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ABHISHEK SHAHU

B.Com, LL.B., CWA Faculty at DMSR-TCSW, NAGPUR

SAI JYOTI PUBLICATION

AUTHOR No part of this book shall be reproduced, stored in retrieval system, or translated in any form or by any means, electronic, mechanical, photocopying and/or otherwise without the prior written permission of the publishers.

FIRST EDITION : 2011 ISBN: 978-81-920041-7-4

Published By: Sai Jyoti Publication C-9 Shrinath Sainagar, Near Onkar Nagar, Ring Road, Manewada, NAGPUR. Ph. No.: 9764673503, 9923693506. email id: sjp10ng@gmail.com

Type Setter: Om Sai Graphics Plot No. 29 Behind T.B. Ward, Indira Nagar, Nagpur 440003.

CONTENTS
1. INTRODUCTION TO THE COMPANY ANNEXURE 1 2. 3. FORMATION OF COMPANY CAPITAL AND ISSUE OF CAPITAL ANNEXURE 2 4. 5. MANAGEMENT AND CONTROL I MANAGEMENT AND CONTROL II ANNEXURE 3 6. CONTEMPORARY ISSUES 1 10 11 25 26 74 75 115 116 118 119 160 161 203 204 207 208 237

Preface
This book is about basic concepts of Corporate Law. Company Law in itself is a vast concept and is difficult to cover in a single book. However this book provides the basic concepts of the company law at the introductory level. I tried to cover all the topics which are required to know at the managerial level. The book is prepared specially for the understanding of students. Information about the Company Law is although widely available I have tried to put all the information at one place. While I was studying company law as a student I came across many websites and books on the topic, however there was no single source which provides all the information about the concept with basics. I therefore tried to keep this book simple but comprehensive. The book is divided into six chapters covering various aspects of the company as they come across during the life of the company except the last one which deals with the Contemporary Issues. Chapter one is about the company as an organisation. This chapter describes the origin of company and company law and its comparison with the other forms of organisation Chapter two describes the provision of company law for the formation of the company and basic documents that are to be prepared during the formation of the company. Chapter three is about the issue and management of capital that a company can use to finance its operation. Chapter four is the first part of the management and control which provides for the constitution of the company management and roles of various members of the company. Chapter five deals with various compliances a company has to do and also the managerial procedures a company has to follow for the management of the company. This chapter also provides the procedure for winding up of the company. Chapter six is for Contemporary Issues or recent matters in the company law. The book will be a guide to Basic Concepts of Company Law for the students of MBA and Undergraduate students. I present this book to the students with my best wishes, Abhishek Shahu Shahu.edu@gmail.com

Acknowle wledgement
First of all I would like thank my publisher for giving me the opportunity to present this book before you. It has been a great honour for me to write this book. Further I would like to thank my family and friends for providing me the support and encouragement for writing this book

1
INTRODUCTION TO THE COMPANY
Meaning of Company:COMPANY as we hear, we imagine as a layman, big business houses, large offices, huge money, lot of influential people etc. It is a most common form of business organisation as we see today, other being, proprietorship, partnership, societies etc. rather it is outnumbering them as the time passes. This is because the company has several advantages over other form of organisation. The word company is derived from the Latin words com which means together and panis which means bread, hence the word company originally means an association of person who took their meals together, however as a form of business organisation company means two or more persons coming together to carry on a business. The Companies as recognised by the modern business laws is body corporate, which is formed by an association of person coming together to achieve a common objective and acting in unity. Company is person created by the process of law and hence known as artificial person. An organisation can be called as a company if it fulfils the following characteristics:

a) Corporate personality:
An organisation incorporated or registered under the law gain a separate legal entity in the eyes of law. It means that for all the legal purpose, a company will be treated as a person and have all the rights and liabilities that person can have. A company can enter into a contract in its own name and can sue or be sued in its own for the enforcement of the contract, just like any other individual person with body and soul. A company is thus a juristic person i.e. an artificial person created by law.

b) Limited liability:
Limited liability is a concept whereby a person's financial liability is limited to a fixed 1 sum, most commonly the value of a person's investment . This concept gives company its essential characteristic. The liability of the members of a company or the shareholders is restricted to the nominal value of the shares held by them. This means that in case of dissolution of company, a shareholders liability is limited to the extent of the unpaid amount on the shares, if any.

c) Perpetual Succession:
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http://en.wikipedia.org/wiki/Limited_liability

A company is created by law and therefore it can be destroyed only by legal procedure. A company thus lives in perpetuity irrespective of any change in its membership. Perpetual succession denotes the ability of a company to allow the change in membership without affecting the continuity of the organisation.

d) Transferability of ownership:
Capital of the company is divided into small denomination of shares. Each share denotes ownership of the company. Further section 82 of the Companies Act 1956 states that share are the transferable instruments. Thus a shareholder, who is the owner of the company, can freely transfer the shares to any other person whenever required. The availability of stock exchanges makes the shares as one of the most liquid assets for investment.

e) Separate management:
Shareholders of a company are huge in number, also they are scattered in various geographical areas, which makes it difficult to take part in management routine business of the company. The company is therefore has to be managed by agents elected by shareholder thereby separating the ownership of a business from its management.

f) Common seal:
The company can enter into a contract or other legal agreements on its own name, however being an artificial person a company cannot sign on itself. In such case a Common seal acts as a signature of the company. Any document affixed by common seal is legally binding on the company. A common seal is kept with the agents of the company with care and caution and used with great diligence.

g) Limitation of Action:
The scope of the companys activities is defined by the Memorandum of Association, which is created at the time of the birth of the contract. A company cannot act beyond the scope defined in Memorandum, thus limiting its scope of activity, however if a company wants to increase its scope of activity, the same can be done by first amending the Memorandum.

Origin of Company:The credit of giving company its present form goes to Dutch, who formed first company in 1602 by the name Vereenigde Nederlandsche Geoctroyeerde Oostindische Compagnie (United Dutch Chartered East India Company, or VOC for short), which was a chartered
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Ascent of money: Financial history of the world, by Nail Ferguson, Penguin press

company. The company was formed to organise to trade with Asian countries through the sea route. The funds for this company were collected from the ordinary people, who were then issued securities against the sum they have invested in the company and the returns were paid in the form of share in the profits earned by the company, hence the security was called as shares. These shares, unlike other securities, could not be redeemed with the issuing authority; on the other hand they were allowed to transfer their securities to others for the money. The company later earned huge profits and the shareholders became richer. This made the model of VOC very popular and soon it was adopted all over the Europe.

The first share certificate The model of VOC was adopted in England and was applied to other business also. Thereafter in England there were two types of companies one formed by the charter and the other were unincorporated companies, or association of person working in form of company. The modern form of company came into existence much later in 1844 when the Joint Stock Companies Act was passed in England.

Evolution of Company law in India


The Indian Legal system has evolved from the British law and so is the company law. The first Companies Act of India was passed in 1850 which was based on the Joint Stock Companies Act of 1844 of England. The affairs of the company were still regulated by other laws until the Act of 1856, which repealed all the other laws governing the company. The Act was then amended from time to time in accordance of the changes made in Company Law of England, the last being made in 1936. In 1951 the government of India passed an ordinance for consolidation of company law which was then replaced by the Amendment Act. The present Companies Act was passed in 1956. The Act which was then the longest piece of legislation of that time was drafted on the recommendations of the Bhabha Committee. The Companies Act 1956 gave a comprehensive guideline regarding formation, management

and winding up of the company. However, the longest legislation consisting of 658 sections and 15 schedules was not sufficient to meet the demands of changing business scenario and hence, went through various amendments to reach its present status. Some of the important amendments are given below. 1) 1963: Appointment of Companies Tribunal and constitution of the Board of Company Law Administration. 2) 1974: Under this amendment substantial changes were made to attract public investment in companies such as: a) Recognition of Deemed company b) Allowing companies to accept public deposits c) Preventing misutilization of unclaimed dividend, by making mandatory provision of separate account for unclaimed dividend. d) Extending the reach and accessibility of Company Law board by establishing its offices in Metropolitan city. e) Mandatory appointment of whole time secretary for some companies. 3) 1988: Based on the recommendation of Sanchar Committee, several amendments were made such as: a) Mandatory appointment of managing or whole time director for several public companies b) Freedom to fix managerial remuneration on the basis of certain limits. c) Central Law board was given the power to carry judicial and quasi judicial functions. d) The concept of company secretary in practice was introduced 4) 1991: In consequences of changes in MRTP Act, Companies Act was also changed as regards to the provision of merger and acquisition and transfer of share. 5) 1996: The following are the some of the Amendments of 1996 a) Every shareholder will be deemed to be member of the company b) Distinguishing each share in a company by an appropriate number is not mandatory. c) Only Private Companies were entitled to restrict transfer of shares, thereby making securities of Public Companies freely transferable. d) Provision made for facilitation to the person holding securities in DEMAT account 6) 1999: Following are the salient features of the 1999 amendment act a) Companies being allowed to buy-back their own shares.

b) Companies can issue Sweat Equity shares. c) Establishment of Investor Education and Protection Fund. of National Advisory Committee on Accounting Standards for

d) Constitution companies.

7) 2000: are the salient features of the 2000 amendment act. a) b) c) The act made it mandatory for all the companies to have minimum paid-up capital of Rupees one lakh for Private Company and Rupees five lakhs for Public Companies. Provision for Deemed Public Companies made inoperative. SEBI is empowered to deal with the issues of transfer of securities and non-payment of dividends in case of listed companies.

d) Providing laws for Shelf Prospectus and information memorandum in the Act. e) The amount of interim dividend to be deposited in a separate bank account within 5 days of declaring dividend and such dividend should be distributed within 30 from the date of declaration. To ensure good corporate governance, board of directors report to include a Directors Responsibility Statement highlighting the accountability of directors.

f)

g) Audit of the public companies to be excluded in calculation of the audit ceiling limit. h) Compulsory appointment of a Director to be elected small shareholder (shareholding should be Rs.20000 or less), for the companies having paid-up Share capital of Rupees Five crore or more and one thousand or more small share holder. i) j) All public companies have paid-up capital of Rs. 5 crore of more must appoint an Audit committee. The amount of penalties increased 10 folds.

8) 2002: Amendment Act 2002 made the following significant changes a) Appointment of National Company Law Tribunal in place to Company Law Board b) BIFR to be dissolved and the powers of it to be transferred to the Tribunal c) Roles of Professionals in Corporate administration enhanced d) Establishing separate fund for reconstruction of sick industries, funds for the same is to be collected by way of charging cess to existing companies. 9) 2006: The Companys amendment act 2006 has the following significant features. a) Introduction of Directors Identification Number (DIN), to be obtained by all the directors.

b) Rules were framed for applications, documents, inspection etc. electronically.

Comparing Company with other form of Organisation

Company is one of the newest forms of organisation; however there are several other types of organisations. Understanding and comparing them with companies will help us to understand the evolution of the company in better way. The following are the various forms of organisation other than the company.

1) Sole Proprietorship
A Sole proprietorship is an organisation where the control and ownership lies in the hands of only one organisation. In this form of organisation owner has all the power to direct and control the organisation, at the same time, owner takes all the liabilities for the losses. The liability of the owner is unlimited, extending to all the assets of the owner held for the business and also for personal purpose. Such types of organisation are easy to form and are suitable for small organisation.

2) HUF
Hindu Undivided Family (HUF) is a form of organisation owned and managed by the members of joint Hindu family. The members of HUF together known as Co-parcners headed by one person called as Karta who is the senior most male member of the company. The management of the HUF is in the hands of the Karta and he is liable for the acts of the HUF. The membership of the HUF is strictly on the basis of birth. The organisation is suitable for large family business, but the concept is vanishing due to reduction in family size of family and unequal distribution of rights and duties amongst co-parcners and Karta.

3) Partnership Firms
"Partnership" is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called individually, "partners" and collectively "a firm", and the name under which their business is carried on is called the "firm-name". In case of partnership all the partners have equal rights to take part in management, at the same the liability for the partners are joint, several and unlimited. This form is suitable for large organisation as compared to proprietorship; however, size of organisation cannot be too large as the number of member in firm is restricted to 10 in case of banking firm or 20 in firm engaged in any other business.

4) Co-operative society
A Co-operative society is formed where at least 10 persons having common interest comes together for their mutual benefit. It is a body corporate; a person created by law, managed by body of persons elected by members. Members have limited liability. The

main purpose of this organisation is the mutual benefit of its members and not to earn profit. Such type of organisation suitable for non-profit organisations.

Advantages of Joint Stock Companies:


The following are the various advantages of Joint Stock companies:

Large financial resources:


A joint stock company is able to collect a large amount of capital through contributions from a large number of people. In a public limited company, shares can be offered to the general public to raise capital. The companies can also accept deposits from the public and issue debentures to raise funds.

Limited liability:
In case of a joint stock company, the liability of its members is limited to the value of shares held by them. Private property of members cannot be confiscated for overcoming the debts of the company. This advantage attracts many people to invest their savings in the company and it encourages the company to take more risks.

Professional management:
Management of a company is in the hands of the directors, who are elected democratically by the members or shareholders. These directors are known as the "Board of Directors". They manage the affairs of the company and are accountable to all the investors. So, the investors elect capable persons who have sound financial, legal and business knowledge to the board so that they can manage the company efficiently.

Transferability of Shares:
The shareholders of the can easily transfer their shares which mean that a person can easily liquidate its investments in the company without any difficulty. Similarly it is easy to invest in a company without changing its structure.

Perpetual Succession:
Perpetual succession refers to the existence till eternity. A company has its separate existence which is different from the existence of its shareholder. A company will continue to exist even if all its members die. A company once formed can be dissolved only by way of legal procedure and nothing else can affect its existence.

Disadvantages of Joint Stock Companies:


Difficult to form:
The formation & registration of Joint Stock Company involves a long and complicated procedure. A number of legal documents and formalities have to be completed before a company can start business. The process of formation requires the services of specialists such as

chartered accountants, company secretaries, etc. Because of all this, the cost of formation of a company is very high.

Excessive government control:


Joint stock companies are regulated by government through the Companies Act and other economic legislations. Especially, public limited companies are required to complete various legal formalities as provided in the Companies Act and other legislations. Noncompliance with these causes a heavy penalty. This affects the smooth functioning of the companies.

Delay in policy decisions:


Policy decisions are taken at the Board of Directors meetings of the company. Further, the company has to fulfil certain procedural formalities. These procedures are time consuming and therefore, may delay action on the decisions.

Compulsory Public Disclosure:


A Company has to publish its annual accounts and other operational information every year, which makes it difficult for the management to maintain privacy of their policies and strategies. Thus giving an advantage to its competitors.

Difficult to exit:
The winding up of the company is as difficult and costly as the formation. A company has to go for several legal procedure and series of approvals which makes it difficult for the investors to exit from the business.

Lifting and Piercing of Corporate Veil:


The Supreme Court has stated the following about the company, 3The Corporation in law is equal to a natural person and has a legal entity of its own. The entity of the corporation is entirely separate from that of its shareholders; it bears its own name and has a seal of its own; its assets are separate and distinct from those of its members; it can sue and be sued exclusively for its own purpose; its creditors cannot obtain satisfaction from the assets of its members; the liability of the members or shareholders is limited to the capital invested by them; similarly, the creditors of the members have no right to the assets of the corporation. The concept of distinguishing the identity of the company from the identity of the persons working for the company is known as doctrine of corporate veil. The doctrine implies that the person working for a company cannot be held liable for the acts of the company. For example if a company breached a contract, the aggrieved party can sue the company for damages; however, the party cannot claim any damages from directors or officers of the
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Tata engineering and locomotive co. Ltd Vs. State of Bihar and others, 1964

company individually. The concept was first established by a judgement pronounced by House of Lords in case of Salomon Vs. Salomon & Company. The law however provides exception to the doctrine of corporate veil. The corporate veil can be lifted of pierced in the following circumstances:

A) Breach of Law:
In case a company is functioning in violation of legal provision. The following are the cases of breach of law: 1) If any act done by the company attracts criminal liability, the court will lift the corporate veil to identify the people who actually committed and punish him. 2) If at any time the number of members of a company is reduced, in the case of public company, below seven, or in the case of private company, below two, and the company carrier on business for more than six months while the number is so reduced, every person who is a member of the company during the time that it so carries on business after those six months and is cognizant of the fact that it is carrying on business with fewer than seven members or two members, as the case may be, shall be severally liable for the payment of the whole debts of the company contracted during that time, and may be severally sued there for (Sec. 45, Companies Act). 3) The director of a company are jointly and severally liable to repay the application money with interest if the company fails to refund the application money of those applicants who have not been allocated shares, within 130days of the date of issue of the prospectus.(Sec 69(5)) 4) Where an officer or agent of a company does any act or enters into a contract without fully or properly mentioning the companys name and the address of its registered office, he shall be personally liable.(Sec 147 (4)

B) By court of Law:
1) If the court of law finds that a company is used as deception with the intention of doing fraud, then in that case court may lift the corporate veil to identify the culprit and punish them. 2) In case where the company was acting as an agent of the shareholder or the management, the shareholder or the management cannot use the defence of the corporate veil. 3) The Company is said to be of enemy character where the management and control of the company lies in the hands of the persons of the enemy state. The court for the purpose of determining the enemy character of the company 4) The court can also lift the corporate veil in case of tax evasion by the company.

Cases: Kandoli tea company Ltd(1886) Facts Certain persons transferred their properties in the name of company on which tax was payable.

Petition

Petitioners claimed exemption from such tax on the ground that the transfer was from them individually to themselves in another name.

Judgment Company is separate from its shareholders and this should be treated as transfer. Saloman Vs. Saloman & Co. Ltd. (1895 - 99) Facts Saloman sold his business to a company named Saloman & Company Ltd., which he formed. Saloman took 20,000 shares. The price paid by the company to Saloman was 30,000, but instead of paying him, cash, the company gave him 20,000 fully paid shares of 1 each & 10,000 in debentures. The company wound up & the assets of the company amounted to 6,000 only. Debts amounted to 10,000 due to Saloman & Secured by debentures and a further 7,000 due to unsecured creditors. The unsecured creditors claimed that as Saloman & Co. Ltd., was really the same person as Saloman, he could not owe money to himself and that they should be paid their 7,000 first.

Judgment1. 2. 3. 4. A Company is a "legal person" or "legal entity" separate from and capable of surviving beyond the lives of, its members. The company is not in law the agent of the subscribers or Trustee for them. Saloman was entitled to 6,000 as the company was an entirely separate person from Saloman. The unsecured creditors got nothing. Questions: 1. Define a Joint Stock Company. What are its characteristics /features? 2. What re the advantages / merit of a Joint Stock Company? 3. What are the disadvantages / demerits of a Joint Stock Company? 4. Explain the concept of Corporate Veil along with its exception.

ANNEXURE-1
Departments guidelines for deciding cases for availability of names* Superseding all previous Circulars and Instructions (Circular Letter No. 10(1)RS/60, dated 01-04-1960 and Circular Letter No. 10 / (19)-RS/61, dated 15-03-1962) the Department of Company Affairs has laid down the following principles for deciding cases for availability of names: Guiding instructions for availability of names The procedure for scrutinizing the availability of names of new companies has recently been re-examined carefully in this Department, having taken into account the difficulties experienced by some Registrars in the following the instruction given to them vide Departments Letter No 10/(19)-RS/61, dated 15-03-1962. This letter together with the enclosed set of instructions as revised, consolidates, and is in supersession of all the previous instruction issued from time to time by this Department. An illustrative list of names considered to be undesirable within the meaning of Section 20 of the Companies Act, has also been given herewith. The guiding instructions for deciding cases of making a name available for registration are given in Appendix A to this letter. In addition to these, the Registrars of Companies are requested to note the following general instructions also. 1. As the Registrars have hitherto been doing, they should refer only doubtful and hard cases where they might find it difficult to take a decision, to the Research and Statistics Division at the Headquarters.

2. Where consultation with the Regional Director on the spot is possible, Registrars of Companies would take advice before referring doubtful and hard cases to the Headquarters. 3. The Registrars of Companies may ask the promoters to suggest a panel of three to five names quite distinct from each other for consideration. 4. The Registrars should adopt a polite attitude and persuade the Company promoters to suggest names consistent with the guiding principles. They should explain the difficulties of the Administration in approving names likely to create confusion in the minds of the public and harm the interest of the promoters. 5. In case any of the names proposed by the promoters is not agreed to by the Registrars as available, it should be open to them to follow up the matter by subsequent letters or application for the same fee within a reasonable period which may normally be construed to mean three months from the date of rejection of the name/names proposed. 6. The Registrars may permit the promoters to use the name of the firm in brackets after the duly approved names as incorporating or successor to (name of the firm) in order to fulfill the desire of the promoters to retain the goodwill of their business in

cases where the names of firms seeking registration under the Companies Act is considered as undesirable within the meaning of Section 20 of the Companies Act. 7. Registrars should ascertain from the promoters if the proposed name/names were applied for to any other Registrar of Companies and if so, with what result. In case there is some difference of opinion between the two Registrars in making the name available, then the case may be referred to the Board for advice. 8. The following guidelines were substituted vide amended Rule 4A of the Companies (Central Governments) General Rules & Forms 1956) Notification G.S.R 720(E) dated 16th November 2007.

8a. The Registrar shall cause to examine the application as to whether the changed name or the name with which the proposed company is to be registered, as the case may be, is undesirable within the meaning of section 20. In case the name is undesirable, he may reject the same or ask for resubmission of the application with new names or calls for further information, ordinarily within three days of receipt of the application. 8b. The applicants shall be given only upto two opportunities for resubmission of their proposal against the fee paid in the first instance for name availability after the original application is filed. In the event the registrar does not find the proposals so submitted and resubmitted as fit for approval, he shall reject the application after the second re-submission. However, the applicant will be at liberty to file fresh application along with prescribed fee. 8c. The Registrar of Companies informs the company or the promoters of the company that the changed name or the name with which the proposed company is to be registered, as the case may be, is not undesirable, such name shall be available for adoption by the said company or by the said promoters of the company for a period of sixty days from the date the name is allowed. 8d. If the name so allowed is not adopted on or before the expiry of the period of sixty days from the date it is allowed, the applicant may apply for extension for retention of such name for a further period of thirty days on payment of fifty per cent of the fee prescribed for the application at the initial stage. No further extension will be granted after expiry of ninety days from the date the name is allowed in the first instance. The name allowed shall lapse after expiry of sixty or ninety days, as the case may be, from the date it is allowed first. 8e. The name allowed by the Registrar before the date of this notification comes into force, if not adopted, shall lapse after the expiry of a period of six months from the date on which the name was initially allowed or renewed. However, in case the name has not been renewed earlier, the applicant on or before the date of expiry, may apply for one time extension of such name for a further period of thirty days on payment of fifty per cent of the fee prescribed for the application at the initial stage.

9. It is necessary that the keyword of proposed name/names are checked separately with the names of the existing companies beginning with those keywords so as to avoid any possibility of allowing a name with a little rearrangement of the same words of the existing company which may be said to be closely resembling each other. It may be further added that although it is not possible to lay down hard and fast rules for determining whether a particular name or any two names too nearly resemble each other, each case, however, will be decided on its merits. As already emphasized in the earlier circular letter of this Department on the subject dated 15th March 1962 that the various criteria set out in the guiding principles at Appendix A are not exhaustive but only illustrative of what is considered to be undesirable names under Section 20 of the Companies Act and that, by the very nature of the subject all possible cases could not be covered. It is therefore, suggested that where the Registrars find that certain proposed names could not be referred to the Research and Statistics Division at the Headquarters after availing of the help of the Regional Director if available on the spot. Guiding instructions for deciding cases of making a name available for registration Departments guiding principles The Department has evolved the following guiding principles for deciding availability of names: A name which falls within the categories mentioned below will not generally be made available: 1. If it is not in consonance with the principal objects of the company as set out in its memorandum of association. This does not necessarily mean that every name should be indicative of its objects. Bu when there is some indication of business in the name then it should be in conformity with its objects. 2. If the Company / Companies main business is finance unless the name is indicative of that particular financial activities. Viz. Chit Funds / Investments / Loan, etc. 3. If it includes any word or words which are offensive to any section of the people. 4. If the proposed name is the exact Hindi translation of the name of an existing company in English especially an existing company with a reputation. 5. If the proposed name has a close phonetic resemblance to the name of the company in existence for example, J.K Industries Ltd., Jay Kay Industries Limited. 6. If the name is only a general one like Cotton Textile Mills Ltd., or Silk Manufacturing Ltd., and not specific like Calcutta Cotton Textiles Mills Limited or Lakshmi Silk Manufacturing Company Limited. 7. If it includes, the word Co-operative, Sahakari or the equivalent of word Cooperative in the regional languages of the country. 8. If it attracts the provisions of the Emblems and Names (Prevention of Improper Use) Act, 1950 as amended from time to time, i.e. use of improper names prohibited under this Act.

Department of Company Affairs Circulars


General Circular No: 24 of 2001, dated 21-11-2001 Instruction No. 8 of the Guiding instructions circulated, vide this Departments Letter No. 10(1)-RS/65, dated 27th November 1965 provides that a name in the category mentioned below will not generally be made available: 1. If it attracts the provisions of the Emblems and Names (Prevention of Improper Use) Act, 1950 as amended from time to time. i.e. use of improper names, prohibited under this Act. 2. It is observed from a communication received from the Department of Consumer Affairs that the above said instructions are not being followed scrupulously. 3. The ROCs are advised to take into account the provisions of the above said Emblems and Names Act while making names available to companies under the Companies Act, 1956. All the ROCs are requested to adhere to the above instructions for strict compliance. 9. If it connotes Governments participation or patronage unless circumstances justify it. E.g., a name may be deemed undesirable in certain context if it includes any of the words such as National, Union, Central, Federal, Republic, President, Rashtrapati, Small-Scale Industries, Cottage Industries and Financial Corporation etc. 10. If the proposed name contains the words British India 11. If the proposed name implies association or connection with Embassy or Consulate which suggests connection with local authorities such as Municipal, Panchayat, Delhi Development Authority or any other body connected with the Union or the State Government. 12. If the proposed name is vague like D.J.M.O Limited or T.N.V.R Private Limited or S.S.R.P Limited. 13. If a proposed name implies association or connection with or patronage of a national hero or any person held in high esteem or important personages who are occupying important positions in Government so long as they continue to hold such positions. 14. If it resembles closely the popular or abbreviated descriptions of important companies like TISCO (Tata Iron and Steel Company Limited), HMT (Hindustan Machine Tools), ICI (Imperial Chemical Industries), TEXMACO (Textile Machinery Corporation), WIMCO (Western India Match Company) etc. In some cases, the first word or first few words may be the key words and care should be taken that they are not exploited. Such words should not be allowed even though they have not been registered as trademarks. a. Where the existing companies are stated and found to be well known in their respective fields by their abbreviated names, these companies may be allowed to

change their names, by way of abbreviation with the prior approval of the Regional Director concerned. Departments Circular, dated 31-03-1993 The abbreviated name will be considered only in the case of change of name under section 21 of the Companies Act, 1956, with the prior approval of the Regional Director concerned and should not be allowed for adoption by new companies. [Circular No. 4/93: F. No. 3/14/93-CL V, dated 31-03-1993]. Press Note, dated 05-05-1993 As per existing guidelines, the companies well known in their respective field by abbreviated names are allowed to change their names by way of abbreviation (e.g. ABC Limited) with the approval of Department of Company Affairs after following the requirement of Section 21 of the Companies Act, 1956. It has now been decided that any such change of name will require only the prior approval of Regional Director concerned. The company will, however, continue to make applications in Form 1A for availability changed names to the concerned Registrar of Companies. It may be noted that the abbreviated name will not be allowed for adoption by a new company proposed to be incorporated under the Act [No 3/14/93-CL V: Press Note No. 1/93, dated 05-05-1993]. Government is now vested with the Registrar. Departments Circular, dated 16-02-1995 Presently, there is a restriction on use of abbreviated names (like ITC Limited) in case of existing companies requiring approval of the Regional Director concerned. No such approval of Regional Director will now be necessary and ROCs may take a final decision on such applications in the light of existing guidelines. (Para iii) [Circular No. 1/95 F. No. 14/6/94-CL V, dated 16-02-1995]. 15. If it is different from the name/names of the existing company/companies only to the extent of having the name of a place within brackets before the word limited; for example, Indian Press Limited. To this rule, however, frequent exceptions are made in the case of the subsidiary and in the case of a company carrying on local business and in other cases on their merits. As for an example, Corner Garage (Delhi) Private Limited may be allowed notwithstanding that there is an existing company Corner Garage Private Limited at Calcutta. So would be Regent Cinema Limited at Madres, if there is a company by the name Regent Cinema (Delhi) Limited. These names may also be allowed if they are in the same group of management. 16. If the proposed name includes common words like Popular, General, Janta, if they are in the same State doing the same business. But in case of companies in different The power of Central

business in the same State and in all cases when the registered office of the company is in different States, the name might be allowed. For instance, if there is Popular Drug House Private Limited existing, another company by the name of Popular Plastics Private Limited should not be objected to. 17. If it includes a name of registered trade-mark unless the consent of the owner of the trade-mark has been produced by the promoters. It may not be possible in all cases to check up the proposed name with the trade mark. However, if the Registrars are in the knowledge or some interested party / parties bring to their notice a trade mark which is included in the proposed name then it should not be allowed unless a noobjection certificate is obtained from the party who has registered the trade mark in its own name. [Note: Section 20(2)/(3) has been amended by the Trade Marks Act, 1999. The amended section now provides statutory protection of trade marks in the matter of availability of name] 18. If a name is identical with or too nearly resembles, the name of which a company in existence has been previously registered. A few illustrations of closely resembling names are given below for guidance. The names as proposed in column 1 should not (normally) be made available in view of the companies in existence as shown in column 2. However, if a proposed company is to be under the same management or in the same group and like to have a closely resembling name to the existing companies under the same management or group with a view to have advantage of the goodwill attached to the management or group name such a name may be allowed. Even in the case of unregistered companies or firms who have built up a reputation over a considerable period, the principle (that if a name is identical with or too closely resembles the name by which a company has been previously registered and is in existence, it should not be allowed) should be observed as far as practicable. In view of the difficulty in checking up whether a proposed name is identical with or too nearly resembles the name of an unregistered company or a firm of repute, it should at least be ensured that a proposed name is not allowed if it is identical with or too nearly resembles the name of a firm within the knowledge of the Registrar. The cases of foreign companies of repute should also be similarly treated even if there are no branches of such companies in India.

Proposed Name

Existing Company too nearly resembling name

Hindustan Motor and General Finance Company Hindustan Motor Limited The National Steel Mfg. Co. Private Limited National Steel Works

Trade Corporation of India Limited Viswakaram Engineering Works Private Limited General Industrial Financing & Trading Co. Ltd. India Land & Finance Limited Northern India United News of India Limited Hindustan Chemicals and Fertilizer

State Trading Corporation of India Limited Viswakaram Engineer (India) Private Limited General Financial & Trading Corporation Land & Finance Limited United Newspaper Limited Limited Hindustan Fertilizers Limited

19. If it is identical with or too nearly resembles the name of a company in liquidation, since the name of a company in liquidation is borne on the register till it is finally dissolved. A name which is identical with or too closely resembles the name of a company dissolved as a result of liquidation proceeding should also not be allowed for a period of 2 years from the date of such dissolution since the dissolution of the company could be declared void within the period aforesaid by an order of the Court under section 559 of the Act. Further, as a company which is dissolved in pursuance of action under section 560 of the Act can be revived by an order of the court before the expiry of 20 years from the publication in the Official Gazette of the company being so stuck off, it is considered desirable to stop or conditionally allow the registration of a proposed name which is identical with or too nearly resembles the name of such dissolved company for a period indicated below. Since the period of 20 years as prescribed under the law is considered an unduly long period, the registration of a proposed name which is identical with or too nearly resembles the name of the company dissolved in pursuance of section 560 should not be allowed for a period of first five years only. During the next five years such a proposed name may be allowed subject to the condition that in the event of the dissolved company being restored to life by an order of the Court the new company would have to change its name. After a lapse of ten years, name identical with or too nearly resembling those of the dissolved companies may be allowed without any such condition. 20. If it is different from the name of an existing company merely by the addition of words like New Modern, Nay etc. Names such as New Bata Shoe Company, New Bharat Electronic etc should not be allowed. Different combination of the same words also requires careful consideration. If there is a company in existence by the name of Builders and Contractors Limited the name Contractors and Builders Limited should not ordinarily be allowed. 21. If it includes words like Bank, Banking, Investment, Insurance and Trust. These words may, however, be allowed in cases where the circumstance justify it. In cases of banking companies the Reserve Bank of India should be consulted and its advice should be taken before a name is allowed for registration. The purpose of such consultation is to prevent small banking companies from misleading the general public by adopting the names of some well established and leading banks functioning elsewhere than in India. In case of differences of opinion with the Reserve Bank of India the matter should be referred to the Board for advice.

22. If the name includes the word Industries or Business unless the name is indicative of the business of the proposed company for otherwise it serves as a lever for the company to diversify its activities. 23. If it includes proper name which is not a name or surname of a director such names should not be allowed except for valid reasons. For example, for sentimental reasons, sometimes, the name of the relatives such as wife, son or daughter of the director may have to be allowed provided one other word suggested makes the name quite distinguishable. 24. If it is intended or likely to produce a misleading impression regarding the scope or scale of its activities which would be beyond the resources at its disposal. For example, names like Water Development Corporation of India (Private) Limited, Telefilm of India (Private) Limited, All India Sales Organization Limited, Inter Continental Import and Export Company Limited, etc. should not be allowed. When the authorized capital is to be only a few lakh and the area of operation limited to a State, words like International, Hindustan, India, Bharat, New India etc., included in the proposed name need not stand the same test as Hindustan, India etc. (as they do not give the same sense). Similarly the words, Bharat, India etc. If stated in the bracket before the words limited or private limited need not stand the same test as the words India, etc., put at the beginning of the name. Also the word India or Bharat in brackets before the words limited or private limited does not necessarily mean that the company is an Indian Branch of some foreign company, such as Marsdon Electricals (India) Private Limited. 25. If the proposed name includes the word State along with the name of the State such as Kerala State Company Limited should not be allowed as it would give an impression of the Kerala State Government participating in the share capital of the proposed company. However, if the name of a State only is included without the addition of the word State in the proposed name then it may be allowed as it is not likely to give the impression that the company has the State Governments interest in it. 26. If the proposed name includes the word Corporation unless the company could be recorded as a big sized company. However, the word Corporation and Company may be regarded as closely resembling for purposes of allowing a new name. For example, a company by the name of Rajasthan Finance Company should be regarded as undesirable within the meaning of section 20 of the Act as another company by name Rajasthan Finance Corporation already exists. 27. If the proposed name includes words like French, British, German, etc. unless the promoters satisfy that there is some form of collaboration and connection with the foreigners of that particular company or place the name of which is incorporated in the name. Thus, the name German Tool Manufacturing Company Limited should not be allowed unless the company has some connection with Germany. 28. Even where except for the first word all the other words of the proposed name are similar to those of an existing company, the first word should be considered to be

sufficient to distinguish it from the name of the existing company. For example, Oriental Limited. [Circular Letter No. 10(1)- RS/65, dated 27-11-2965. See also Circular No. 10(19)-RS/61, dated 05-05-1962] The word Hindustan should be kept reserved only for public sector companies. It may, however, be allowed to be used in the names of the private sector companies in a large way of business. Similarly the word Corporation may be allowed in the name of the company in case the authorized capital is more than Rs. 5 crores. [Circular No. 16/74 F.No. 27/9/74-CL-III dated 27.08.1974]

Further Guidelines for availability of names


Departmental Circular dated 13-05-1999 As ROCs are aware this Department has issued exhaustive guidelines on avoiding undesirable names for companies as mentioned in section 20 of the Companies Act, 1956 through Circular No. 10(19)-RS/61 dated 05-05-1962. Further guidelines were also issued through Circular No. 2/90 (No 1/1/90-CL-V27/1/89-CL-III) dated 05-01-1990. 2. In recent times this Department had received a few references which needed further clarification. The following guidelines / clarifications are accordingly issued.

3. Names starting with small letters / having small letters / alphabets 3.1 In the past the name search for allowing names for companies used to be a manual search based on list of names already in existence on a particular date, names made available by different ROCs (which used to be circulated periodically) etc. The name search is no longer manual. It has become a computerized operation in all RoC offices. In view of this some of the old constraints (like alphabetical listing) which could be a restrictive factor in manual system do not exist under the present computerized system. 3.2 ROCs may therefore now allow names starting with small alphabets (like i2 Technologies Ltd., etc) as such names are being increasingly used by many companies in other countries. It should however be ensured that the name starting with small alphabets does not have phonetic or visual resemblance to the name of a company in existence.

