commercial
organisation otherwise the concerned authorities do not have jurisdiction over the private
commercial organisations.

If any person has a reason to believe that a commercial organisation or any directors of such
organisation have committed the offences under the prevention of corruption act, they may
file a complaint either with-

 Central Bureau of Investigation

 Central Vigilance Commission
 State Vigilance Commission
As “Corruption cases are of that category where preliminary inquiry may be conducted”
[25] The agencies initiate preliminary inquiries, it must be well understood that preliminary
inquiry is not conducted to verify the veracity of the information but only to ascertain
whether any cognizable offence is revealed or not. Then The First Information Report is filed,
and an investigation is initiated by the concerned agencies.[26]
If during the investigation process the Central Government due to any reasons mentioned
above has assigned the case to SFIO then CBI, ED, CVC or SVC cannot proceed with the
investigation instead the concerned agency has to transfer all the relevant documents and
records in respect of such offences to SFIO which will be responsible for all further
investigation.[27]

RECONSTRUCTION AND AMALGAMATION

What Is an Amalgamation?

An amalgamation is the combination of two or more companies into an entirely new entity.
Amalgamations are distinct from acquisitions in that none of the companies involved in the
transaction survives as a legal entity. Instead, a completely new entity, with the combined
assets and liabilities of the former companies, is born.

The term amalgamation has generally fallen out of popular use in the United States, being
replaced with terms like merger or consolidation, with which it can be synonymous. But it is
still commonly used in certain countries, such as India.

How Amalgamations Work

Amalgamations typically happen between two (or more) companies that are engaged in the
same line of business or that share some similarity in their operations. Usually, the process
involves a larger entity, called a "transferee" company, absorbing one or more smaller
"transferor" companies before the creation of the new entity.

The terms of an amalgamation are finalized by the board of directors of each company
involved. The plan is prepared and submitted to regulators for approval. In India, for
example, that authority resides in the High Court and Securities and Exchange Board of
India (SEBI).

Indian tax law defines "amalgamation" somewhat broadly as "the merger of one or more
companies with another company or the merger of two or more companies to form one
company." It refers to the merging companies as "the amalgamating company or
companies," while the company they merge with or which is newly formed as a result of the
merger is "the amalgamated company."

The Pros and Cons of Amalgamations

Amalgamation is a way to acquire cash resources, reach a broader customer base, eliminate
competition, save on taxes, and/or improve economies of scale. Amalgamation may also
increase shareholder value, reduce risk through diversification, improve managerial
effectiveness, and help the new company achieve financial results and levels of growth that
would have been more difficult for its predecessor companies.

On the other hand, if too much competition is eliminated, amalgamation may lead to a
monopoly, which can be troublesome for consumers and the marketplace as well as bring
about government intervention. It may also lead to the reduction of the new company's
workforce by making some former employees redundant and costing them their jobs. In
addition, it can increase debt, possibly to a dangerous level: by combining two or more
companies together, the new entity assumes the liabilities of them all.

Pros
 Can improve competitiveness

 May reduce taxes

 Increases economies of scale

 Has potential to increase shareholder value

  Diversifies the business

Cons
 Can concentrate too much power into a monopolistic company

 May lead to job losses

 Increases the new company's debt load

Example of Amalgamation

In April 2022, the telecom giant AT&T and the television entertainment company
Discovery, Inc. announced that they had finalized a deal to combine AT&T's WarnerMedia
business unit with Discovery. That month, a new entity known as Warner Bros. Discovery
Inc. began trading on the Nasdaq stock exchange under the symbol WBD.

What is the Meaning of Reconstruction?

Reconstruction of a company is the process of reorganising a company’s legal, operational,

ownership, and other structures. A new set of obligations are created by revaluing the new
company’s assets and reassessing liabilities. The transfer of business refers to transferring a
company’s operations to a new entity. This will result in the old business being wound up and
its shareholders agreeing to accept shares in the new firm that have an equal value to their
existing shares. Reconstruction is necessary when a company loses money for an extended
period. Reconstruction is also done when the company’s statement of account does not
accurately represent the actual and fair condition of the firm, as a bigger net worth is shown
instead of the actual net value of the organisation.

Goals and Objectives of Reconstruction

The following are the most important goals for reconstructing a company.

1. To overcome the problems of overcapitalisation, massive cumulative losses, and the

overvaluation of assets.
2. To simplify the structure of a company when it becomes too complicated.
3. To change the face value of the company’s shares when necessary.
4. To generate a surplus by writing off cumulative losses and writing down overvalued
assets.
5. To obtain more money via the issuance of new shares.
6. To produce funds for working capital requirements, asset replacement, the addition of
balancing equipment, the modernisation of plant and machinery, and other purposes.
Different types of Reconstruction of Company

Two approaches are used to restructure a corporation.