4. Change of name by companies on Computer Software Business 4.1 In recent times it appears that quite a few companies whose principal object was not computer software and who had actually involved in financing activities have changed their names to indicate as if they were in the business of computer software. For this purpose they have included words like Infosys; Software; Systems; Infosystem; Computers; Cyber; Cyberspace etc in their names. 4.2 In order that investors are not misled by the strategy adopted by a few companies ROCs are hereby advised that in future they should allow change of name to companies to reflect the business of software only if a substantial portion of their

income (as reflected from their audited accounts or accounts certified by a Chartered Accountant) is derived from software business. If this is not proved then such change of name should not be allowed. 5. Companies in Insurance Sector 5.1 It may be recalled that in Guideline No. 21 (printed above) you have been advised not to allow the word Bank, Banking, Investment, Insurance and Trust unless circumstances justify it. The activities of the Insurance Sector are being regulated by the Insurance Regulatory Authority. 5.2 In view of this, in partial modification of the above mentioned Guideline, it is hereby clarified that ROCs may allow companies to be registered by them with the word Insurance or Risk Corporation as part of the name only after consulting the Reserve Bank of India and Insurance Regulatory and Development Authority. Departments Clarification, dated 30-06-2000 Attention is invited to this Departments Circular No. 6 of 1999 (5/35/98-CL-V) dated 13th May 1999, in regard to allow ability ofnames for entrepreneurs seeking to promote companies for providing insurance services, in terms of the above circular, such names were being given only after consulting the Insurance Regulatory Development Authority Act, 1999, with effect from 19th April 2000 the Department has received a reference from the Insurance Regulatory Authority advising that the embargo on registration of names by new companies could be lifted. In view of this all ROCs are advised that they may allow names with the word insurance / assurance or Risk Corporation as part of the name without any need to consult the Insurance Regulatory Authority. It is hereby clarified that such names can be allowed only to new companies and not for change of name as existing companies are not allowed to carry on any insurance activity. [Circular No. 5, Dated 30-06-2000] Departments circular dated 25-04-2003 In partial modification of General Circular No. 5/2000 dated 30th June 2000 it is hereby further clarified that since the Insurance Regulatory and Development Authority has been notified (Insurance Regulations, 2002 permitting private sector companies to carry on the insurance business, the Registrar of Companies may permit change of name of existing companies on their changing the objects to undertake the business of insurance brokers also. [Circular No. 19/2003, dated 25-04-2003, F. No. 5/6/2003-CL-V] 6. Use of Generic Names 6.1 Guideline No. 5 relates to inadvisability of allowing companies to have only generic names without any other proper noun preceding / succeeding it. Under this category would come the word Y2K (i.e. Year 2000) 6.2 It may kindly be noted that this is a generic one and cannot be allowed for any company as a Stand Alone name [Issued by DCA, vide No. 5/35/98-CL-V: General Circular No. 6/99, dated 13-05-1999].

Use of Name of Chamber of Commerce in UK In England the Company and Business Names (Chamber of Commerce, etc) Act 1999 restricts the use of the name chamber of commerce by companies.

Guidelines as to use of Key words


With a view to maintain uniformity, the following guidelines may be followed in the use of keywords, as part of name, while making available the proposed names under section 20 and 21 of the Companies Act, 1956.
No. Key Words 1 2 3 4 5 6 7 Corporation International, Globe, Universal, Continental, Inter Continental, Asiatic, Asia being the first word of the name If any of the words at (2) above is used within the name (with or without brackets) Hindustan, India, Bharat being first word of the name If any of the words at (4) above is used within the name (with or without brackets) Industries / Udyog Enterprises, Products, Business, Manufacturing Required Authorized Capital Rs. 5 Crore Rs. 1 Crore Rs. 50 Lakh Rs. 50 Lakh Rs. 5 Lakh Rs. 1 Crore Rs. 10 Lakh

2.

These names with key words at Serial Nos. (6) And (7) may be considered when the company proposes to deal in various business activities or the company is already carrying on various business activities (in the case of change of name). F. No. 27/1/87-CL-III dated 13-03-1989: (1989) 65 com cases 536 (St.).

No objection from applicants who do not sign memorandum & articles I. Departments Circular As per Application Form for availability of names (Form No. 1A) prescribed under rule 4A of the Companies (Central Governments) General Rules and Forms, 1956, the promoters are, inter alia, required to give the names and addresses of the prospective directors or promoter, as also the name and address of the person(s) applying for availability of name. You are requested to advise your constituents to ensure that the application form is filled up in all respects and application is made by one or more amongst the promoters. The Registrars of Companies have been advised to ensure at the time of registration of a new company that the subscribers to the memorandum and the articles of association tally with the list of promoters / first director stated in the application for availability of name and in case, one or more of the promoters are not interested to participate in the promotion of a new company at a later state. No objection letter from such promoter(s) is made available to the Registrar, while submitting the documents for registration. The Registrars of Companies are also being advised to dispose of applications for availability of name ordinarily

within 14 days of the receipt of application and to correspond with the applicant promoter(s), in this behalf No. 27/1/89-CL-III dated 17-02-1989: (1989) 65 Com Cases 575 (St.) II. Departments Circular I am directed to refer to this Departments Circular No. 27/1/89-CL-III dated 17th February 1989 [Printed above] on the above subject, wherein you were requested to advise your constituents to ensure that the application form is signed by one or more amongst the promoters and in case one or more of the promoters are thereafter no more interested in participating in the promotion of the new company, a no objection letter from such promoter is made available to the Registrar of Companies at the time of registration of the new company. Instances came to the notice of the Department that some promoters are preempting the names, which is not a healthy practice. It has, accordingly, been decided that, in future, Registrars of Companies should register the company only in cases where the promoters, as per availability of name and application, are also the subscribers to the memorandum and articles of association of the proposed company at the time of its registration. In case of any change in the name(s) amongst the subscribers the changed subscribers are advised to make fresh application for the availability of name. The Registrar may, as per existing procedure, allow the same name, if otherwise available, after three monthsfrom the date when the name was allowed to the original promoter(s). Circular No. 1 of 1990 dated 5th January 1990; (1990) 67 Com Cases 230 (St.) III. Departments Circular dated 16-02-1995 The Department vide Circular No. 27/1/89/CL-III dated 17-02-1989 [Printed above] advised the ROCs to ensure that at the time of registration of a new company, the subscribers to the Memorandum of Association should tally with the list of promoters / first directors stated in the application for availability of name and in case one or more of the promoters are not interested in participation in the promotion of a new company at a later stage, a no objection letter from such promoter(s) is made available to RoC. This circular was amended on 05-011990 (No. 1/90) [Printed above] to the effect that ROCs should register the company only in case where the promoters as per the availability of name application are also subscribers to the Memorandum. On reconsideration it has now been decided, in partial modification of the above circular, that so long as there is at least one promoter common both in name availability application and the subscription clause of Memorandum & Articles of Association, and others have no objection, the company may be registered. (Para ii) [Circular No. 1/95, F. No. 14/6/94-CL-V dated 16-02-1995]. Incorporation of Stock Exchanges, advance approval of name by SEBI I am directed to draw your attention to this Departments Circulars No. 27/22/85CL-III dated 13-01-1986 and 23-03-1993 on the above subject and to enclose a copy of

letter, dated 18-03-1996 [Printed below] received from the Chairman, SEBI in this regard. You are requested to ensure that under no circumstance a company is registered with the words Stock Exchange as part of its name without obtaining in principle approval / no objection of Securities and Exchange Board of India. It may kindly be noted that non-compliance with these instruction will be viewed very seriously. Copy of SEBIs letter, dated 18-03-1996 It has come to our notice that certain companies calling themselves Stock Exchanges are enrolling members and collecting substantial deposits from them. The companies who have not obtained permission to operate as a stock exchange under section 19 of Securities Contracts (Regulation) Act, 1956 or have not been granted recognition by Central Government / SEBI under section 4 of the above Act are collecting such deposits in violation of the provisions of the said Act. Section 19(1) of Securities Contracts (Regulation) Act, 1956 prohibits organizing or assisting in organizing any stock exchange without the permission of the Central Government / SEBI. In this regard, we request you not to allow such names to new companies which have the words Stock Exchange in them unless they have been given in principle approval of No objection from SEBI. This would ensure that the investors are not misled by such names into dealing with members of unrecognized stock exchanges [Circular No. 3/96, vide No. 3/4/96-CL-V dated 12-04-1996].

Incorporation of Venture Capital Companies


Departments Circular As per guidelines issued by the Ministry of Finance, Department of Economic Affairs vide press release No: S 11(86)-CCI/11/87, dated 25-11-1988, only such venture capital companies which abide by these guidelines shall take advantage of tax benefits. As per guidelines, approval would be given for establishment of venture capital companies / funds by the Department of Economic Affairs or such authority as many be nominated by the Government. It is possible that some promoters may float a company and call it a Venture Capital Company but may not avail of the tax benefits available to such companies and in such a situation, a common investor would not be able to distinguish between approved venture companies which are within the discipline of the guidelines and eligible for tax benefits from those who call themselves Venture Capital Companies, but prefer to remain outside the guidelines and forego tax benefits. To avoid such eventuality, it has been decided that the words Venture Capital / Venture Capital Company / Venture Capital Finance Company or such similar name as part of the proposed name of a company be only allowed when the company or the promoters have obtained approval from the Department of Economics Affairs or such authority as may be nominated by the Government on this behalf. Circular No. 13/90 dated 27-08-1990. Incorporation of Asset Management Companies (AMCs) other intermediaries Guidelines for registration of AMCs Departments Circular I

The following guidelines are issued in respect of registration of Asset Management Companies (AMCs) in consultation with the Securities and Exchange Board of India: (a) Approval of AMC by SEBI: As per guidelines, AMC shall be authorised for business by SEBI on the basis of certain criteria and the memorandum and articles of association of the AMC would have to be approved by SEBI. Accordingly, you are advised not to register any company under the Companies Act 1956, without the memorandum and articles of association being approved by SEBI. (b) Authorized Capital of AMC: The primary objective of setting up of an AMC is to manage the assets of the mutual funds and other activities which it can carry out, such as, financial services consultancy which do not conflict with the fund management activity and are only secondary and incidental. That being so, it may not be practical to expect a company to be set up with a paid-up capital of Rs. 5 crores to carry on only incidental activities, without any assurance of its receiving an approval from SEBI to act also as an Asset Management Company for a mutual fund. You should, therefore, not have any objection in registering an AMC is the authorized capital of such a company is approved by SEBI. A copy of these guidelines may also be placed on the notice board of your office for general information. (Departments Circular No. 4/92; F. No. 3/14/92-CL-V dated 02-09-1992, addressed to Registrar of Companies) Departments Circular II Some Registrars are insisting upon the promoters proposing to carry on the activity as merchant bankers, registrars to an issue, investment advisers, portfolio managers, etc to obtain prior approval of SEBI before making available the proposed name or incorporation of a company. In this connection, it may be pointed out that under section 12 of the SEBI Act, 1992 the intermediaries associated with securities market are required to seek registration by making an application to SEBI, as per regulation made there under, which inter alia require the applicant to state the date and place of registration, details of directors, as also to furnish Memorandum and Articles of Association, if the applicant is a company. However in terms of Regulation 18(2) of the SEBI (Mutual Fund) Regulations, 1993, Asset Management Companies (AMCs) are required to submit to SEBI their respective Memoranda and Articles of Association for approval. Therefore, unlike the Memoranda and Articles of Association of other intermediaries, it would be in the interest of concerned AMCs to get their Memoranda and Articles of Association cleared by SEBI before the same are presented to the concerned Registrar of Companies for registration. In view of the above, you are requested not to insist upon seeking prior approval of SEBI for registration of intermediaries like merchant bankers, Registrar to an issue, investment adviser, portfolio manager etc. However, this Departments Circular

No. 4/92 (No. 3/14/92-CL-V) dated 02-09-1992 will continue to be in force and you may register an AMC only after its draft Memorandum and Articles of Association is cleared by SEBI (Departments Circular No. 5/94; f. No. 3/14/92CL-V dated 15-04-1994, addressed to Registrars of Companies) User of the words NIDHIS or Mutual Funds as part name The Registrars of Companies (ROCs) have been directed by the Department of Company Affairs (DCA) not to allow registration of names with words mutual funds forming part of some Non-Banking Financial Companies (NBFCs / NIDHIS under Section 20 of the Companies Act, 1956) unless such companies are going to be incorporated actually as mutual funds. ROCs have been informed that companies declared as NIDHIS and mutual benefits societies under section 620A of the Companies Act are not mutual funds. Therefore, names with words mutual funds forming part thereof shall also not be allowed to companies proposed to be incorporated as NIDHI or mutual benefit societies. It has come to the notice of the DCA that some NBFCs or NIDHIS have been registered with words mutual funds forming part of their names, although they are not actually mutual funds. This is likely to create confusion in the minds of investors. In case where NBFCs or NIDHIS have already been asked to get their names changed under section 21 of the Companies Act, 1956 within a reasonable time of six months failing which report would be sent to the DCA for initiating action for withdrawal of notification issued in their favour under section 620A of the companies Act. [PIB Press Release New Delhi dated 14th February 2000].

2
FORMATION OF COMPANY
Learning objectives: Types of companies- process of company formation- role of promoter-name approval- important documents- memorandum of association- articles of association- certificate of incorporation- prospectus certificate of commencement of business Previous chapter dealt with the concept of the company as an organisation. In this part we will study how a company is formed and its implication. However before going to the first step of formation of a company formation let us study an important aspect of company which determines the procedure of formation of company.

Types of Company A) On the Basis of Incorporation


I. Chartered Company
A chartered company is a company formed by the charter of the sovereign authority of 4 the state . These companies were formed in the beginning of the modern European era, specifically to create trading monopoly over specific area. The company is created by charter, order of the sovereign (king or queen), defining rights, liabilities, privileges and scope of operation of the company. East India Company was one of the examples of chartered company.

II.

Statutory Company
A company formed by way of an enactment by Parliament or State Legislature is called as Statutory Company or Corporation. The enactment brings the company into existence and also gives the constitution of the company. The company has its own regulating structure and any changes in the structures has to made by the amending the Act forming the company. The purpose of forming such companies is that the government

Encyclopedia Britanica.

wants to enter in fields of private sector. The statutory corporation usually carries on the work of public importance and has extraordinary powers, sanctions and privileges to carry on their work. The examples of existing Statutory Corporation are RBI, LIC etc.

III.

Registered or Incorporated Company


A company formed by way of incorporating or registering under the law governing the companies is known as Incorporated Company or Registered Company. In India such companies are formed under the Companies Act of 1956. A company registered under the law is subject to the rules and regulation mentioned under the law and has to fulfil the required norms to continue its existence.

B) On the Basis of Liability


I. Limited by Shares
A company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them in its Act termed "a company limited by shares"[Sec. 12(2)(a)]. According to company law in case of company limited by share the liability of its members does not exceed the face value of the shares held by them. Thus in case of liquidation the liability of the shareholder shall not exceed the amount unpaid towards shares; however the company can make its shareholders to pay for share amount for raising capital.

II.

Limited by Guarantee
A company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake by the memorandum to contribute to the assets of the company in the event of its being wound up in this Act termed "a company limited by guarantee"[Section 12(2)(b)]. In case of company is limited by guarantee the liability of the members is restricted to the guarantee of the amount payable by them in the event of liquidation of the company. Such company is usually formed for the non-profit businesses. The liability of the members does not arise until the liquidation of the company.

III.

Unlimited Company
A company not having any limit on the liability of its members in this Act is termed "an unlimited company"[Section 12(2)(b)]. The liability of the member of the unlimited company can extend to their personal assets. Unlike Partnership, the liability of the member is towards company only and not to the creditors, that means a creditor cannot approach members directly for recovery of debt. Section 27(1) further states that in the case of an unlimited company, the articles shall state the number of members with which the company is to be registered and, if the company has a share capital, the amount of share capital with which the company is to be registered.

C) On the Basis of Control

I.

Government Company:
Government Company means any company in which not less than fifty-one per cent of the paid-up share capital is held by the Central Government, or by 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 of a Government company as thus defined [Section 617]. A subsidiary of Government Company is also a government company. A Government Company is a registered company with majority of shares owned by the government.

II.

Holding Company and subsidiary company:


According to section 4 of the Companies Act, a company is called as the subsidiary of the other company if, the other controls the compositions of its Board of directors; or other controls the compositions of its Board of directors; or company is a subsidiary of any company which is that other's subsidiary. The company controlling a subsidiary company is known as holding company. The provision of the companies act states that a holding company is company who controls management of the company directly or indirectly by way its members in the board of the company or having majority of shares thereby influencing the decision of the management. The company which is being controlled is known as subsidiary company.

III.

Foreign Company
The companies act u/s 591(1) describes foreign company as a company which is incorporated outside India, but establishes a place of business within India. In simple terms a Foreign Company is a company which is controlled from a place outside India. Therefore Sec. 591(2) provides that in case of company incorporated outside India and having place of business in India will be considered as Indian company if it is controlled by an Indian entity or person who is citizen of India

D) Other Grounds:
I. Private Companies
As per the Section 3 of companies Act "private company" means a company which, by its articles, (a) restricts the right to transfer its shares, if any; (b) limits the number of its members to fifty (c) Prohibits an invitation to the public to subscribe to any shares in or the debentures of the company. A Private Company can be formed by any two persons with paid up capital of Rupees one lakh. Private company enjoys several privileges over public companies in the matter of formation as well as compliance. The number of members in a private limited company is

restricted to 50 only. A private limited company is thus suitable for business which requires low capital and quick decision making.

II.

Public Companies
The Companies act does not specifically defines the Public Company, the act states that all companies which are not private company are public company. The Act further states that a Public company must have at least 7 members and the paid up capital of such company should not be less than five lakhs while there is no limit for maximum number of membership. A public company has the authority to raise capital from public. A public company is suitable for business requiring huge capital.

Section 25 Companies:
Section 25 companies are those companies which are formed for the sole purpose of promoting commerce, art, science, religion, charity or any other useful object and have been granted a license by the central government recognizing them as such. Such companies should intend to apply its profits, if any or other income only in promoting its objects and must also prohibits payment of dividend to its members. Thus there are three criteria for determining whether a particular company is section 25 company or not: a) Its objects should be only to promote commerce, art, science, religion, charity or any other useful object. b) It should intend to apply its profits or other incomes only in promoting its objects; and c) Central government should have granted a license to such a company recognizing 5 them as such Being understood the types of the companies we can now go to formation of company. As we are aware that a company is a legal entity, hence a formation of a company requires several legal procedures. In this chapter we will see various steps of formation of the company. Questions: 1. Discuss the various types of Companies? 2. Distinguish between public and private company. 3. Explain the meaning of holding and subsidiary company.

PROMOTION AND PROMOTERS


Promotion is a stage where the idea of formation of the company is germinated. In this stage a group of persons come together with intention to form a company and also become a
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part of it as a member. This group of persons is collectively called as Promoters. Although the this stage is very crucial for the formation of the company, the Company law dose deal with it specifically as the company intended to be formed has no existence at this stage. Legally the promoter is in a somewhat anomalous situation inasmuch as he is acting as representative of an enterprise which is, perhaps, not yet formed, or which, even if incorporated, is wholly a product of his own. The promoter's actions and promises cannot legally bind the corporation, although the promoter, as an individual, may be called upon to see to it that arrangements concluded on behalf of the corporation are actually carried out. The promoter, furthermore, stands in a limited trust relationship to the corporation and to the holders of securities which he has sold. This trust relationship forbids him from making secret profits at the expense of the corporation. He may make reasonable open profits without objection; as for instance when he buys a given property which is essential to the corporation, at a known price, and transfers it to the corporation at a known higher price. But, in case he should buy this same property and transfer it to the corporation, making a profit for himself without making known this profit, then he 6 would be guilty of a fraud against the purchasers of the corporation's securities. Thus promoter plays a role of agent of the company.

Duties of the promoter:


The Promoter should not make any profits from the contracts with the company. As company has no existence at the time of promotion, promoter is responsible for the preliminary contracts on behalf of the company. It is primary duty of the promoter not to make any profits. In case a promoter did make any profits the same must be disclosed. This prevents the promoters form using the company as tool of making secret profits at the expense of shareholders fund. The promoter has however right to earn the profits which is just and reasonable. In such cases the promoter is required to make necessary disclosures. Thus a promoter has to disclose the profit earned in any transaction with the company and also about any other interest in the transaction of the company.

Remedy for the breach of duty:


The company has the following remedies in case of the breach of duty by the promoter: 1. Rescind the contract and recover the purchase price where he sold his own property to the company. 2. Recover the profit made, even though rescission is not claimed or is not possible. 3. Claim damages for breach of his fiduciary duty. The measure of damages will be the difference between the market value of the property and the contract price can be recovered from him.

Liabilities of the promoter:


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Section 62 of Companies Act, 1956


Liability of Promoter under this section for misstatements in prospectus Besides the statutory civil liability contained in this section and the criminal liability provided by section 63, there is a liability imposed by section 56 and there is also a liability under the general law enforceable by suit for recovery of damages on the ground of fraud, etc [Cf. sub-section (6) of section 56]. The liability under this section is enforced by sub-section (1)(e) by specifically enumerating the promoter among the category of persons who are made liable under this section. Thus, his liability is uniform with all others in all respects. Promoters may, if the prospectus omits to give the information or makes any untrue statement, be held liable to compensate subscribers and purchases of shares etc., for any damage sustained by them.

Section 56 of Companies Act, 1956


(4) A director or other person responsible for the prospectus shall not incur any liability by reason of any non-compliance with, or contravention of, any of the requirements of this section, if: (a) as regards any matter not disclosed, he proves that he had no knowledge thereof; or (b) he proves that the non-compliance or contravention arose from an honest mistake of act on his part; or (c) the non-compliance or contravention was in respect of matters which, in the opinion of the Court dealing with the case, [were immaterial] or was otherwise such as ought, in the opinion of that Court, having regard to all the circumstances of the case, reasonably to be excused: Provided that no director or other person shall incur any liability of a company of failure to include a prospectus a statement with respect to the matters specified in clause 18 of Schedule II, unless it is proved that he had knowledge of the matters not disclosed. (6) Nothing in this section shall limit or diminish any liability which any person may incur under the general law or under this Act apart from this section.

Section does not affect other remedies [Sub-section (6)]


Section 56(6) of the Companies Act, 1956 clearly provides that nothing in this section shall limit or diminish any liability which any person may incur under the general law or under the Companies Act apart from this section. Thus any action which would lie, apart from section 56, will still be available. Accordingly, even if the prospectus complies with the section, it may still by reason of false or fraudulent statements give a subscriber the right to take legal proceedings for rescission of his contract, or for compensation or damages, under sections 62, 63 or in an action of deceit. A person, not having any interest in the company, come forward and allege that a future investor may suffer on account of false statements in the prospectus and therefore the

company should be restrained from proceeding in a particular manner. Kisan Mehta V. Universal Luggage Manufacturing Col Ltd., (1988) 63 Com Cases 398 (Bom).

Right to remuneration:
Promoter has to make preliminary expenses in the process of incorporation. However, promoters do not have a right of any remuneration from the company. As a result, he is not allowed to have any remuneration for his services except for the fact that if company enters into a particular agreement with the promoter for the purpose. Even if the promoter has entered into a contract with the future directors before the incorporation, he has no valid claim against the company for remuneration. Therefore, the directors cannot enter into any contract on behalf of a company that is not incorporated so far. This remuneration may be paid to the promoters in various ways such as by selling his own belongings to the company and the price is higher than the valuation, when he has purchased a business or a property to be sold to the company, by allotting fully paid up shares of the company, by paying a an estimated amount for the services, giving commission on the sale of shares with fixed commission and by giving him an option to subscribe the unsold shares at par to him.

POSITION OF PRELIMINARY CONTRACTS


The contracts which are entered into by the promoters with the third party for the projected company before its formation are called 'preliminary contracts '. These contracts do not have any legal binding on the company after its formation as company before incorporation is non-entity. The position of these contract is that they are not bound by the preliminary contracts and neither they can enforce preliminary contracts The company is not in a position to approve the preliminary contracts, and finally they are personally liable for these contracts as 7 company is not into existence Practical Problems:
1.

The promoter of a company, before its incorporation, enters into an agreement with P to buy a plot of land on behalf of the company. After incorporation company refuses to buy the said plot of land. Has P any remedies either against the promoter or against the company? XYZ Co. Ltd. was in the process of incorporation. Promoters of the Company signed an agreement for the purchase of certain furniture for the Company and payment was to be made to the suppliers of furniture by the Company after incorporation. The Company was incorporated and the furniture was used by it. Shortly after incorporation, the Company went into liquidation and the debt could not be paid by the Company for the purchase of above furniture. As a result suppliers sued the promoters of the Company

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for the recovery of money. Examine whether promoters can be held liable for payment in the following cases: a. When the Company has already adopted the contract after incorporation? b. When the Company makes a fresh contract with the suppliers in terms of preincorporation contract? Questions:
1. 2.

A promoter stands in a fiduciary position towards the company he promotes. Explain. Explain the rights and liabilities of promoter with respect to the company.

FORMATION OF THE COMPANY


The process of formation of the companies depends on the type of the company, the companies act deal with two basic types of company being, Private company and Public Company. The company formation goes under the following steps: i. Application for the name of the company ii. Preparation and filling of Memorandum and Articles of association iii. Obtaining Certificate of Incorporation iv. Raising capital by issue of shares v. Subscription and membership. vi. Certificate of commencement of business The steps mentioned above are dealt with in detail hereafter.

Name of the Company:


A company is known by its name and hence the company law deals specifically with the name of the company that is to be proposed. According to section 13 of the Act provides that the memorandum of every company shall state the name of the company with "Limited" as the last word of the name in the case of a public limited company, and with "Private Limited" as the last words of the name in the case of a private Limited company. The company law under section 20 gives the restriction of selecting the name for the company. According to this section a name of the company cannot be a name which, in the opinion of the Central Government, is undesirable. A name which is identical with, or too nearly resembles, the name by which a company in existence has been previously registered, may be deemed to be undesirable by the Central Government within the meaning of sub-section (1). The Ministry of company affairs also issued guidelines for choosing the name of the company.[Annexure 1] Practical Problem:

1.

ABC (Pvt.) Ltd. was incorporated in 10th June, 1996. A similar Company with identical name and same objects was also incorporated on 10th June1997. ABC (PVT.) Ltd. came to know about this and filed a petition on 10th January, 1998. Explain remedies available to the first Co.

Questions: 1. State the steps involved in the formation of the company.


2.

Explain the provisions for selecting the name of a company.

MEMORANDUM OF ASSOCIATION
Memorandum of association is important document of the company. It is the constitution of the company defining its aims and objective and the scope of its operations. The memorandum is used by the investors or members to understand the scope of the operations of the company indicating the sector in which the company is going to operate and the risk on the investment of the company. Further it is also useful for the other persons dealing with the company to know whether the company is acting within its limit or not. Any act done outside the scope given in memorandum is void and a company cannot be held liable for such acts.

Contents of the memorandum


The Companies act under section 13 states the essential requirement of the memorandum as follows: (1) The memorandum of every company shall state (a) The name of the company with "Limited" as the last word of the name in the case of a public limited company, and with "Private Limited" as the last words of the name in the case of a private Limited company; (b) The State in which the registered office of the company is to be situate; and (c) The objects of the company, and, except in the case of trading corporations, the State or States to whose territories the objects extend. (2) The memorandum of a company limited by shares or by guarantee shall also state that the liability of its members is limited. (3) The memorandum of a company limited by guarantee shall also state that each member undertakes to contribute to the assets of the company in the event of its being wound up while he is a member or within one year after he ceases to be a member, for payment of the debts and liabilities of the company, or of such debts and liabilities of the company as may have been contracted before he ceases to be a member, as the case may be, and of the costs, charges and expenses of winding up, and for adjustment of the rights of the

contributories among themselves, such amount as may be required, not exceeding a specified amount. (4) In the case of a company having a share capital (a) Unless the company is an unlimited company, the memorandum shall also state the amount of share capital with which the company is to be registered and the division thereof into shares of a fixed amount; (b) No subscriber of the memorandum shall take less than one share; and (c) Each subscriber of the memorandum shall write opposite to his name the number of shares he takes. The contents of the Memorandum of Association of a company can be classified in following classes:

1) Name Clause
This part of the memorandum states the name of the company of the company. The company should have a name as it gives the company its distinct identity. The company will be addressed by the name mentioned in its memorandum of association. A company has to first apply for the approval of name before putting it in the memorandum. However, a company need not carry its name throughout its life. As provide in section 21 of the act a company may, by special resolution and with the approval of the Central Government signified in writing, change its name. A company may also have change under compulsion. According to section 22 governments can ask the company to change its name if in the opinion of the Central Government, is identical with, or too nearly resembles, the name by which a company in existence has been previously registered. Where a company received such direction from the government, it must change its name within 3 months or such longer period as the government prescribes, by passing an ordinary resolution. Section 23 deals with effects of change in name of the company. According to section 23(3) the change of name shall not affect any rights or obligations of the company, or render defective any legal proceedings by or against it; and any legal proceedings which might have been continued or commenced by or against the company by its former name may be continued by or against the company by its new name.

2) Domicile Clause:
The domicile clause provides the state in which the registered office of the company is situated, it is also known as situation clause. Every company must have a registered place of office which works as place of correspondence. A domicile of the company will decide the jurisdiction of the company.

3) Object Clause:
This is the most important clause in the memorandum. It clearly defines the sphere of the companys activities. It specifies the activities which a company can carry on and which

activities it cannot carry on. The company cannot carry on any activity which is not authorised by its MOA. This clause must specify:i. Main objects of the company to be pursued by the company on its incorporation

ii. Objects incidental or ancillary to the attainment of the main objects iii. Other objects of the company not included in (i) and (ii) above. In case of the companies other than trading corporations whose objects are not confined to one state, the states to whose territories the objects of the company extend must be specified. Doctrine of the ultra-vires The object clause of the Memorandum of the company contains the object for which the company is formed. An act of the company must not be beyond the objects clause, otherwise it will be ultra vires and, therefore, void and cannot be ratified even if all the members wish to ratify it. This is called the doctrine of ultra vires, which has been firmly established in the case of Ashtray Railway Carriage and Iron Company Ltd v. Riche. Thus the expression ultra vires means an act beyond the powers. Here the expression ultra vires is used to indicate an act of the company which is beyond the powers conferred on the company by the objects clause of its memorandum. An ultra vires act is void and cannot be ratified even if all the directors wish to ratify it. Sometimes the expression ultra vires is used to describe the situation when the directors of a company have exceeded the powers delegated to them. Where a company exceeds its power as conferred on it by the objects clause of its memorandum, it is not bound by it because it lacks legal capacity to incur responsibility for the action, but when the directors of a company have exceeded the powers delegated to them. This use must be avoided for it is apt to cause confusion between two entirely distinct legal principles. Consequently, here we restrict the meaning of ultra vires objects clause of the companys memorandum. Basic principles included the following: 1. 2. An ultra vires transaction cannot be ratified by all the shareholders, even if they wish it to be ratified. The doctrine of estoppel usually precluded reliance on the defense of ultra vires where the transaction was fully performed by one party If the contract was fully executory, the defense of ultra vires might be raised by either party. If the contract was partially performed, and the performance was held to be insufficient to bring the doctrine of estoppel into play, a suit for quasi contract for recovery of benefits conferred was available.

3. A fortiori, a transaction which was fully performed by both parties could not be attacked. 4. 5.

6. If an agent of the corporation committed a tort within the scope of his or her employment, the corporation could not defend on the ground the act was ultra vires. Origin and development Doctrine of ultra vires has been developed to protect the investors and creditors of the company. The doctrine of ultra vires could not be established firmly until 1875 when the Directors, &C., of the Ashbury Railway Carriage and Iron Company (Limited) v Hector Riche, (1874-75) L.R. 7 H.L. 653 was decided by the House of Lords. A company called The Ashbury Railway Carriage and Iron Company, was incorporated under the Companies Act, 1862. Its objects, as stated in the Memorandum of Association, were to make, and sell, or lend on hire, railway carriages and waggons, and all kinds of railway plant, fittings, machinery, and rollingstock; to carry on the business of mechanical engineers and general contractors ; to purchase, lease, work, and sell mines, minerals, land, and buildings; to purchase and sell, as merchants, timber, coal, metals, or other materials, and to buy and sell any such materials on commission or as agents. The directors agreed to purchase a concession for making a railway in a foreign country, and afterwards (on account of difficulties existing by the law of that country), agreed to assign the concession to a Socit Anonyme formed in that country, which socit was to supply the materials for the construction of the railway, and to receive periodical payments from the English company. The objects of this company, as stated in the Memorandum of Association, were to supply and sell the materials required to construct railways, but not to undertake their construction. The contract here was to construct a railway. That was contrary to the memorandum of association; what was done by the directors in entering into that contract was therefore in direct contravention of the provisions of the Company Act, 1862 It was held that this contract, being of a nature not included in the Memorandum of Association, was ultra vires not only of the directors but of the whole company, so that even the subsequent assent of the whole body of shareholders would have no power to ratify it. The shareholders might have passed a resolution sanctioning the release, or altering the terms in the articles of association upon which releases might be granted. If they had sanctioned what had been done without the formality of a resolution, that would have been perfectly sufficient. Thus, the contract entered into by the company was not a voidable contract merely, but being in violation of the prohibition contained in the Companies Act , was absolutely void. It is exactly in the same condition as if no contract at all had been made, and therefore a ratification of it is not possible. If there had been an actual ratification, it could not have given life to a contract which had no existence in itself; but at the utmost it would have amounted to a sanction by the shareholders to the act of the directors, which, if given before the contract was entered into, would not have made it valid, as it does not relate to an object within the scope of the memorandum of association. Later on, in the case of Attorney General v. Great Eastern Railway Co.4, this doctrine was made clearer. In this case the House of Lords affirmed the principle laid down in Ashbury Railway Carriage and Iron Company Ltd v. Riche5 but held that the doctrine of ultra vires ought to be reasonable, and not unreasonable understood and applied and whatever may fairly be

regarded as incidental to, or consequential upon, those things which the legislature has authorized, ought not to be held, by judicial construction, to be ultra vires. The doctrine of ultra vires was recognised in Indian the case of Jahangir R. Mod i v. Shamji Ladha and has been well established and explained by the Supreme Court in the case of A. Lakshmanaswami Mudaliar v. Life Insurance Corporation Of India8. Even in India it has been held that the company has power to carry out the objects as set out in the objects clause of its memorandum, and also everything, which is reasonably necessary to carry out those objects.9 For example, a company which has been authorized by its memorandum to purchase land had implied authority to let it and if necessary, to sell it.However it has been made clear by the Supreme Court that the company has, no doubt, the power to carry out the objects stated in the objects clause of its memorandum and also what is conclusive to or incidental to those objects, but it has no power to travel beyond the objects or to do any act which has not a reasonable proximate connection with the object or object which would only bring an indirect or remote benefit to the company. To ascertain whether a particular act is ultra vires or not, the main purpose must first be ascertained, then special powers for effecting that purpose must be looked for, if the act is neither within the main purpose nor the special powers expressly given by the statute, the inquiry should be made whether the act is incidental to or consequential upon. An act is not ultra vires if it is found: (a) Within the main purpose, or (b) Within the special powers expressly given by the statute to effectuate the main purpose, or (c) Neither within the main purpose nor the special powers expressly given by the statute but incidental to or consequential upon the main purpose and a thing reasonably done for effectuating the main purpose. The doctrine of ultra vires played an important role in the development of corporate powers. Though largely obsolete in modern private corporation law, the doctrine remains in full force for government entities. An ultra vires act is one beyond the purposes or powers of a corporation. The earliest legal view was that such acts were void. Under this approach a corporation was formed only for limited purposes and could do only what it was authorized to do in its corporate charter. This early view proved unworkable and unfair. It permitted a corporation to accept the benefits of a contract and then refuse to perform its obligations on the ground that the contract was ultra vires. The doctrine also impaired the security of title to property in fully executed transactions in which a corporation participated. Therefore, the courts adopted the view that such acts were voidable rather than void and that the facts should dictate whether a corporate act should have effect.

Over time a body of principles developed that prevented the application of the ultra vires doctrine. These principles included the ability of shareholders to ratify an ultra vires transaction; the application of the doctrine of estoppel, which prevented the defense of ultra vires when the transaction was fully performed by one party; and the prohibition against asserting ultra vires when both parties had fully performed the contract. The law also held that if an agent of a corporation committed a tort within the scope of the agent's employment, the corporation could not defend on the ground that the act was ultra vires. Despite these principles the ultra vires doctrine was applied inconsistently and erratically. Accordingly, modern corporation law has sought to remove the possibility that ultra vires acts may occur. Most importantly, multiple purposes clauses and general clauses that permit corporations to engage in any lawful business are now included in the articles of incorporation. In addition, purposes clauses can now be easily amended if the corporation seeks to do business in new areas. For example, under traditional ultra vires doctrine, a corporation that had as its purpose the manufacturing of shoes could not, under its charter, manufacture motorcycles. Under modern corporate law, the purposes clause would either be so general as to allow the corporation to go into the motorcycle business, or the corporation would amend its purposes clause to reflect the new venture. State laws in almost every jurisdiction have also sharply reduced the importance of the ultra vires doctrine. For example, section 3.04(a) of the Revised Model Business Corporation Act, drafted in 1984, states that "the validity of corporate action may not be challenged on the ground that the corporation lacks or lacked power to act." There are three exceptions to this prohibition: it may be asserted by the corporation or its shareholders against the present or former officers or directors of the corporation for exceeding their authority, by the attorney general of the state in a proceeding to dissolve the corporation or to enjoin it from the transaction of unauthorized business, or by shareholders against the corporation to enjoin the commission of an ultra vires act or the ultra vires transfer of real or personal property. Government entities created by a state are public corporations governed by municipal charters and other statutorily imposed grants of power. These grants of authority are analogous to a private corporation's articles of incorporation. Historically, the ultra vires concept has been used to construe the powers of a government entity narrowly. Failure to observe the statutory limits has been characterized as ultra vires. In the case of a private business entity, the act of an employee who is not authorized to act on the entity's behalf may, nevertheless, bind the entity contractually if such an employee would normally be expected to have that authority. With a government entity, however, to prevent a contract from being voided as ultra vires, it is normally necessary to prove that the employee actually had authority to act. Where a government employee exceeds her authority, the government entity may seek to rescind the contract based on an ultra vires claim. Effect of ultra vires transactions A contract beyond the objects clause of the companys memorandum is an ultra vires contract and cannot be enforced by or against the company as was decided in the cases of In Re,

Jon Beaufore (London) Ltd ., (1953) Ch. 131, In S. Sivashanmugham And Others v. Butterfly Marketing PrivateLtd. , (2001) 105 Comp. Cas Mad 763, A borrowing beyond the power of the company (i.e. beyond the objects clause of the memorandum of the company) is called ultra vires borrowing. However, the courts have developed certain principles in the interest of justice to protect such lenders. Thus, even in a case of ultra vires borrowing, the lender may be allowed by the courts the following reliefs: (1) (2) (3) Injunction --- if the money lent to the company has not been spent the lender can get the injunction to prevent the company from parting with it. Tracing--- the lender can recover his money so long as it is found in the hands of the company in its original form. Subrogation---if the borrowed money is applied in paying off lawful debts of the company, the lender can claim a right of subrogation and consequently, he will stand in the shoes of the creditor who has paid off with his money and can sue the company to the extent the money advanced by him has been so applied but this subrogation does not give the lender the same priority that the original creditor may have or had over the other creditors of the company.

Exceptions to the doctrine of ultra vires There are, however, certain exceptions to this doctrine, which are as follows: 1. 2. An act, which is intra vires the company but outside the authority of the directors may be ratified by the shareholders. An act which is intra vires the company but done in an irregular manner, may be validated by the consent of the shareholders. The law, however, does not require that the consent of all the shareholders should be obtained at the same place and in the same meeting. If the company has acquired any property through an investment, which is ultra vires, the companys right over such a property shall still be secured. While applying doctrine of ultra vires, the effects which are incidental or consequential to the act shall not be invalid unless they are expressly prohibited by the Companys Act. There are certain acts under the company law, which though not expressly stated in the memorandum, are deemed impliedly within the authority of the company and therefore they are not deemed ultra vires. For example, a business company can raise its capital by borrowing. If an act of the company is ultra vires the articles of association, the company can alter its articles in order to validate the act.

3. 4. 5.

6.

4) Liability clause:

This clause of memorandum contains the declaration that the liability of the shareholders is limited to the extent of the value of shares held by them. A declaration that the liability of the members is limited in case of the company limited by the shares or guarantee must be given. The memorandum of a company limited by guarantee must also state that each member undertakes to contribute to the assets of the company such amount not exceeding specified amounts as may be required in the event of the liquidation of the company. A declaration that the liability of the members is unlimited in case of the unlimited companies must be given. The effect of this clause is that in a company limited by shares, no member can be called upon to pay more than the uncalled amount on his shares. If his shares are already fully paid up, he has no liability towards the company. The following are exceptions to the rule of limited liability of members:1. If a member agrees in writing to be bound by the alteration of memorandum requiring him to take more shares or increasing his liability, he shall be liable upto the amount agreed to by him. If every member agrees in writing to re-register the company as an unlimited company and the company is re-registered as such, such members will have unlimited liability. If to the knowledge of a member, the number of shareholders has fallen below the legal minimum, (seven in the case of a public limited company and two in case of a private limited company) and the company has carried on business for more than 6 months, while the number is so reduced, the members for the time being constituting the company would be 8 personally liable for the debts of the company contracted during that time.

2. 3.

5) Capital Clause:
Capital clause indicates the authorised capital of the company and its denomination in number of shares. The authorised capital is the maximum amount of capital a company can raise by way of issuing shares. The company law does not specify any limit over maximum amount of authorised capital a company can claim in its memorandum. However, the law prescribes the minimum amount of capital for a company to start with, for Private limited company it is Rupees one Lakh and Rupees five Lakhs for a Public Company. 5) Subscription Clause: Subscription clause consists of list of members subscribing to the memorandum of the company. The members subscribes to the memorandum by attesting their signature under a declaration that he or she agrees to take the number of shares as mentioned against their name. As per the company law every person subscribing to memorandum should take atleast one share. Apart from the above the clauses the memorandum may also contain other provisions such as preliminary contracts, managing agents etc. Further according to section 14 a memorandum

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shall be in such one of the Forms in Tables B, C,D and E in Schedule I as may be applicable to the case of the company, or in a Form as near thereto as circumstances admit. Alteration of memorandum: Memorandum of association is an important document of the company hence company law restricts its alteration. Section 16(1) states that, a company shall not alter the conditions contained in its memorandum except in the cases, in the mode, and to the extent, for which express provision is made in this Act. Thus a memorandum of the company can be altered only according the provision of law and to extent permitted under the law. The provisions of alteration of memorandum are as follows: Alteration of name clause: (Refer to discussion in name clause above) Alteration of domicile clause: The company alters its memorandum for the purpose of changing its registered office. The following are the procedure of change in registered office: Change in the address of registered office within the city limits a board resolution and intimation of the change to registrar within 30 days of alteration. Changing registered office from one city to another within the same state requires special resolution and intimation of the same within 30 days of passing of such resolution. However if such changes results in change in jurisdiction of the registrar then prior permission of regional director is required before altering the memorandum. Alteration of memorandum for changing the place of registered office from one state to another requires a special resolution, however section 17 of the act states that such alteration can be done only in the following circumstances: (a) To carry on its business more economically or more efficiently; (b) To attain its main purpose by new or improved means; (c) To enlarge or change the local area of its operations' (d) To carry on some business which, under existing circumstances may conveniently or advantageously be combined with the business of the company; (e) To restrict or abandon any of the objects specified in the memorandum; (f) To sell or dispose of the whole, or any part, f the under taking, or of any of the undertaking, of the company; or (g) To amalgamate with any other company or body of persons. Further such alteration would also prior approval of the company law board or the central government.

Alteration of object Clause: Alteration of memorandum for changing the place of so as to change the objects of the company requires a special resolution, however section 17 of the act states that such alteration can be done only in the following circumstances: (a) To carry on its business more economically or more efficiently; (b) To attain its main purpose by new or improved means; (c) To enlarge or change the local area of its operations' (d) To carry on some business which, under existing circumstances may conveniently or advantageously be combined with the business of the company; (e) To restrict or abandon any of the objects specified in the memorandum; (f) To sell or dispose of the whole, or any part, f the under taking, or of any of the undertaking, of the company; or (g) To amalgamate with any other company or body of persons. Further such alteration would also prior approval of the company law board or the central government. Alteration of liability clause: The liability clause of a limited company cannot be altered to change the liability of its members to be unlimited. However section 323 provides an exception. According to this provision a limited company may, if so authorised by its articles, by special resolution, alter its memorandum so as to render unlimited the liability of its directors or of any director or manager.

Alteration of capital: Section 94 of the companies act provides for the rules for the alteration of capital of the company. The provision states that a limited company having a share capital, may, if so authorised by its articles, alter the conditions of its memorandum as follows, that is to say, it may (a) Increase its share capital by such amount as it thinks expedient by issuing new shares; (b) Consolidate and divide all or any of its share capital into shares of larger amount than its existing shares; (c) Convert all or any of its fully paid up shares into stock, and reconvert that stock into fully paid up shares of any denomination; (d) Sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the memorandum, so however, that in the sub-division the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share from which the reduced share is derived;

(e) Cancel shares which, at the date of the passing of the resolution in that behalf, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled.

Practical problems: 1. A Company filed a petition before the NCLT for shifting its registered office to another state. The S.G. objected against such shifting on the ground that it would adversely affect the government revenues and employment. Decide whether objection of the State Government is tenable. Promoters made an application for registration of a Company in the name of MCN Association. At the time of application, another Company was already registered with the similar name but it was defunct for more than 10 year. Decide whether new Company can be registered in a name which is similar to any other existing Companys name.

2.

Questions: 1. What are the various clauses of Memorandum of Association? 2. How an object clause of the Memorandum can be amended. 3. Explain the doctrine of ultra vires with its exceptions.

ARTICLES OF ASSOCIATION
Articles of association are the most important document next to memorandum of association. The articles provide rules, regulation and bye laws for the internal management of the company. In case of Naresh Chandra Sanyal Vs. The Calcutta Stock Exchange Association Ltd9 . the importance of articles of association as follows, Subject to the provisions of the Companies Act the Company and the members are bound by the provisions contained in the Articles of Association. The Articles regulate the internal management of the Company and define the powers of its officers. They also establish a contract between the Company and the members and between the members inter se. The contract governs the ordinary rights and obligations incidental to membership in the Company.

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1971 AIR 422, 1971( 2 )SCR 483, 1971( 1 )SCC 50.

Section 27-30 of the Companies Act deals with form and content of Articles of Association. Sec. 27 consists of regulations required in case of unlimited company, company limited by guarantee or private company limited by shares. The provision states that in the case of an unlimited company, the articles shall state the number of members with which the company is to be registered and, if the company has a share capital, the amount of share capital with which the company is to be registered, in the case of a company limited by guarantee, the articles shall state the number of members with which the company is to be registered and in case of private limited company the following conditions; (a) Restricts the right to transfer its shares, if any; (b) Limits the number of its members to fifty (c) Prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company; Section 28 provides that in the articles of association of a public company limited by shares may adopt all or any of the regulations contained in Table A in Schedule I. Usually, the Articles contain rules and regulations regarding: (i) (ii) (iii) (iv) (v) (vi) (vii) (ix) (x) (xi) (xii) share capital an variation of rights, exercise of lieu by the company, calls on shares, transfer, transmission, forfeiture and surrender of shares, conversion of shares into stock and its reconversion into shares, issue of share warrants and rights of their holders, alternation of capital, voting by members. powers, rights, remuneration, qualification and duties of directors, proceedings of Board, appointment of manager, secretary, etc.,

(viii) conduct of any proceedings at general meetings of shareholders,

(xiii) seal of the company, (xiv) dividend, reserves and capitalization of profits (xv) accounts, and, (xvi) winding up. The contents of Articles are limited to extent of memorandum. In other words articles cannot provide for anything which violates the provisions of memorandum.

Alteration of articles

According section 31 of the companies act articles of the company can be amended by passing a special resolution in its general meeting. The section further provide that any alteration so made shall have the same effect as if they were part of the original articles and will be subject to alteration in same way. The alteration of articles must also comply with following conditions: 1) Not to contravene the act: The alteration of articles so as to allow the company to do certain act which is contrary to the company law is not valid. 2) Must not sanction anything illegal: A company cannot alter its articles so as to enable it to do any act which illegal in the eyes of law. Thus alterations sanctioning an illegal act are not valid. 3) Approval of the central government: According to Sec. 31(1) an alteration made in the articles which has the effect of converting a public company into a private company, shall not have effect unless such alteration has been approved by the Central Government. 4) It should be within the scope of Memorandum: The alteration of articles could not entitle a company act beyond the scope provided in the memorandum. An article should always be framed within the framework defined by the memorandum and if the scope of the article, by way of alteration, exceeds the scope of memorandum of the company such alteration will not be considered as valid.

Comparison between Memorandum and articles of the company: The Memorandum of Association is a dominant instrument as compared to the Articles of Association. A Memorandum of Association defines the specific objects and other incidental objects to be carried out by the company on its incorporation and also restricts the companys power to carry on business within the confines of objects specified in the Memorandum. The Memorandum of Association consists the name of the company, the place where the registered office of the company shall be situated, the main objects to be followed by the company on its incorporation along with other incidental objects to be carried on by the company for the attainment of the main objects, the liability of the members and the authorized share capital of the company with which the company is to be registered. The Articles of Association is also the second important document to be registered with the Memorandum. The Articles of Association are the set of rules for the management of the affairs of the company providing for the rights of the shareholders, the meetings, the directors of the company, the manager, the chairman of meetings of the Board, the rights and duties of

the directors and other matters required for the regulation of the internal affairs of the company. The provisions of the Articles are to provide for the management of the company and the provisions of the Articles are binding on the company in reference to its members and vice versa. The Articles of Association can be defined to be a contract between the Shareholders inter se. The binding force of the Articles of Association is only with respect to the relationship of the company in its capacity with the shareholders and does not extend to matters outside the company relationship anything contained in the Articles of Association which is inconsistent with the provisions of the Memorandum is invalid. Doctrine of constructive notice: The doctrine of constructive notice states that, any person dealing with the company is presumed to have the knowledge of memorandum and articles of the company. Thus if person entered into a contract with a company, which was not authorised by the memorandum or the articles of the company, such person cannot claim his rights arising from such contracts as the said contract is invalid. The rule of constructive notice was laid down by the House of Lords in Earnest v. Nicholls and was explained by Lord Hatherely in Mahony v. East Holyford Mining Co.: "(The memorandum and articles) are open to all who are minded to have any dealings whatsoever with the company and those who so deal with them must be affected with notice of all that is contained in those documents." The doctrine of constructive notice is more or less an unreal doctrine. It does not take notice of the realities of business life. People know a company through its officers and not through its documents. The courts in India do not seem to have taken it seriously though. For example, in Dehra Dun Mussorie Electric Tramway Co. v. Jagmandardas, the Allahabad high court allowed an overdraft incurred by the managing agent of a company when under the articles the directors had no power to delegate their borrowing power. High Court held that unless there is wilful or fraudulent turning away from enquiry, the doctrine of constructive notice would not apply. The case Re Bright's Trusts (1856) 21 Beav. 430 was also referred to. That relates to a charge without notice on a chose in action, and it appears that except so far as the actual notice was given, subsequent encumbrances could have no knowledge whatever of the existence of any prior charge. In that case the charge was one on a fund in the hands of trustees, and notice was given only of one of two charges created in the same deed, that for the life policy being mentioned, and that the express notice given implied that no other charge was alleged. It is clear that the principles of that case apply only to the duty of enquiry arising in cases where, apart from constructive notice, there is nothing to put the purchaser on enquiry. The doctrine confined originally to cases of fraudulent turning away was subsequently extended to cases of gross negligence and in West v. Reid (1843) 2 Hare 249, the same learned Vice-Chancellor stated that there might be a degree of negligence so gross (crassa negligentia) that a Court of Justice might treat it as evidence of fraud though in fact as pointed out by
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Doctrine of Construct ive Notice by Sameer Sharma.

Romilly M.R. in Jones v. Williams (1857) 24 Beav. 47, no fraudulent intent may be present. Lord Cranworth expressed the rule thus in Ware v. Lord Egmont (1854) 4 De G. M. & G. 460 at page 473: Where a person has actual notice of any matter of fact, there can be no danger of doing injustice if he is held to be bound by all the consequences of that which he knows to exist. But where he has not actual notice, he ought not to be treated as if he had notice, unless the circumstances are such as enable the Court to say, not only that he might have acquired, but also, that he ought to have acquired, the notice with which it is sought to affect him-that he would have acquired it but for his gross negligence in the conduct of the business in question. The question, when it is sought to affect a purchaser with constructive notice, is not whether he had the means of obtaining, and might by prudent caution have obtained, the knowledge in question, but whether the not obtaining it was an act of gross or culpable negligence. It is obvious that no definite rule as to what will amount to gross or culpable negligence, so as to meet every case, can possibly be laid down. Though no definite rule defining what would constitute gross negligence could by its very nature be laid down, the Courts of Equity held that if a purchaser of property omits to make proper and usual inquiries into his vendor's title, such omission, in the absence of reasonable explanation, would amount to gross negligence and the purchaser must, therefore, be fixed with constructive notice of facts which he would have known if he had made such inquiries. This proposition was also in some cases rested on the original theory of fraudulent turning away by saying that such omission on the part of the purchaser, if not explained, may be evidence "of a design inconsistent with bona fide dealing to avoid knowledge of the true state of the title". But whatever be the legal theory on which the proposition may be supported, the principle underlying the proposition was that a purchaser of property, as an ordinary prudent man, is expected, for the protection of his own interest, to make proper and usual inquiries into his vendor's title before he purchases the property and if he omits to do so, without any reasonable explanation, an inference can legitimately be drawn that either he has wilfully abstained from making inquiries for the purpose of avoiding notice of facts which he would have known had he made the inquiries or he is guilty of gross negligence. This principle was explained by Lord Selborne, in Agra Bank v. Barry (1874) L.R. 7 H.L. 135, where with reference to the duty of a purchaser to investigate title the learned Law Lord said: It has been said in argument that investigation of title and inquiry after deeds is 'the duty' of a purchaser or a mortgagee; and, no doubt, there are authorities which do use that language. But this, if it can properly be called a duty, is not a duty owing to the possible holder of a latent title or security. It is merely the course which a man dealing bona fide in the proper and usual manner for his own interest, ought, by himself or his solicitor, to follow, with a view to his own title and his own security. If he does not follow that course, the omission of it may be a thing requiring to be accounted for or explained. It may be evidence if it is not explained, of a design inconsistent with bona fide dealing, to avoid knowledge of the true state of the title.

What is a sufficient explanation, must always be a question to be decided with reference to the nature and circumstances of each particular case Lord Lindley also said much to the same effect when after referring to the passage from the judgment of Lord Cranworth in Ware v. Lord Egmont (supra), he observed in Bailey v. Barnes (1894) 1 Ch. 25 at page 35: Gross or culpable negligence" in this passage does not import any breach of a legal duty, for a purchaser of property is under no legal obligation to investigate his vendor's title. But in dealing with real property, as in other matters of business, regard is had to the usual course of business; and a purchaser who wilfully departs from it in order to avoid acquiring a knowledge of his vendor's title is not allowed to derive any advantage from his wilful ignorance of defects which would have come to his knowledge if he had transacted his business in the ordinary way Can we say that Mr. Lilley or his solicitors 'ought reasonably' to have made inquiries into the validity of the sale by Barnes? 'Ought' here does not import a duty or obligation; for a purchaser need make no inquiry. The expression 'ought reasonably' ought to mean as a matter of prudence, having regard to what is usually done by men of business under similar circumstances. Doctrine of indoor management: The doctrine of Indoor management, popularly known as the Turquands rule initially arose some 150 years ago in the context of the doctrine of constructive notice. The rule of Doctrine of Indoor Management is conflicting to that of the principle of Constructive Notice. The latter seeks to protect the company against outsiders; the former operates to protect outsiders against the company. The Doctrine of Indoor Management lays down that persons dealing with a company having satisfied themselves that the proposed transaction is not in its nature inconsistent with the memorandum and articles, are not bound to inquire the regularity of any internal proceeding. In other words, while persons contracting with a company are presumed to know the provisions of the contents of the memorandum and articles, they are entitled to assume that the provisions of the articles, they are entitled to assume that the officers of the company have observed the provisions of the articles. It is no part of duty of any outsider to see that the company carries out its own internal regulations.

Origin of The Doctrine


The rule had its genesis in the case of Royal Bank v Turquand[1]. In this case the Directors of the Company were authorized by the articles to borrow on bonds such sums of money as should from time to time by a special resolution of the Company in a general meeting, be authorized to be borrowed. A bond under the seal of the company, signed by two directors and the secretary was given by the Directors to the plaintiff to secure the drawings on current account without the authority of any such resolution. Then Turquand sought to bind the Company on the basis of that bond. Thus the question arose whether the company was liable on that bond.

The Court of Exchequer Chamber overruled all objections and held that the bond was binding on the company as Turquand was entitled to assume that the resolution of the Company in general meeting had been passed. The relevant portion of the judgment of Jervis C. J. reads: "The deed allows the directors to borrow on bond such sum or sums of money as shall from time to time, by a resolution passed at a general meeting of the company, be authorized to be borrowed and the replication shows a resolution passed at a general meeting, authorizing the directors to borrow on bond such sums for such periods and at such rates of interest as they might deem expedient, in accordance with the deed of settlement and Act of Parliament; but the resolution does not define the amount to be borrowed. That seems to me enough......We may now take for granted that the dealings with these companies are not like dealings with other partnerships, and the parties dealing with them are bound to read the statute and the deed of settlement. But they are not bound to do more. And the party here on reading the deed of settlement, would find, not a prohibition from borrowing but a permission to do so on certain conditions. Finding that the authority might be made complete by a resolution, he would have a right to infer the fact of a resolution authorizing that which on the face of the document appear to be legitimately done."

Provisions Under The Indian Companies Act, 1956


The provision under the Indian Act which directly imbibes the Turquand rule is section 290, which reads as under: Section 290:- Validity of acts of directors:-Acts done by a person as a director shall be valid, notwithstanding that it may afterwards be discovered that his appointment was invalid by reason of any defect or disqualification or had terminated by virtue of any provision contained in this Act or in the articles: Provided that nothing in this section shall be deemed to give validity to acts done by a director after his appointment has been shown to the company to be invalid or to have terminated: Another Provision which directly follows the above stated rule is section 81 of the Indian Companies Act, 1956 which bears the heading further issue of shares. Bona fide allottees of shares are protected by the Doctrine of Indoor Management under s-81. Illustrating upon the point the Punjab & Haryana High Court has avowed in the case of Diwan Singh v Minerva Mills[3] that The allottees of the shares were contracting in good faith with the Company and they were entitled to assume that the acts of the Directors in making allotments of the shares to them are within the scope of their powers conferred upon them by the shareholders of the Company. They were not bound to enquire whether the acts of the Directors which as in this case related to internal management had been properly and regularly performed. Even when the Directors exceed their powers or infringe the restrictions imposed upon them, the company

may be bound for the outsider dealing with the company is only required to see that the transactions are consistent with the article. Strangers are justified in assuming that all matters of Indoor management have been done regularly.

Application of the Rule by the Indian Courts


The Turquand's rule has been approved and followed by Varadaraja lyengar J., in Varkey Souriar v. Keraleeya Banking Co. Ltd [4]. In the following way: " Coming to the alternative ground, it is no doubt true that where a company is regulated by a memorandum and articles registered in some public office, persons dealing with the company are bound to read the registered documents and to see that the proposed dealing is not inconsistent therewith but they are not bound to do more. They need not enquire into the regularity of the internal proceedings what -Lord Hatherley called 'indoor management'. So if there is a managing director and authority in the articles for the directors to delegate their powers to him, a person dealing with him may assume that it is within the ordinary duties of a managing director. All he has to see is that the managing director might have power to do what he purports to do. But the rule cannot apply where the question, as here, is not one as to the scope of the power exercised by an apparent agent of the company, but is in regard to the very existence of the agency." In Lakshmi Ratan Cotton Mills Co. Ltd, v. J. K. Jute Mitts Co. Ltd,[5] the plaintiff company sued the defendant company on a loan for Rs. 1,50,000. Among other things the defendant company raised the plea that the transaction was not binding as no resolution sanctioning the loan was passed by the board of directors. The court, after referring to Turquand's case and other Indian cases, held :If it is found that the transaction of loan into which the creditor is entering is not barred by the charter of the company or its articles of association, and could be entered into on behalf of the company by the person negotiating it, then he is entitled to presume that all the formalities required in connection therewith have been complied with. If the transaction in question could be authorised by the passing of a resolution, such an act is a mere formality. A bona fide creditor, in the absence of any suspicious circumstances, is entitled to presume its existence. A transaction entered into by the borrowing company under such circumstances cannot be defeated merely on the ground that no such resolution was in fact passed. The passing of such a resolution is a mere matter of indoor or internal management and its absence, under such circumstances, cannot be used to defeat the just claim of a bona fide creditor. A creditor being an outsider or a third party and an innocent stranger is entitled to proceed on the assumption of its existence ; and is not expected to know what happens within the doors that are closed to him. Where the act is not ultra vires the statute or the company such a creditor would be entitled to assume the apparent or ostensible authority of the agent to be a real or genuine one. He could assume that such a person had the power to represent the company, and if he in fact advanced the money on such assumption, he would be protected by the doctrine of internal management." In case of Official Liquidator, Manasube & Co. (P.) Ltd. V. Commissioner of police[6] the learned judge observed that the lenders to a company should acquaint themselves with

memorandum and articles but they cannot be expected to embark upon an investigation as to legality, propriety and regularity of acts of directors. The rule is based upon obvious reasons of convenience in business relations. Firstly, the memorandum and articles of associations are public documents, open to public inspection. Hence an outsider is presumed to know the constitution of a company; but not what may or may not have taken place within the doors that are closed to him. The wheels of commerce would not go round smoothly if persons dealing with the company were compelled to investigate thoroughly the internal machinery of a company to see if something is not wrong. People in business would be very shy in dealing with such companies. The rule is of great practical utility. It has been applied in a great variety of cases involving rights and liabilities. It has been used to cover acts done on behalf of a company by de facto directors who have never been appointed, or whose appointment is defective, or who, having been regularly appointed, have exercised an authority which could have been delegated to them under the companys articles, but never has been so delegated, or who have exercised an authority without proper quorum. Thus, where the directors of company having the power to allot shares only with the consent, something which he could do only with the approval of the board; where the managing agents having the power to borrow with the approval of directors borrowed without any such approval, the company was held bound.

Exceptions to the rule The rule of doctrine of indoor management is however subject to certain exceptions. In other words, relief on the ground of indoor management cant be claimed by an outsider dealing with the company in the following circumstances: a) Where the outsider has knowledge of Irregularity b) Suspicion of Irregularity c) Forgery d) Representation through Articles e) Acts outside apparent authority 1. Knowledge of Irregularity: - The first and the most obvious restriction is that the rule has no application where the party affected by an irregularity had actual notice of it. Knowledge of an irregularity may arise from the fact that the person contracting was himself a party to the inside procedure. As in Devi Ditta Mal v The Standard Bank of India, where a transfer of shares was approved by two directors, one of whom within the knowledge of the transferor was disqualified by reason of being the transfer himself and the other was never validly appointed, the transfer was held to be ineffective. Similarly in Howard v. Patent Ivory Manufacturing Co. where the directors could not defend the issue of debentures to themselves because they should have known that the extent to

which they were lending money to the company required the assent of the general meeting which they had not obtained. Likewise, in Morris v Kansseen, a director could not defend an allotment of shares to him as he participated in the meeting, which made the allotment. His appointment as a director also fell through because none of the directors appointed him was validly in office. But after the Hely-Hutchinson v Brayhead Ltd[12]., according to which the mere fact that a person is a director does not mean that he shall be deemed to have knowledge of the irregularities practiced by other directors. A newly appointed director does not mean that he shall be deemed to have knowledge of the irregularities practiced by the other directors. A newly appointed director entered into contracts of indemnity and guarantee with the company through a director whom the company had knowingly allowed to hold himself out as having the authority to enter into such transaction, although in fact he had no such authority. The company was held liable. 2. Suspicion of Irregularity: - The protection of the Turquand Rule is also not available where the circumstances surrounding the contract are suspicious and therefore invite inquiry. Suspicion should arise, for example, from the fact that an officer is purporting to act in matter, which is apparently outside the scope of his authority. Where, for example, as in the case of Anand Bihari Lal v. Dinshaw & co[13]., the plaintiff accepted a transfer of a companys property from its accountant, the transfer was held void. The plaintiff could not have supposed, in absence of a power of attorney, that the accountant had authority to effect transfer of the companys property. Similarly, in the case of Haughton & co v. Nothard, Lowe & Wills Ltd[14]., where a person holding directorship in two companies agreed to apply the money of one company in payment of the debt to other, the court said that it was something so unusual that the plaintiff were put upon inquiry to ascertain whether the persons making the contract had any authority in fact to make it. Any other rule would place limited companies without any sufficient reasons for so doing, at the mercy of any servant or agent who should purport to contract on their behalf. 3. Forgery:- Forgery may in circumstances exclude the Turquand Rule. The only clear illustration is found in the Ruben v Great Fingall Consolidates[15]; here in this case the plaintiff was the transferee of a share certificate issued under the seal of the defendants company. The companys secretary, who had affixed the seal of the company and forged the signature of the two directors, issued the certificate. The plaintiff contended that whether the signature were genuine or forged was a part of the internal management, and therefore, the company should be estopped from denying genuineness of the document. But, it was held, that the rule has never been extended to cover such a complete forgery. Lord Loreburn said: It is quite true that persons dealing with limited liability companies are not bound to enquire into their indoor management and will not be affected by irregularities of which they have no notice. But, this doctrine which is well established, applies to irregularities, which otherwise might affect a genuine transaction. It cannot apply to Forgery.

4.

Representation through Articles: - The exception deals with the most controversial and highly confusing aspect of the Turquand Rule. Articles of association generally contain what is called power of delegation. Lakshmi Ratan Lal Cotton Mills v J.K. Jute Mills Co[16]. explains the meaning and effect of a delegation clause. Here one G was director of the company. The company had managing agents of which also G was a director. Articles authorised directors to borrow money and also empowered them to delegate this power to any or more of them. G borrowed a sum of money from the plaintiffs. The company refused to be bound by the loan on the ground that there was no resolution of the board delegating the powers to borrow to G. Yet the company was held bound by the loans. Even supposing that there was no actual resolution authorizing G to enter into the transaction the plaintiff could assume that a power which could have been delegated under the articles must have been actually conferred. The actual delegation being a matter of internal management, the plaintiff was not bound to enter into that. Thus the effect of a delegation clause is that a person who contracts with an individual director of a company, knowing that the board has power to delegate its authority to such an individual, may assume that the power of delegation has been exercised. The question of knowledge of Articles came up in the case of Rama Corporation v Proved Tin and General Investment Co.[17], here; one T was the active director of the defendant company. He, purporting to act on behalf of his company, entered into a contract with the plaintiff company under which he took a cheque from the plaintiffs. The companys article contained a clause providing that the directors may delegate any of their powers, other than the power to borrow and make calls to committees, consisting of such members of their body as they think fit. The board had not in fact delegated any of their powers to T and the plaintiffs had not inspected the defendants articles and, therefore, did not know of the existence of power to delegate. It was held that the defendant company was not bound by the agreement. Slade J, was of the opinion that knowledge of articles was essential. A person who at the time of entering into a contract with a company has no knowledge of the companys articles of association, cannot rely on those articles as conferring ostensible or apparent authority on the agent of the company with whom he dealt. He could have relied on the power of delegation only if he knew that it existed and had acted on the belief that it must have been duly exercised. Knowledge of articles is considered essential because in the opinion of Slade J; the rule of indoor management is based upon the principle of estoppel. Articles of association contain a representation that a particular officer can be invested with certain of the powers of the company. An outsider, with knowledge of articles, finds that an officer is openly exercising an authority of that kind. He, therefore, contracts with the officer. The company is estoppel from alleging that the officer was not in fact authorised.

This view that knowledge of the contents of articles is essential to create an estopped against the company has been subjected to great criticism. One point is that everybody is deemed to have constructive notice of the articles. But Slade J brushed aside this suggestion stating constructive notice to be a negative one. It operates against the outsider who has not inquired. It cannot be used against interests of the company. The principle point of criticism, however, is that even if the directors had the power to delegate their authority. They would not yet be able to know whether the director had actually delegated their authority. Moreover, the company can make a representation of authority even apart from its articles. The company may have held out an officer as possessing an authority. A person believes upon that representation and contract with him. The company shall naturally be estopped from denying that authority of that officer for dealing on its behalf, irrespective of what the articles provide. Articles would be relevant only if they had contained a restriction on the apparent authority of the officer contained. 5. Acts outside apparent authority: - Lastly, if he act of an officer of a company is one which would ordinarily be beyond the power of such an officer, the plaintiff cannot claim the protection of the Turquand rule simply because under the articles power to do the act could have been delegated to him. In such a case the plaintiff cannot sue the company unless the power has, in fact, been delegated to the officer with whom he dealt. A clear illustration is Anand Behari Lal v Dinshaw[18] here the plaintiff accepted a transfer of a companys property from its accountant. Since such a transaction is apparently beyond the scope of an accountants authority it was void. Not even a delegation clause in the articles could have validated it, unless he was, in fact, authorized. Practical Problems:
1.

The authorised signatory of a Co. issued a share certificate in favour of X, which apparently complied with the Companys articles as it was purported to be signed by two directors and the secretary and it had the Companys common seal affixed to it. Infact, the secretary had forged the signatures of the Directors and affixed the seal without any authority. Will the certificate be binding upon the Company?

Questions: Distinguish between Memorandum and Articles of association. 2. How an Articles of Association of a company can be amended. 3. Explain the doctrine of Indoor Management.
1.

INCORPORATION CERTIFICATE
The incorporation certificate is a document provided by the registrar as certificate existence of company. According to sec. 34 of the act on the registration of the memorandum a company, the Registrar shall certify under his hand that the company is incorporated and, the case of a limited company, that the company is limited. In other words certificate incorporation granted after the registration of memorandum and articles of association. of of in of

The company is treated as an entity separate from its members after the receipts of certificate of incorporation. The act in sec. 34(2) states that from the date of incorporation mentioned in the certificate of incorporation, such of the subscribers of the memorandum and other persons, as may from time to time be members of the company, shall be a body corporate by the name contained in the memorandum, capable forthwith of exercising all the functions of an incorporated company, and having perpetual succession and a common seal, but with such liability on the part of the members to contribute to the assets of the company in the event of its being wound up as is mentioned in this Act. Conclusive evidence: The certificate of incorporation is a conclusive evidence of the existence of the company. The concept has been established by section 35 of the companies act. According to this provision, a certificate of incorporation given by the Registrar in respect of any association shall be conclusive evidence that all the requirements of this Act have been complied with in respect of registration and matters precedent and incidental thereto, and that the association is a company authorised to be registered and duly registered under this Act. Thus, where a certificate of evidence is issued for a company its existence cannot be challenged under law. The concept is based on the fact that when the Legislature makes a certain document conclusive evidence as to a certain fact, then the Court must assume that all the requirements which were necessary in order to get that document were complied with & it would not be open to anyone to challenge the absence of any such requirement. The concept was further established in case of Moosa Goolam v. Ebrahim Goolam by way of following judgment: In dealing with the first question their Lordships will assume that the conditions of registration prescribed by the Companies Act were not duly complied with, that there were not seven subscribers to the memorandum of association, and that the Registrar of Companies ought not to have granted a certificate of incorporation. As a matter of fact a certificate of incorporation was granted. In their Lordships' opinion the certificate of incorporation is conclusive for all purposes." Therefore, even though the law requires that there should be seven subscribers to the memorandum of association & although the law requires certain other conditions before the company can be incorporated, the Privy Council clearly states that once the certificate of incorporation was issued which by the law is made conclusive, then it is conclusive for all purposes & the Ct. must assume that all the requirements were satisfied. A Private limited company can start its business as soon as it receives certificate of incorporation, however a Public limited company has to get certificate of commencement of business to start its operation. Certificate of incorporation only entitles a public company to issue prospectus and invite people to subscribe its shares. Practical Problems:

1.

The Memorandum of Association of a Company was signed by two adult members and by a guardian of the other five minor members, the guardian signing separately for each minor member. The Registrar registered the Company and issued under his hand a certificate of incorporation. The plaintiff contended that a. Conditions of registration were not duly complied with, and b. That there were no seven subscribers to the Memorandum. Will the Court uphold his contention?

Question:
1.

Certificate of Incorporation is a conclusive evidence of a companys existence. Explain

PROSPECTUS
A public company is required to raise capital to start its business. To raise capital a company issues prospectus and thereby invite public to subscribe to its shares and securities. A prospectus is thus an important document required in formation of the company. The companies act defines prospectus as any prospectus, notice, circular, advertisement or other document inviting offers from the public for the subscription on purchase of any shares in, or debentures of, a body corporate. The essential elements of the prospectus are as follows: 1. Invitation to public: As per the definition of the companies act sec 2(36) the prospectus is an invitation to public for subscription of securities issued by it. The companies act does not describe what it mean by the term invitation to public, the term is however described in the case of Nash v. Lynde Viscount Sumner. According to the judgement in this case an invitation is open to public if it is open to anyone who brings his money and applies in due form, whether the prospectus was addressed to him on behalf of the company or not. Thu a document calling specified person or class of person will not be considered as prospectus. 2. Prospectus to be dated: Section 55 of the Act states that a prospectus issued by or on behalf of a company or in relation to an intended company shall be dated, and that date shall, unless the contrary is proved, be taken as the date of publication of the prospectus. 3. Registration of prospectus: A prospectus should be registered with the registrar of the company. Section 60(1) states that no prospectus shall be issued by or on behalf of a company or in relation to an intended company unless, on or before the date of its publication, there has been delivered to the Registrar for registration a copy thereof. A prospectus should however be issued within 90 days of registration.

Contents of the prospectus:

A prospectus is an instrument of communication for a company. The prospectus is used by the prospective investor for collecting information about the company. It is therefore necessary that the prospectus gives the true and fair view of the companys performance and prospects. The company law under section 44(2)(a) and 56 provides for the contents of the prospectus. The provision the law states that the prospectus should provide the general information and risk factors provided in the Schedule two of the companies act.[Annexure]

Experts opinion:
A company prospectus contains various opinion of expert about the prospects and viability of the companys operations. The subscription of companys securities is substantially affected by the opinion on such experts, the company law therefore provide guidelines for giving experts opinion on the prospectus. According to section 57 a prospectus inviting persons to subscribe for shares in or debentures of a company shall not include a statement purporting to be made by an expert, unless the expert is a person who is not, and has not been, engaged or interested in the formation or promotion, or in the management, of the company. Section 58 further provides that any opinion of an expert should not be provided without getting prior consent of such expert in writing.

Deemed Prospectus:
The company law provides various condition for the issuing the prospectus, however the management may try to evade these provision by issuing instrument which does not comply all the condition of the prospectus but consist of main specification i.e inviting public for subscription of securities. The Company law under section 64 provides conditions of deemed prospectus to avoid such deceptive practices. According to section 64 (1) Where a company allots or agrees to allot any shares in or debentures of the company with a view to all or any of those shares or debentures being offered for sale to the public, any document by which the offer for sale to the public is made shall, for all purposes, be deemed to be a prospectus issued by the company; and all enactment and rules of law as to the contents of prospectuses and as to liability in respect of statements in and omissions from prospectuses, or otherwise relating to prospectuses, shall apply with the modifications specified in sub-section (3), (4) and (5), and have effect accordingly, as if the shares or debentures had been offered to the public for subscription and as if person accepting the offer in respect of any shares or debentures were subscribers for those shares or debentures, but without prejudice to the liability, if any, of the persons by whom the offer is made in respect of mis-statements contained in the document or otherwise in respect thereof. (2) For the purposes of this Act, it shall, unless the contrary is proved, be evidence that an allotment of, or an agreement to allot, shares or debentures was made with a view to the shares or debentures being offered for sale to the public if it is shown -

(a) that an offer of the shares or debentures or of any of them for sale to the public was made within six months after the allotment or agreement to allot; or (b) (3) that at the date when the offer was made, the whole consideration to be received by the company in respect of the shares or debentures had not been received by it. Section 56 as applied by this section shall have effect as if it required a prospectus to state in addition to the matters required by that section to be stated in a prospectus -

(a) the net amount of the consideration received or to be received by the company in respect of the shares or debentures to which the offer relates; and (b) the place and time at which the contract under which the said shares or debentures have been or are to be allotted may be inspected.