 External Reconstruction of a Company

When a firm has been losing money for many years and is in the midst of a financial crisis, it
may be able to sell its assets to a newly created company. In reality, the new corporation is
founded to acquire the assets and liabilities of the previous corporation. External
reconstruction is the term used to describe this procedure.

In other words, external reconstruction refers to the selling of an existing firm’s business to a
new company that has been founded specifically for this reason. In the case of external
reconstruction, one firm is dissolved, and a new company is founded in the place of the
former. The dissolved firm is called the vendor company, while the newly formed company is
called the purchasing company. Those who own shares in the vendor firm also own shares in
the purchasing corporation.

 Internal Reconstruction of a Company

Internal reconstruction is the internal reorganisation of a company’s financial structure. The
present firm is allowed to continue operations. In most cases, the company’s share capital is
lowered to write off its prior accumulated losses.

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Differences between the Internal and External Reconstruction of a Company

These are some essential differences between a company’s internal and external
reconstruction.

1. Internal reconstruction is ‘restructuring without dissolution’ since it does not involve

starting a new business from scratch. However, an external reconstruction is a kind of
corporate restructuring. The current corporation is dissolved to give birth to a new
company that will continue the business of the previous one.
2. No new company is formed as a consequence of internal rebuilding. An alternative is
to create a new company to take over activities of the existing one through the
external reconstruction process.
3. Debenture holders and creditors, for example, are given a discount on their claims in
return for lowering the company’s capital as part of internal reconstruction. However,
the company’s capital is not reduced by external rebuilding.
4. A court-ordered internal reconstruction is necessary because a drop in capital might
affect shareholder rights, necessitating a court order. Exterior reconstruction, on the
other hand, does not need such approval.
5. The phrase ‘And Reduced’ appears on the balance sheet of a company that has
undergone internal restructuring. The balance sheet, on the other hand, does not use
any particular language for external reconstruction.
6. Internal reconstruction does not create a new business hence no assets or liabilities are
transferred. In contrast to internal reconstruction, external reconstruction entails
transferring the assets and liabilities of the old one to the new business.
National Company Law Tribunal (NCLT) – Composition, Powers, Jurisdiction
What does NCLT and NCLAT mean?
The NCLT – National Company Law Tribunal or “Court” is a semi legal position made
under the Companies Act, 2013 to deal with corporate common debates emerging under the
Act. It is an element that has forces and systems like those vested in an official courtroom or
judge. National Company Law Tribunal (NCLT) is obliged to impartially decide realities,
choose cases as per the standards of common equity and make determinations from them as
requests.
Such requests can cure a circumstance, right a wrong or force legitimate punishments/costs
and may influence the lawful rights, obligations or advantages of the particular gatherings.
The Tribunal isn’t limited by the severe legal principles of proof and technique. It can choose
cases by following the standards of regular equity. NCLAT or “National Company Law
Appellate Tribunal” is an authority given for managing requests emerging out of the choices
of the Tribunal. It is shaped for revising the mistakes made by the Tribunal. It is a moderate
redrafting gathering where the bids lie after request of the Tribunal.

Foundation of National Company Law Tribunal (NCLT)

National Company Law Tribunal (NCLT) was conceptualized by Eradi Committee. It was at
first presented in Companies Act, 1956 of every 2002 except the arrangements of Companies
(Second Amendment) Act, 2002 were never informed as they got buried in suit encompassing
constitutionality of National Company Law Tribunal (NCLT).

2013 Act was ordered and the idea of NCLT was held. Notwithstanding, the forces and
elements of NCLT under 1956 Act and 2013 Act are extraordinary. The constitutionality of
National Company Law Tribunal (NCLT) related arrangements were again tested and this
case was at long last chosen in May 2015.

COMPOSITION

As of now, the Ministry of Corporate Affairs has 15 NCLT benches

Each Bench is headed by a President, 16 judicial members, and 9 technical members. The
current and the first President of the NCLT is Justice MM Kumar.

Aspirants should also know that the National Company Law Appellate Tribunal (NCLAT) is
a tribunal which was formed by the government under Section 410 of the Companies Act,
2013. NCLAT is responsible for hearing appeals from the orders of the National Company
Law Tribunal.

Decisions taken by the NCLT can be appealed to the National Company Law Appellate
Tribunal (NCLAT). The decisions of the NCLAT can be appealed to the Supreme Court on a
point of law.