(4) Section 60 as applied by this section shall have effect as if the persons making the offer were persons named in a prospectus as directors of a company. (5) Where a person making an offer to which this section relates is a company or a firm, it shall be sufficient if the document referred to in sub-section (1) is signed on behalf of the company or firm by two directors of the company or by not less that one-half of the partners in the firm, as the case may be; and any such director or partner may sign by his agent authorised in writing.

Misstatements in Prospectus:
When any prospectus is issued by the company, then it is basically to invite people to purchase their share. Now, it is the duty of the company to see that the statements mentioned in the prospectus are of true nature. As prospectus is a soul of the company, it is the duty of the company to prepare such prospectus with complete due care. Also when any prospectus is made the company is bound to mention every detail regarding the company in its prospectus. Omission of single fact also may mislead the investors. Preparing a prospectus is of a great responsibility. Thus, the company, director or a promoter is liable if any of the statement mentioned in the prospectus is of untrue nature.
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MIS-STATEMENTS IN THE PROSPECTUS (S. 62) [CIVIL LIABILITY]


Every person authorizing the issue of prospectus has a primary responsibility to see that the prospectus contains the true state of affairs of the company and does not give any fraudulent picture to the public. The section 62 of the Companies Act, 1956 makes certain person liable to pay compensation to every person who subscribes for any shares of debentures on the faith of the prospectus for any loss or damage he may have suffered by reason of any untrue statement made in the prospectus. These would include Directors of the company, Promoters, or even the company. Thus, this section deals with the cases of misstatements of facts in a prospectus. It is immaterial for the purpose of this section whether the Director sees the prospectus or not; it is enough that he authorizes its issue.
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http://jurisonlin e.in/2008/05/company-law-liability-for-a-mis-statement-in-a-prospectus

The effect of Section 62 is not to alter the tortuous nature of the acts in respect of which there is to be liability but, to render it easier to establish liability against the Directors in a common law action of deceit by raising certain legal presumptions against them. Thus, this provision is an effective remedy to the deceived shareholders. This section is meant to tighten up the duties of directors and others who are in connection with the prospectus. So, this section provides statutory civil liability for untrue statement. Misstatement means a falsehood or concealment or an ambiguity or an exaggeration all of these have the potential to mislead a prospective investor in the company. The term untrue statement or misstatement is used in the broader sense. So, an untrue statement means a statement in fact untrue, not a statement in the belief of the Directors untrue. It includes not only false statements but also statements which produce a wrong impression of actual facts.

Conditions for invoking Section. 62:


1) 2) 3) 4) 5) The company had issued a prospectus inviting persons to subscribe for its shares or debentures. An untrue statement was included in the prospectus. The person who is claiming for the compensation had subscribed for the shares or debentures offered by the prospectus. Such person has subscribed for the shares or debentures relying upon the untrue statement contained in the prospectus. Such person has sustained a loss or damage after having subscribed for the shares or debentures.

Persons liable under Section.62:


1) 2) 3) 4) Every director holding the office at the time of the issue of the prospectus. Every person named in the prospectus as a director or a proposed director, if he has consented to include his name in the prospectus as such. Every promoter of the company as defined in sub-section (6) (a) of this section. Every other person who has authorized the issue of prospectus.

Defenses to escape from liability:


1) Withdrawal of consent: The director will not be liable if he had withdrawn his consent to become a director before the issue of the prospectus and it was issued without his authority or consent. Reasonable public notice must be given of withdrawal of consent. 2) Issue without knowledge: The director can escape from his liability if he proves that the prospectus was issued without his knowledge and when he became aware about it, and

then he gave a public notice for it. Some of the principal newspapers is not enough, it should be all newspapers in which the prospectus was advertised and with same frequency too. But, I dont agree with this statement as it is very difficult to advertise in all the newspapers, and it may cause huge expenses too. 3) Withdrawal of the consent after the issue of the prospectus but before allotment: When the director becomes aware about such misstatement in the prospectus, after the issue of the prospectus but before the allotment, then he can withdraw his consent and can give a public notice for it. 4) Reasonable ground for belief: The director shall be protected if he can show that he had such reasonable ground to believe, which he did up to the time of allotment. Here, showing honesty is not enough, as one has to go beyond the principle of honesty. 5) Statement of expert: If any statement is made by the expert, then director can always contended the fact that he had a reasonable ground to believe that such statements made were made under competent authority, and he did believe such statement to be true till the time of allotment. Even for public official document, the same rule shall apply.

REMEDIES AGAINST THE DIRECTOR


1) Damages for Fraudulent Misrepresentation:

In Contract Law, Misrepresentation means a false statement of fact made by one party to another party and has the effect of inducing the party into the contract. The misrepresentation should relate to a material fact. Where it is represented that something will happen or be done in future, this does not amount to a representation of fact. The person who has been allotted the share may bring an action for fraudulent misrepresentation. Now, a director who was aware that a prospectus was being issued to the public, and if that person did not read the prospectus and did not withdraw his consent, is very much responsible for the contents of the prospectus. In certain cases, where the representation which are true at the time of issue of prospectus become false before the allotment is made. In such cases, the applicant should be informed about the changed circumstances. Lord Hewart C.J. in one of his judgments pointed out that, As a normal business seeking development when money is really being asked to feed and supply an ambitious gamble, is merely deceit. The argument is not that in this or that particular this prospectus was untrue; the argument is that its whole purpose and effect were to deceive. P.P.S. Gogna states that It may be noted that the liability of these persons (it includes promoters, directors or other persons) is for a mere untrue statement in the prospectus, and it is not necessary that such a statement should be made with an intention to deceive the investors. Thus, the investor can claim compensation for any untrue statement in the prospectus without proving any fraud or intention to deceive. However, in Taxmann its stated, There must be an intention to defraud and that is to be proved by him.

When those who have made a misrepresentation wish to resist the claim, the onus is upon them to show that notice of the misrepresentation was given to and received by the person whose claim they are residing.

Cases: Derry vs. Peek


The directors of a tramway company issued a prospectus stating that they had the right to run tram cars with steam power instead of with horses as before. The Act incorporating the company provided that such power might be used with the sanction of the Board of Trade. But, the Board of Trade refused to give permission and the company had to be wound up. One of the shareholders sued the directors for damages for fraud. Now, the House of Lords held that the directors were not liable in fraud because they honestly believed what they said in the prospectus to be true. Lord Herschel in this case observed that Fraud is proved when it is shown that false representation has been made (a) knowingly, (b) without belief in its truth, or, (c) recklessly, carelessly whether it be false or true. Hallows vs. Fernie Here, the prospectus contained one statement which said that the company would commence operations with six crew steamships of 20,000 tons and 300 H.P. each having capacity of 2000 tons of cargo. Also, the steamers were guaranteed to steam 10 knots and calculated to perform the voyage from F to R in 25 days. But, there were no steamships in possession of the company when the prospectus was issued. And neither had it had any contract to obtain those steamships. Thus, the contention which was made was that the statements misrepresentation of fact. But, this contention was overruled. Court held that, the prospectus did not announce clearly and in unequivocal language to the public that the promoters of the company actually possess any steamships or has entered in the contract with respect to that. The Court further observed that there is a difference when we talk about words which can bear one meaning and another which is left to people to interpret. Also, the future sense must be given to words in the past or present to which it contains. Thus, in this way Court gave a very mild interpretation in this case. I firmly disagree with this case as when any statement is issued in the prospectus then any individual would infer the fact that it is true. Here, when the prospectus mentions the details of the steamships then anyone would think that the ships are in possession. Thus, Court has given a very liberal judgment to the case.

Re Reese River Silver Mining Company

In this case, the prospectus contained the statement that the property which the company had contracted consisted of 50 acres land. It also said, Containing several very valuable claims, some of which are in full operation, and make large daily returns. The statement made was completely false as no such claims were in full operation. Now, the party contented that the statement was based on the report which was received by the director, and believed the same honestly. The Court said that there was a misrepresentation of facts. Court further observed that the company had committed the mistake by stating the circumstances as facts instead of stating as information received. If the company speaks that they have got the information from the report, then its their duty not to mention as facts. The Court is completely right in judging the case as the Company shouldnt have mentioned such claims when they dont exist. Again, the Court has done a fair job by judging the case as the prospectus stated entirely about wheels, that they have been ordered and now they are in use, but the fact mentions that no such wheels have been ordered. So, its nothing but misrepresentation of facts. When we see the definition of misrepresentation, then the statement is falsely made in the prospectus and the persons should be liable for the same. 2) Damages for omission:

Lord Macnaghten has rightly stated that, the prospectus must be taken as a whole for everybody knows that half a truth is no better than a downright falsehood. A prospectus may be fraudulent where its statements are true but on omitting something, it may create a false impression. To render a prospectus fraudulent, it is not necessary that there should be a false representation in it. The suppression of material fact is also fraudulent. If an omission of a material fact is such that even if the omitted statement were included in the prospectus it would not render untrue the statement made in the prospectus, such omission will not entitle the purchaser to avoid the contract; nor will it make the persons responsible for the issue of the prospectus liable in damages. Thus a prospectus must be looked from a point of view of Constitution of a Company. So, in this regard, a company should never omit material facts which are directly relevant for investing in the company. Omission of such material facts should be handled strictly. S. 56 do not provide in clear terms that such persons are liable for omission of the particulars in the prospectus. It is immaterial whether or not the omission made in the prospectus is false or misleading. It is important to note that S. 56 does not entitle the shareholder to rescind the contract to take shares by reason merely of the omission of any of the facts required to be disclosed. But, in Shiromani Sugar Mills Case, it was held that if the omission amounts to fraud of misrepresentation, the contract may also be rescinded. A person responsible for the issue of prospectus shall not be liable if: (a) if there is no knowledge of the particular statement that such statement has not been disclosed, (b) there

was a honest mistake of fact on his part, (c) when Court considers that omission should be excused or is immaterial. Cases: Rex v. Kylsant Here, Kylsant issued a prospectus where it was stated that the company had paid dividend varying from 5 to 8% every year between 1911 to 1927, except in or 2 years where a lower rate of dividend or no dividend was paid. The prospectus thus rejected that the company was financially strong and stable. But, the facts were that the last 7 years, the company had incurred heavy losses and dividends were paid only out of the accumulated profits which had been stored up during the war period. The Court held that the prospectus was misleading not because of what is stated but because of what it concealed or omitted. The Court is completely right in judging the case as the fact that the company has incurred heavy losses from past 7 years, and that the dividends is paid form a fund is a material fact. And so, its the duty of a company to disclose such fact. Peek v. Gurney Here, in this case, a deceitful prospectus was issued by the defendants on behalf of a company. The plaintiff received a copy of it but did not take any shares originally in the company. The allotment was completed and after several months, the plaintiff bought 2000 shares on the stock exchange. His action against the directors was rejected. A purchaser of shares in the open market has no remedy against the company or the promoters though he might have bought on the faith of the representations contained in the prospectus. The Court further observed that Those only who are drawn on by the misrepresentation in the prospectus to become allottees can have remedy against the directors. The Court also held that As regards omission and concealment of material facts the Directors and other persons responsible for issue o the prospectus are liable, and the purchasers of shares are entitled to avoid their contracts for the purchase of shares in the company, if the facts concealed or omitted are not only material facts but are also of such character that if stated in the prospectus they would render false that which is included in the prospectus or would render false statement, or any part thereof, contained in the prospectus. The conditions drawn in this case are: 1. The misstatement in the prospectus must be fraudulent i.e. must be made knowingly and with the intention to deceive. In other words, there must exist the elements of fraud.

2.

The fraudulent misstatement must relate to some existing facts which are material to the contract of purchasing shares or debentures and the investor must be induced to purchase the shares of debentures in the co. The investor must have taken the shares directly from the co. A person who purchases the shares in the open market has no remedy against the co. or directors etc. even if he bought the shares on the faith of representation contained in the prospectus.

3.

Manavedan Tirumalpad (T), Rajah of Nilumbur vs. Amirchand Dass Here, in this case, a prospectus contained a statement that the Government of Cochin have agreed to encourage the company by giving a steady and continuous supply of timbers extracted from the state forests required for the purpose of the company at economical prices in order to encourage the establishment of industries for which there are natural advantages in the State. Now, in reality, there was only a conditional promise held out by the Government to give such steady supply of timber at reasonable rates that the first years transaction should be found to be mutually satisfactory. It was held that the statement made in the prospectus was false and misleading and the same did not amount to any fair representation of what was stated by the Government. The Court also held that If the directors have taken the responsibility of asserting that there was an unconditional promise given by the Cochin Government to supply timber steadily for the purposes of the company, they must bear the consequences. This case clearly shows that the company suppressed the material fact for its own benefit. The condition mentioned by the Government was not at all disclosed and with this any prudent man would believe that the agreement with the Government is unconditional. So, the Court has completely justified the case by stating that the statement made in the prospectus is misleading and not true. 3) Compensation under Section. 62:

An allottee of shares or debentures is entitled to claim compensation from directors, promoters and any other persons who authorized the issue of a prospectus, for damages sustained by reason of any who authorized the issue of prospectus, for any damages sustained by reason of any untrue statement in it. The persons liable to pay compensation are: Every person who is the director of the company at the time of issue of prospectus, or any person who has authorized himself to be named in the prospectus or has agreed to become a director, every person who is the promoter of the company, or every person who has authorized the issue of the prospectus. If a person who makes a false statement entertains a bonafide belief that the statement is true, an action of deceit cannot be maintained against him on the ground that he formed his

belief carelessly or on insufficient reason. The compensation which is given must be with reference to the loss sustained by a person and not to be seen as penalty imposed. Only such subscribers who apply for allotment of the securities on the faith of the prospectus purporting to contain an untrue statement are entitled to be compensated for any loss or damage sustained by reason of the untrue statement. The shareholder is entitled to recover the difference between what he paid for the shares and what they were worth (i.e. true value) when they were allotted to him. Cases: Kisan Mehta vs. Universal Luggage Mfg. Co. Ltd. Here, in this case, Mehta filed a suit for injunction to restrain the company from issuing a prospectus. Mehta alleged that it contained misleading statements. The suit was later dismissed. Court held that Only a person who has suffered loss or damage on the faith of the prospectus is entitled to a remedy under the section. Thus, public interest litigation shall not be allowed with this. The Court further said that If a subscriber, who purchases shares on the faith of a prospectus which allegedly contains misstatements, wants to take an action in addition to what is contemplated under section 62 or section 63, it is open to him to take an action; but that does not mean that any other person who is not interested in the company at all can come forward and say that the statements contained in the prospectus are false, and that a future investor might be duped, that he might suffer, and therefore, the company should be restrained from acting in any particular manner. Thus, the Court is right in judging the fact that any person is not entitled to file a case stating that the prospectus is misleading. The right is absolute and is given only to those people who have subscribed such shares. Clark vs. Urquhart Lord Summer held in this case that, Compensation had no technical significance. The word was selected because it represented the difference between the actual value of the shares or debentures taken and the sums paid for them on the fact of the prospectus and at the same time avoided the invidious association of damages. 4) Damages under the General Rule:

The persons responsible for the issue of false prospectus may also be held liable for the payment of damages under the general law. Thus, a person who has been induced to invest money in a company by fraudulent statement in a prospectus can recover damages for fraud under the Indian Contract Act or the Law of Trots.

Period of Limitation: There is no such Article in the Limitation Act, 1963 which specifically provides for actins against a director or a promoter of a co. in respect of a false statement made in the prospectus. The Madras High Court in one of its judgment stated that the suit alleging compensation must be filed within two years from the date of cause of action. Also, any people who claim to retire from a company on the ground that he was induced to become a member by misrepresentation in the prospectus is bound to come at the earliest possible moment after he becomes aware of the misrepresentation.

REMEDIES AGAINST THE COMPANY


1) Recession of the Contract

It is a general principle of law that if one of the parties to a contract does not disclose what he is bound to disclose to the other party, then he has full rights to rescind the contract. Where a prospectus contains certain misstatement then the shareholder has full right to rescind the contract. Thus, by avoiding such a contract, a person is able to get rid of his shares and can claim the money he paid for it. Section 75 of the Contract Act speaks that a person who lawfully rescinds a contract is entitled to compensation for any damages which he has sustained in the non-fulfillment of the contract. A suit for compensation or damages under this section is thus not based on a cause of action arising out of a contract, because at the stage of issue of prospectus there is no contract between a shareholder and anybody else. So, when the shares are allotted, then the contract is between the shareholder and the co. and with the director of the company. Recession will not be a remedy if the investor has been induced to buy shares on a material misrepresentation of law. There are certain conditions for Recession of the contract. They are: 1. It must be established that the prospectus issued by the co. or by someone on behalf of the co.

2. There must be an untrue statement in the prospectus. 3. The misrepresentation contained in the prospectus must be material to the contract of taking shares. A fact will be material if it is likely to influence the judgment of a prospective investor in deciding whether he should purchase shares in the co. or refrain from doing so. Misrepresentation must be one of fact and not merely an expression of opinion or expectation. The aggrieved party must have relied upon the prospectus while applying for shares. He must have taken the shares directly from the co. The aggrieved party must exercise the right to rescind the contract within reasonable time of becoming aware of a misstatement in the prospectus.

4. 5.

The contract is valid till its rescinded. A shareholder has only a limited time to rescind the contract. So, he must rescind it promptly on becoming aware of the fraud which is done to

him. The right of recession is not available where the allottee has subscribed for the shares before looking at the prospectus, where the prospectus itself makes it clear that such statements are mere hearsay statements and are not true otherwise, where the allottee has not relied on such statements but made a personal investigation for it, he is such a person who cant get misled merely by the statements of prospectus. The reason that a shareholder should be prompt in rescinding the contract is that the register of the shareholders is to be the creditors guarantee, showing them to whom and to what they have to trust. A shareholder knowing hat he has been induced by fraud to enter into the contract of purchase of shares, cannot lie by, let his name remain in the register and let the third party enter into the contracts with the co. on the faith of the register. Loss of right to recession: To avoid the contract must be done within a reasonable period of time. Though there is no specific time which has been allotted, but when a person gets to know about such fraud, then he must rescind the contract duly. Also, where a party who has a right to rescind the contract and even after having the knowledge of it acts which affirms the contract, then later that same person cant avoid the contract. In certain cases the right to recession is lost. They are: 1. If the proceedings for recession are not begun within a reasonable time. 2. 3. If he affirms the contract, directly or indirectly after becoming aware of the misleading nature of the prospectus. If he initiates legal action only after the commencement of the winding up proceedings of the co. the reason for this is that the creditors would have relied upon his membership also while making the deals with the co.

4. If it is proved that he had not been induced by the prospectus to make the contract. 5. The right of recession is lost on the commencement of winding up of the co. Thus, this right to recession is a better remedy against the company and on becoming aware of any such fraudulent conduct of the co. one should definitely use this rt. and should rescind the contract immediately. 2) Damages for fraud:

The allottee can claim for damages of fraud from the co. Now, such damages can be claimed only after the allottee has rescinded the contract and ceased to remain the shareholder. Thus, if he still continues to be a shareholder of that same co. even after knowing the fact that the co. is acting fraudulently, then that person has no right to ask for any further damages. Fraud occurs when any statement is made without belief in the truth or carelessly. It shall be necessary to establish that there is fraudulent misrepresentation in the prospectus. If the aggrieved person can prove it, he can claim for the all the loss which has been sustained by him as a result of such fraudulent acts or statement. The fraudulent statement must be related

to facts which were material to the contract of purchasing shares and the aggrieved party must have actually relied on such facts and must have taken the shares on the basis of such statement only. Thus, the right to claim damages is exercised against the co. as wll as against the directors or promoters of the co.

Case: Edington vs. Fitzmaurice A company issued a prospectus inviting subscriptions for debentures. The prospectus contained a statement that the objects of the issue of debentures are (a) to complete alterations in the buildings of the co., (b) to purchase horses and vans and, (c) to develop the trade of the co. However, the real object raised by debenture was to payoff the liabilities. Relying upon the statement in the prospectus, a person advanced money to the co. and purchased its debentures. The co. became insolvent, and that person filed a suit against the directors for fraud. It was held that the directors were liable for fraud. Here, the statement made was of existing fact as the director has misrepresented their state of mind and the statement made in the prospectus was material to the contract of purchasing debentures. Here, the Court is right in judging the case as the object of the debentures mentioned in the prospectus is totally contradictory to the actual purpose. The company is rightly liable for fraud.

EXPERTS LIABILITY
The provision of experts was introduced in the English Act, 1947. Section 58 of the Indian Companies Act, 1956, speaks that before an opinion of an expert is relied upon by a co. the co. must have the opinion in writing, and the manner of publication of such opinions should be different. An expert who has given the consent under Section 59 of the Companies Act, 1956, shall not by reason of having given such consent be liable as a person who has authorized the issue of the prospectus except any untrue statement made by him being an expert unless he establishes bonafide pleas which are available to him. It has been held in some English cases that if a co. issues a prospectus on the bonafide report of an expert and the report proves to be inaccurate, any material inaccuracy in the prospectus though based on the report, will be a ground for recession of the contract to take shares unless the prospectus contains a clear and unambiguous warning to the public that the co. does not guarantee the accuracy of the statements contained in the report. An expert is also liable to pay compensation under Section 62. However, he may not be entitled to pay the same is he proves that:
1.

That having given the consent in the prospectus, he withdrew the same in writing before the delivery of a copy of the prospectus to the registration; or

2.

After the delivery of prospectus for registration but before allotment he withdrew his consent in writing when he became aware about such untrue statement made, and he also gave a public notice for the same. That he was competent to make such statement, and believed on reasonable grounds that it was true.

3.

The allottee of the shares, who has been induced to take shares on the faith of the untrue statement made by an expert, is entitled to claim damages and compensation under Section 62 from the expert. The expert shall be entitled to give compensation in the same manner as director or promoter gives. The expert shall not be criminally liable for any misstatements in the prospectus.

PROMOTERS LIABILITY
Promoter has lots of meanings. It was an old name for a common informer and the technical term for the prosecutor of a suit in the ecclesiastical Courts. But, in general terms, the promoters of a co. are those who are leading in the formation or floatation of the company. The Act does not define promoter. Lord Justice Bowen in one of his case speaks that: the term promoter is not a term of law but of business usefully summarizing-up in a single word a number of business operations familiar to commercial world by which a co. is generally is brought into existence. A promoter stands in the fiduciary relationship to the company and his duties includes, drafting the prospectus, negotiating with people, getting the directors of the company, entering into agreements, hiring the professionals like company accountants etc. So, one can say that a promoter is the one who promotes the business or rather funds the business, gives a new identity as co., prepares the souls of the company i.e. memorandum and articles of association. Its the promoter who appoints the directors for the company. Thus, a promoter is the one who is the machinery of the company where the business is in his hands. A promoter may be personally liable for any breach of contract done by him before a new company is formed. But, the persons who are merely a servant or agents of the promoters or other persons working for the company cant be classified under the term promoter. Also, those people who have subscribed their share initially cant be treated as a promoter of the co. A company promoter stands in a fiduciary relationship with the company Fiduciary is a person, such as trustee, who holds a position of trust or confidence with respect to someone else and who is, therefore, obliged to act solely for that persons benefit. Thus, the position of a promoter is of trust and confidence. Thus, promoters stand in the fiduciary relationship to the future allottees of the shares. If promoters attempt to acquire any secret profits out of their dealings with the company, they are responsible to make good to the company with those profits. Also, the promoter cannot make any co-promoter liable for any of his own independent acts done by him. The duties of a promoter are:

1.

The promoter shouldnt make any secret or extra profits form the expense of the co. if any such profits accrued by any promoter are disclosed by the promoter, then that profit shall no longer be secret. Thus, a promoter cant retain any profit made out of a transaction to which co. is a party, without full disclosure. A promoter is an independent Board of Directors A promoter is an existing and intended shareholder

2. 3.

4. To act honestly for the co. by taking the due care of the co. There are certain rights of a promoter. They are: 1. 2. 3. The promoter has full right in getting the profits even when he sells off the co. even if he discloses such a fact; the promoter has full right to do so. The directors may pay a promoter certain expenses which are incurred by him at the time of formation of the co. The promoter has no right of indemnity against the co. in respect of any obligation undertaken on his behalf before its incorporation, stipulating that he shall be paid a certain sum as the preliminary expenses.

There are certain remedies available if a promoter fails to make full disclosure of a profit made by him out of the promotion. They are: 1. Where the promoter has e.g. has sold his own property to the company, the co. may rescind the contract and recover the purchase-money paid.

2. The co. may compel the promoter to account for any profit he has made. 3. The co. may sue the promoter for damages for breach for his fiduciary duty. Thus, even a promoter is liable for any such breach. He is treated the same as to the directors of the co. Thus, the promoter is not the king of the co. who can do whatever he likes if he has formed the company even he is abided by the rules of law and cant deny them. So, we can say that the promoter, director or the company cant move away from their duties and responsibilities. Even though they are at a particular position, they have to go in accordance with the law, and for any breach they shall be punished. Practical Problems:
1.

X Co. Ltd, intended to buy a rubber in Peru. Its prospectus contained extracts from an experts report giving the number of rubber trees in the estate. The report was inaccurate. Will any shareholder buying the shares of the Co. on the basis of the above representation have any remedy against the Co.? Can the persons authorising the issue of prospectus escape from their liability? A applied for 200 shares on the basis of a prospectus which contains some misstatement. The shares are allotted to him. A afterwards transfers the shares to B. Can B bring an Action for a rescission on the ground of mis-statement?

2.

3.

In a scheme of amalgamation shareholders of Company A was offered shares of Company B in lieu of shares held by them in Company A. The offer letter issued by Company B to the shareholders of Company A can be regarded as prospectus?

COMMENCEMENT OF BUSINESS
The date of incorporation of a company may not be the date of commencement of business. A private company and a public limited company not having share capital are not required to comply with any other formalities and may commence its business activities immediately after obtaining the certificate of incorporation from the concerned Registrar of Companies. A private limited company, which has converted into public limited company, is also not required to obtain certificate of commencement of business. Requirement for obtaining commencement of business certificate A public limited company having share capital cannot commence business until it has obtained the certificate to commence business (COB) from the concerned Registrar of Companies. Normally a new company will comply with the required formalities and obtain the commencement of business certificate (COB) from the Registrar as soon as possible after formation because it cannot commence any business activities or exercise its borrowing powers without it. The section 149 of the companies act provides for the requirement for getting the certificate for commencement of business. According to section 149(1) where a company having a share capital has issued a prospectus inviting the public to subscribe for its shares, the company shall not commence any business or exercise any borrowing powers, unless(a) Shares held subject to the payment of the whole amount thereof in cash have been allotted to an amount not less in the whole than the minimum subscription; (b) Every director of the company has paid to the company, on each of the shares taken or contracted to be taken by him and for which he is liable to pay in cash, a proportion equal to the proportion payable on application and allotment on the shares offered for public subscription; (c) No money is, or may become, liable to be repaid to applicants for any shares or debentures which have been offered for public subscription by reason of any failure to apply for, or to obtain, permission for the shares or debentures to be dealt in on any recognised stock exchange; and (d) There has been filed with the Registrar a duly verified declaration by [one of the directors or the secretary or, where the company has not appointed a secretary, a secretary in whole1

time practice], in the prescribed form, that clauses (a), (b) and (c) of this sub-section, have been complied with. Section 149(2) provides for the conditions where company issued statement in lieu of prospectus. According to this section where a company having a share capital has not issued a prospectus inviting the public to subscribe for its shares, the company shall not commence any business or exercise any borrowing powers, unless(a) There has been filed with the Registrar a statement in lieu of the prospectus; (b) Every director of the company has paid to the company, on each of the shares taken or contracted to be taken by him and for which he is liable to pay in cash, a proportion equal to the proportion payable on application and allotment on the shares payable in cash; and 1 (c) There has been filed with Registrar a duly verified declaration by [one of the directors or the secretary or, where the company has not appointed a secretary, a secretary in wholetime practice], in the prescribed form, that clause (b) of this sub-section has been complied with. Section 149(2A) further provides common condition under both the conditions, section states that where a company having a share capital has not issued a prospectus inviting the public to subscribe for its shares, the company shall not commence any business or exercise any borrowing powers, unless(a) There has been filed with the Registrar a statement in lieu of the prospectus; (b) Every director of the company has paid to the company, on each of the shares taken or contracted to be taken by him and for which he is liable to pay in cash, a proportion equal to the proportion payable on application and allotment on the shares payable in cash; and (c) There has been filed with Registrar a duly verified declaration by [one of the directors or the secretary or, where the company has not appointed a secretary, a secretary in wholetime practice], in the prescribed form, that clause (b) of this sub-section has been complied with. If any company commences business or exercises borrowing powers in contravention of this section, every person who is responsible for the contravention shall, without prejudice to 3 any other liability, be punishable with fine which may extend to [five thousand rupees] for every day during which the contravention continues.(sec. 149(6)) Practical Problem:
1.

X a furniture dealer, entered into a contract with the Company for furnishing the Companys office before it could obtain certificate of commencement of business. Can X recover the price of the furniture?

Question: 1. What are the requirements to get the certificate of commencement of business?

3
CAPITAL AND ISSUE OF CAPITAL
Learning objective: The object of this chapter is to understand legal aspects of the capital structure of the company and the legal issues involved in management of this capital. Factors determining capital Sources of capital Classification of capital Issue of capital Borrowing powers Management of capital Charges on asset

SOURCES AND TYPES OF CAPITAL


The capital requirement of the company is basically based on two factors i.e. financial and legal. The following are the general consideration in deciding the types of capital in the companys capital structure.

Simplicity
From the administrative point of view, it is necessary that capital structure is simple in the sense that it contains minimum of securities. Also, a simple capital structure should leave enough scope for raising funds in future. A complex capital structure makes it difficult to come to a correct estimate of capital requirements and it also creates suspicion about the companys financial position in the minds of investors.

Balance
The capital structure is well-balanced when it contains different types of securities in right proportion. Of course, the ratio between preference shares and ordinary shares depends on the nature of business, yet it is generally believed that the quantum of ordinary shares

should be more than fifty per cent of total capital, while that of preference shares should be much less than fifty per cent. For long, it has been held that the amount of owned capital (i.e. ordinary shares) should be twice as large as the amount of borrowed capital (i.e. debentures). In practice, however, the desirable ratio of owned capital to borrowed capital is different for different companies. The balance should be established in capital structure keeping in view the cost of capital and the nature of business both. When capital structure is balanced, the value of companys share is maximum and average cost of capital is the lowest.

Liquidity
To build and maintain the prestige of the company it is necessary that the company ahs enough liquid funds to pay off its debts as and when they mature. If capital structure does not provide for enough liquidity, the company will not be able to meet its obligations in time; it will face financial crisis; and sometimes it will have to be liquidated, in spite of enough assets at its command. The quantum of liquidity that is advisable for a company depends on a number of factors such as nature of business, credit policy the company etc.

Flexibility
The financial requirements of the company change with circumstances. Hence it is necessary that capital structure is flexible so that it may be adapted to changing conditions. For instance, it should be possible in times of depression when a company needs less finance to repay the debentures and redeemable preference shares. Also, there should be enough unclassified capital in the authorized capital of the company so that any expansion scheme may be easily financed. This is the reason why most of the companies fix quite a large amount of authorized capital and issue shares as and when required. For example, the authorized capital of the Indian Rayon Corporation Limited was Rs.10 crores, while its paid up capital was Rs.2 crpres. The capital structure should not be so rigid and inflexible as to become a burden on the management of the company.

Provision against contingencies


It should be possible to raise enough funds to meet unforeseen needs. For this purpose, generally, ordinary shares are issued first and provision is made for raising enough funds through debts in times of crisis. Keeping in view the long term financial needs of the company, the authorized capital should also be quite large.

Economy
The capital structure should be such tat it imposes less burden on the company and yet it allows enough scope for raising sufficient funds at an appropriate time. The burden of interest payment on debentures and that of dividend payments on cumulative preference shares is almost inescapable. Hence in a business in which revenues are unstable and fluctuating, a high level of ordinary shares is most economical. But in a business in which income is stable and regular (e.g. public utilities), a large part of capital may be obtained through the issue of debentures. Thereby, enough capital can be raised and it can be repaid when financial requirements are low. If capital is less than required, the growth of the company is impeded and if capital is more than required, its profitability is reduced.

Consistent with the companys objectives


The capital structure should be in conformity with the basic objectives of the company. For example, the amount of fixed capital should be quite less than that of short term capital in the capital structure of a company which is set up for the purpose of trading only. An industrial enterprise, on the other hand, needs more capital in the form of fixed assets.

Profitability
Profitability depends on the efficiency with which capital is used. If, according to the nature of business, a proper ratio is maintained between owned capital and borrowed capital, it can be efficiently utilized. Similarly, there should be a proper balance between fixed capital and working capital.

Solvency
Capital structure should not impair the solvency of the company. The amount of debts should be so fixed that interest can be paid easily and at right time. The inflow of cash should be taken into account while fixing the proper amount of debts. Though all the above factors are essential for building an appropriate capital structure, Yet, in practice, they all can be hardly combined. Hence the management of each company should try to evolve a capital structure that suits them best in view of the nature of their business, its size and duration, credit and goodwill in the market the stages of business cycle etc. These capital can be raised from various sources depending upon the needs of the company. For the study of company law we classify the capital into two types: 1. Owned Capital or Share capital 2. Borrowed capital which included debentures and loans.

1. Owned Capital or share capital :


Share capital denotes the amount of capital raised by the issue of shares, by a company. It is collected through the issue of shares and may remain with the company till its liquidation. Share capital is owned capital of the company, since it is the money of the shareholder and the shareholder are the owners of the company. The total share capital is divided into small parts and each part is called a share. Share is the smallest part of the total capital of a company. Features of Share Capital:

Owned capital: Share capital is owned capital of the company. It is actually the money of the shareholders and since the shareholders are the owner of the company, so share capital is the owned capital. Remains with the company: It remains with the company till its liquidation.

Dependable sources: Share capital is the most dependable source of finance for the joint stock companies. Raises creditworthiness: It raised the credit worthiness of the company. Substantial funds: It provides substantial funds to the company. Available for: Share capital is easily available for expansion and diversification of business activities. Amendment: The amount of share capital can be raised by amending the capital clause of the Memorandum of Association. No charge: Share capital does not create any charge on the assets of the company. Opportunity to participate: Share capital give its shareholders an opportunity to participate in the company's management with normal rights of shareholders. Benefit of bonus shares: It gives it shareholders the benefit of bonus shares. Benefit of limited liability: Share capital also gives its shareholders the befit of limited liability as the liability of its shareholders is limited up to the face value of each share. Meaningful participation: Share capital enables its shareholders to have a meaningful participation in the expansion of corporate sector.

The share capital of a company is further classified into two types equity and preference shares.

1. Equity Shares
Equity shares are those shares which are ordinary in the course of company's business. They are also called as ordinary shares. These share holders do not enjoy preference regarding payment of dividend and repayment of capital. Equity shareholders are paid dividend out of the profits made by a company. Higher the profits, higher will be the dividend and lower the profits, lower will be the dividend. Features of Equity Shares: (1) (3) (5) Owned capital: Equity share capital is owned capital because it is the money of the shareholders who are actually the owners of the company. Attached rights: A share gives its owner the right to receive dividend, the right to vote, the right to attend meetings, the right to inspect the books of accounts. Return on shares: Every shareholder is entitled to a return on shares which is known as dividend. Dividend depends on the profits made by a company. Higher the profits, higher will be the dividend and vice versa. Transfer of shares: Equity shares are easily transferable, that is if a person buys shares of a particular company and he does not want them, he can sell them to any one, thereby transferring the shares in the name of that person.

(6)

(7)

Benefit of right issue: When a company makes fresh issue of shares, the equity shareholders are given certain rights in the company. The company has to offer the new shares first to the equity shareholders in the proportion to their existing share holding. In case they do not take up the shares offered to them, the same can be issue to others. Thus, equity shareholders get the benefits of the right issue. Benefit of Bonus shares: Joint stock companies which make huge profits, issue bonus shares to their ordinary shareholders out of the accumulated profits. These shares are issued free of cost in proportion to the number of existing equity share holding. In case they do not take up the shares offered to them, the same can be issued to others. Thus, equity shareholders get the benefits of the right issue. Irredeemable: Equity shares are always irredeemable. This means equity capital is not returnable during the life time of a company. Capital appreciation: The nominal or par value of equity shares is fixed but the market value fluctuates. The market value mainly depends upon profitability and prosperity of the company. High rate of dividend is paid with high rate of profit, the shareholders capital is appreciated through an appreciation in the market value of shares. (i.e. higher the rate of dividend, higher the market value of the shares.)

(8)

(9) (10)

Types of Share Capital:

Authorized capital: It is the maximum amount of capital which a company can collect or raise by selling it's shares to the general public. Authorized capital is known as nominal capital or registered capital. For example: A company wants to sell 100 shares of Rs. 10/each, so the total amount collected by the company is Rs. 1000/- i.e. 100 shares x 10 each = 1000. The capital with which a company is registered is known as its authorized capital. Issued capital: It is that part of the authorized capital which is actually issued to the general public. For example: A company has issued 80 shares of Rs. 10/- each so the issued capital is Rs. 800/Unissued capital: It is that part of the authorized capital which is not being issued to the general public. That is, company has not issued 20 shares of Rs. 10/- each, so the unissued capital is Rs. 200/-. Subscribed capital: It is that part of the issued capital which is actually subscribed by the general public. That is company has issued 80 shares out of which 70 shares are being bought by the general public, so the subscribed capital is Rs. 700/-. That is 70 shares of Rs. 10/- each. Unsubscribed capital: It is that part of the issued capital which is not subscribed by the general public. That is, if the the company has issued 80 shares out of which 70 are

bought by the general public and 10 are not being bought by them, so the unsubscribed capital is 10 x Rs. 10 = Rs. 100. That is 10 shares of Rs. 10 each.