Powers and Functions of NCLT

Class Action
Section 245 of Companies Act, 2013

1. An application may be filed to the tribunal by either the members of the company
or by the depositors or on the behalf of the members stating that affairs have been
conducted in the manner which is prejudicial to the interest of the company and
seeking all or any of the ground:
The company may be restrained:

 from doing any act which is outside the scope of MOA and AOA,
 from committing any breach of the provision of MOA and AOA,
 and its directors from acting on such resolutions,
 doing any act which is either contrary to this act or any other act which is in force
for time being,
 declaring any resolution which in turn alters the MOA and AOA and it becomes
void if such resolution is passed.
To claim either damages or compensation or to demand any other suitable action.

 company or directors of the company for any unlawful, fraudulent or wrongful act
or omission committed by them.
 auditor or audit firm of the company for improper or misleading statements.
 can seek any other remedy from the tribunal.

1. where the members of depositors claim damages or compensation or any other

action against the audit firm the liability shall fall on the firm and each and every
partner who was involved in making the improper or misleading statement.
2. the number of members for filing an application to tribunal shall be:

 Not less than one hundred members or members who are are not holding less than
one-tenth shares of total voting power in the company (in case the company is
having a share capital) ; or
 Not less than one-fifth of people on the company’s register of the members (in
case the company does not have share capital).

1. The depositors shall be not less than one hundred depositors or not less than such
percentage of total depositors.
2. The tribunal shall see that the members and depositors have acted in good faith
while an application is made for seeking the order.
3. On the application made by the members or the depositors the tribunal shall issue a
public notice to be served on all of the members and depositors, where similar
application is made from jurisdiction, the tribunal shall consolidate and consider it
as one application and the class members or depositors shall be allowed to choose
the lead applicant, and two class-action application filed for the same cause of
application shall not be allowed.
 4. The orders which are passed by the tribunal shall be binding on the members,
depositors, auditor which includes audit firm, advisors, expert or consultant and
any other person associated with the company.
5. If the company fails to comply with the order which is passed by the tribunal the
company shall be punished with a fine of INR 5 lakhs which may extend to INR
25 lakhs and every officer of default shall be punished with fine INR 25 thousand
and which may extend to INR 1 lakh and with the imprisonment of three years.
6. If the tribunal comes to the conclusion that the application filed is found to be
frivolous or vexatious the tribunal shall reject the application and record the
reasons in writing and shall order the other party to pay the cost which does not
exceed INR 1 lakh.

Deregistration

Section 7(7) of Companies Act, 2013 states if tribunal comes to the notice that the company
at the time of incorporation of the company furnished false or incorrect information or by
suppressing any material facts, information or any declarations is filed by the company the
tribunal may pass any one of the orders as mentioned below:

 Pass such orders as it thinks fit.

 Pass orders for winding of the company.
 Direct the liability of members shall be unlimited.

Oppression and mismanagement

Section 241 of Companies Act, 2013 states that any member of the company who has the
right to complain to tribunal as per section 244 of the Act, 2013 shall file a complaint to
tribunal stating that:

 Affairs of the company are conducted in such a manner which is prejudicial to

public interest or oppressive to him or to any member of the company or which is
prejudicial to the company.
 A material change which has been brought by the company which is against the
interest of creditors of the company, debenture holders, shareholders of the
company and it has brought significant change in the management or control of the
company either in:

1. alteration in the board of directors,

2. alteration of managers,
3. alteration of the member, or
4. any other reason.
For such reasons, the members of the company perceive that affairs of the company have
been conducted in the manner which is prejudicial to its interest.


When the Central Government is of opinion that affairs of the company have been
conducted in any one of below manner mentioned and by that tribunal comes to
the conclusion that it has been prejudicial to public interest or in an oppressive
manner:

1. a member of the company is either guilty of fraud, misfeasance, persistent

negligent, breach of trust or is the default in carrying out the obligations and
functions as per law; or
2. management of the company is not been carried out as per the sound principles or
prudent commercial practices; or
3. when a company is being conducted which causes serious injury to trade, business,
industry; or
4. when a company is being managed with the sole motive to defraud creditors,
members, or being managed only for fraudulent or unlawful purposes which is
against the public interest;
shall file an application to the tribunal for seeking the remedy.

Investigation powers

Section 213 of Companies Act, 2013 states:

 When an application is made to the tribunal by:

1. Company having share capital: Not less than one hundred members or members
who are are not holding less than one-tenth shares of total voting power in the
company; or
2. A company having no share capital: Not less than one-fifth of people on the
company’s register of the members.

 When an application is made by any other person other than the member of the
company to the tribunal stating one of the circumstances:

1. affairs of the company have been conducted only with the intent to defraud the
creditors or the members or any of the other persons.
2. business is being conducted either for fraudulent or unlawful purposes.
3. business is being conducted in such a way it is oppressive to its members.
4. business is being formed only with sole motive for unlawful or fraudulent
purposes.
 5. persons who were engaged in the formation of the company or management of its
affairs of the company were either guilty of fraud, misfeasance or misconduct
towards the company or any of its members.
6. When members of the company have failed to give all the information to the
company relating to the affairs of the company which they are expected to give
including the information relating to the calculation of commission payable to
managing director, director or any other manager of the company and the tribunal
may after giving the reasonable opportunity to the parties, the tribunal feel that the
affairs of the company should be investigated and for such purpose, the central
government shall appoint an inspector to investigate.