Called up capital: It is that part of the subscribed capital which is actually called up by the company. For instance, if a company has asked its shareholders to pay Rs. 5/- per share so on 70 shares, they have to pay 70 shares x Rs. 5 each = Rs. 350/-. This is the called up capital. Uncalled up capital: It is that part of the subscribed capital which is not being called up by the company. It may be called up as and when the company need funds. That is out of Rs. 10/- per share, Rs. 5/- per share is being called up by the company and Rs. 2 is being uncalled up and Rs. 3 is kept as reserve, that is yet to be called. Reserve capital: Reserve capital is that part of the uncalled capital which is reserved to be called up only at the time of winding up or liquidation of the company. It cannot be called during the life time of a company. It is to be used only for meeting extra- ordinary situation such as liquidation of the company. The purpose of reserve capital is to meet the interests of the creditors at the time of winding up of the company. Paid up capital: It is that part of the called up capital which is actually paid up by the shareholders. For example, out of 70 shares which were subscribed for 60 shareholders have paid up their call money, that is 60 x Rs. 5 = Rs. 300/- is called as the paid up capital of the company. Unpaid up capital: It is that part of the called up capital which is not being paid by the shareholders. For example: out of 70 shareholders, 60 shareholders have paid up their call money and 10 shareholders have not paid their call money, so 10 x Rs. 5 = Rs. 50/- is called as unpaid up capital. Unpaid up capital is also known as Calls in Arrears.

2. Preference Shares:
Preference shares are those shares which are given preference as regards to payment of dividend and repayment of capital. Preference shareholders are given preference over equity shareholders as in the case of winding up of the company, their capital is paid back first and then the equity shareholders are paid. Preference shareholders cannot exercise their voting rights on all the matters. They can vote only on the matters affecting their own interest. Features of Preference Shares:

Return on investment: Preference shares are given preference to get a return on investment i.e. dividend. they are paid dividend first out of the profits made by a company. Return of capital: These shareholders are paid their capital first in case of winding up of the company. Fixed dividend: Preference shares have a fixed rate of dividend and that is the reason they are called fixed income securities. Whether the company has low or high profits, they are entitled only to a fixed rate of dividend.

Non-participation in prosperity: On account of fixed dividends, these shares do not have any change to share in the prosperity of the company's business. (except in case of participating preference shares.) Non-participation in management: Preference shareholders do not participate in the management of the company's affairs.

Types of Preference Shares 1. Cumulative or Non-cumulative : A non-cumulative or simple preference shares gives right to fixed percentage dividend of profit of each year. In case no dividend thereon is declared in any year because of absence of profit, the holders of preference shares get nothing nor can they claim unpaid dividend in the subsequent year or years in respect of that year. Cumulative preference shares however give the right to the preference shareholders to demand the unpaid dividend in any year during the subsequent year or years when the profits are available for distribution . In this case dividends which are not paid in any year are accumulated and are paid out when the profits are available. 2. Redeemable and Non- Redeemable : Redeemable Preference shares are preference shares which have to be repaid by the company after the term of which for which the preference shares have been issued. Irredeemable Preference shares means preference shares need not repaid by the company except on winding up of the company. However, under the Indian Companies Act, a company cannot issue irredeemable preference shares. In fact, a company limited by shares cannot issue preference shares which are redeemable after more than 10 years from the date of issue. In other words the maximum tenure of preference shares is 10 years. If a company is unable to redeem any preference shares within the specified period, it may, with consent of the Company Law Board, issue further redeemable preference shares equal to redeem the old preference shares including dividend thereon. A company can issue the preference shares which from the very beginning are redeemable on a fixed date or after certain period of time not exceeding 10 years provided it comprises of following conditions :1. It must be authorised by the articles of association to make such an issue. 2. The shares will be only redeemable if they are fully paid up. 3. The shares may be redeemed out of profits of the company which otherwise would be available for dividends or out of proceeds of new issue of shares made for the purpose of redeem shares. If there is premium payable on redemption it must have provided out of profits or out of shares premium account before the shares are redeemed.

4.

5.

When shares are redeemed out of profits a sum equal to nominal amount of shares redeemed is to be transferred out of profits to the capital redemption reserve account. This amount should then be utilised for the purpose of redemption of redeemable preference shares. This reserve can be used to issue of fully paid bonus shares to the members of the company.

3. Participating Preference Share or non-participating preference shares : Participating Preference shares are entitled to a preferential dividend at a fixed rate with the right to participate further in the profits either along with or after payment of certain rate of dividend on equity shares. A non-participating share is one which does not such right to participate in the profits of the company after the dividend and capital have been paid to the preference shareholders.

Borrowed Capital:
Borrowed capital is opposite to the owned capital. Although borrowed capital may also be taken from public it does not create ownership over the company, on the other hand people contributing the borrowed capital are the creditor of the company. Thus borrowed capital can be described as that part of capital which are collected with intention to repay over a specified period of tiem.

Features:
The following are the feature of the borrowed capital. 1. Creditors fund: The borrowed capital of a company is the creditors fund of the company. The borrowed capital does affect the ownership of the company 2. Repayment Borrowed capital has to be repaid within a stipulated period. A company cannot keep the borrowed capital with it forever. However a company can make the fresh borrowing anytime after the repayment of the original fund. 3. Fixed Charge Borrowed capital carries a fixed charge with it. Which mean a company has to pay a fixed amount of return in the form of interest over the borrowed capital, irrespective of the level of profit made by the company. 4. Non Participative: Borrowed capital is creditors fund and hence the owner of the borrowed capital cannot take part in the management of the company. 5. Not suitable for long-term: Since the borrowed fund has to be repayed and further it carries a fixed charge over it, it is not advisable the for the company to use the borrowed fund to finance its long-term or risky investments.

Debentures:
The word debenture has been derived from a Latin word debere which means to borrow. Debenture is a written instrument acknowledging a debt under the common seal of the company. It contains a contract for repayment of principal after a specified period or at intervals or at the option of the company and for payment of interest at a fixed rate payable usually either half-yearly or yearly on fixed dates. According, to section 2(12) of The Companies Act,1956 Debenture includes Debenture Stock, Bonds and any other securities of a company whether constituting a charge on the assets of the company or not. Also there are multiple types of debentures a company can issue. A company may issue different types of debentures which can be classified as under:

From the Point of view of Security

Secured Debentures: Secured debentures refer to those debentures where a charge is created on the assets of the company for the purpose of payment in case of default. The charge may be fixed or floating. A fixed charge is created on a specific asset whereas a floating charge is on the general assets of the company. The fixed charge is created against those assets which are held by a company for use in operations not meant for sale whereas floating charge involves all assets excluding those assigned to the secured creditors. Unsecured Debentures: Unsecured debentures do not have a specific a charge on the assets of the company. However, a floating charge may be created on these debentures by default. Normally, these kinds of debentures are not issued.

From the Point of view of Tenure

Redeemable Debentures: Redeemable debentures are those which are payable on the expiry of the specific period either in lump sum or in Instalments during the life time of the company. Debentures can be redeemed either at par or at premium. Irredeemable Debentures: Irredeemable debentures are also known as Perpetual Debentures because the company does not given any undertaking for the repayment of money borrowed by issuing such debentures. These debentures are repayable on the on winding-up of a company or on the expiry of a long period.

From the Point of view of Convertibility

Convertible Debentures: Debentures which are convertible into equity shares or in any other security either at the option of the company or the debenture holders are called convertible debentures. These debentures are either fully convertible or partly convertible.

Non-Convertible Debentures: The debentures which cannot be converted into shares or in any other securities are called nonconvertible debentures. Most debentures issued by companies fell in this category.

From Coupon Rate Point of view

Specific Coupon Rate Debentures: These debentures are issued with a specified rate of interest, which is called the coupon rate. The specified rate may either be fixed or floating. The floating interest rate is usually tagged with the bank rate. Zero Coupon Rate Debentures: These debentures do not carry a specific rate of interest. In order to compensate the investors, such debentures are issued at substantial discount and the difference between the nominal value and the issue price is treated as the amount of interest related to the duration of the debentures.

From the view Point of Registration

Registered Debentures: Registered debentures are those debentures in respect of which all details including names, addresses and particulars of holding of the debenture holders are entered in a register kept by the company. Such debentures can be transferred only by executing a regular transfer deed. Bearer Debentures: Bearer debentures are the debentures which can be transferred by way of delivery and the company does not keep any record of the debenture holders. Interest on debentures is paid to a person who produces the interest coupon attached to such debentures.

Shares vs Debentures

Ownership: A shareholder is an owner of the company whereas a debenture holder is only a loan creditor. A share is a part of the owned capital whereas a debenture is a part of borrowed capital. Return: The return on shares is known as dividend while the return on debentures is called interest. The rate of return on shares may vary from year to year depending upon the profits of the company but the rate of interest on debentures is pre-fixed. The payment of dividend is an appropriation out profits, whereas the payment of interest is a charge on profits and is to be paid even if there is no profit. Repayment: Normally, the amount of shares is not returned during the life of the company, while the debentures are issued for a specified period and the amount of debentures is returned after that period. However, an amendment in 1998 to The Companies Act, 1956 has permitted the companies to buy back its own shares from the market, particularly, when the price of its share in the market is lower than the book value. Voting Rights: Shareholders enjoy voting rights whereas debentureholders do not normally enjoy any voting right. Issue on Discount: Both shares and debentures can be issued at a discount. However, shares can be issued at discount in accordance with the provisions of Section 79 of The

Companies Act, 1956 which stipulates that the rate of discount must not exceed 10% of the face value.

Security : Shares are not secured by any charge whereas the debentures are generally secured and carry a fixed or floating charge over the assets of the company. Convertibility: Shares cannot be converted into debentures whereas debentures can be converted into shares if the terms of issue so provide, and in that case these are known as convertible debentures.

Fixed Deposits:
Corporate FD is a debt instrument issued by companies wanting to raise money. This instrument is similar to that of bank FDs- money will be parked for a fixed duration at a predetermined rate of interest. The difference lies in the risk profile and hence the return.
Particulars Corporate FDs They are unsecured instruments with no backing of a physical asset. This means, in case the company were to be in financial trouble, the liability of the deposit holders will be settled only after meeting the obligation of all the secured creditors. Hence, there is a risk of losing money in case the corporate entity defaults. Higher the risk, higher the return. Therefore, in order to compensate the investor for additional risk taken, corporates will offer higher rate of interest. This rate will differ from corporate to corporate depending on their credit rating and financial condition. Lower credit rating means the instrument has high risk and hence will have higher return. Rate of interest for 1-3 year tenure lies between 8% and 12% depending on which company is issuing it. Bank FDs Bank FDs up to Rs 1 lakh per bank branch are secured by Deposit Insurance and Credit Guarantee Corporation. So in case the bank is unable to make the payment, you will be compensated up to a limit of Rs. 1 lakh. . This makes it a relatively safe instrument

Risk

Return

On account of the fact that these are safe instruments, the rate of interest offered is lower as compared to that of Corporate FDs.

Current Rate of Interest

The rate offered for a 1-3 year tenure is between 6% and 7.5%

Loans:
Companies also raise capital from availing loans various financial institutions. These loans can be for short term as well as long term. It the most convenient form of raising capital mostly due to simple legal procedure involved in getting such capital.

In the following lecture we will see the legal procedure under the company law regarding the various sources capital raised by the company. Questions:
1. 2. 3.

What are the types of Preference shares? Distinguish between preference shares and equity shares. What are the types of debentures and distinguish between shares and debentures.

ISSUE OF SHARES/SHARE CAPITAL


Equity share capital is the primary source of finance for a joint stock company. A company cannot start its business without having an equity capital. The issue of capital of the company governed by the following instruments:

1. Memorandum of association:
The memorandum of association provides the maximum amount of the share capital that can be issued by a company. The authorised capital of the company is the maximum amount of capital that a company can raise during its life time. In case a company requires issuing capital more than the authorised capital it can do so by amending the memorandum of association.

2. Articles of association:
The articles of association prescribe the rules regarding the issue of shares by company. The articles provide the process through which a company can issue its shares also to whom it can be issued. In case of Private limited company, the articles specifically prohibit the issue of shares to the public at large. In such cases the share has to be issued by way of private placements only.

3. The company law:


The issue of shares involves the interaction of company to the person outside the company and hence to protect the interest of the public at large the company law provides various rules for the issue of the shares, especially in case of Public Limited Company. The following procedure is adopted by the company to collect money from the public by issuing of shares:

Step-1 Issue of prospectus: When a Public company intends to raise capital by issuing its shares to the public, it invites the public to make an offer to buy its shares through a document called Prospectus. According to Section 60 (1), a copy of prospectus is required to be delivered to the Registrar for registration on or before the date of publication thereof. It contains the brief information about the company, its past record and of the project for which company is issuing share. It also includes the opening date and the closing date of

the issue, amount payable with application, at the time of allotment and on calls, name of the bank in which the application money will be deposited, minimum number of shares for which application will be accepted, etc. Step-2 To receive application: After reading the prospectus if the public is satisfied then they can apply to the company for purchase of its shares on a printed prescribed form. Each application form along with application money must be deposited by the public in a schedule bank and get a receipt for the same. The company cannot withdraw this money from the bank till the procedure of allotment has been completed (in case of first allotment, this amount cannot be withdrawn until the certificate to commence business is obtained and the amount of minimum subscription has been received). The amount payable on application for share shall not be less than 5% of the nominal amount of share. Step-3 Allotments of shares: Allotments of shares means acceptance by the company of the offer made by the applicants to take up the shares applied for. The information of allotment is given to the shareholders by a letter known as Allotment Letter, informing the amount to be called at the time of allotment and the date fixed for payment of such money. It is on allotment that share come into existence. Thus, the application money on the share after allotment becomes a part of share capital. Decision to allot the share is taken by the Board of Directors in consultation with the stock exchange. After the closure of the subscription list, the bank sends all applications to the company. On receipt of applications, each application is carefully scrutinised to ascertain that the application form is properly filled up and signed and the money is deposited with the bank. Step-4 To make calls on shares: The remaining amount left after application and allotment money due from shareholders may be demanded in one or more parts which are termed as First Call and Second Call and so on. A word Final word is added to the last call. The amount of call must not exceed 25% of the nominal value of the shares and at least 1 month have elapsed since the date which was fixed for the payment of the last preceding call, for which at least 14 days notice specifying the time and place must be given.

Modes of issue of shares:


A company can issue shares in two ways: 1. For cash. 2. For consideration other than cash.

Issue of shares for cash: When the shares are issued by the company in consideration for cash such issue of shares is known as issue of share for cash. In such a case shares can be issued at par or at a premium or at a discount. Such issue price may be payable either in lump sum along with application or in instalments at different stages (e.g. partly on application, partly on allotment, partly on call). Issue of shares at par: Shares are said to be issued at par when they are issued at a price equal to the face value. For example, if a share of Rs. 10 is issued at Rs. 10, it is said that the share has been issued at par. Issue of shares at premium: When shares are issued at an amount more than the face value of share, they are said to be issued at premium. For example, if a share of Rs. 10 is issued at Rs. 15; such a condition of issue is known as issue of shares at premium. The difference between the issue price and the face value [i.e. Rs. 5 (Rs.15 Rs.10)] of the shares is called premium. It is a capital profit for the company and will show credit balance; hence it will be shown in the liability side of the Balance Sheet under the heading Reserves and Surplus in a separate account called Security Premium Account. Shares of those companies can be issued at premium which offer attractive rate of dividend on their existing shares, having a good profit track for last few years and whose shares are in demand. The amount of premium depends upon the profitability and demand of shares of such company. Note: The Company may collect the amount of security premium in lump sum or in instalments. Premium on shares may be collected by the company either with application money or with the allotment money or even with one of the calls. In absence of any information, the amount of the premium is to be recorded with allotment. Issue of shares at discount: Shares are said to be issued at a discount when they are issued at a price lower than the face value. For example if a share of Rs. 10 is issued at Rs. 9, it is said that the share has been issued at discount. The excess of the face value over the issue price [i.e. Re.1 (Rs. 10 Rs. 9)] is called as the amount of discount. Share discount account showing a debit balance denotes a loss to the company which is in the nature of capital loss. Therefore, it is desirable, but not compulsory, to write it off against any Capital Profit available or Profit and Loss Account as soon as possible, and the unwritten off part of it is shown in the asset side of the Balance Sheet under the heading of Miscellaneous Expenditure in a separate account called Discount on issue of Shares Account. Conditions for issue of shares at discount: For issue of shares a discount the company has to satisfy the following conditions given in section 79 of the Companies Act 1956: (i) At least one year must have elapsed since the company became entitled to commence business. It means that a new company cannot issue shares at a discount at the very beginning.

(ii) The company has already issued such types of shares.

(iii) An ordinary resolution to issue the shares at a discount has been passed by the company in the General Meeting of shareholders and sanction of the Company Law Tribunal has been obtained. (iv) The resolution must specify the maximum rate of discount at which the shares are to be issued but the rate of discount must not exceed 10% of the face value of the shares. For more than this limit, sanction of the Company Law Tribunal is necessary. (v) The issue must be made within two months from the date of receiving the sanction of the Company Law Tribunal or within such extended time as the Company Law Tribunal may allow.

Forfeiture of shares:
When any company allots share to the applicants, it is done on the basis of a legal contract between the company and the applicant, which makes it binding upon the shareholders to pay the amount of allotment and calls whenever they are due. Now if any shareholder fails to pay the allotment and or call money due to him, the shareholder violates the contract and the company is entitled to take its share back, which is known as forfeiture of shares. The company can forfeit such shares if authorised by the Articles of Association. Forfeiture of share can be done according to the rules laid sown in the Articles and if no rules are given in Articles, the provisions of Table A, regarding forfeiture will apply. Forfeiture of shares means cancellation of allotment to defaulting shareholders and to treat the amount already received on such shares is not returnable to him it is forfeited.

Procedure for forfeited shares:


The usual procedure is that the defaulting shareholder must be given a minimum 14 days notice requiring him to pay the amount due on his shares along with interest on it stating that if he fails to pay the amount and the interest on it, the shares will be forfeited. Inspite of this notice, the shareholder does not pay the unpaid amount. The directors after passing a resolution will forfeit the shares and information will be given to the defaulting shareholder about the forfeiture his shares. Effect of forfeiture of shares: 1. Termination of membership: The membership of the defaulting will be terminated and they lose all the rights and interest on those shares i.e. ceases to be the member / shareholder / owner of the company and his name will be removed from the Register of Members Seizure of money paid: The amount already paid on the forfeited shares by the defaulting shareholders will be seized by the company and in no case will be refunded back to the shareholder. Non payment of dividend: When shares are forfeited the shareholder remains no longer the member of the company therefore he loses the right to receive future dividend.

2.

3.

4.

Reduction of share capital: Forfeiture of shares result in the reduction of share capital to the extent of amount called up on such shares.

Surrender of shares:
When a shareholder feels that he cannot pay further calls; he may himself surrender the shares to the company. These shares are then cancelled. Surrender of shares is a voluntary return of shares for the purposes of cancellation. The directors can accept the surrender of shares only when the Articles of Association authorise them to do so. Surrender is lawful only in two cases viz. (a) where it is done as a short cut to forfeiture to avoid the formalities for a valid forfeiture and (b) where shares are surrendered in exchange for new shares of the same nominal value. A surrender will be void if it amounts to purchase of the shares by the company or if it is accepted for the purpose of relieving a member from his liabilities. Entries are passed just like forfeiture of shares. Thus, surrender of shares is at the instance of shareholder whereas forfeiture of shares at the instance of company. Re-issue of Forfeited of shares: Shares forfeited becomes the property of the company and the directors of a company have an authority to re-issue the shares once forfeited by them in accordance with the provisions contained in Articles of Association. Table A provides that A forfeited shares may be sold or otherwise disposed off on such terms and in such manner as the Board thinks fit. They can re-issue the forfeited shares at par, at premium or at discount. However, if the shares are re-issued at discount, the amount of the discount does not exceed the amount paid on such shares by the original shareholder but in case of shares originally issued at a discount, the maximum permissible discount will be amount paid on such shares by the original shareholder plus the amount of original discount. Over subscription of issue: When the application received from the public are more than the shares issued by the company, this situation is called as over subscription of issue. The Board of Directors cannot allot shares more than that offered to the public, in such a condition the Directors of the company make the allotment of shares on the basis of reasonable criteria. Any allotment to be made by the company in case of over subscription should be according to the scheme, which is finalized with the consultation of Security and Exchange Board of India (S.E.B.I.) The journal entry for application money will be passed for all the shares applied for, but while transferring the application money to share capital account, only the application money on shares issued will be considered. Under subscription of issue: Shares are said to be under-subscribed when the number of shares applied for is less than the number of shares offered, but at least minimum subscription (According to the

guidelines issued by S.E.B.I. minimum subscription means If the company does not receive a minimum subscription of 90% of the issued amount within 60 days from the date of closure of the issue, the company shall forthwith refund the entire subscription amount) is received. For example, in case has offered 5,000 shares to public but the public applied for 4,500 shares only, it is called a case of under-subscription. Journal entries are passed on the basis of shares applied for. Under writing: Underwriting is process in the Public issue of share. If the company is not sure of the success of the issue they first underwrite the shares with the financial institution/mutual funds. If the share is subscribed fully the underwriters get only the commission in % In case of the issue is not fully subscribed then the underwriter has to buy the shares. Under the present rule of 90% of the issue is not subscribed then they have to refund the amount to applicants. To avoid this some issuers prefer for underwritings. Underwriting is the nature of an insurance against the adverse situation in the timing of the public issue. It can be defined as bearing the risk of not being able to sell a security at the established price by virtue of purchasing the security for resale to the public; also known as firm commitment underwriting. The person who assures is called as Underwriter; and the consideration for the assurance is known as Underwriting Commission. The Underwriters give guarantee for the public subscription and in turn they receive the commission. In public issues, after the merchant bankers, the next position goes to the Underwriters, where they play a very major role. The SEBI has defined the Underwriting as an agreement with or without conditions to the subscribe to the securities of a body corporate where the existing shareholders of such body corporate or the public do not subscribe to securities offered to them. The Underwriter has been defined as a person who engages in the business of Underwriting of an issue of securities of a body corporate. The Underwriting is mandatory for the public issue. The stock exchange regulations clearly specify that no stock broker is allowed to underwrite more than 5 per cent of the public issue and the concerned stock exchange should approve the appointment of broker underwriters. Usually the bankers can underwrite upto 10 per cent of the public issue. The Underwriting Commission cannot be paid on the amounts contributed by promoters, directors, employees and business associates. It is an important element of the primary market. It is appointed by the issuing company in consultation with the merchant bankers. The name of the Underwriter and his obligations should be disclosed in the prospectus. There are a number of financial institutions, commercial banks, insurance companies as well as a number of private companies which provide underwriting. An Underwriter issue is the safe way of marketing securities and the investors are influenced by the prestige of the underwriters. The issuing companies may appoint one or more of the following parties: (A) Financial Institutions, (B) Brokers, (C) Bankers, (D) Investment Companies, and (E) Trusts. Objectives Of The Underwriting The objectives of the Underwriting are presented below:

It guarantees the sale of securities at a given price. It facilitates the provision of money during the financial crisis of the company. The Underwriter helps the new company in its reorganization. The following are the salient features of an underwriting agreement: The Underwriter may not be able to sell the issues in some situations. The unsold securities are distributed among the underwriters in the agreed proportion. The offering price must be maintained for the successful distribution of the securities. The company makes a delivery of the securities to the manager and receives the payment on the closing date At the termination of the underwriting, the manager must make the final accounting for each underwriter. He should also remit the commissions and accounts for the expenditure incurred. Underwriting is insurance for the new securities of the public. It is one of the methods of marketing securities. The other methods are: Prospectus method, where the capital is raised by this method is very prevalent in India. The distribution expenses may be substantially saved. Offer for sale, where the sales are sold largely to the brokers/issue houses. The issue house/brokers again sell the shares to the public at a fixed price. This method saves the company the cost and the trouble of selling the shares to the public. Here a Third party takes over the responsibility. Private placement, where the funds are raised in the primary market by selling the security issue to one investor or a small group of investors without resorting to underwriting. The cost of the issue is minimal. It is the most effective way of procuring the long term funds. There is no need to follow the statutory formalities. The offer is made to select a group of known persons. Kinds Of Underwriting: The following are the various kinds of underwriting agreements: The Purchase Contract Agreement between Underwriters and Representatives The selling agreement The Purchase Contract: Here the sale of shares is made to the underwriters at an accepted level of proportion. There will be an agreement among several underwriters to purchase the securities from the company. Agreement between Underwriters and Representatives: This is an agreement between the Underwriters and the Representatives or Managers. The agreement includes all the aspects of the issue of securities:

1. To fix the time of offering; 2. To reserve a proportion of securities for the selected dealers and institutions; 3. Place, date and delivery of securities; 4. Provisions regarding the termination and settlement of the underwriters account; 5. Underwriters responsibility. The selling agreement: In this method, the issuer company will make an agreement with the dealers to subscribe the new securities. The agreement includes the offering price, selling concession and provisions for delivery and payment.

Underwriters
An Underwriter is a financial intermediary in the primary market. The Underwriter has been defined as a person who engages in the business of Underwriting of an issue of securities of a body corporate[5]. The Underwriters give guarantee for the public subscription and in turn they receive the commission. Classification Of Underwriters Underwriters in India may be classified into: Institutional Underwriters Non-Institutional Underwriters Institutional Underwriters: The following are the Institutional Underwriters: Development Banks Commercial Banks Insurance Companies State Finance Corporations Unit Trust of India The Development Banks are also known as Industrial Banks. They have got long term deposits and are in a position to enter into long term investments. The Industrial banks help the industries by underwriting their shares and debentures. When an Industrial Unit approaches for underwriting the shares and for direct financial aid, the industrial banks investigate the prospects of the industry, the soundness of the financial requirements, the feasibilities and the utilities of the schemes. If the shares and debentures are not fully subscribed or the minimum subscription is not taken up by the public within a specified period, the Development Banks come to the rescue and take up the residual amount of shares and debentures. The Underwriting facilitates the direct financial aids to the new industrial set up. Some of the

Development banks are Industrial Finance Corporation of India (IFCI), Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India (ICICI) among others. The Commercial Banks, also known as Public banks, perform the routine banking. Lending and underwriting are their main objectives. A few of them have been rendering services as syndicators of loans and managers to the issue. The Commercial Banks normally act as passive agents by supplying the forms only on request rather than on their own initiative and earn brokerage. The Insurance Companies are basically investment institution and not development institutions. Life Insurance Corporation (LIC) and General Insurance Corporation (GIC) are the premier institutions in the country which are involved in the insurance sector. These two conventional investment institutions supply funds mainly to provide the liquidity to the investments for developing the corporate sector. The objectives of these corporations are direct lending to industry, subscription to shares and bonds to special industrial financial institution, and purchase of securities of the Joint stock companies from the capital market. The Government corporations also are involved in underwriting business. The State Financial Corporations are also involved in underwriting business for stimulating the capital market. The Unit Trust of India is the other conventional investment institution which enjoys superiority as an organizational device because of some activities. It is involved in continuous sale of units, redemption of units at Net Asset Value (NAV), convenience to the small investors of small amount. Non-Institutional Underwriters: There are two types of non-institutional underwriters in India: Stock brokers Individuals: The Stock brokers act as intermediaries in the purchase and sale of securities in the primary and secondary markets. These persons have a network of brokers, working under them, who spread throughout the length and breadth of the country. They are known as sub-brokers. These people spread message and give publicity about various issues in the offering. They rapidly supply application forms or even go to the extent of collecting money from the investors. They play a very crucial role in the area of underwriting. The brokers can influence their clients by persuasion. The Individuals/Investment Companies obtain funds from a large number of investors by selling the shares. The pooled funds are placed before the experts to deploy the purchase of financial assets. The benefits derived from the capital market will surpass that of the shareholders. There are two types of investment companies namely: (a) Fixed Investment Trusts, and (b) Management Investment Trusts.

Registration
Underwriters are appointed by the issuing companies after consulting the merchant bankers. To act as an Underwriter, a certificate of registration must be obtained from the SEBI. The SEBI has the full authority to grant the certificate of registration. No person should act as an

underwriter unless he holds a certificate granted by the SEBI. The stock broker or the merchant banker should hold a valid certificate or registration u/s 12 of the Act. According to SEBI (UNDERWRITERS) RULES AND REGULATIONS, 1993, section 30, the prospecting person should apply for the grant of the certificate in a particular format (FORM A as per regulation). The board takes into account all the matters that are relevant to underwriting and particularly regarding the below facilities before granting the certificate: The applicant has the necessary infrastructure. The applicant should have the experience otherwise he should appoint two experienced members. The underwriter should satisfy the capital adequacy requirement of net worth of Rs 20.00 Lakhs The purpose of net worth means, the applicant might be a proprietary concern or a firm or an association of persons or anybody of individuals, the value of capital plus free reserves of business. In the case of a body corporate, the should be disclosed in the looks of account applicant is eligible, then it sends intimation to of certificate; and thus it grants the certificate fee. value of the paid up capital plus free reserves of the applicant. If the SEBI believes that the the applicant that he/she is eligible for the grant in FORM B after the payment of the prescribed

Fee
Underwriters had to pay Rs. 5 lakhs as registration fee and Rs. 2 lakhs as renewal fee every three years from the fourth year from the date of initial registration. Failure to pay renewal fee leads to cancellation of certificate of registration.

General Obligations And Responsibilities


Code of Conduct:
Every underwriter has at all times to abide by the code of conduct; he has to maintain a high standard of integrity, dignity and fairness in all his dealings. He must not make any written or oral statement to misrepresent (a) the services that he is capable of performing for the issuer or has rendered to other issues or (b) his underwriting commitment.

Agreements with clients:


Every underwriter has to enter into an agreement with the issuing company. The agreement, among others, provides for the period during which the agreement is in force, the amount of underwriting obligations, the period within which the underwriter has to subscribe to

the issue after being intimated by/on behalf of the issuer, the amount of commission/brokerage, and details of arrangements, if any, made by the underwriter for fulfilling the underwriting obligations.

General responsibilities:
An underwriter cannot derive any direct or indirect benefit from underwriting the issue other than by the underwriting commission. The maximum obligation under all underwriting agreements of an underwriter cannot exceed twenty times his net worth. Underwriters have to subscribe for securities under the agreement within 45 days of the receipt of intimation from the issuers. Every Underwriter should maintain the following accounts, namely: - If the Underwriter belongs to a body corporate- A copy of the balance sheet, profit and loss account as specified in the Sections 211 and 212 of the Companies Act, 1956; - A copy of the auditors report referred in Section 227 of the Companies Act, 1956. - If the Underwriter belongs to a body corporate- The records in respect of all the sums of money received and expended by them; and the matters in respect of the receipt and expenditure - Their assets and liabilities Commission Of Underwriters: The underwriting commission is paid only in accordance with the Section 76 of the Companies Act, 1956. The statutory regulations and other obligations regarding the commission are: The underwriting commission should be paid only with the acceptance of the article of The underwriting commission should be paid in accordance with the rules and regulations as prescribed by the Government. In case of shares, the amount or rate of commission which is not offered to the public should be disclosed in the statement in lieu of prospectus. The number of underwriters and their proposition should be indicated in the statement. An underwriting agreement copy should be submitted to the Registrar of Companies at the time of delivery of the prospectus. Agreement Of Underwriting: Depending on the type of commitment required by the issuing company, several kinds of underwriting agreements are formed, each with its own level of risk: Firm Commitment: Firm commitment is the most commonly used type of underwriting contract. The underwriter agrees to buy securities from the issuing corporation and pay the proceeds to the company. Any losses that occur due to unsold shares are prorated

amongst the participating participation.

underwriting

firms according

to their proportional

Best Efforts: Best efforts underwriting allows the firm (or underwriting syndicate) to act as agent for the issuing corporation and limits the responsibility of that firm to the shares it is able to sell. All unsold shares are absorbed by the issuer. All or None: All or none underwriting allows the issuing corporation to contract for the sale of all shares. If any shares remain at the end of the underwriting process, the underwriting is cancelled. Underwriters cannot deceive investors by stating that all of the securities in the underwriting have been sold if it is not true. Standby: Stand by underwriting allows an underwriting firm (or syndicate) to wait in the wings in an additional offering for any unused pre-emptive rights that are not executed by the companys current shareholders. The underwriter will purchase the unused rights, exercise them and sell the shares. A sample underwriting agreement is provided in annexure 1 of this chapter

Private placement of shares:


According to Section 81 (1A) of the Companies Act, 1956 private placement of shares implies issue and allotment of shares to a selected group of persons such U.T.I., L.I.C. etc. in other words; an issue which is not a public issue but offered to a select group of persons is called Private Placement of shares. Preferential allotment: A preferential allotment is one that is made at a pre-determined price to the preidentified people who wish to take a strategic stake in the company such as promoters, venture capitalists, financial institutions, buyers of companies products ore its suppliers. In other such a case, the allottees will not sell their securities in the open market for a minimum period of three years from the date of allotment. This period is known as the lock-in-period. The preferential allotment can take place only if three-fourths of the shareholders agree to the issue on preferential basis. S.E.B.I. has prescribed that the minimum price of such an issue has to be an average of highs and lows of the 26 week preceding the date on which the board resolves to make the preferential allotment. Employee stock option plan: In order to retain high calibre employees or to give them a sense of belonging, companies may offer their equity shares to be purchased at their will. Such scheme is called Employee stock option plan (ESOP). Following are the characteristics of this scheme: 1) ESOP implies the right, but not an obligation. 2) The employee has a right to exercise the option of purchase of shares within the vesting period, i.e., the time period during which the scheme remains in operation.

3) Any share issued under the scheme of ESOP shall be locked-in for a minimum period of one year from the date of allotment.

Buy-back of shares:
The term buy-back of share implies the act of purchasing its own shares by a company either from free reserves, securities premium or proceeds of any shares or securities. According to Section 77A of the Companies Act 1956, a company can buy its own shares either from the: a) Existing equity shareholders on a proportionate basis. b) Open market c) Odd lot shareholders d) Employees of the company pursuant to a scheme of stock option or sweat equity.

Right shares:
Under Section 81 of the Companies Act, the existing shareholders have a right to subscribe, in their existing proportion, to the fresh issue of capital or to reject the offer, or sell their rights. The existing shareholders can authorize the company by passing a special resolution to offer such shares to the public.

Sweat Equity Shares:


Issue of sweat equity shares is governed by the provisions of S. 79A of the Companies Act. Explanation II to the said Section defines the expression sweat equity shares to mean equity shares issued by the company to employees or directors at a discount or for consideration other than cash for providing the know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called. It is, therefore, necessary for the issue of sweat equity shares that the concerned employee either provides the know-how, intellectual property rights or other value additions to the company. In terms of the said Section, a company may issue sweat equity shares of a class of shares already issued, if the following conditions are satisfied: (a) such issue is authorised by a special resolution of the company in the general meeting; (b) such resolution specifies the number of shares, current market price, consideration, if any, and the class or classes of the directors or employees to whom such shares are to be issued; (c) such issue is after expiry of one year from the date on which the company was entitled to commence business; and (d) in the case of an unlisted company, such shares are issued in accordance with the prescribed guidelines.

Practical problems:
ABC Company Limited at a general meeting of members of the Company pass an ordinary resolution to buy-back 30% of its Equity Share capital. The articles of the Company empower the Company for buy-back of shares. The Company further decide the payment for buy-back

to be made out of the proceeds of the Companys earlier issue of equity shares. Explaining the provisions of the Companies Act, 1956, and stating the sources through which the buyback of Companies own shares be executed. Examine. a. Whether Companys proposal is in order? b. Would your answer be still the same in case the Company instead of 30% decide to buyback only 20% of its Equity Share Capitals? Questions: 1. What are the needs of underwriting agreement? 2. What is sweat equity shares? When a company can issue sweat equity shares? 3. State the types of underwriting agreement. 4. Under what circumstances a company can forfeiture its shares? What are the effects of forfeiture?

BORROWING POWER OF THE COMPANY


While a company can finance its activities by way of issuing share capital, it is for the long term operations of the company. However the procedures of issuing shares is difficult and further it is not suitable for short term needs. The company therefore needs to borrow funds from various sources. The company law permits the directors of a company to borrow capital for its operation at the same time the same puts several restriction on the borrowings of the company. The restriction on borrowing of the company is as follows:

A public company having a share capital cannot exercise borrowing power unless certificate of commencement of business is obtained by it. (Sec. 149 (1)). Sec 293(1)(d) Prohibits the board of directors from borrowing a sum which exceeds the aggregate of the paid-up capital of the company and its free reserves unless they have obtained the sanction of the company in a general meeting and Limitation as contained in the memorandum or the articles.

Ultra vires borrowing: A borrowing beyond the power of the company (i.e. beyond the objects clause of the memorandum of the company) is called ultra vires borrowing. In England, S. 9(11) of the European Communities Act, 1972 provides, even such a borrowing can be enforced by a third party against the company if he has acted in good faith and the borrowing has been decide on by the directors of the company.

In India, there is no specific legislation like the European Communities Act, 1972. Consequently the ultra vires borrowing is void and cannot be ratified by the company and the lender is not entitled to sue the company for return of the loan. However, the courts have developed certain principles in the interest of justice to protect such lenders. Thus, even in a case of ultra vires borrowing, the lender may be allowed by the courts the following reliefs: (1) Injunction --- if the money lent to the company has not been spent the lender can get the injunction to prevent the company from parting with it. (2) Tracing--- the lender can recover his money so long as it is found in the hands of the company in its original form. Where his money is applied in purchasing certain property, he can claim the property so long as it remains in the actual possession of the company. Where the lenders money gets mixed up with the companys money in such a way that both cannot be separated from each other, the lender can claim pari-passu distribution of the assets of the company with the shareholder in the event of the winding up of the company, i.e. the mixed fund should be appointed between the shareholders and the creditors in proportion to the amount paid by them respectively. (3) Subrogation---if the borrowed money is applied in paying off lawful debts of the company, the lender can claim a right f subrogation and consequently, he will stand in the shoes of the creditor who has paid off with his money and can sue the company to the extent the money advanced by him has been so applied but this subrogation does not give the lender the same priority that the original creditor may have or had over the other creditors of the company. Borrowing Intra vires: Any borrowing which is intra-vires the company but beyond the authority of the directors is ultravires the director. If such borrowing is ratified the company becomes liable to repay the money. Where such borrowing is not ratified by the company doctrine of indoor management applies. Issue of Debentures: Debenture is one of the source through which a company can borrow. A debenture can be described as smallest denomination of loan. Being issued to public, issue of debentures is regulated by the company law. According to the company law the power to issue debentures can be exercised on behalf of the company at a meeting of the Board of Directors {Section 292(1)(b)}. A public company may, however, require the approval of shareholders to borrow money in excess of the aggregate of its paid up capital and free reserves.{Section 293 (1) (d)}. Consent of the shareholders would also be required for selling, leasing or disposing of the whole or substantially the whole of the undertaking of the company under section 293 (1) (a). Debentures have been defined under Section 2 (12) of the Act to include debenture stocks, bonds and any other securities of the company whether constituting a charge on the company's assets or not.