Reopening of accounts

Section 130 of Companies Act, 2013 states that.

 Except on the order of central government, income tax authorities, SEBI, statutory
body, the order made by a court of competent jurisdiction or tribunal the company
shall not open its accounts or recast its financial statements and shall be allowed to
do so when:

1. Earlier accounts were prepared in a fraudulent manner.

2. affairs of the company were mismanaged and casting a doubt on reliability of
financial statements.

 Before passing such orders, the tribunal shall give the notice to concerned
authorities.

Refusal to transfer shares

Section 58 of Companies Act, 2013 states:

 A private company which is limited by the shares or the public company which
refuses to register the transfer of shares of the transferor, the company shall within
thirty days of transfer shall send a notice to the transferor and transferee of such
refusal.
 The transferee in return shall file the appeal to the tribunal within thirty days from
the date of receipt of the notice and in case no notice is sent by the company to the
transferee, the transferee shall file an appeal to the tribunal within sixty days from
the instrument of the transfer.
 The tribunal shall hear the orders and after hearing such order shall either reject
the appeal or order the company.

1. To transfer the shares within ten days of an order.

 2. Direct rectification of the register and also direct the damages to be paid if any
sustained by the aggrieved party.

 If any person contravenes with the order shall be punishable with imprisonment
for a term which shall be not less than one year but may extend to three years and
with the fine which shall not be less than INR 1 lakh but may extend to INR 5
lakh.

Conversion of Public Company into Private Company

Section 13 to 18 of Companies Act, 2013 read with the Rule 41 of Companies(Incorporation)

rule 2014 states when a company converts from a public company into private company an
approval of NCLT tribunal is required for such conversion. The tribunal may impose such
terms and conditions as in section 459 of Companies Act, 2013.

Annual General Meeting

As under section 97 and 98 of Companies act, 2013, if the members of the company fail to
convene the meeting within a particular time and the member of the company may give an
application to the tribunal to convene such meeting, the tribunal as such as the power to
convene those meetings.

Winding up of the company

Section 242 of Companies Act, 2013 a company may be wound by the tribunal when the
affairs of the company have been conducted in any one of below manner, set under section
242 of the companies act, 2013 and by that tribunal comes to the conclusion that the company
has been prejudicial to public interest or in an oppressive manner.

Additional Powers

1. Section 221 of Companies Act, 2013 power of the tribunal to freeze the assets of
the company.
2. Section 2(41) of Companies Act, 2013 power to change the financial years of the
company registered.

Meaning of winding up of a company

The process of ending the life of a company by administering its properties for the benefit of
shareholders & creditors of the company is known as winding up of a company. A company
is a corporate body which is an association of people for some common purpose of carrying
on the business and earning profits. A company has to be incorporated and registered
according to the Companies Act 2013. Chief Justice Marshall defines a company as “a
corporation which is an artificial being, invisible, intangible and exists only in contemplation
of law.” A company, being a corporate body has the following characteristics:

 It has a separate legal entity.

 It is an artificial person.
 It has limited liability.
 It can own separate properties and assets.
 It has a common seal.
 It has perpetual succession.
 It can sue and be sued in its own name.
 In a public company, shares can be transferred freely.
From the above definition, it is clear that a company has to be incorporated according to the
provisions of the Act. Similarly, when a company is to be closed, a proper procedure has to
be followed. This process of realisation of assets, payment to creditors and distribution of
surplus among the shareholders in order to finally dissolve the company is called winding up.
Thus, it can be said that winding up is the last stage after which a company ceases to exist
and is finally dissolved.

Modes of winding up of a company

According to Section 270 of the Act, a company can be wound up by either of the two modes.
These are:

 Winding up by the Tribunal ( NCLT)/ Compulsory winding-up

 Voluntary winding up of a company

Winding up by court/tribunal

Chapter XX of the Companies Act, 2013 in part I deals with the winding up of a company by
a court or tribunal. When a company is wound up by the order of a court or tribunal, it is
called winding up by the court or tribunal. This mode of winding up is also called
compulsory winding up of a company. The provisions with respect to the same are explained
below.

Who can file a petition for the winding up of a company

According to Section 272 of the Companies Act, 2013, the following persons can present a
petition for the winding up of a company to the Tribunal:
Company

According to Section 272(1)(a), a petition for winding up can be presented by a company

itself. However, before presenting a petition, the company must pass a special resolution in
this regard. In the case of BOC India Ltd. Zinc Products & Co. (P) Ltd. (1996), a petition for
winding up was presented by a person not authorised to do so by the board of directors and
hence, the petition was declared as incompetent.