Section 372 A of the Companies Act also regulates inter-corporate loan and investments and stipulates the ceiling limits on investments and the amount of loan that can be borrowed by a company. The explanation clause of this section states that the loan shall include debentures. Section 117 to Sections 123 of the Companies Act, 1956 regulate the provisions relating to debentures, appointment of debenture trustees, their duties, creation of Debenture Redemption Reserve Account, liability of trustees etc. The debentures issued under the Act shall not carry any voting rights. In the case of public issue of debentures, there would be a large number of debenture holders on the register of the company. As such it shall not be feasible to create charge in favour of each of the debenture holder. A common methodology generally adopted is to create Trust Deed conveying the property of the company. A Trust deed is an arrangement enabling the property to be held by a person or persons for the benefit of some other person known as beneficiary. The Trustees declare the Trust in favour of the debenture holders. The Trust Deed may grant the Trustees fixed charge over the freehold and leasehold property while a floating charge may be created over other assets. The Company shall allow inspection of the Trust Deed and also provide copy of the same to any member or debenture holder of the company on payment of such sum as may be prescribed. Failure to provide the same would invite penalties by way of fine under the Act. Any provision contained in the Trust Deed, which exempts a Trustee from liability for breach of Trust, is void. As per Section 125 (4) of the Companies Act, registration of a charge for purpose of issue of debentures is mandatory. Section 128 stipulates that where a company issues series of debentures which is secured by charge, benefit of which will be available to all debenture holders pari passu, the company shall file the prescribed particulars in Form 10 and 13 with the Registrar of Companies for registration of charge. These forms shall be filed within 30 days after the execution of the deed. Appointment and Duties of Debenture Trustees In terms of Section 117 B, it has been made mandatory for any company making a public/rights issue of debentures to appoint one or more debenture trustees before issuing the prospectus or letter of offer and to obtain their consent which shall be mentioned in the offer document. The Debenture Trustees shall note: a. beneficially hold shares in a company. b. be beneficially entitled to monies which are to be paid by the company to the debenture trustees. c. enter into any guarantee in respect of principal debt secured by the debentures or interest thereon.

This section also lists the functions that shall be performed by the Trustees. These include: i. Protecting the interests of the debenture holders by addressing their grievances.

ii. Ensuring that the assets of the company issuing debentures are sufficient to discharge the principal amount. iii. To ensure that the offer document does not contain any clause this is inconsistent with the terms of the debentures or the Trust Deed. iv. To ensure that the company does not commit any breach of the provisions of the Trust Deed. v. To take reasonable steps as may be necessary to undertake remedy in the event of breach of any covenant in the Trust Deed.

vi. To convene a meeting of the debenture holders as and when required. If the debenture trustees are of the opinion that the assets of the company are insufficient to discharge the principal amount, they shall file a petition before the Central Government and the latter may after hearing the parties pass such orders as is necessary in the interests of the debenture holders. As per the SEBI (Debenture Trustees) Regulations, 1993, {hereinafter referred to as the 'Regulations'} a Debenture Trustee can be a scheduled bank, an insurance company, a body corporate or a public financial institution. Debenture Trust Deed A Debenture Trust Deed shall, interlay, include the following:
a. b. c. d. e. f. g. h. i. j.

An undertaking by the company to pay the Debenture holders, principal and interest. Clauses giving the Trustees the legal mortgages over the company's freehold and leasehold property. Clauses that may make the security enforceable in the event of default in payment of principal or interest i.e. appointment of receiver, foreclosure, sale of assets etc. A clause giving the Trustees the power to take possession of the property charged when security becomes enforceable. Register of Debenture holders, meeting of all debenture holders and other administrative matters may be included in the Deed. In addition thereto, the SEBI regulations have laid format of the Trust Deed in Schedule IV to the regulations. Some of the important provisions would include Time limit of creation of security for issue of debentures. Obligations of the body corporate towards the debenture holders. Obligations towards the debenture holders - equity ratio and debt service coverage ratio. Procedure for the inspection of charged assets by the Trustees.

Creation of debenture Redemption Reserve

Section 117 C of the Act casts an obligation on the company to create a Debenture Redemption Reserve. This account will be credited with proceeds from the profits of the company arrived at every year till redemption of the debentures. The Act, however, does not stipulate the time period for creation of security. SEBI regulations provides for creation of security within six months from the date of issue of debentures and if a company fails to create the security within 12 months, it shall be liable to pay 2% penal interest to the debenture holders. If the security is not created even after 18 months, a meeting of the debenture holders will have to be called to explain the reasons thereof. Further, the issue proceeds will be kept in escrow account until the documents for creation of securities are executed between the Trustees and the company. Compliances under Registration Act and Stamp Duty Act In the case of English Mortgage, the trust deed will attract ad valorem stamp duty. After execution, such deed will be registered with the sub registrar of Assurances. Registration charges will have to be paid in addition to the stamp duty. While in case of an equitable mortgage, if no document, deed etc. is signed then nothing is required to be registered with the sub registrar of Assurances. If however, a note or letter is made then it will attract stamp duty. It is pertinent to mention that once a mortgage is created by registration then no further stamp duty is payable on registration. Default In the event of failure on the part of the company to redeem the debentures on the date of maturity, the Company Law Tribunal may, on the application of any debenture holder, direct redemption of debentures forthwith by payment of principal and interest due thereon. If a default is made in complying with the orders of the Tribunal, every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years and shall also be liable to fine of not less than Rs.500/- for every day during which the default continues. (Section 117C) Further this offence is not compoundable under section 621A of the Act. There are contradictions between the Companies Act and the SEBI regulations on issues relating to: a. Utilisation of Debenture Redemption Reserves. The Act provides that the Debenture Redemption Reserve will be used towards redemption of debentures only whereas the SEBI regulation states that these will be a part of the General Reserves, which can be utilised for the purpose of bonus issues. Any debentures issued with a maturity period of 18 months or less is exempted from the creation of Debenture Redemption Reserve Account, whereas no such exemption is provided under the Companies Act.

b.

c. No Public Issue/Rights Issue of Debentures shall be made by a company unless it has appointed one or more Debenture Trustees for such debentures whereas under

SEBI guidelines, appointment of Debenture Trustees is compulsory only in case of debentures with maturity of 18 months or more. A listed company though subjected to SEBI regulations must comply with stringent norms between the two legislations / regulations made there under.

ACCEPTANCE OF PUBLIC DEPOSITS


Public deposits are an important and popular source of raising funds by companies. Section 58 A of the Companies Act, 1956 deals with invitation, acceptance, renewal and acceptance of deposits. No company can invite and accept deposits except in the manner and subject to conditions prescribed by the Central Government in consultation with the Reserve Bank of India.

Meaning: Deposit means any deposit of money with and includes any amount borrowed by a Company but shall not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India. Nowhere it is written that deposit is unsecured only, and as such we can safely infer that it can be secured also. PERIOD OF DEPOSIT: No Company shall accept or renew any deposit which is repayable on demand or on notice or after a period of less than 6 months or more than 36 months from the date of acceptance or renewal of such deposit. CEILING OF DEPOSIT: i) No Company, other than government, shall accept: any deposit against an unsecured debenture or any deposit from a shareholder or any deposit guaranteed by any person who, at the time of giving such guarantee is a director of the Company if the amount of any such deposit together with amount of such other deposits of all or any of the kinds of deposits referred to in this clause and outstanding on the date of acceptance or renewal of such deposit exceeds 10% of the aggregate of the paid-up share capital and free reserves of the Company. Any other deposit , if the amount of such deposit together with the amount of such other deposit other than any of the deposits referred to in clause(i), outstanding on the date of acceptance or renewal exceeds 25% of the aggregate of the paid up share capital and free reserves of the Company.

ii)

No company shall invite or accept or renew any deposit in any form, on a rate of interest exceeding 12.5% per annum.

PRIVATE COMPANY

As per section 3 (iii) (d) of the Companies Act, 1956 Private company are prohibited from inviting or accepting of deposits from /to persons other than its members, directors or their relatives. The prohibition extends to accept deposits from members of Public. Though joint holders are treated as one member, it seems that deposits can be taken from all the joint holders separately. Some of the private limited NBFCs have reportedly started accepting deposits from all joint shareholders. This practice has found to been irregular and violating the NBFC directions on acceptance of public deposits. It has been decided that the deposits accepted by a private limited NBFC from the first named shareholders will only be exempted from the purview of public deposit.

PUBLIC COMPANY ADVERTISEMENT BEFORE ACCEPTANCE OF DEPOSIT No company shall invite or accept any deposit except after the publication of an advertisement specifying therein the financial conditions, management structure and other particulars of the Company. Such advertisement should not be necessary for acceptance of deposit from the directors and shareholders of the company. It would be enough if acceptance if acceptance by a company of deposit is made in accordance with the rules made by the Central Government after the consultation. An advertisement issued is valid until the expiry of 6 month from the date of closure of the financial year in which it is issued or until the date on which the balance sheet is laid before the company in general meeting or where the Annual General Meeting for any year has not been held, latest day on which that meeting should have been held in accordance with the Act. A fresh advertisement shall be made, in each succeeding financial year. Exemption is provided to public company under Rule (2) (b) to the extent of amount received by a Company from any other Company or can be said other body corporate. Any amount received from an employee of the Company by way of secured deposits. STATEMENT IN LIEU OF ADVERTISEMENT Where a company intends to accept deposits without inviting or allowing or causing any other person to invite, such deposit , shall, before accepting deposits deliver to the Registrar for registration a statement in lieu of advertisement containing all the particulars required to be included in the advertisement. RETURN OF DEPOSIT TO BE FILED WITH THE REGISTRAR

Every company who accepts deposit from the public shall on or before 30th June, of every year, file with the Registrar a return in the form prescribed and furnish the information st contained therein as on 31 March of that year, duly certified by the auditor of the company. NON BANKING FINANCIAL COMPANY 1. a financial institution which is a company. 2. a company and has as its principal business of receiving of deposits, under any scheme or arrangement or in any other manner, or lending . The activities of the non-banking companies accepting deposits from public are regulated by the provisions of the Reserve Bank of India. It is mandatory for all NBFCs to obtain a certificate of registration from RBI under section 45-IA of the Reserve Bank of India Act, even if they do not hold / accept deposits from the public. PERIOD OF DEPOSIT No NBFC shall accept or renew any public deposit, unless such is repayable after a period of 12 months, but not later than 60 months from the date of acceptance or renewal of the deposit. Questions:
1) 2) 3)

What are the contents of debenture trust deed. Explain the procedure of accepting public deposits by a public company. What is ultravires and intravires borrowing also state the remedies available against them.

MANAGEMENT OF CAPITAL
The share capital issued by the company stays with the company throughout the life time of the company. The company law therefore provides regulation for the management of the share capital so as to enable the company to efficiently use its capital without harming the rights of the members. Calls on shares: The term call refers to a demand made by a company on its shareholders in pursuance of its articles to pay the whole or part of the balance remaining unpaid on each share after allotment during the life time of the company. The company may not ask the subscriber of the share to pay all the amount of the value of the shares and keep some amount with the subscriber for subsequent use. The company may then ask the subscriber to pay the balance amount whenever it is required, which is termed as making call on shares. A valid call must comply with the rules and regulation mentioned in the law, as the subscriber cannot be binded by an invalid call. Whereas a subscriber not responding to a valid call will be liable for forfeiture of its shares. Legal provisions relating to calls:

1. 2.

Resolution of the Board: A call must be made under a resolution of the Board of Director passed at a meeting of the Board. The power to make calls cannot be delegated. Bonafide and for the benefit of the company: The call must be made bonafide and in the best interest of the company. The directors must not abuse their power by making calls only to serve their personal ends. It must be made on good faith. For e.g. good faith is lacking where the directors call upon the shareholders to pay without leaving their own dues on their shares (Alexander V. Automatic Telephone Co., (1900 2 ch. 56) Uniform basis: The calls must be made on a uniform basis on call shares falling under the same class (Sec. 91) Calls in advance: A company may if authorized by its articles accept from any member the whole or part of the amount remaining unpaid on any shares held by him although no part of that amount has been called up. The payment of amount voluntarily towards the uncalled share capital does not give voting rights to the members in respect of that amount until that amount becomes presently payable (Sec. 92) In accordance with Articles: Call must be made in accordance with the provisions of its articles. Table A provides the following: a. No call amount should exceed one fourth of the nominal value of the share. b. The interval between two calls must be at least one month. c. At least 14 days notice must be given to each member for paying the call amount. The notice should specify the amount due on calls. Time and place of payment.

3. 4.

5.

d. The board has the right to revoke or postpone a call at its discretion. e. The joint holders of a share are liable jointly to pay all calls. f. If the call amount is not paid within the period specified, interest may have to be paid till the date of actual payment at 5% p.a. or at a lower rate as specified by the Board. If the call is not made as described above, it is invalid.

Transfer of Shares:
A share is a movable property, Sec. 82 of the Companies Act empowers every shareholder to transfer his shares in the manner laid down by the articles. Right to transfer shares is a statutory right and cannot be taken away by any provisions in the articles. But the articles may restrict the right to transfer. The articles may empower the board of directors to refuse to register a transfer without giving any reasons, as long as they act in good faith and in the interest of the company. Provisions of the Act relating to transfer:

Sec. 108 and 112 deal with the transfer of shares. The provisions of these sections are as follows: 1. Instrument of transfer (Sec 108): A company shall not register a transfer unless a proper instrument of transfer duly stamped and executed by the transferor as well as the transferee has been delivered to the company along with the relevant share certificate or letter of allotment. The instruments of transfer shall be in he prescribed form 7-B. it shall be presented to the prescribed authority before it si signed by the transferor and before any entry is made therein. The prescribed authority shall stamp or otherwise endorse thereon the date on which the instrument is so presented. It shall then be delivered to the company in the case of shares, dealt in on a recognized stock exchange at any time before the date on which the register of members is closed, in accordance with law for the first time after the date of such presentation. In any other case the instrument shall be presented to the company within 12 months from the date of presentation to the prescribed authority. Any instrument of transfer which is not in conformity with this authority. Any instrument of transfer which is not in conformity with these provisions shall not be accepted by the company. The transferee becomes a member of the company only when the transfer is registered by the company. 2. Application by legal representative: (Sec. 109) A transfer executed by the legal representative of a deceased member although he is not himself a member, is as valid as the one executed by the member himself. Application for transfer (Sec. 110) The application for the transfer of shares should be made in the prescribed form either by the transferor or the transferee. If the transferor makes an application for the transfer of shares and if the transfer relates to the partly paid shares, the company gives a notice to the transferee regarding this application. If the transferee makes no objection to this within two weeks from the date of receipt of the notice, then the company registers the transfer of shares. Refusal by the company to register: (Sec. 111) Directors have power to refuse to register a transfer in the interest of the company [Sec. 111(2)]. In such a case the company must send the notice of refusal to the transferor and the transferee within two months of the date on which the instrument of transfer was delivered to the company. The transferor or transferee may appeal to the company Law board against any refusal of the company to register the transfer. The appeal shall be made within two months of the notice of such refusal or where no notice has been sent by the company within four months from the date on which the instruments of transfer was delivered to the company. The Company Law Board shall give an opportunity to the company, the transferor and the transferee to explain their cases. It may if it thinks that refusal is not justified order the company to

register the transfer. The company shall give effect to the decision of the Company Law Board within ten days of the receipt of the order. Power of directors to reject transfer: 1. Where the articles contains no clause allowing the directors to reject the transfer. Ion such a case a share holder may freely transfer his shares on may compel the directors to register the transfer. Where the article contain a clause empowering the directors to reject the transfer. The articles normally contain a clause giving power to the directors to refuse transfer of shares without assigning reasons. The Company Law Board may set aside the decision of the directors in refusing to register the transfer in the following cases. a. Where the directors have not acted bonafide and in the interest of the company. In Bajaj Auto Limited U.N.K. Firodia A.I.R. (1971) S.C. 321 where in appeared that the discretion of the directors in refusing transfer was actuated by fear that the transferee would get more numerical strengths the Supreme Court quashed the directors refusal. b. Where the directors have of their won given reasons for refusing the transfer by the Company Law Board finds them to be not sufficient. In V.S. Ratnam V. Ossor Estates Ltd.. A company refused transfer of shares on the ground that the transferee was a benamidar of another share holder and was an undesirable person. The Company Law Board held in this case that the decisions of the Board of Directors was not bonafide on was based on wrong principles. c. Where the directors in refusing a transfer did not have regard to the consideration which the articles on their true construction permit them to take into consideration.

2.

In Jalpaiguri Cinema Co. Ltd., U.P.K. Mukerhee, (1971) 41 Comp. Cas 678. The directors of a company had the power to refuse a transfer of partly paid share to a person they would not approve of in exercise of this power they rejected transfer of fully paid shares. Held the refusal was unjustified.

Certification of Transfer:
A company issues only one certificate in respect of a number of shares purchased by a person. If he wants to sell only a part of the shares, he has to produce before the company his share certificate for the purose of certification. Certification is an act of endorsement on the instrument of transfer by an officer of the company that the share certificate relating to the shares to be transferred has been lodged with the company. The officer writes on the instrument of transfer the words Certificate lodged and mentions the number of shares for which it is lodged. The seller then delivers the certified instrument of transfer to the purchases

who can take certification as amount to delivery to himself on the share certificate. In due course the company prepares two share certificates, on for the shares sold to the purchaser and the other for the seller for the balance of shares which remain unsold when these certificates are issued to the transferee and the transferor, both of them become the members of the company. Forged Transfer: When an instrument of transfer does not bear the real signature of the rightful owner of shares, it is called a forged transfer. In other words, where the signature of the transferor is forged it is called forged transfer. Consequences: 1. A forged transfer is a nullity. It does not confer any legal title upon the transferee. The true owner can have his name restored in the register of members and he continues to be the owner of the shares. A bonafide buyer of shares for value from this forged transferee also has no right to claim membership of the company. However he can claim damages from the company. For this purpose he should prove that he has sustained loss because of his having acted in the faith of the share certificate issued by the company. The company may in turn can get damages from the person who induced it to issue a share certificate on the basis of a forged instruments of transfer.

2.

3.

Therefore a company must carefully examine the instrument of transfer. It must be satisfied as to the genuineness of the transferors signature by comparing it, with his specimen signatures. It should also give notice of transfer to the transferor before registering it.

Blank Transfer:
When a transferor hands over to the transferee the instrument of transfer duly signed and completed by him but leaving the name of transferee blank along with the relevant share certificate it is known as blank transfer. These shares can be transferred from one person to another by merely delivering the bland instrument of transfer and the relevant share certificate. As a result new transfer deed need not be executed with each transfer? In this way the shares move person to person till they get into the hands of a purchaser who wants to retain them. It is only this last transferee who fills in his name and affixes the stamps and sends the completed form along with the necessary registration fee to the company. For this last transferee, the first seller is treated as the transaction fee to the company. For this last transferee, the first seller is treated as the transferor and on registration the former becomes the shareholder of the company.

Lien on shares:
Lien means the right to retain property belonging to another until the debt due is discharged. Though the Companies Act does not certain any provision regarding lien the articles of companies invariably provide that they will have a first and paramount lien on all partly paid

shares in respect of amount due on shares or on any debt due by the shareholder. The lien extends to all dividends payable on shares. When a company exercising its right of lien a share holder is not permitted to transfer his shares without paying his debts to the company. Unless the power of sale is given in the articles, a company is not empowered to enforce the lien by selling the shares. However articles generally give such a power to companies. Similarly express provision in the articles is necessary for a lien on fully paid shares. Loss of Lien: (i) A company loses if it registers a transfer of shares subject to the lien of the transferee. (ii) Where the shares holder pledges his shares to some third party as security for a loan and the company has notice thereof and then incurs a liability to the company. In such a case the pledges has priority over the lien of the company. Practical Problems: 1. A Public Company proposes to purchase its own shares. State the source of funds that can be utilised by the Company for purchasing its own shares and the requirements to be complied with by the Company under the Companies Act before and after the shares are so purchased. 500 equity shares in 'XYZ' Limited were acquired by Mr. 'B'. But the signature of Mr. 'A', the transferor, on the transfer deed was forged. Mr. 'B'. After getting the shares registered by the Company in his name, sold 200 equity shares to Mr. 'C' were not aware of the forgery. What are the rights of Mr. 'A', 'B' and 'C' against the Company with reference to the aforesaid shares?

2.

Questions:
1. 2.

What are the calls on share? State the legal procedure for making the call on share. State the powers of directors as to the transfer of shares.

CHARGES ON ASSETS
A charge means an interest or right which a lender or creditor obtains in the property of the company by way of security that the company will pay back the debt. Charges are of 2 types :1. Fixed Charge: Such a charge is against a specific clearly identifiable and defined property. The property under charge is identified at the time of creation of charge. The nature and identity of the property does not change during the existence of the charge. The company can transfer the property charged only subject to that charge so that the

charge holder or mortgage must be paid first whatever is due to him before disposing off that property. 2. Floating Charge : When a charge is created on property which is not fixed but changing or unstable, it is known as floating charge. For example, where a debenture is secured by creating a charge on stock-in-trade, the charge will be valid as a floating charge. Lord Macnaghten remarks, "A floating charge is an equitable charge on the assets for the time being of a going concern. It attaches to the subject charged in the varying conditions in which it happens to be from time to time. It is of the essence of such a charge that it remains dormant until the undertaking charged ceases to be a going concern or until the person in whose favour the charge is created intervenes. [Government Stock Investment Co. Ltd. v. Manila Rly Company Ltd.] The chief characteristics of a floating charge have been summed up by Justice Romer in Re Uorkshire Woolcomber's Association Lt. His Lordship said that mortgage or charge will be treated as a floating charge, if: i. ii. It is a charge upon a class of assets both present and future. The class of assets upon which the charge has been created must be one which in the ordinary course of the business of the company would be changing from time to time, and It has been contemplated by the charge that until some step is taken by the mortgagee, the company can use the assets comprised in the charge in the ordinary course of business.

iii.

Effects of floating charge: In the case of floating charge 1. The company has a free hand to deal with the property charged in the ordinary course of business in any way authorised by its memorandum or articles so long as the company remains a going concern or so long as the charge does not become a fixed charge. Unless otherwise agreed, a floating charge leaves the company at liberty to create a specific mortgage on the property subject to the floating charge ranking in priority in such floating charge. The company can sell the whole of its undertaking if that is one of its objects specified in the memorandum, in spite of a floating charge on the undertaking.

2.

3.

Crystallization of floating charge: When the charge holder takes steps to enforce his charge, a floating charge becomes a fixed charge on the assets covered by that charge. Until a floating charge becomes a fixed charge, the company is free to deal with the property charged in any manner it deems fit. But once the floating charge crystallises, the company cannot dispose off the charged assets without paying

of the charge holder. Otherwise, the charge holder can recover his dues from the proceeds. A floating charge crystallises or becomes the fixed in following situations:1. Where the company ceases to carry on the business, whether the principal money has become payable or not, unless the debenture or trust deed contains the stipulation to the contrary.

2. Upon the commencement of winding up of the company. 3. If a debenture holder, having become entitled to realise the securities by the reason of the fact that the principal money has become payable, intervenes for the purpose by appointing the receiver or by making an application to the court for appointment of the receiver.

Registration of charges: Every company must keep at its registered office a register of charges in which all the charges and mortgages specifically affecting the property of the company must be entered. The register must contain short description of the property charged, the amount of the charge, the name of the person entitled to the charge, etc. The company must keep at its registered office, a copy of every instrument creating any charge requiring the registration. During the business hours inspection by the creditor or member of the company is allowed to be without charge of the register and documents. Any outsider can inspect them on the payment of Rs10 for each inspection during the business hours. Registrar of the company must keep also the register of charges in respect of each company and register therein full particulars relating to the charge created by the company and registrable under the Act. This register is also open to inspect by any person on payment of Rs 10 as fees. The company must submit to the Registrar the instrument creating the charge or its certified copy which will be returned after the registration along with the certificate of registration. The company must cause the copy of every registration to be endorsed on every debenture or certificate of debentures stock which is issued by the company and the payment of which is secured by the charge. Charges requiring registration : A company must file within 30 days of creation of a charge with the Registrar complete details of the charge together with the instrument of charge or its verified copy in respect of certain charges. Otherwise the charge will be void. This does not mean that the creditors cannot recover their dues. It merely means that the benefit of the charged security will not be available to them. The following charges are compulsorily registrable :i. ii. iii. iv. A charge for the purpose of securing any issue of any debentures A floating charge A charge on uncalled share capital Charge on calls made but not paid

v. vi. vii. viii. ix.

A charge on any immovable property A charge on ship A charge on book debts of the company A charge on goodwill or on patent or on license under the patent or on trademark or copyright or on the license under the copyright A charge other than a pledge on any movable property of the company.

Effects of Registration : Once a charge is registered, it acts as a notice to the public at large that the charge holder has an interest in the charged property. No person can take a defence against the charge holder that he was not aware that a charge was created against the property. That person will be entitled to the property subject to the interest of the charge holder. Once certificate of charge is issued by the Registrar, it is conclusive evidence that the document creating the charge is properly registered. Consequences of Non-Registration: 1. A charge which is compulsorily registarble but which is not registered is void. This does not mean that the creditors cannot recover their dues. It merely means that the benefit of the charged security will not be available to them. Although the security becomes void by non-registration, it does not affect the contract or obligation of the company to repay the money thereby secured. Omission to registrar particulars of charge is required punishable with fine. A company or every officer of company is in default shall be liable to fine upto Rs 500 for each day of continuing default. A further fine of Rs. 1000 may be imposing on the company and every officer for other defaults relating to registration of charges.

2. 3.

Wherever the terms and conditions or the extent of the operation of any registered charge is modified, the company is required to file the particulars of modification within 30days thereof with the Registrar of Companies. Memorandum of satisfaction A company must make a report to the Registrar of payment of satisfying in full of any charge registered under this act. The satisfaction of charges must be filed with the Registrar within 30 days from the date of such a payment of charge. On receipt of intimation to the company, the Registrar gives notice to the charge-holder calling upon him to show cause within time not exceeding 14 days as why the payment of satisfaction should not be registered. If no cause is shown within the time stipulated above the Registrar must enter the satisfaction of the payment of charge. If some cause is shown, the Registrar must record note to that effect in the register and inform the company accordingly Questions: 1. What the different types of charges and state their effects?

ANNEXURE-2
AGREEMENT FOR UNDERWRITING SHARES OF A COMPANY
THIS AGREEMENT made at ................. on this .................. of ................... 2000, between ABC Ltd., a company incorporated under the Companies Act, 1956 and having its registered office at .................... hereinafter called "the company" (which expression shall, unless it be repugnant to the context or meaning thereof be deemed to mean and include its successors and assigns) of the ONE PART and M/s. XYZ a partnership firm registered under the Partnership Act, 1932 and having its place of business at .................. hereinafter called "the underwriters", (which expression shall unless it be

repugnant to the context or meaning thereof, be deemed to mean and include every partner for the time being of the said firm, the survivor or survivors or the legal representatives, executors or administrators of the last partner) of the OTHER PART. WHEREAS the company proposes to issue ............... equity shares of to Rs

..................... each and offer the same for public subscription at Rs ....................... per share in accordance with the terms of the draft prospectus, a copy of which is annexed hereto, or with such modifications therein as may be mutually agreed upon between the company and the underwriters. AND W HEREAS the underwriters have agreed to underwrite the subscription of the said shares on the terms and conditions hereinafter appearing. NOW IT IS HEREBY AGREED BETWEEN THE PARTIES AS FOLLOWS: 1. The company shall issue ...................... equity shares of Rs . ............ each for public subscription in terms of the draft prospectus, a copy of which is annexed hereto or with such modification therein, as may be mutually agreed upon between the parties, on or before the ................... day of . 2000, or such later date as shall be

mutually agreed upon by the parties hereto not after the .......... day of ............. 2000. 2. The underwriters shall on or before the closing of the subscription list apply for the .................... shares or cause the same to be applied for by the responsible persons,

who shall pay on application, the application moneys payable on the shares applied for by them respectively and who shall not withdraw their applications before notification of allotment of shares to them. 3. If on the closing of the list under the said prospectus the said ...................... shares shall be allotted on the applications received from the public, the responsibility of the underwriters will cease and no allotment is to be made to the underwriters under this agreement, but if the said ............ shares shall not be allotted to the public, but any smaller number of such shares is so allotted, the underwriters undertake to stand for the difference between the said .......................... shares and the number of the shares allotted to the public and company may allot to the underwriters all the shares which shall not have been applied for by such members of the public or such responsible persons as aforesaid and the underwriters shall accept the shares so allotted and pay all application and allotment money in respect of those shares in accordance with the said prospectus. 4. The underwriters irrevocably authorise the company to apply for the said ............... shares or any part thereof in the name and on behalf of the underwriters in accordance with the terms of the said prospectus and authorise the directors of the company to allot the said ..................... shares of the company or part thereof to the underwriters and in the event of the company making an application for such shares in the names of the underwriters, the underwriters shall hold the company harmless and indemnified in respect of such application. 5. The company shall pay to the underwriters in cash a commission of

.............................. per cent on the nominal value of the shares within ............. days from the allotment of the said ...................... shares. But should any allotment of the shares be made to the underwriters in accordance with the terms of this agreement, the commission shall not be payable until the underwriters pay the application and allotment moneys payable in respect of all the shares so allotted to the underwriters. 6. It is hereby agreed that time is the essence of this agreement.

7. This agreement shall be executed in duplicate. The original shall be retained by the company and the duplicate by the underwriters. IN W ITNESS WHEREOF the parties have signed these presents and a duplicate hereof the day and year first hereinabove written.

Signed and delivered by A 8 Ltd., the within named company by its Managing Director Shri ..................

Signed and delivered by M/s. XYZ the within named underwriters by their partners WITNESSES; 1.

2.

4
MANAGEMENT AND CONTROL - I
Learning objective: This chapter gives the basic about the organisation structure of the company and rules and regulation regarding the functioning of the company. Membership and rights and duties of member Role of managerial persons of the company Types of meetings in a company Procedure of conducting a meeting.

MEMBERSHIP OF THE COMPANY


A company is composed of certain persons who constitute it as a corporate body. However, the identity of the company is different from the persons composing it. The persons composing the company are the 'members' or 'shareholders' of the company. A member is a person who has signed company's memorandum of association. Any other person who agrees in writing to become a member and whose name is entered in company's register of members is also a member of the company [Section 41]. It is important to note here that the terms 'member' and 'shareholder' are used interchangeably in the Companies Act. A shareholder means a person who holds the shares of the company. A part from a few exceptional cases, the terms member and shareholder are synonymous. In these exceptional cases, a person may be a member but not a shareholder, or he may be a shareholder but not a member. In the following cases, a person is a member, but not a shareholder: (a) A person who signs company's memorandum of association, immediately becomes the member on registration of the memorandum before any shares are allotted to him. (b) A person who transfers his shares, continues to be the member of the company until his name is replaced by the name of the transferee. But he is no more a shareholder. (c) A person who has ceased to be a shareholder by reason of forfeiture, surrender or transfer of shares, may be held liable as member, for the payment of unpaid amount on shares in case of default by the present shareholder.

(d) A company limited by guarantee or an unlimited company having no share capital will have only members but no shareholders. In the following cases, a person is a shareholder, but not a member: 1. A person having a share warrant is a shareholder but he is not a member [Section 115 (1)]. However, he may be treated as member for specific purpose if company's articles so provide. 2. A legal representative of a deceased shareholder is the shareholder even if his name is not entered in the register of members. He becomes a member only when his name is entered in the register. Note: The Depositories Act, 1996 has further widened the definition of a member by inserting a new Sub-section 41 (3). This sub-section provides that every person holding equity share capital of the company and whose name is entered as beneficial owner in the record of the depository shall be deemed to be a member of the company.

DIFFERENCE BETWEEN MEMBERS AND SHAREHOLDERS


The terms 'member' and 'shareholder' have been used interchangeably in the Companies Act. The word 'shareholder' is used in relation to a company having a share capital and there can be no membership except through the medium of shareholding. A holder of shares becomes a member only when his name is entered on the register of members. But the term 'member' is wider in scope and may be used in relation to all types of company. A person may become a member of a company without holding any shares. Companies limited by guarantee or unlimited companies having no share capital can have no shareholders but do have members. The following are the points of distinction between members and shareholders : 1. 2. 3. 4. 5. A holder of a share warrant is a shareholder but not a member as his name is struck off the register of members immediately after the issue of such share warrant. Every registered shareholder is a member but every registered member may not be a shareholder because the company may or may not have share capital. The transferor or the deceased person is a member so long as his name is on the register of members whereas he cannot be termed as shareholder. Similarly, a shareholder by transfer is not a member until his name is entered in the company's register of members. A person who mispresents himself to be a member is estopped from denying his position subsequently. He is said to have become a member by estoppel.

6. A person may become a member by an order or decree of a court.

MODES OF ACQUIRING MEMBERSHIP

A person may become a member in a company in any of the following ways : 1. Membership by Subscribing to Memorandum (Section 41) All the subscribers to the memorandum are deemed to have agreed to become members of the company and on the registration of the company their names are automatically entered as members in the company's register of members. Thus, the signatories to the memorandum become members of the company simply by reason of their having signed the memorandum. Neither an application form nor allotment of shares is necessary for becoming a member in their case. A person who signs the memorandum enters into a contract with the company to take the number of shares written opposite his name and be cannot repudiate his contract on the ground of misrepresentation. In the case of Metal Constituents Co. a subscriber agreed to take 350 shares. Then, he wanted to rescind the contract on the ground of misrepresentation on the part of the promoters. Held that the subscriber by signing the Memorandum becomes liable to the members in the company brought into existence by his own act. So he can not rescind the contract. 2. Membership by Qualification shares Before a person can be appointed a director of a public company, he must take, or sign an undertaking to take and pay for the qualification shares. He thus becomes a member and is in the same position as a subscriber to the memorandum of the company is. 3. Membership by Application and Allotment A person may become a member of a company by an application for shares subject to formal acceptance by the company. The ordinary law of contracts applies to the agreement to take shares in a company. An application for shares may be absolute or conditional. If it is absolute, a simple allotment and notice thereof to the applicant will constitute the agreement. If it is conditional, the allotment must be made on the basis of the conditions specified. Where there is a conditional application for shares and an unconditional allotment, there is no contract constituted. R agreed to take shares in a company provided he was appointed local manager of the company. Shares were allotted to him but he was not given the appointment. R refused to take the shares. It was held that R was not a member as his application was conditional and allotment was unconditional. [Roger's case ]. 4. Membership by Transfer Where a transfer of share is made and the transfer is registered with the company, the transferee becomes entitled to be placed on the company's register of members in the place of the transferor in respect of the shares so transferred. 5. Membership by Transmission

On the death of a member his shares rest with his legal representative. The legal representative is entitled to be registered as the holder of the shares and to get his name entered as member in the register of members provided there is no provision in the articles of the company and for the purpose no instrument of transfer is required to be delivered by him to the company. If a company unduly refuses to accept a transmission, the same remedies are available to the legal representative as in the case of transfer. In the case of Indian Chemical Products V. State of Orissa, by devolution, the state of Orissa had become entitled to the shares of the Maharajas. But the company refused to register the shares in the name of state's representative. It was held that the company was bound to register the shares in favour of the state's representative because it was a case of transmission. And the state became entitled to the shares due to the operation of law. 6. Membership by Estoppel If a person holds himself out in writing or allows his name to be on the register of members, he is deemed to be a member of the company. Thus if a persons's name is improperly placed on the register of members, and he knows and assents to it, he cannot afterwards say that he is not a member. Estoppel is simply a rule of evidence which prevents a person from denying the legal implications of his conduct. CESSATION OF MEMBERSHIP A person may cease to be a member of a company : (a) If he transfers his shares to another person. (b) by the sale of his shares by the company in exercise of right of lien over his shares. (c) by forfeiture of his shares; (d) by a valid surrender of his shares. (e) by the death of a member. The estate of the deceased remains liable until the shares are registered in the name of his legal representative. (f) by his insolvency. (g) by his rescission of contract to take shares on the ground of misrepresentation or fraud. (h) by the winding-up of the company, of course he remains liable as a contributory. (i) by redemption of redeemable preference shares. (j) by issue of share warrants to him in exchange of fully paid shares.

DUTIES AND LIABILITIES OF MEMBERS


Duties It is the duty of a shareholder :

(a) as a subscriber of the memorandum, to take the share written opposite his name direct from the company and pay for them ; (b) to take shares when they are duly allotted to him and pay for them according to the terms of issue of the shares ; (c) to pay all valid calls as and when they are made; (d) to abide by the decisions of the majority of members unless the majority acts vindictively, oppressively, mala fide or fraudulently; (e) to contribute to the asset of the company when it goes into liquidation. Liability The liability of the members of a company depends upon the nature of the company. Company limited by shares. In the case of a company limited by shares, the liability of a member of company is the amount, if any unpaid on his shares. If his shares are fully paid, his liability is nil for all purposes. Company limited by guarantee. The liability of the members of a company limited by guarantee is limited to the amount they undertook to contribute to the assets of the company in the event of winding up. Company with unlimited liability. Every member of an unlimited company is liable in full for all debts contracted by the company during the period he was a member.