Any contributory

According to Section 2(26) of the Act, a contributory is a person who is liable to contribute
towards assets of the company in case it is wound up. However, according to Section 272(2),
a contributory will be allowed to present a petition for winding in spite of him being the
holder of fully paid up shares or the company has no surplus assets left for distribution among
its shareholders after satisfying all the liabilities. One important requirement is that the shares
in respect of which a person is a contributory were allotted or registered under him for at least
6 months during the period of 18 months before the commencement of winding up or such
shares devolved on him by the death of the former holder.

All or any persons mentioned above

The petition for winding up can also be presented by the company and the contributories
together or separately.

Registrar

The registrar can file a petition for the winding up of a company under the following
circumstances:

 Actions of the Company were against the interests of sovereignty and integrity of
the country, Security of States, friendly relations, morality etc.
 If the tribunal is of the opinion that the company was formed with a fraudulent aim
and unlawful purpose or its affairs have been conducted in a fraudulent manner or
the persons who formed the company are guilty of fraud or misconduct.
 There was a default in filing the financial statements or annual returns of the
company with the Registrar.
 It is just and equitable for the tribunal to wound up the company.
However, a registrar cannot file a petition for winding up of a company to a tribunal, if a
company has decided that it will be wound up by a tribunal by a special resolution.

The registrar is also required to obtain previous sanction from the Central Government before
filing a petition. The government will not accord the sanction unless the company is given a
reasonable opportunity to make the representations. Also, a petition presented by a company
for winding up will be admitted by the tribunal only if it is accompanied by a statement of
affairs.
Person authorised by central government

Section 272(1)(e) provides that a petition for winding up can also be filed by any person who
is authorised by the Central Government to do so.

Central or State government

The Central or State government can also present a petition for winding up of a company if
its actions are against the sovereignty and integrity of the country, public order, morality,
decency, foreign relations etc.

Grounds for winding up by court

Section 271 deals with circumstances under which a tribunal can order for winding up of a
company. These are:

Special resolution

According to Section 271(a), a petition for the winding up of a company can be prevented if a
special resolution has been passed by the company in this regard.

Sovereignty, integrity, and other factors

A company can be wound by a tribunal if it acts against the sovereignty and integrity of
India, the security of the state, foreign relations, public order, morality etc. This is given
under Section 271(b) of the Act.

Fraudulent conduct of the company.

According to Section 271(c), if the tribunal on the application filed by the registrar is of the
opinion that the company was formed with a fraudulent aim and unlawful purpose or its
affairs have been conducted in a fraudulent manner or the persons who formed the company
are guilty of fraud or misconduct, it can order for winding up of the company.

Default in filing financial statements or audit returns

Section 271(d) provides that where the company defaults in filing its financial statements or
audit returns with the registrar, the tribunal can order for winding up of the company.

Just and equitable

A tribunal can order for winding up of a company if it is just and equitable to do so in the
following circumstances:
  Deadlock: When two or more people cannot agree with each other and reach an
agreement, the situation is known as deadlock. In case of deadlock between the
management of the company, it is just and equitable for the tribunal to wind up the
company. In the case of Etisalat Mauritius Ltd. V. Etisalat DB Telecom (P) Ltd.
(2013), there was a deadlock and irretrievable breakdown between major
shareholders of the company which further hampered its performance and work
and no scheme or solution could be propounded, the tribunal ordered to wind up
the company.
 Loss of Substratum: When the object of the company fails, it leads to loss of
substratum. In the case of Dunlop India Ltd. re (2013), the company was unable to
show its long or short term business plans and the company was not conducting its
business for quite some time and so the company was ordered to wind up. In the
case of Seth Mohan Lal v. Grain Chambers Ltd. (1968), the Supreme Court
observed that when the object of the company for which it was formed fails
substantially, it leads to loss of substratum.
 Losses: if a company is suffering loss and cannot carry on its business, it is just
and equitable to wind up the company. A company was asked to wind up on this
ground in the case of Bachharaj Factories v. Hirjee Mills Ltd. (1955).
 Oppression of minority: another just and equitable ground for a tribunal to order
winding up is where the principal shareholders adopt aggressive or oppressive
policies towards the minority shareholders.
 Fraudulent purpose: a tribunal can also order for winding up of a company if it
has been formed for an unlawful or illegal purpose.
 Public interest: if it is in the public interest to wind up a company, it is a just and
equitable ground. In the case of Millennium Advanced Technology Ltd., re,
(2004), the company was ordered to wind up due to multiple undesirable practices
like false invoicing etc.
 Company was a bubble: When the company was a bubble, i.e. it was never in
real business, then also it classifies as just and equitable ground of winding up.

Steps for compulsory winding up or winding up by a tribunal

The Companies (Winding Up) Rules, 2020 provides the rules governing compulsory winding
up process of a company along with required forms and particulars. This, the steps involved
in the process are:

 Step 1- the petition for winding up must be presented in Form WIN 1 or Form
WIN 2. The petition must be verified by an affidavit by a person making the
petition or if the petition is made by the company by its director, secretary or any
other authorised person. The affidavit must be in accordance with Form WIN 3.
 Step 2- the statement of affairs has to be filed within 30 days in accordance with
Section 274 of the Companies Act, 2013. It must contain the information till the
date when the statement is filed. The statement must be filed in Form WIN 4 and
accompanied by an affidavit of concurrence of the statement.
  Step 3- the petition will be posted before the tribunal and a date will be fixed for
hearing the petitioners. If the petition is not made by the company, notice will be
sent to the company and an opportunity to be heard must be given before
advertisement directions to be given with respect to the petition.
 Step 4- according to Rule 6, every contributories will be served a copy of the
petition by the person making the petition within 24 hours of making payment in
this regard.
 Step 5- notice of the petition will be given in advertisement 14 days before fixing a
date of hearing in a daily newspaper which is widely circulated in the state where
the office of registrar is located. The newspaper must be either in English or any
vernacular language of such area. Further, rule 8 provides that an application for
winding up cannot be withdrawn without the permission of the tribunal
 Step 6- Any objection can be filed in the form of an affidavit in objection within
30 days from the date of order and the same will be served to the petitioner.
 Step 7- The reply to the objection must be filed in the form of an affidavit within 7
days before the date fixed for hearing of petition.
 Step 8- provisional liquidator will be appointed after the admission of petition by
the tribunal and upon sufficient grounds for his appointment in accordance with
Rule 14. The order of appointment of provisional liquidator will also contain
restrictions and limitations on his powers. The same will also be intimated to the
provisional liquidator and the registrar of companies within 7 days from the date
of order of appointment.
 Step 9- order of winding up by the tribunal will be in accordance with Form WIN
11 and will be sent by the registrar to the company liquidator and the registrar of
the companies within 7 days and the same will also be advertised.
 Step 10- after the affairs of the company have wound up completely, the company
liquidator will apply for the dissolution of the company within 10 days along with
audited final accounts and auditors certificates and the tribunal will order for
dissolution. The process of winding up will be concluded on the day on which the
order of dissolution has been reported to the registrar of the company.
Consequences of winding up Order

When the court orders winding up, the immediate consequence results in the commencement
of winding up. However, other consequences are as follows: –

1. When the order of winding up is made, and the provisional appointment is made,
immediate intimation is provided to the company liquidator, provisional liquidator, and
Registrar.

2. After such an order is made, the company is obligated to submit a certified copy of the
order within 30 days to the registrar.

3. The order of winding up shall be adjudicated as the discharge of the company officials and
employees. But in the event where the company’s business is in operation, this rule will not
apply. If the company has hired employees for a specific period of time, and the term has not
expired when the order of winding up is passed, the company cannot discharge such
employee. Upon such discharge, the company will be liable to a branch of contract.

4. When the order has been made, no legal proceeding or suit shall be commenced except
with the Tribunal leave. Similarly, any pending suits cannot be activated except with the
leave of the Tribunal. When court grant such leave, all the circumstances of the case is taken
into consideration. This is done to secure the unsecured creditors and to preserve the assets of
the company.

Appointment of official liquidator

The official liquidator is an officer who is appointed to proceed with the winding up of a
company and its affairs. Section 275 provides that in order to wind up a company, the
tribunal will appoint an official liquidator from a panel maintained by the Central
Government which consists of names of advocates, Chartered Accountants, Company
Secretaries, Cost Accountants etc. having at least ten years of experience in the matters
related to the company. However, if a provisional liquidator is appointed, his powers will be
restricted by an order of appointment by the tribunal. A provisional liquidator is a person
appointed by the court or tribunal to carry on the process of winding up of a company.

The central government also has the power to remove the name of any person from the panel
on the grounds of misconduct, fraud, breach of duties, professional incompetence etc, but
before doing so an opportunity to be heard must be given to him. The liquidator so appointed
must within seven days of appointment make a declaration regarding conflict of interest or
lack of independence with respect to his appointment with the tribunal.