RIGHTS OF MEMBERS
When a person becomes a member of a company he is entitled to exercise all the rights of a member until he ceases to be a member in accordance with the provisions of the Act. The rights of a member can be classified under the following heads :

(A) Statutory Rights


Statutory rights are those which are given to the members by the statute, i.e. the Companies Act, 1956. No document of the company can take away or modify such rights. Such rights, for example, are : 1. Right to receive copies of the Balance Sheet and Profit and Loss Account of the company along with the auditor's report. 2. Right to obtain a copy of the contract for the appointment directors/managers of the company. 3. Right to receive notice of the general meetings of the company. 4. Right to get the copies of the Memorandum and the Articles of the company on payment of the prescribed fees. of managing

5. Right to inspect the register of members, and debenture holders and index registers, annual returns etc. and get copies thereof on payment of the prescribed fee. 6. Right to inspect the debenture trust deed and get copies thereof on payment of the prescribed fees. 7. Right to inspect the register of charges and get copies thereof on payment of the prescribed fees. 8. Right to receive a copy of the statutory report. 9. Right to apply to the Central Government to call the annual general meeting when default is made by the company in holding annual general meeting (AGM). 10. Right to attend the AGM. 11. Right to appoint a proxy to attend the AGM and vote i n his place and right to inspect the proxy register. 12. Right to receive a share certificate in respect of his share holding and a certificate of stock within a prescribed time. 13. Right to transfer shares. 14. Right to receive dividend when declared by the company. 15. Preemptive right i.e. right to have the rights shares on any further issue of shares. 16. Right of participation in the appointment the directors who are to retire by rotation by taking part in the AGM. 17. Right of participation in appointing the auditors and fixing their remuneration. 18. Right to have a share in the surplus of assets, if any, on the winding up of the company. 19. Right of dissident shareholders to apply to the court to have any variation of their rights cancelled. 20. Right to have notice of any resolution requiring a special notice in the meeting. 21. Right to inspect the shareholders' minutes book and get copies thereof on payment of the prescribed fees.

(B) Documentary Rights


There rights are the rights given by the two basic documents i.e. memorandum of association and articles of association. The company may also give certain rights to its members by expressly providing for them in the memorandum or the articles of the company.

(C) Legal Rights

These rights are given to members under general law. For example, a person who has taken shares of a company on the faith of a misleading prospectus can avoid the contract and claim damages under the general law.

REGISTER OF MEMBERS (SEC. 150)


It is the statutory obligation of every company to maintain a register of its members containing the following particulars : (a) The name and address and the occupation, if any, of each member ; (b) In the case of a company having share capital, the shares held by each member and the amount paid or agreed to be considered as paid on those shares; (c) The date on which each person was entered in the register as a member; (d) The date on which any person ceased to be a member. (e) Where the company has converted any of its shares into stock and given notice of conversion to the Registrar, the register shall show the amount of the stock held by each of the members concerned instead of the shares so converted which were previously held by him. If default is made in complying with these provisions, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to fifty rupees for every day during which the default continues.

INDEX OF MEMBERS (SEC. 151)


Every company having more than fifty members must keep an index of members, unless the register is already in the form of an index. Any alteration in the register of members must be noted in the index within 14 days of alteration. The index must, in respect of each member, contain a sufficient indication to enable the entries relating to that member in the register to be readily found. The index must always be kept at the same place as the register of members. Inspection : The register of members and the index must be open for inspection, except when closed under the provisions of the Act, by members and debenture-holders free and by other persons on payment of such sum as may be prescribed. The company is also bound to supply a copy of the register on demand on payment. Closure of Register of Members : As per Sec. 154, a company may, after giving not less than seven days' previous notice by advertisement in a local daily, close the register of members, for a period not exceeding 45 days in a year, but not exceeding 30 days at any one time. The closure of the register of members is necessary whenever any general meeting of the shareholders is to be held or interim dividend is to be declared or a call is made. During the period of closure, no transfer of shares can take place and therefore, the company may

determine its membership and may send notices of general meetings and calls made and also the dividend warrants to its members. Questions: 1. M Company Limited issued 2,00,000 Equity shares of Rs. 10 each. You are allotted 100 shares. Explain any ten rights you have as a member of the Company.

MANAGMENT OF COMPANY
A company being a artificial person cannot act on itself, it requires a set of individuals to manage its operations. These sets of individual act as an agent and caretaker of the company and are vested with some powers to exercise their duties. The company law defines the role and the authority of such managing authorities as well as the liability of such person to enable the efficient management of the company. The role such managerial person are discussed as below.
4)

Director:
According to Sec. 2(13) Director includes may person occupying the position of directors by whatever name called. As per this definition, if one performs the functions of a director he would be considered as a director from the point of law, it is immaterial by whatever name he is called. Thus a director may be defined as a person, having control over the direction, conduct, management and superintendence of the affairs of the company. The directors of a company who are collectively known as the board of directors or simply a board, frame the general policy of the company, direct its affairs, appoint the officers for the company and ensure that they carry out their duties properly. As per Sec. 253 a director of a company can only be a person and not an association or body corporate. As per Sec. 303(1) any person as per whose direction the board of directors of a company is accustomed to act is deemed to be a director of the company.

Number of Directors: According to Sec. 252 every public company (other than demand deemed public company U/s 43A), shall have atleast three directors and every other company at least two directors. Subject to this statutory requirement, the articles of a company may prescribe the maximum and minimum number of directors for its board of directors. The number so fixed may be increased or reduce within the limits prescribed by the articles by an ordinary resolution (Sec. 258) Any increase beyond the maximum permitted by the articles must be approved by the central Government. But if the increase in number does not make the total number of directors more than twelve, no approval of the Central government is needed (Sec. 259).

APPOINTMENT OF DIRECTORS
1. First Directors:

The first directors are usually named in the articles. If not the number of directors and the names of the directors are determined in writing by the subscribers of the memorandum or a majority of them. If that is not done all the subscribers of the memorandum who are individuals shall be deemed to be the Companys first directors. They hold office until directors are duly appointed in the first annual general meeting (Sec. 254). 2. Appointment of directors by company: In the case of private companies, all the directors can be permanent ones if the articles so provide. They are appointed at the first annual general meeting. In the case of a public company the articles may provide for the retirement of all its directors at every annual general meeting. Otherwise, at least two thirds of the total number of directors shall be liable to retire by rotation. It is thus clear that only one third of its total number of directors can be permanent. Of the two thirds liable to retire by rotation one third shall retire every year. Those holding the longest period in office since their last appointment should, retire first. If all of them have been appointed on the same day, then the issue is to be settled by mutual agreement. If it is not possible lot should be drawn and decided. A person other than a retiring director should file with the company his consent to act as its director if appointed. Further he is required to file with the Registrar within 30 days of his appointment; his written consent to act as a director otherwise his appointment will become invalid. The articles of the company may provide for the appointment of not less than two thirds of directors on the basis of proportional representation to protect mino9rity interest, either by single transferable vote or according to the principle of cumulative voting or otherwise. If the company decides to appoint directors under this method, the directors must be appointed for a period of three years at a time. 3. Appointment of directors by the board of directors: The board of directors may appoint directors in the following ways: (a) As additional directors: (Sec. 260) The board of directors may appoint additional directors within the maximum strength fixed for the board by the articles. The board can make such an appointment only if the articles provide for that. Such additional directors hold office only upto the date of the next annual general meeting of the company. In a casual vacancy: (Sec. 262) Casual vacancy can be filled up by the board if the articles permit it. A casual vacancy arise due to reasons such as death, resignation, disqualification or failure of an elected director to accept the office or due to any other reason. A vacancy which arises due to retirement of a director by rotation is not

(b)

a causal vacancy. The director appointment in a casual vacancy shall hold office only upto the date on which the director whose place has been filled up was to retire. (c) As an alternate director: (Sec. 313) The board of directors if authorized by the articles or by the companys resolution at the general meetings may appoint an alternate director. Such an alternate director is to act for the original director during his absence for a period of more than three months from the state in which the meetings of a company are held. The alternate director can continue as director only for the period for which the original director was eligible. Further on the return of the original director, the alternate director must vacate the office of directorship.

4. Appointment of directors by Third Parties : (Sec. 225) Sometimes the articles may give a right to financial institutions, debenture holders and banking companies which have lent money to the company to nominate directors on the board of the company with a view to ensuring that the funds advanced by them are used by the company for the purpose for which they are borrowed. The number of directors so nominated should not exceed one-third of the total strength of the board and they are not to retire by rotation. 5. Appointment of directors by the Central Government: (Sec. 408) The Central Government may appoint such number of directors of the board of a company as the company Law Board may by an order in writing specify as being necessary to effectively safe the interest of the company, its shareholders or the public interest for a period not exceeding three years on any one occasion. They are appointed to prevent oppression of the minority shareholders or to prevent mismanagement of the company or in the public interest. They are appointed for a maximum period of three years. Restrictions on appointment of directors: (Sec. 226) Sec. 266 lays down that a person cannot be appointed as a director by the articles or named as director in the prospectus or statement in lieu of prospectus unless before registration of the articles, publication of the prospectus or filing of the statement in lieu of prospectus, he has (a) [i] [ii] signed the memorandum for his qualification shares, or taken his qualification shares and aid or agreed to pay for them or

[iii] signed and filed with the Register an under-taking to take and pay for the qualification share or [iv] made and filed with the Register an affidavit stating that his qualification shares are registered in his name. Number of Directorships: A person cannot hold office at the same time in more than twenty companies. When a person already holding the office of a director in 20 companies is appointed as a director of a any other company the appointment shall not be effective unless such person has within 15

days thereof effectively vacated his office as director in any of the office in which he was already a director. His new appointment shall become void if he fails to make a choice within 15 days as aforesaid (Section 275-279) Share qualification of a director: The act does not prescribe any share qualification, Regulation 66 of table A provides that the qualification of a director shall be the holding of one share of the company. The articles usually require its directors to hold a certain number of shares, such shares are called qualification shares. The nominal value of the qualification shares shall not exceed Rs. 5,000 or the nominal value of one share where it exceeds Rs. 5,000. Disqualification of directors: According to Sec. 274 the following persons cannot be appointed as directors of a company. (a) A person of unsound mind (b) An undischarged insolvent (c) A person who has applied to be adjusted an insolvent (d) A person imprisoned for not less than six months on account of moral turpitude and five years have not elapsed since the completion of the sentence (the central government can remove this disqualification). (e) A person who has nto padi the call money on his shares for more than six months. (f) A person disqualified by the court under Sec. 203 for a fraud committed in the promotion, formation management of winding up of a company. The Central Government can remove this disqualification. Position of Directors: It is very difficult to define exactly the legal position of the directors of a company. The directors have at various times been described by Judges as agents trustees or managing partners let us discuss their position in detail in each case. 1. Directors as Agents: As a company is an artificial person, it enters into contract with third parties through its agents, viz., the directors of the company. Therefore, the relationship between the company and the directors is that of principal and the agent. The directors as agents of the company have certain powers and duties to carry on the business of the company subject to restrictions imposed by the articles and the companies act. They can make contracts on behalf of the company and are not personally liable provided they do not exceed the powers conferred on them.

2.

Directors as employees: Though directors are agents of a company they are not employees of the company. But there is nothing to prevent a director from being a servant of a company, under a special contract of service which may be entered into with the company.

3.

Directors as officers: Under Sec. 2 (30) of the companies act directors are officers of the company. As officers they are liable for any default in complying with the provisions of the act.

4.

Directors as managing partners: Unlike agents, directors are elected by the shareholders and not appointed. They resemble the position of managing partners, like managing partners directors are entrusted with the powers of management and control of the affairs of the company. But directors have to retire unlike the managing partners. Hence they are not managing partners in the full sense of this term also.

5.

Directors as trustees: Directors resemble trustee in certain respects. They are not trustees in the legal sense of the term, because a trustee deals with the property as principal and owner. But a director enters into a contract for his principal that is for the company. Yet the directors are treated as trustees of the companys property and money and of the powers entrusted to them. They must account for all the companys money and property over which they exercise control. They have to refund to the company any of its money or property which they have improperly paid away. They are trustees of the powers vested with them and they must exercise those powers honestly and in the interest of the company and the shareholders and not in their own interest.

Removal of directors: A director can be removed from his office before the expiry of his term of office as described below:

1. Removal by shareholders: (Sec. 284) The shareholders may by passing an ordinary resolution at the general meeting remove a director. Special notice is required of any resolution to remove a director. It means that a shareholder should send a notice to company at least 14 days before the date of meeting specifying his intention to move the resolution. Upon receipt of such a notice, the company should send a copy of it to the concerned director and other member. The director sought to be removed is entitled to be heard at the general meeting. 2. Removal by the Central Government : (Sec. 388B to 288E)

If the Central Government is convinced that a director has been guilty of grand, misfeasance gross negligence etc. it will refer to the company law Board for an opinion whether or not such person is fit and proper to hold the office of director. The application made to the company Law Board must contain a concise statement of the circumstances and materials as the central government may consider necessary of the purpose of the inquiry. At the end of the hearing of the case the company Law Board must record its finding. If finding of the company Law Board is against the director, the Central Government by order removers him from office. No compensation is payable to him for the termination of office. He is debarred from holding any office for five years from the date of the order of removal. 3. Removal by company Law Board: (Sec. 402) Where an application to the company Law Board for prevention of oppression or mismanagement, the company law board funds that the relief might to be granted, it may by an order provide for the termination, setting aside or modification of any agreement between the company and the managing director, any other director or the manager. In such case he cannot claim compensation for loss of office. He is debarred from holding any managerial pert in any company for a period of five years.

Powers of Board of Directors


General Powers:
As per Sec. 291 of the companies Act., subject to the provisions of the Act., and the articles of association, the land of directors of a company are entitled to exercise all such powers and to do all such acts and thing as the company is entitled to do. However, there are two limitation upto the powers of the board. 1. The board cannot exercise these powers which the Act or memorandum or articles require to be exercised by the shareholders in the general meeting. 2. In the exercise of their powers the directors are subject to the provisions of the Act. Memorandum and articles and other regulations not inconsistent made by the company in the general meeting. Powers to be exercised at board meetings: According to Sec. 292 the following powers can be exercised only by means of resolution panel at the board meetings. 1. The power to make calls 2. The power to issue debentures 3. The power to borrow money otherwise than debentures 4. The power to invest the companys fund

5. The power to make loans. The last three powers can be delegated to a committee of directors or the manager or any other principal officer of the company subject to the limits specified by the board. Other powers of the board exercisable only at the board meeting:1. The power of filling casual vacancies in the board (Sec. 262) 2. Sanction of a contract in which a director is interested. 3. Receiving of notice of disclosure of interest of a director in a contract or an arrangement. 4. Unanimous consent of all the directors present at a board meeting is also necessary for appointing a peson as managing director or manager who is already managing director or manager of another company (Sec. 316 and 386). Unanimous consent of all the directors present at a boar meeting is also necessary for sanctioning the making of investments in shares of other body corporate (Sec. 372). Receiving notice of disclosure of shareholding by directors and persons deemed to be directors (Sec. 308).

5. 6.

Restrictions on powers (Sec. 293). The board of directors cannot exercise the following powers except with the conquest of the company in the general meeting. (a) To sell, least or otherwise dispose off the whole or substantially the whole of the undertaking of the company. (b) To extend time for the repayment of any debt due by the director. (c) To invest otherwise than in trust securities the compensation received on compulsory acquisition of its fixed assets. (d) To borrow money where the money to be borrowed together with that already borrowed is in excess of the aggregate of the paid up capital of the company and its free reserves. (e) To contribute to charitable and other funds not directly relating to the business of the company or the welfare of its employees amounts exceeding in any financial year Rs. 50000 or five per cent of the average net profits of the three preceding financial years which ever is greater.

Duties of the Directors:


Generals:
(i) Duty of good faith: They must act bonafide in the interests of the company. They should not make use of the property of the company for promoting their personal ends. They should not make any secret profits.

(ii) (iii)

Duty of reasonable care: They must discharge their duties worth such care in diligence as is reasonable for persons of their knowledge and experience. Duty to attend meetings: They must attend Board meetings as for as possible. In case they do not attend three consecutive meetings for absent themselves from all meetings of the Board for a consecutive period of three months whichever is longer without the leave of the Board they are liable to vacate office. Personal attendance: They must perform their duties personally. They can delegate only certain functions as permitted by the articles.

(iv)

Statutory duties:
Some of the important duties as laid down in the companies Act are enumerated below: (i) To sign a prospectus and deliver it to the Register before its issue to the public. (ii) (iii) (iv) (v) (vi) (vii) To see that all moneys received from applications for shares are kept in a scheduled bank: Not to allot shares before receiving minimum subscription. To forward a statutory report to all its members and file a copy of it with the Register. To call an extraordinary general meeting of the company on the requisition of the requisite number of members. To lay before the company at the annual general meeting balance sheet, profit and loss account, auditors report, and their own report/ To hold their meeting at least once in every three months (Sec. 285)

(viii) If a director is interested in a contract to be entered into with the company, it is his duty to disclose the nature of his interest at a meeting of board of directors (Sec. 299) (ix) (x) The interested director not to take part in the decision or vote on any contract in which is interested (Sec. 300) To make a declaration of solvency of the company in the case of members voluntary winding up (Sec. 488)

Liabilities of Directors:
Directors will not be held personally liable for acts done interavires and in good faith. Their liabilities can be studied under two needs. (a) Civil liabilities and (b) Criminal liabilities.

CIVIL LIABILITIES

I.

Liability to Outsiders: Directors act as the agents of the company. So long as they enter into contracts in the name of and on behalf of the company, they cannot be held liable to the outsiders. Yet they may be liable in the following circumstances. a. For ultravirres transactions: they will be liable for breach of warranty of authority.

b. For mis-statements in a prospectus: They will be asked to compensate the subscribers for loss or damage suffered by them by mis-statements in the prospectus (Sec. 62). c. When they enter into contracts in their own names: Even when the contracts are in the name of the company, they become personally liable to the outsiders when they undertake personal liability.

II. Liability to the company: Acts which are ultravires the directors but are intra vires the company can be ratified by the shareholders in their general meeting. But the directors have to compensate the company any loss it may suffer on account thereof. a. For negligence: Through directors are not liable for mere errors of judgment, they will be held liable for grass negligences. In other words, when they fail to use such, reasonable skill and diligence in the performance of their duties as may be expected from persons of such experience and knowledge (e.g. payment of dividend when there are not trading profits) they will be liable. For breach of trust: When they fail to act honestly and in the interests of the company, they will be liable for breach of trust (e.g. Misapplication of funds, mis appropriation of assets, making secret profit etc.) For misfeasance: For willful misconduct, the court may ask the directors to replace or restore the money or the property taken by them. For fraudulent conduct of the business: if it appears in the course of winding up of a company that the business of the company has been carried on with intent, to defraud the creditors or for any fraudulent purpose directors who had knowledge on parry to it will be held, responsible by the court for the debts and liabilities of the company.

b.

c. d.

CRIMINAL LIABILITY
When the directors fail to comply with the various provisions of the Act, they will be punishable with fine or imprisonment or with both under the Act. Following are some of the ceases when the directors will be criminally liable. (i) (ii) (iii) Filing a prospectus containing untrue statement (Sec. 63) For fraudulently inducing persons to invest money in a company (Sec. 68) For default in keeping the share certificate ready for delivery within three months after allotments or within 2 months since the date of registrations of transfer.

(iv) (v) (vi)

For failure to make entries in the register of members of the issue of share warrants (Sec. 115) For failure to file annual return within 60 days of the holding of the annual general meeting (Sec. 162). For failure to pay dividend within 42 days form the date of its declaration (Sec. 207)

(vii) For failure to lay before the company in annual general meetings the audited profit and loss account and Balance Sheet. Powers of the Court to grant relief: Under Sec. 633, the court has power to relieve an officer of a company from liability for negligence, default, breach of duty, misfeasance or breach of trust if it appears to the court that he had acted lonely and responsible in the circumstances of the case. The object of this section is to provide against under undue hardship in deserving cases, and give relief from liability to persons who though technically guilty of negligence etc. are able to convince the court that they have acted honestly and reasonably. Directors with unlimited liability: The liability of directors of a company is limited to the extent of shares, held by them. The companies Act, however, provides for a statutory exception to the rule. Section 322 provides that a limited company may make the liability of any or all of its directors unlimited, if it is so provided by the memorandum. Where the memorandum does not contain any such clause, it may be altered to that effect by a special resolution, provided it is so authorized by its articles. Managing Director or Whole time Director or Manager A managing director, as defined in Section 2(26), means a director who is encrusted with substantial powers of management which would not otherwise be exercisable by him. The "substantial powers" of management may be conferred upon him by virtue of an agreement with the company, or by a resolution of the company or the Board or by virtue of its memorandum and articles. The powers so conferred are alterable by the company. He is also removable the same way as he was appointed irrespective of the fact that his appointment has been approved by the Central Government. But if he is prematurely removed from office he is entitled to compensation. A managing director is an employee of the company, but not to the extent so as to be entitled to preferential payments.(News Papers Proprietary Syndicate Ltd,Re, [1990]2Ch349). It is an essential requirement of his office as "managing director" that he should hold the office of a director. A managing director who is not a director is contradiction in terms. Shirlaw v. Southern Foundaries Ltd., (1940) 10 Com Cases I I (CA) affirmed on appeal Southern Foundaries Ltd. v. Shirlaw, (1940) 10 Com Cases 255 :(1940) 2 All ER 445 (HL); Balchand C v. Devashola (Nilgiri) Tea Estates Co. Ltd., (1972) 42 Com Cases 623 (Mad).

A managing director occupies the dual capacity of being a director as well as employee of the company. Thus for example, the Supreme Court observed that he can be regarded as a principal employer for the purposes of the ESI Act, 1948. Employees State Insurance Corpn. v. Appex Engineering P. Ltd., (1998) 1 Comp LJ 10: [19981 1 LLJ 274 (SC). He is not a mere servant, he is an agent of the company with capacity to bind the company within the sphere of management authorised to him. Happy Home Builders (Karnataka) P. Lid. v. Delite Enterprises, (1994) 13 Corpt LA 405 (Kar). The day to day management is entrusted to the managing director who can exercise powers of management without referring to the Board. It is necessary that the articles must provide for such an appointment being made. Boschoek Proprietary Co. Ltd. v. Fuke, (1906) 1 Ch 148. A managing director who was prosecuted for default under S. 220 contended that he was not liable as he had resigned before the last date for filing accounts. The court held that a managing director combines in himself two capacities, namely, manager and director. The capacity as manager cannot be terminated by merely sending up resignations. It becomes effective only when the company accepts the resignation and relieves him from his duties (on facts held that despite resignation, he continued to be managing director). Achutha Pai v. ROC, (1966) 36 Com Cases 598 (Ker). In our view the observation that a managing director holds two offices namely that of manager and of a director is not correct. The concept of a 'manager' as defined by the Act is different from that of managing director. A managing director as defined by the Act is a director who is entrusted with substantial powers of management. It is, however, true that a managing director may resign his office and continue! to be an ordinary director. His resignation as managing director becomes effective only when accepted by the company. A managing director cannot be equated with an ordinary director. Section 2(26) and S. 2(13) show the intention of the legislature to treat the two as separate categories. Therefore, when the term of a managing director expires, he cannot continue as a managing director without being reappointed. Sishu Ranjan Dutta v. Bhola Nath Paper House Ltd., (1983) 53 Com Cases 883, 898 (Cal). A person does not acquire the status of a manager or managing director only on being appointed as a director. Deen Deyalu, T. v. Sri Bezwada Papi Reddy, (1984) 2 Comp LJ 396 (AP). The question whether a managing director, inasmuch as he is both a 'director' and 'employee' should in his capacity of employee be considered a 'servant' or agent of the company is unimportant for purposes of the Companies Act, though it may be relevant for determining whether his remuneration is salary or business income for purposes of theincome-tax Act. For a discussion of his position as 'servant or 'agent' see Rant Prasad v. CIT (1972) 42 Corn Cases 544 : AIR 1973 SC 637; CIT v. M.S.P. Rajes, (1993) 77 Com Cases 402 (Kar). See also Hindustan Vacuum Glass Lid. v. Union of India, 1981 Tax LR 2438 (Del); Southern Foundries (1926) Ltd. v. Shirlaw, (1940) 10 Corn Cases 255 : (1940) 2 All ER 445 (HL); Union India Sugar Mills Co. Ltd., Re, (1933) 3 Corn Cases 424 : AIR 1933 All 607, managing director regarded an agent and therefore his knowledge as the knowledge of the company; CIT v. L. Armstrong Smith, (1946) 16 Corn Cases 172 (Born), remuneration of managing director taxed! as salary and not as income from business. CIT v. B.P. Dalmia (1994) 3 Comp LJ 268 (Ca!) where also the managing director was

viewed as a servant and his remuneration taxable as salary. CIT v. M.S.P. Rajes, (1993) 77 Com Cases 402 (Kant). The Civil Court will not grant an injunction to restrain the company from interfering with a managing director carrying out the duties of managing director who is removed from his office. Joginder Singh Palta v.Time Travels (P.). Ltd., (1984) 56 Corn Cases 103 (Cal). Where, for recovery of dues from the company, a decree was passed against the company as well as its managing director, it was held that the managing director was not the judgment-debtor in his individual capacity and, therefore, he was not liable to be arrested and detained in civil prison for enforcement of the decree. Maruti Lid. v. Pan India Plastic P, Ltd., (1995) 83 Com Cases 888 (P&H). Managing Or Wholetime Director, Link With Nature Of Duties, Not Designations Department's Clarification.-Whether a director is to be regarded as a whole-time director or as a managing director of the company would depend on the nature and extent of the duties entrusted to him and that the designation under which the appointment is made would no! make any difference in this regard. Thus, if a director is entrusted with managerial functions, he would be in the position of a Managing Director notwithstanding the fact that he may be designated as a technical adviser or as a technical director of the company. [Fourth Annual Report Year ended 31 st March, 19601. Company May Have More Than One Managing Director Department's Clarification-"Section 2(26) defines "Managing director" as a director who is entrusted with substantial powers of management which term refers to the nature of the powers and not the quantum thereof. Section 2(24) of the Companies Act, 1956, on the other hand has defined the word manager' as an individual who has the management of the whole or substantially the whole of the affairs of a company. Thus the managing director of a company may be entrusted with substantial power of management but not necessarily of the whole or substantially the whole of the affairs of a company. A company may, therefore, have more than one managing director. [Department's Clarification F. No. 8/16/(1)/61-PR]. Other Statutory Provisions.-Section 269 makes it obligatory for a company having capital of a sum as may be prescribed (w.e.f. 18-9-1990 Rs. Five crores or more) to appoint a managing director or wholetime director or manager. Section 267 disqualifies certain persons from being appointed as managing director. Section 316 prescribes the number of companies in which a person can be appointed as managing director at the same time; section 317 restricts the maximum term of appointment to five years. The remuneration of a managing director is now governed by section 309 and Schedule XIII. Procedure Of Appointment [S. 269] Section 269 has been recast by the amendment of 1988. In the case of public companies or their subsidiary private companies, Teaching a figure of paid-up share capital which may be prescribed [Rs 5 crores or more] the appointment of a managing director, whole-time director or manager has been made compulsory. The appointment has to correspond with the conditions specified in Parts I and II of Schedule XIII, which parts are subject to the

provisions of Part III. The appointment and remuneration require approval of shareholders in general meeting. The auditor of the company or company secretary has to certify that requirements have been complied with. A return of the appointment in a prescribed form must be filed with the Government within 90 days. Approval of the Central Government is not necessary in such cases. But if the appointment does not comply with the schedule, the approval becomes necessary. Application for approval must be made within 90 days. The Central Government may not accord the approval if it is satisfied that the candidate is not a fit and proper person for the post and his appointment is not in public interest and the terms and conditions of the appointment are not fair. The Government may accord the approval for a shorter period than proposed. If there is no approval, the appointee should vacate the office from the date of the communication of the refusal to the company, failing which he incurs a penalty of Rs 500 for every day of usurpation of the office. Where the Government suo motu or on information received is prima facie of opinion that an appointment has been made without approval in contravention of the requirements of the schedule, the Government shall be competent to refer the matter to the Company Law Board for a decision.The Board has to give notice to the company, the appointee and any other officer of the company who was responsible for compliance of Schedule XIII to show cause why the appointment should not be terminated and the penalty of sub-section (10) imposed. The Board should give appropriate opportunity and then may make an order declaring that there has been a contravention. The declaration will have the following effects: (1) the company is liable to a fine extending upto Rs 5000 ; (2) every officer of the company who is in default is liable to a fine of Rs 10,000 ; (3) the appointment comes to an end and the appointee is liable to a fine of Rs 10,000 and is also liable to refund the entire amount of salaries, commissions and perquisites received by him upto the date of the order. Any violation of the order of the Board or any default in meeting its consequences is further punishable under sub-section (II). Every officer of the company who is in default and the managing or whole-time director or the manager, shall be punishable with imprisonment extending upto three years and also fine extending upto Rs 50 for every day of default. Whether such a double penalty amounts to a violation of the doctrine of double jeopardy, only time will decide. Sub-section (12) provides that the acts of such a person done by him upto the date of the finding that his appointment was void would be valid provided that they were otherwise valid. The section concludes with an Explanation that the word "appointment" includes reappointment and "whole-time director" includes a director in the wholetime employment of the company. The Government examines whether the proposed candidate is a fit and proper person. The Government may refuse the proposal where there is a pending prosecution against the person concerned. Further, the Government may sanction the appointment subject to any condition that it considers necessary. Thus where the person proposed to be appointed was

a promoter of the company and had in that capacity made a secret profit of three lakh rupees, the Government approved his appointment subject to the condition that he restored the profit to the company. Disqualifications [S. 267] The following cannot be appointed managing or whole-time directors: (1) A person who is an undischarged insolvent or has at any time been adjudged insolvent. (2) A person who suspends or has at any time suspended, payment to his creditors or makes or has made a composition with them. (3) A person who is or has been convicted by a court of an offence involving moral turpitude. The first Part of Schedule XIII gives the list of statutes and provides that any person convicted for violating them and sentenced to imprisonment or fine up to Rs 1000 shall not be appointed without the approval of the Central Government. Where a person is already a managing director of another company he can be appointed only with the unanimous resolution of the board of directors. 16 The Central Government may permit Any person to be appointed managing director of more than two companies if the Government is satisfied that it is necessary that the companies should, for their proper working, function as a single unit and have a common managing director [S 316(2), provison] The maximum term of appointment can be five years at a time and a new term cannot be sanctioned earlier than two years from the date on which it is to come into force. The terms of appointment can be changed, when they are to be different from those prescribed by Schedule XIII, only with the approval of the Central Government. Managerial Remuneration: As director on managing director are not servants of the company, they have no right for payment or remuneration unless it is provided in the articles. The remuneration payable to the directors of a company, including any managing director or whole time director is determined either by the articles of the company or by a resolution passed by the company in a general meeting. The Articles may also require that a special resolution is to be passed for the purpose. The amount of remuneration and its mode of payment must be in accordance into the provision of Sec. 198 and 309. Maximum Limit Section 198 of the companies act, 1956 puts a maximum limit of 11% of the net profits in any financial year on the managerial remuneration payable by a public company or a private company which is a subsidiary of a public company to its directors including any managing or whole time director or manager.

Minimum Limit Section 198 (4) of the companies act 1956 as amended by the companies act 1988 provided that subject to the provisions of section 269 read with schedule XIII, if in any financial year a company has no profits or its profits are inadequate, the company shall not pay to its directors including any managing or whole time director or manager, by way of remuneration any sum except with the previous approval of the central government. Calculation of Managerial Remuneration The remuneration should as far as possible be broken up under the following broad heads as per the requirements of Schedule VI:a) Salaries and allowances b) Monetary value of various perquisites c) Contribution to provident, superannuation and gratuity funds d) Commission The following perquisites or benefits provided by the company to its managerial remuneration: 1. Any expenditure incurred by the company in providing rent free accommodation, or any other benefit or annuity. 2. Other benefit or concessional benefit 3. Any expenditure in respect of any obligation paid. 4. Any expenditure incurred by company in effecting any insurance on the life of the managerial. Remuneration to Manager Section 387 of the companies act 1956 contains the provisions relating to the remuneration payable to the manager of a public company or its subsidiary which are as follows: A Manager may receive remuneration by way of a monthly payment or by way of a specific percentage of the net profits of the company or partly by way of monthly payment and partly by way of specific percentage of the net profits of the company. The total remuneration can not exceed 5% of the net profits of the company except with the previous approval of the government. The net profits of the company are to be calculated in the manner laid down in section 349 and 350 of the companies act. A company can not have more than one manager at a time. Overall Remuneration Limit

The following chart shows the maximum limit of remuneration: If there is only one managing director If more than one managing director If there is only one MD If there is only part time directors only and has no MD If there is pert time directors and also have one or more MD If there is manager 11% 5% 10% 3% 1% 5%

Remuneration to the Directors Section 309 contain the provisions relating to remuneration payable to the directors including any MD or WHD of a public company and a private company which is the subsidiary of a public company which are as follows: A director may be paid fee for attending the meetings of the board or a committee thereof attended by him. A WHD or a MD may be paid remuneration either by way of a monthly payment or at a specified percentage of the net profits or partly by one way and pertly by other. But except with the previous approval of the central government the remuneration shall not exceed: If one whole time director If More than one whole time director If only part time directors If part time directors as well as whole time directors : : : : 5% 10% 3% 1%

However the company can increase the remuneration with the previous approval of the central government and by passing a special resolution. The net profit for this purpose shall be calculated in the manner laid down in section 349 and 350. A director who is in receipt of any commission from the company is not entitled to receive any commission or remuneration.

Company Secretary:
A secretary is a representative of the company who is selected to carry out the ministerial or administrative duties. He is mainly anxious to make sure that the relationships of the company are accomplished according to the provisos of the Companies Act and articles of association of the company.

The Indian Companies Act, 1956 (as amended by the Companies Amendment Act, 1974) in Section 2(45) has expressed the term secretary as "any individual, possessing the prescribed qualifications, appointed to perform the duties which may be per by a secretary under the Act and any other ministerial or administrative duties". The definition of Company secretary has given various points of concern they are that a person can only be appointed as a company secretary rather than the firm, he or she should have the qualifications prescribed by the Central Government and the duties have ministerial or administrative nature.

QUALIFICATIONS OF A COMPANY SECRETARY


Section 2(45) of the Companies Act has given the guidelines for the qualifications of a company secretary. Under Section 383-A of the Act states that company with a paid up share capital should appoint a whole time secretary. There are two qualifications of company who can appoint secretary are the company having a paid up share capital of Rs.2 crores or more and the other one is that those companies having lesser paid up share capital. Companies having a paid up share capital of less than Rs.2 crores. As it is not an easy appoint company secretary with the companies having a paid up share capital of less than Rs.2 crores might not appoint a wholetime secretary. An individual having one or more of the following qualification be able to be appointed as a secretary for small sized companies such as he or she should be a member of the Institute of Company Secretaries of India; have passed the Intermediate examination conducted by the Institute of Company Secretaries of India; possessing a Post-graduate degree in Commerce or Corporate Secretary ship being approved by any University in India; Law graduate from any University; can be a member of the Institute of Chartered Accountants of India; an individual holding post-graduate degree or diploma in Management science granted by any University or the Institutes of Management i.e., Ahmedabad, Calcutta, Bangalore, or Lucknow, can be a member of the Institute of Cost and Works Accountants of India; should have Postgraduate diploma in company secretaryship granted by the Institute of Commercial Practice. Delhi, under Delhi Administration or diploma in corporate laws and management granted by the Indian Law Institute, New Delhi; or a Post-graduate diploma in Company Law and Secretarial Practice granted by the University of Udaipur, or should be a member of the Association of Secretaries and Managers, Calcutta. Besides these statutory qualifications he or she have got the general knowledge together with the knowledge of the industry and trade, so that he can make useful suggestion to directors. He should have a sound knowledge of different laws affecting the business. He should also have knowledge of economics, banking and finance. He must have a good personality as he is supposed to co-operate with the staff at all times.

SECRETARY IN WHOLE-TIME PRACTICE


The term 'Company Secretary' means an individual who is a member of the Institute of Company Secretaries of India. A Company Secretary can admit full time employment as secretary of a company or he may choose to practice independently as a company secretary, either individually or in partnership with one or more company secretaries. Section 6 of the Company Secretaries Act, 1980 describes that only a member of the Institute whether in India or elsewhere is entitled to practice with the condition that he should have obtained the certificate

from the council a certificate of practice. According to Section 2(2) of the Company Secretaries Act, 1980 has approve various areas of practice for a company secretary in practice such as to appoint himself in the practice of the occupation of company secretaries to, or in relation to, any company; or, offer to make or perform service in relation to the encouragement, forming, incorporation, amalgamation, reconstruction, re-organization or winding up of companies; or an offer to make or execute services as may be performed,

APPOINTMENT OF SECRETARY
A company having paid up share capital of 2 crores or more, it is required to employ a whole-time-secretary. If companies are having paid up share capital of less than the prescribed amount, it is not required to appoint a whole-time secretary. Usually, every company appoints a secretary and the essential provision is made in the articles of association for the purpose. Nevertheless, each company is not obligatory to appoint a whole time secretary with a paid up capital of 10 lakh rupees or more but less than 2 erores shall file with Registrar a certificate from a secretary in whole time practice. The first secretary is usually appointed by the promoters. They help the promoters in carrying out all the preliminary work in relation to the formation of the company. They are termed as the 'pro-tern secretary' (secretary for the time being). Usually, the appointment of a company secretary is made by the Board of directors in their first meeting by passing a resolution. A service agreement is carry out between the company and the secretary in which the terms and conditions of his appointment, remuneration etc. are declared.