According to Section 276, a provisional liquidator or a company liquidator appointed by the

tribunal can be removed by the tribunal on the following grounds:

 Misconduct;
 Fraud or misfeasance;
 Professional incompetence or failure to exercise due care and diligence;
 Inability to act as a liquidator;
 Conflict of interest or lack of independence during the term of appointment

Powers of liquidator

According to Section 277(5), a company liquidator will be the convener of meetings of the
winding up committee which will assist in the liquidation proceedings and related functions
like:
  Take over the assets.
 Examination of statement of affairs.
 Recovery of property and other assets of the company.
 Review of audit reports and accounts.
 Sale of assets.
 Finalising the list of creditors and contributories.
 Compromise and settlement of claims.
 Payment of dividends.
 Any other function.
The company liquidator is also required to submit a report along with minutes of meetings of
the committee before the tribunal. The report will be submitted on a monthly basis and will
be signed by the members present in the meeting till a report for dissolution of the company
is submitted (Section 277(6)). He will also prepare a draft final report for the approval of the
winding up committee (Section 277(7)).

According to Section 290, the Company liquidator will have the power to:

 Manage the business of the company for the process of winding up.
 Execute deeds, receipts and other documents on behalf of the company and use its
seal if necessary.
 Sell the immovable and movable property and actionable claims of the company,
either by public auction or private contract.
 Sell the undertaking of the company.
 Raise money required for the security of assets of the company.
 Institute or defend suits or other legal proceedings, whether civil or criminal, on
behalf of the company.
 Settle claims of creditors, employees or any other claimant and distribute the sale
proceeds.
 Inspect the records and returns of the company.
 Draw, accept, make and endorse any negotiable instrument which includes a
cheque, bill of exchange, hundi or promissory note on behalf of the company.
 Obtain any professional assistance from any person or appoint any professional for
the protection of assets of the company.
 Take actions and steps and sign, execute and verify papers, deeds, documents,
applications etc for winding up of the company, distribution of assets and
discharge of duties and obligations of liquidator.
Duties of company liquidator

According to Section 288, it is the duty of the company liquidator to make periodical reports
to the Tribunal and make reports at the end of each quarter regarding the progress of winding
up of the company. Section 292 deals with the exercise and control of powers of company
liquidators. The company liquidator is required to give regard to the directions given by the
creditors or contributories in a resolution at any general meeting or by the advisory
committee. The directors of creditors and contributories will override those given by the
advisory committee in case of conflict. The company liquidator can also:

 Summon the meetings of creditors or contributories.

 Summon meetings as and when directed or requested by the contributories and
creditors in writing by not less than one-tenth.
If a person is aggrieved by the decision or any act of the company liquidator, he can make an
application to the tribunal, which can further confirm, reverse or modify the decision. Section
294 of the Act further provides another duty of the company liquidator to maintain proper
and regular books of accounts, receipts and payments which will be presented to the tribunal
two times in each year during his tenure. The tribunal can cause the accounts to be audited,
and the company liquidator will have to furnish such vouchers and information to the tribunal
as required. One copy of the audited accounts will be filed with the tribunal and the other will
be delivered to the registrar. If the account refers to a government company, the company
liquidator will give a copy to the:

 Central Government if it is a member of the government company.

 State government if it is a member of the company
 Both the governments, if they are members of the company.

Voluntary winding up of a company

Corporate Insolvency Resolution Process (CIRP) is a process to resolve the corporate

insolvency of a corporate debtor. It can be initiated by filing an application to the
Adjudicating Authority under Chapter II of Part II of the Code. If this process fails, the
company initiates the process of liquidation. The process of voluntary winding up under IBC
may be started by a corporate debtor, financial creditor or operational creditor.

When a company decides to wind up its affairs and proceed further with the required
proceedings on its own, this Act is called the voluntary winding up of a company. Part II of
Chapter XX of the Act deals with the voluntary winding up of the companies.

Circumstances in which a company can be wound up voluntarily

Section 304 provides the circumstances under which a company can be wound up
voluntarily:
  Company passes a resolution in a general meeting regarding voluntary winding up
due to the expiry of its duration fixed by its articles or due to the occurrence of any
event for which articles provide that the company should be dissolved;
 Company passes a special resolution regarding voluntary winding up.
However, this Section and the provisions related to the voluntary winding up of a company
were omitted in 2016. Now, the Insolvency and Bankruptcy Code, 2016 deals with the
voluntary winding up process.

Meeting of creditors

It is necessary to inform the creditors of the company which can be done through the post. A
meeting is conducted where they are notified about the amount of money due to each
creditor. The board of directors will then put forth the statement of affairs and if the majority
opines that the company should be wound up voluntarily, the process is initiated. However, if
the majority opt for compulsory winding up of the company or winding up by a tribunal,
application must be sent in this regard to the tribunal within 14 days and inform the same to
the registrar within 10 days. A company liquidator is appointed to carry on the process of
voluntary winding up according to the Insolvency and Bankruptcy Code, 2016 who finally
evaluates the assets of the company and submits the report to the tribunal.

Procedure of voluntary winding up

Further, Section 59 of the Insolvency and Bankruptcy Code, 2016 deals with the voluntary
liquidation of corporate persons. It provides that a corporate person who wants to liquidate
itself voluntarily and has not committed any default may initiate the liquidation proceedings
under the Act. However, the proceedings of a registered corporate person must satisfy the
following conditions:

 There must be a declaration from the majority of the directors of the company
which must be verified by an affidavit and must state that:
o A full inquiry into the affairs of the company has been made and an
opinion has been formed that the company has no debt or will be able to
pay its debts in full from selling its assets in the voluntary liquidation.
o The company is not liquidated in order to defraud any person.
 The declaration must be accompanied by the following documents:
o Financial statements and record of the company’s operations for the
preceding two years or since its incorporation.
o Valuation report of the assets of the company which is prepared by a
registered valuer.
 A special resolution regarding the voluntary winding up of the company must be
passed within four weeks of declaration or a general resolution must be passed in a
general meeting regarding voluntary winding up due to the expiry of its duration
fixed by its articles or due to occurrence of any event for which articles provide
that the company should be dissolved.
Further, the Section provides that the company must notify the Registrar and Board about the
resolution being passed for the liquidation of the company within seven days from the date
such resolution is approved by the creditors. With the approval of creditors, the liquidation
proceedings of the company will be deemed to have commenced from the date such
resolution is passed. When the affairs of a company have wound up completely and its assets
have been liquidated completely, an application will be made by the liquidator to the
Adjudicating Authority for the dissolution of such a company. The Authority will pass an
order regarding dissolution of the company and it will be dissolved accordingly and the copy
of said order must be given to the required authority with which the company is registered
within fourteen days.

Consequences of voluntary winding up

1. The consequence on shareholders and members- if a company has limited shares, its
shareholders are liable to pay the full amount up to their face value. He is not free of his
obligation even if the company is liquidated.

2. The consequence on the creditors-

i. Solvent company- where the company is solvent, all debts payable on a

contingency and all claims against the company present or future, certain or
contingent, ascertained or sounding only in damages, shall be admissible to
proof against the company.
ii. Insolvent company- if a company is insolvent and has wound up, it also has to
follow the same rule as provided above.

Powers and duties of company liquidator under the Code

According to Section 35 of the IBC, a liquidator will perform the following functions and
duties:

 Verify the claims of creditors of the company.

 Take into custody all the assets, properties and actionable claims belonging to the
company.
 Evaluate the assets and property of the company and prepare a report in this
regard.
 Take measures to protect and preserve the assets and properties of the company.
 Carry on the business for beneficial liquidation.
 He can also sell the immovable or movable property of the company.
 Draw, accept, make and endorse any negotiable instrument including the bill of
exchange, hundi or promissory note on behalf of the company.
  He can also obtain any professional assistance in order to discharge his duties.
 Institute or defend the suits by or against the company.
 Investigate the financial affairs of a company.

Winding up of unregistered companies

Part II of Chapter XXI deals with the winding up of unregistered companies. Section 375 of
the Act provides that an unregistered company cannot be wound up voluntarily under the Act.
It provides that such a company will be wound up under the following circumstances:

 The company is dissolved or ceases to carry on the business or is continuing to

carry on the business only for the purpose of winding up.
 The company is not able to pay its debts.
 It is just and equitable in the opinion of the tribunal to wind up the company.
The Section further provides that an unregistered company will include any partnership firm,
limited liability partnership, society or cooperative society, association etc but will not
include:

 A railway company incorporated under any Act of Parliament or any other Indian
law.
 Any company registered under the Act.
 Any company registered under the previous company law but not a company
whose office was in Burma, Aden, or Pakistan.
According to Section 376, a foreign company incorporated outside India but carrying
business in India can be wound up as an unregistered company if it ceases to carry business
in India.

Official liquidators under the Companies Act

Section 359 provides for the appointment of official liquidators for the winding up of
companies by the tribunal. It provides that the Central Government can appoint official
liquidators, joint liquidators, and deputy or assistant official liquidators in order to discharge
the functions of an official liquidator. Section 360 further provides that the official liquidator
will person such duties and exercise such powers as prescribed by the Central Government. It
can also conduct inquiries or investigations as directed by the tribunal or the Central
Government.

Basis of
Winding up Dissolution of company
difference

Meaning It is the process by which the dissolution of a Dissolution of the company means
company is initiated. that the company has ceased to
 exist.

Dissolution means that even the

Existence of After winding up, the legal entity of a company
legal entity of a company comes to
company continues to exist, and it can be sued.
an end.

Under the process of winding up, a company is

Business of
allowed to continue its business for the benefit Ceases on dissolution.
company
of winding up.