REMOVAL OF SECRETARY
The appointment of a company secretary is usually done by way of a resolution of the Board of directors, and the same can be removed by the Board of Directors or by the managing director, if he is authorized by the Board. The terms and conditions of the service of the company secretary are stated in the service agreement. A clause is mentioned in the service agreement which describes the manner in which he can be dismissed or removed. He should be given due notice of termination of his employment according to the terms and conditions of his employment or else the company shall be liable to pay compensation to him.

POSITION OF A COMPANY SECRETARY


The position of a company secretary has undergone a remarkable change during the last few years. He has come up from the position of a clerk to an essential body in the corporate chain of command. The position of a company secretary can be conferred as a Servant of the Company, as an Agent of the Company: as an Officer of the Company and as an Advisor to the Board:

DUTIES OF A SECRETARY
The duties of a company secretary differ from business to business in accordance with its size, management structure and the personal qualifications of the secretary. The company secretary is usually assigned with legal, administrative and management functions. In big

companies, there are separate managers who get themselves involve with the functions relating to accounts, law and personnel etc.The main role of the company secretary as the coordinator cannot be under estimated as he performs three fold capacity. as an agent of the Board of directors and as a person in charge of secretarial work relationship to the company and as chief administrative officer of the company. These duties can be classified into two categories (a) statutory duties, and (b) general duties. The statutory duties can be subdivided into two-duties under Companies Act and duties under other Acts. Besides the statutory duties, a secretary is required to carry out a number of general duties such as to carry out the orders of the Board of director, to assist the Board in the formulation of policy decisions, not to disclose confidential information relating to the affairs to the company, not to make any secret profits on account of his position, to act as a medium and link between the company and outsiders, to provide information to the shareholders and to organize, supervise and coordinate the office work.

LIABILITIES OF A SECRETARY
It is the duty and responsibility of a secretary to look into the affairs of the company and perform in accordance with the provisions of the Companies Act and articles of association. If a default is made to fulfill certain requirements of the Act, a secretary, being an officer of the company is liable for fine and punishment. The liability of a secretary can be statutory as well as contractual.

RIGHTS OF A SECRETARY
There are certain rights which are specified to the secretary by the Act, Board of directors and the general meetings of shareholders. He also obtains some rights from the service agreement with the company which usually include right to control and supervise the working of his department; right to sign documents requiring authentication by the company; right to be indemnified for any loss suffered by him while discharging his duties; and right to receive remuneration.

ROLE OF A SECRETARY
The company secretary performs an important role in company administration. The role depends on the size and nature of the company. He is accountable not only to the company, but also to its shareholders, creditors, employees and the society. He usually performs three fold functions as a statutory officer, as a coordinator and as an administrative officer. Questions:
1. 2. 3. 4.

State the qualification of the Directors and explain the procedure of appointing the director. What the rights and duties of a director? Explain who is a managing director of a company and explain the procedure of appointing the same. Explain the role of a company secretary in the company.

COMPANY MEETINGS
The company is an artificial person created by law having a separate entity distinct from its members. Being an artificial person, it cannot take decisions on its own. It has to take decisions on matters relating to its well being by way of resolutions passed at properly constituted and convened meetings of its shareholders or directors. The decisions about a company's management are taken by the directors in their meetings and they are to be ratified in the general meetings of the company by the shareholders. There in an old proverb that "Two heads are always better than one". When two or more than two persons come together to discuss matters of common interest, there is said to be a meeting. It follows that to constitute a meeting there must be two or more persons. Generally, the purpose of a meeting is to consider issues of common interests to its attendants.

KINDS OF MEETINGS
The meetings of a company are of three kinds : 1. Meetings of the shareholders (i) General meetings (ii) Class meetings 2. Meetings of the Directors 3. Meetings of the Creditors

STATUTORY MEETING
Every public company limited by shares and every company limited by guarantee and having a share capital shall, within a period of not less than one month nor more than six months from the date on which the company is entitled to commence business hold a general meeting of the members of the company. This meeting is called 'the statutory meeting'.[Sec. 165 (1)] A meeting held prior to the statutory period of one month from the date of entitlement of a company to commence business cannot be called the statutory meeting. The notice for such a meeting should state it to be statutory. The statutory meeting is held only once in the life time of a company. Private companies, public companies limited by guarantee and not having a share capital and unlimited companies are not required to hold the statutory meeting. However, a private company which becomes a public company by the application of Sec. 43 will have to comply with the provisions of the Act which are applicable to public limited companies from the date of its becoming a public limited company. A private company can commence business on the date of its incorporation. If the date of its becoming a public company is within 6 months of

its incorporation, it must hold a statutory meeting in accordance with the provision of Section 165 (1). If it becomes a public company after 6 months of its incorporation, it is not required to hold the statutory meeting.

Notice The company must give notice to its members 21 days before the holding of the statutory meeting. The notice convening the statutory meeting must specifically state that the meeting is the statutory meeting. The time, date and place of the meeting must be mentioned in the notice. However, a shorter notice may be sufficient if consent is accorded by the members of the company: (a) If the company has a share capital, holding not less than 95% of such part of the paid up share capital of the company as gives a right to vote at the meeting. (b) If the company has no share capital, holding not less than 95% of the total voting power exercisable at the meeting. Procedure at the meeting A list showing the names, addresses and occupation of the members of the company and the number of shares held by them must be produced by the Board of Directors at the commencement of the statutory meeting. The list is to remain open and accessible to any member of the company during the continuance of the meeting [Section 165 (6)]. It is to be noted that the members of the company present at the meeting are at liberty to discuss any matter relating to the formation of the company or arising out of the statutory report, whether previous notice has been given or not but one resolution may be passed of which notice has not been given in accordance with the provisions of Companies Act. [Sec.165 (7)] Adjournment of Statutory Meeting The meeting may adjourn from time to time and at any adjourned meeting any resolution of which notice has been given in accordance with the provisions of the Companies Act may be passed and the adjourned meeting will have the same power as an original meeting. [Sec. 165(8)] Penalty If any default is made in complying with the above provisions, every director or other officer of the company who is in default shall be liable to a fine which may extend to Rs. 500. Besides, if default is made in delivering the statutory report to the Registrar or in holding the statutory meeting, the Court may order the compulsory winding up of the company. [Sec. 433 (b)]

Objects The obvious purpose of the statutory meeting with its preliminary report is to put the shareholders of the company as early as possible in possession of all the important facts relating to the new company what shares have been taken up, what moneys received, what contracts entered into, what sums spent on preliminary expenses, etc. Furnished with these particulars the shareholders are to have an opportunity of meeting and discussing the whole situation in the management methods and prospects of the company. If the shareholders fail to do so, they have only themselves to blame.

ANNUAL GENERAL MEETING


Every company must in each year hold in addition to any other meeting a general meeting, as its annual general meeting and must specify the meeting as such in the notices calling it [Section 166 (1)]. The annual general meeting is to be held in addition to any other general meeting that might have been held in a year. It appears that holding of an annual general meeting in every calendar year is a statutory necessity. Calendar year is to be calculated from Ist January to 31st December and not twelve months from the date of incorporation of the company. First annual general meeting A company must hold its first annual general meeting within a period of not more than 18 months from the date of its incorporation and if such general meeting is held within that period, it shall not be necessary for the company to hold any annual general meeting in the year of its incorporation or in the following year [Section 166(1)]. For example a company is incorporated in October 1994. Its first annual general meeting is required to be held within 18 months from the incorporation, i.e. up to March 1996 and if such a meeting is held within this period, no other meeting will be necessary either for 1995 or 1996. Subsequent annual general meeting As already discussed a company is required to hold an annual general meeting in each year. Where a meeting called and held on a day in one year is adjourned to a date in the next year and held on that date, the meeting held on the latter date is not a different meeting and does not comply with the requirements of Section 166. However, the gap between one annual general meeting and the next should not be more than fifteen months. In the case of Shree Meenakshi Mills Company Limited v. Astt. Registrar of Joint Stock Companies Madurai AIR 1938 Mad. 640, the annual general meeting of a company called in December 1934 was adjourned and held in March 1935. The next annual general meeting was held in January 1936, no other meting being held in 1935. The company was prosecuted for failure to call the annual general meeting in 1935. It was held that there should be one meeting per year and as many meetings as there are years. The Registrar

can, for any special reason, extend the time within which any annual general meeting is required to be held by a period not exceeding 3 months but the time for holding the first annual general meeting cannot be so extended. [Sec. 166(1)] Power to convene an annual general meeting The proper authority to convene an annual general meeting is the Board of Directors, and if the managing director, manager, secretary or other officer calls a meeting without such authority, it will not be effectual unless the Board ratifies the act before the meeting is held. Notice A public company must give at least 21 days notice for convening any general meeting including annual general meeting. Annual general meeting may be called after giving a shorter notice than 21 days if it is so agreed by all the members entitled to vote in the meeting (Section 171). In calculating 21 days, the date on which the notice is served and the day of the meeting are excluded. Date, time and place of holding the annual general meeting Every annual general meeting shall be called at any time during the business hours, on a day that is not a public holiday. It shall be held either at the registered office of the company or at some other place within the city, town or village in which the registered office of the company is situated [Section 166(2)]. The Central Government may exempt any class of companies from the provisions of Sec. 166 subject to such conditions as it may impose. (a) A public company or a private company which is a subsidiary of a public company, may by its Articles fix the time for its annual general meetings and may also by a resolution passed in preceding annual general meeting fix the time for its subsequent annual general meetings and (b) A private company which is not a subsidiary of a public company may in like manner and also by a resolution agreed to by all the members thereof, fix the time as well as the place for its annual general meetings [Sec. 166(2)] Adjournment Where an annual general meeting is held but adjourned, the adjourned meeting is nothing but continuance of the earlier meeting and therefore if in the adjourned meeting the Balance Sheet and the Profit and Loss Account of the company are laid and adopted and thereafter sent to the Registrar, Section 220(I) is not violated. Holding of annual general meeting where the annual accounts are not ready According to Central Government instructions, in case the annual accounts are not ready for laying at the appropriate annual general meeting, the company must hold the annual general meeting within the time limit, transact all business other than the consideration of the accounts, announce when the accounts are expected to be ready for laying and pass a suitable resolution adjourning the said annual general meeting to a specific date or to a date to be

specified later on. Thus the company cannot take the plea that the annual general meeting was not held because the accounts were not ready. Power of Company Law Board to call Annual General Meeting: If any company fails to hold an annual general meeting within the prescribed period, the Company Law Board on the application of any member, may either call or direct the calling of a general meeting of the company. It may give such directions as it thinks fit in regard to the calling, holding, or conducting of such meetings. The Company Law Board may direct that one member of the company present in person or by proxy shall be deemed to constitute a meeting. A general meeting held at the directions of the Company Law Board shall be regarded as an annual general meeting [Section 167]. Penalty: If default is made in holding the meeting of the company in accordance with Section 166 or in complying with any direction of the Company Law Board under Section 167 the company and every other officer of the company who is in default shall be punishable with fine which may extend to Rs. 5,000 and in the case of a continuing default with a further fine which may extend to Rs. 250 for every day after the first during which the default continues (Section 168).

EXTRAORDINARY GENERAL MEETING


A statutory meeting and annual meeting of a company are called ordinary meetings. All general meetings other than these are called extra-ordinary general meetings. This meeting is generally held for the purpose of dealing with any extra-ordinary matter which cannot be postponed till the next annual general meeting. Hence, it is a general meeting of a company which is held between two consecutive annual general meetings for transacting some urgent or special business. Who can convene? An extra-ordinary general meeting may be convened by any one of the following: 1. The Board of Directors 2. Any director or any two members. 3. Requisitionists. 4. Company Law Board 1. Extra-ordinary meeting convened by the Board of Directors: (ii) On its own Regulation 48 (1) of Table A provides that the board may, whenever thinks fit, call an extra-ordinary general meeting. However, the company secretary has no authority to convene an extra-ordinary general meeting without such authority, if he calls; it will not be effectual unless the Board of Directors ratifies the act before the meeting is held.

(iii) On Requisition of Members: The directors are bound to call an extra-ordinary general meeting of the company if the requisition is made bya. If a company has a share capital by members holding 10% of the share capital of the company and having a right to vote at the date of the deposit of the requisition: or b. If a company has not share capital, members having 10% of the voting powers of all the members having a right to vote at the date of the requisition. [Section 169(4)]. If the Board does not, within 21 days from the date of the deposit of a valid requisition, proceed duly to call a meeting on a day not later than 45 days from the date of the deposit of the requisition the meeting may be called. i. ii. By the requisitionists themselves; In the case of company having a share capital, by such of them represent either a majority in value of the paid-up share capital held by all of them or not less than one tenth paid up share capital of the company, whichever is less; or In the case of a company not having share capital, by such of the requisitionsists as represent not less than one tenth of the voting power of the members of the company [Section 169(4)].

iii.

The extra-ordinary general meetings requisitioned by he members must be held within three months of the deposit of the requisition. [Sec. 169(7)]. 5. Extra-ordinary Meeting convened by the Company Law Board (Sec. 186). The Company Law Board has been vested with the power to call a meeting of the company. If for any reason it is impracticable to call a meeting of a company, according to the provisions of the Act or the Articles, the Company Law Board maya. Order a meeting of the company to be called, held conducted in such manner as the Company Law Board thinks fit, and b. Give such ancillary or consequential directions as the Company Law Board thinks expedient, which may even modify or supplement the provisions of the Companies Act, 1956 and of the companys articles in relation to the calling, holding and conducting of the meeting. It can also direct that even one member of the company present in person or by proxy shall be deemed to constitute a meeting.

Meetings of Directors (Sec. 285 to 288) Directors of a company exercise most of their powers at the meetings of the Board. The Companies Act contains the following provisions relating to Board meetings.

1.

Number of meetings: (Sec. 285) In the case of every company a meetings of its Board of directors shall be had at least once in every three months and at least four such meetings shall be held in every year (Sec. 285). The Central Government may, by notification in the Official Gazette, direct that this provision shall not apply in relation to any class of companies (Proviso to Sec. 285)

2.

Notice of meetings: (Sec. 286) Notice of every meetings of the Board of directors of a company shall be given in writing to every director for the time being in India, and at his usual address in India (Sec. 286(1)). Every officer of the company whose duly it is given notice and who fails to do so shall be punishable with fine which may extend to Rs. 100 [Sec. 286(2)].

3.

Quorum for meetings (Sec. 287 and 288) The quorum for a meeting of the Board shall be one-third of its strength (any fraction contained in that one-third) being rounded off as one or two directors, whichever is higher. Where at any time the total strength, then the remaining directors who are not interested present at the meetings (being not less than two) shall be the quorum [Sec. 287(2)]. Total strength means the total strength of the Board of Directors of the company, after deducting there form the vacant posts of directors [Sec. 287 (1) (a)] and interested director means any director whose presence cannot, by reason of Sec. 300 cont for the purpose of forming a quorum at a meeting of Board, at the time of any discussion or vote on any matter [Sec. 287 (1) (b)].

Other Meetings 1. Class Meeting: Meeting of classes of share holders are only possible where shares of the company are divided into various classes e.g. preference shares, equity shares. Section 170 states that provisions of the act as applicable to general meeting also apply to class meetings. Meeting of creditors otherwise than in winding up Section 391-393 provide for a scheme of compromise which a company can make with its creditors and also prescribed procedure to be adopted.

2.

The requisites of a valid meeting are as follows: 1. Proper authority A meeting must be called by a proper authority. It is the Board of Directors, which should pass a resolution to call a general meeting. However under certain circumstances meeting can also be convened by the members or the Company Law Board.

2.

Proper Notice: A proper notice to every member of the company is required. It must be given twentyone days before the meeting. In calculating the twenty one days the date of posting and the date of meeting should be excluded. The meeting may be called by a notice of less than twenty-one days if it is so agreeda. In the case of an annual general meeting by all the members who are entitled to vote there. b. In the case of any other meeting of a company having a share capital by members holding not less than ninety-five percent of the paid-up share capital, giving a right to vote. If the company does not have capital by members having not less than ninety-five percent of the total voting power must give their consent. Notice must be given to the following persons: 1. All the members of the company entitled to vote at the meeting. 2. The persons on whom the shares of any deceased or insolvent member may have devolved. 3. The auditor or auditors of the company.

Ordinary business and special business: (Sec. 173) The business to be transacted may be general ordinary or special business. Ordinary business: The following business which is transacted at every annual general meeting is considered as ordinary business. 1. The consideration of accounts, balance sheet, and the report of the Board of directors and auditors. 2. The declaration of dividend. 3. The appointment of directors in place of those retiring. 4. The appointment of and fixing the remuneration of auditors. Special business: Any business other than ordinary business at an annual general meetings and all business transacted at the statutory meeting and at any extra-ordinary general meeting is deemed as special business. Notice of meeting must state the purpose of the meeting; an explanatory statement shall be annexed to the notice of the meeting. That statement must set out all material facts relating to the special business and the interest of the directors in the special business. The notice must give a sufficiently full and frank disclosure to the members of the facts upon which they are asked to vote otherwise the resolution passed at the meeting will be invalid. 4. Quorum for meeting: (Sec. 174)

A quorum is the minimum number of members who must be present in order to constitute meeting. If there is no quorum proceedings of the meeting become invalid. Unless the articles provide for a larger number five members personally present in the case of public companies (other than 43A companies) and two persons personally present in the case of private company will be the quorum. No proxy is counted in forming the quorum. Joint holders are treated as one member for the purpose of quorum. If within half an hour from the time appointed for holding a meeting of the company, a quorum is not present the meeting if called upon the requisition of members stand dissolved. In any other case, the meeting is adjourned to the same day in the next week, at the same time and place or to such other day and at such other time and place as the Board may determine. If no quorum is present in an adjourned meeting, the meeting will proceed with the members present. Chairman: (Sec. 175) Every meeting is presided over by a chairman. He looks after the proper conduct of the business. His appointment is usually regulated by the articles of association. The qualities of a good chairman are given below: 1. Tact 2. Impartially 3. Judicial mind 4. Fair and fearless 5. High morale 6. Regular and functional in attending the meeting 7. An ideal man Rights and powers of Chairman: 1. To maintain the order and decorum of the meeting 2. To decide the priority in which members will speak 3. To stop discussion if it has become sufficiently long 4. To decide the points of order submitted to him 5. To use casting vote 6. To check irrelevant and personal referenced during the course of debate. Duties and Responsibilities of the Chairman:

1. To act in the interest of the company 2. To see the validity of his appointment as a chairman. 3. To see the regularity of the meeting. 4. To follow strictly the rules of the Company Law Board and Articles of Association. 5. To conduct the business of the meeting according to its agenda 6. To ensure the validity of the business 7. To act within the jurisdiction of his powers. 8. To listen the minority 9. To take correct and valid decisions. 10. To make bonafide use of the casting vote. 11. To certify under his signature the correctness of the minutes. 5. Minutes of the Meeting: (Sec. 193-196)

Record of the proceedings of the meeting is termed as minutes, Sec. 193 makes it subligatory on the part of every company to maintain minutes of every general meeting and the meetings of Board and its committees separately. The book in which the record is kept is known as the minute book. The pages of the minute book must be consecutively numbered. In no case the attaching of pasting of papers of proceedings of a meeting allowed in minute books. It can be kept in the loose leaf form provided it is under the safe custody of a responsible officer and is bound periodically at an internal not exceeding six months. Signing of minutes: Each page of the minute book which records the proceedings of a meeting shall be initialed or signed at last page dated and signed in the case of board or committee meeting by the Chairman of the same or the next meeting by the Chairman of the same meeting or in his absence by the director duly authorized by the Bard for the purpose. Contents of minutes: The minutes of each meeting shall contain a. A fair a correct summary of the proceedings, and b. All appointments of officers made there at. In the case of a meeting of the Board of Directors or of a committee of the Board, the minutes shall also contain. a. The names of the directors present at the meeting and b. The names of those directors who dissent from or do not concur in the resolution passed at the meeting. Evidentiary value of minutes:

Minutes kept in accordance with the provision of Sec. 193 are evidence of the proceedings recorded therein (sec. 194). Accordingly the meeting is deemed to have been duly called and held until the contrary is provided (Se. 195) Proxies: (Sec. 176) The term proxy refers to the person authorized to attend and vote for another at a meeting of the company. It also means thee instruments by which the proxy is appointment. A proxy has no right to speak at the meeting. He is not entitled to vote except on a pool unless the Articles provides otherwise. A member of Private Company unless the articles provides otherwise is not entitled to appoint more than one proxy to attend on the same occasion. Also a member of a company not having a share capital can not unless the articles provides otherwise appoint a proxy. The instrument of proxy must be in writing, duly signed by the appointer and stamped (30 paise stamp). It must be deposited with the company forty eight hour before the commencement of the meeting. A member can not be required to deposit earlier than this period. After giving three days notice a member can inspect proxiees lodged with the company during 24 hours before the time fixed for the meetings till the conclusion of the meeting. A proxy is revocable. It can be revoked before the proxy has voted. If the shareholder after having appointed a proxy personally attends and votes at the meeting the proxy is revoked thereby. Voting: The voting in a company may take place either (i) By show of hands or (ii) By poll. In the case of voting by show of hands each member is entitled to exercise only one irrespective of his holding. A personal when passed by a majority is termed as a resolution. A declaration by the Chairman that a resolution has been carried is conclusive unless a pool is demanded under Sec. 179. Proxy can not vote on show of hands unless the articles provides for that. Voting by show of hands may not effectively reflect the interest of the members. A more proper method of ascertaining the wishes of the members is by taking a pool.

Voting on Poll: A poll can be ordered by the Chairman of his own motion. It will be taken if a demand is made by the following persons present in person or by proxy.

1.

In the case of a public company giving a share capital by any member or members present in person or by proxy and holding shares which confer not less than one tenth of the total voting power in respect of the resolution or holding shares paid up value not less than Rs. 50,000. In the case of a private company having a share capital;, by one member having the right to vote on the resolution and present in person or by proxy is not more than seven such members are personally present and by two such members present in person or by proxy is more than seven such members are personally present. In the case of any other company by any member or members prese4nt to person or by proxy and having not less than one tenth of the total voting power in respect of the resolution.

2.

3.

The Chairman will appoint two scrutineers to scrutinize the votes polled. At least one of them should be a member of the company. On getting the report from the scrutineers, the chairman will declare the result. Resolution: When the motion i.e. a personal placed before a meeting is passed by the meeting, it becomes a resolution. Thus a resolution reflects the will of the majority. The Companies Act provides for three types of resolutions: 1. Ordinary Resolution 2. Special resolution 3. Resolution requiring special notice. 1. Ordinary Resolution: An ordinary resolution is one which is passed at a general meeting of a company by a simple majority of votes including the casting vote of the Chairman if any. In other words a resolution is an ordinary resolution when at a general meeting the votes cast in favour of the resolution are more than the votes cast against it. Items requiring ordinary resolutions: Any matter which does not require a special resolution under the companies act is to be passed only as an ordinary resolution. All ordinary business of the company at the annual general meeting require only ordinary resolution. The following items special business also require the passing of an ordinary resolution. 1. For issuing shares at discount (Sec. 79) 2. For rectifying the name of a company if it has been registered with a name which resembles that of an existing company (Sec. 22) 3. For removing a director before the expiry of his term of office. 4. For appointing a director in the place of the removed director (Sec. 284) 5. For approving the appointment of sole selling agents (Sec. 294)

6.

For paying remuneration to a director who is neither its managing director nor in wholetime employment of the company (Sec. 309) 7. For increasing or reducing the number of directors within the limits prescribed by the articles (Sec. 258(1)).

Special Solution The conditions which should be satisfied for a special resolution are as follows: 1. The intention to purpose the resolution as a special resolution must have been duly specified in the notice calling the meeting. 2. The notice should have been given to the members at least 21 days before the date of meeting. 3. The votes cast in favour of the resolution are not less than three times the number of votes if any cast against the resolution in other words a special resolution requires a three growth majority. The votes may be cast either by show of hands or by poll. There is no question of casting vote in the case of a special resolution. A copy of every special resolution must be filed with the Register within thirty days. Items which require special resolution: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. For changing the place of its registered office form one state to another or changing the object clause (Sec. 17) To change the name of the company (Sec. 17) To alter the articles of the company (Sec. 31) To offer further issue of subscribed capital when shares are offered to outsiders (Sec. 81) To create reserve capital (Sec. 99) To reduce the share capital of the company (Sec. 100) To authorize payment of interest out of capital (Sec. 208) To request the Central Government to appoint inspection for investigation of the affairs of the company (Sec. 327) To authorize payment of remuneration to directors who are not on the whole time employment of the company. To make the liability of directors unlimited (Sec. 323) To have the company wound up by the court (Sec. 433) To wound up the company voluntarily (Sec. 484)

To purpose of a special resolution i9s to ensure that every important matter is decided after due deliberations and with the consent of a large number of shareholders present at the meeting in person or proxy. Resolution requiring special notice:

This type of resolution does not belong to a separate class of resolutions. It is only an ordinary resolution or a special resolution where the mover of the proposed resolution is required to give a special notice of 14 days to the company. Normally a proposed resolution must be intimated to the company before it sends the notice of the company and a notice must be given to the members at least 21 days before the date of the meeting. But here the mover is shown concession because he is required to give only 14 days clear notice to the company. The company, on receipt of a resolution must give notice of the resolution to its members at least 7 days before the meeting. Where it is not practicable it may be published in a newspaper. Special notice is required in the following cases. i.) For appointing an auditor other than the retiring auditor. ii.) For a resolution providing expressly that a retiring auditor should not be reappointed. iii.) For removing a director before the expiry of his period of office. iv.) For appointing another person as a director in place of the director so removed. Registration of certain Resolutions and Agreements: A copy of each of the following resolutions and agreements must be filed with the Registrar within 30 days of the passing or making thereof. 1. Special resolutions. 2. Resolutions which have been agreed to by all the members, but which would not otherwise have been effective unless they had been passed as special resolutions. 3. Any resolution of the board of directors or agreement executed by a company relating to the appointment or variation of the terms of appointment of a managing director. 4. Resolutions approving the appointment of sole selling agent. 5. Resolutions requiring a company to be wound up voluntarily passed in pursuance of Sec. 484(1). 6. Copies of the terms and conditions of appointment of sole selling agent appointment under Sec, 294 or Sec. 294A.

Review Questions: 1. What do you understand by a quorum? Must a quorum be present throughout a meeting? What is the procedure if a quorum is never formed? 2. What are the requisites of a valid meeting.

3. What do you understand by a proxy? What are the statutory provision regarding proxies? 4. How is the chairman of a general meeting of a company usually appointed? What are his duties? What powers have been given to him by law to perform these duties? 5. A. What are the requirements of the Companies Act, 1956 regarding the keeping of the minutes of a meeting? B. What rights of inspection of minutes is given to the members of the Companies Act, 1990. C. Can a company rely on a resolution of which no record has been made in the minutes. D. Can an extra ordinary general meeting of a company be held at any time on any day including a Public holiday of after working hours? 6. What are the different types of resolutions which may be passed in a meeting of the shareholders. 7. Set out the differences between a special resolution and a resolution requiring special note. For what purposes is a special resolution required. 8. What resolutions of a company or its Board of Directors and which agreement made by a company require registration with the Registrar of Companes? Questions: 1. What is an extra ordinary general meeting? Explain the procedure of conducting an EGM. 2. What are the central government for calling a general meeting? 3. State and explain the various types of resolution. 4. Write a note on: Proxies; minutes of meeting. 5. What are the contents of agenda of a statutory meeting? 6. What are the rights and prowers of chairman of the meeting?

5
MANAGEMENT AND CONTROL - II
Learning objective: This chapter is the extension of the previous chapter which deals with the management and functioning of the company. Audit and accounts Company reports and returns Prevention of oppression and mismanagement Winding up of a company

AUDIT AND ACCOUNTS


A company is managed through its agents who have a major role in the management and operations of the company. The other members of the company are not allowed to take part in day to day operations of the company. It is therefore needed a system of maintain the transparency in the management of company. The company law therefore provides for maintain accounts and getting them audited so that accountability of the management is maintained. The requirement of maintaining the company accounts is provided under sec 209(1) of the companies act. According to this section every company shall keep at its registered office proper books of account with respect to(a) all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure take place; (b) all sales and purchases of goods by the company; (c) the assets and liabilities of the company; and (d) in the case of a company pertaining to any class of companies engaged in production, processing, manufacturing or mining activities, such particulars relating to utilisation of material or labour or to other items of cost as may be prescribed, if such class of companies is required by the Central Government to include such particulars in the books of account.

Requirement of Company accounts:

The company act under section 209(3) provides for the following requirement of accounts maintained above: 1. True and fair view: According to company act the accounts of the company should give a true and fair view of the state of the affairs of the company or branch office, as the case may be, and explain its transactions. 2. Double entry system of accounting: The accounts of the company should be maintained on accrual basis and according to the double entry system of accounting. 3. Available for inspection: The books of account and other books and papers shall be open to inspection by any director during business hours. Responsibility of maintaining accounts: The company law under sec 209(6) levies the liability of maintaining the accounts on the following person:
1. 2. 3.

The managing director or manager; If the company has neither a managing director nor manager, then every director of the company; Every officer and other employee who has been authorised and to whom responsibility to maintain the books has been allotted by the Board of Directors.

Consequence of default: If any of the persons referred to above fails to take all reasonable steps to maintain proper books of accounts or has by his own willful act been the cause of any default by the company in this respect, he is punishable with imprisonment up to six months or with fine which may extend to Rs. 1,000 or with both. However, no person can be sentenced to imprisonment unless it is proved that the contravention was committed by him wilfully. Statutory Record: Every company incorporated under the Act is required to keep at its registered office, inter alia, the following books and registers 1. Register of investments in securities not held in companys name. [Section 49(7)] 2. Register of deposits. [Section 58A and the Companies (Acceptance of Deposits) Rules, 1975 and the RBI Non Banking Financial Companies Directions] 3. Register of securities bought back. (Section 77A)

4. Register of charges. (Section 143) 5. Register and index of members. [Sections 150, 151 and the Companies (Issue of Share Capital with Differential Voting Rights) Rules, 2001] 6. Register and index of debenture holders. (Section 152) 7. Register and index of beneficial owners. (Section 152A) 8. Foreign register of members and debenture holders and their duplicates. [Section 157(1) and 158(4)] 9. Annual Return (Section 163) 10. Books containing minutes of general meeting and of Board and of committees of Directors. [Section 193(1)] 11. Register of Postal Ballot [Section 192A and the Companies (Passing of the resolutions by postal ballot) Rules, 2001] 12. Books of accounts. [Section 209(1)(a) to (c)] 13. Cost account records for Companies engaged in industries so specified by Central Government [Section 209(1)(d)] 14. Register of contracts with companies/firms in which directors are interested. [Section 301(5)] 15. Register of Directors/Managing Directors/Managers/Whole-time Directors/ Secretary. (Section 303) 16. Register of directors shareholdings. (Section 307) 17. Register of loans or investments made, guarantees given and security provided to other body corporate. (Section 372A) 18. Register of Renewed and Duplicate Share Certificates. [Rule 7 of the Companies (Issue of Share Certificate) Rules, 1960] 19. Register of records and documents destroyed [Section 163 and the Companies (Preservation and Disposal of Records) Rules, 1966] 20. Register of sweat equity shares [Section 79A and the Unlisted Companies (Issue of Sweat Equity Shares) Rules, 2003] 21. Dividend Register The records mentioned above shall be available to members and public for inspection. However there are several exception provided under the law. Presentation of company accounts: Section 210 of the companies act provides for the rules of preparation and presentation of company accounts. The provisions of the law are as follows:

(1) At every annual general meeting of a company held in pursuance of section 166, the Board of directors of the company shall lay before the company(a) a balance sheet as at the end of the period specified in sub-section (3); and (b) a profit and loss account for that period. (2) In the case of a company not carrying on business for profit, an income and expenditure account shall be laid before the company at its annual general meeting instead of a profit and loss account, and all references to "profit and loss account", "profit" and "loss" in this section and elsewhere in this Act, shall be construed, in relation to such a company, as references respectively to the "income and expenditure account", "the excess of income over expenditure", and "the excess of expenditure over income". (3) The profit and loss account shall relate(a) In the case of the first annual general meeting of the company, to the period beginning with the incorporation of the company and ending with a day which shall not precede the day of the meeting by more than nine months; and (b) in the case of any subsequent annual general meeting of the company, to the period beginning with the day immediately after the period for which the account was last submitted and ending with a day which shall not precede the day of the meeting by more than six months, or in cases where an extension of time has been granted for holding the meeting under the second proviso to sub-section (1) of section 166, by more than six months and the extension so granted. (4) The period to which the account aforesaid relates is referred to in this Act as a "financial year" and it may be less or more than a calendar year, but it shall not exceed fifteen months: Provided that it may extend to eighteen months where special permission has been granted in that behalf by the Registrar. (5) If any person, being a director of a company, fails to take all reasonable steps to comply with the provisions of this section, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to 2 [ten thousand rupees], or with both : Provided that in any proceedings against a person in respect of an offence under this section, it shall be a defence to prove that a competent and reliable person was charged with the duty of seeing that the provisions of this section were complied with and was in a position to discharge that duty : Provided further that no person shall be sentenced to imprisonment for any such offence unless it was committed wilfully.

(6) If any person, not being a director of the company, having been charged by the Board of directors with the duty of seeing that the provisions of this section are complied with, makes default in doing so, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to 2 [ten thousand rupees], or with both : Provided that no person shall be sentenced to imprisonment for any such offence unless it was committed wilfully. Form and content of Final accounts: Sec 211 of the companies act provides for the forms and contents of the final accounts of the company. The final accounts of the company should comply with the following: 1. Schedule VI: The balance sheet of the company should be prepared in accordance of Part 1 of schedule VI whereas profit and loss account should be prepared in accordance of part 2 schedule VI. 2. Accounting standards: Every profit and loss account and balance sheet of the company shall comply with the accounting standards. Where the profit and loss account and the balance sheet of the company do not comply with the accounting standards, such companies shall disclose in its profit and loss account and balance sheet, the following, namely :(a) the deviation from the accounting standards; (b) the reasons for such deviation; and (c) the financial effect, if any, arising due to such deviation. 3. Notes to Accounts: Any reference to a balance sheet or profit and loss account shall include any notes thereon or documents annexed thereto, giving information required by this Act, and allowed by this Act to be given in the form of such notes or documents. Authentication of Final accounts: According to section 215 of the companies act every balance sheet and every profit and loss account of a company shall be signed on behalf of the Board of directors(i) in the case of banking company, by the persons specified in clause (a) or clause (b), as the case may be, of sub-section (2) of section 29 of the Banking Companies Act, 1949 (10 of 1949); (ii) in the case of any other company, by its manager or secretary, if any, and by not less than two directors of the company one of whom shall be a managing director where there is one.

(2) In the case of a company not being a banking company, when only one of its directors is for the time being in India, the balance sheet and the profit and loss account shall be signed by such director; but in such a case there shall be attached to the balance sheet and the profit and loss account a statement signed by him explaining the reason for non-compliance with the provisions of sub-section (1). (3) The balance sheet and the profit and loss account shall be approved by the Board of directors before they are signed on behalf of the Board in accordance with the provisions of this section and before they are submitted to the auditors for their report thereon. Company Audit: Audit of Annual Accounts of a company is compulsory and is indispensable part of incorporated business. Those who carry on business with the other peoples money have to be accountable to the so-called owners. Management and accountancy demands specialised skill. Shareholders are generally laymen. Thus there arises a need of an agency to stand in between the shareholders and management. The agency, viz., statutory auditors, should be technically qualified for the job and should be independent, and able to withstand the pressure of management. It is because of this law demands for skill full and independent auditor, who is appointed by the shareholders of the company so that they are reported by a reliable person. Section 224 (1) of the Companies Act, 1956 states that every company whether it is public or private limited shall have an auditor to audit its accounts. The appointment of auditor is mandatory in the Annual General Meeting for the ensuing year. The Auditors appointed at the Annual General Meeting hold the office from the conclusion of the Annual General Meeting at which he is appointed until the conclusion of the next Annual General Meeting. Thus, the Act seeks to ensure that the appointment of auditors is not in the hands of the directors and is vested in the general body of shareholders. However, the first auditors of the Company are appointed by the Board of Directors within one month from the date of incorporation of a company. The auditors, so appointed, hold the office until the conclusion of the first annual general meeting of the Company. If the Board fails to appoint the first auditor, the company may do so at a general meeting. The first proviso of Section 224 (5) of the Companies Act, 1956, states that the company may, at a general meeting, remove the first auditor appointed by the board and appoint in its place other auditor of whose nomination a special notice has been given. As the auditor is appointed from the conclusion of one annual general meeting until the conclusion of the next annual general meeting, the auditor shall not cease to hold the office in case the next annual general meeting is not held in each calendar year as required by Section 166 of the Companies Act, 1956. Thus, he will continue in office until the next annual general meeting is actually held and concluded. He cannot be deemed to have retired on the date when the meeting ought to have been held. MAXIMUM NUMBER OF COMPANIES FOR AN AUDITOR. Section 224 (1B) places a ceiling on the number of audits of public companies which a Chartered Accountant not in full time employment, or a firm of Chartered Accountants, can conduct.

1. 2.

A person can be appointed as an auditor, who is not in full-time employment elsewhere, of a maximum of 20 companies as described below Where some companies have paid-up capital of or more than 25 Lacs, a person can be appointed as auditor of only 20 companies out of which not more than 10 companies can have paid up capital of or exceeding Rs. 25 Lacs. In a firm of auditors, total number of 20 companies shall be for every partner of the firm who is not in full-time employment elsewhere. As per the fourth proviso added to sub-section (1B) by the Companies (Amendment) Act, 2000, private companies have been excluded from the existing ceiling of 20 audits per partner and sub-ceiling of 10 audits for companies having a paid up capital of Rs. 25 Lacs or more. Thus, apart from 20 audits of public companies, an auditor may conduct audit of private companies without any ceiling.

3.

CONFIRMATION FROM AUDITOR. Before a company makes an appointment or reappointment of an auditor, a written certificate has to be obtained from the person concerned stating that the appointment or reappointment, if made, will be within the limits specified above. NOTICE TO THE AUDITOR AND INTIMATION BY THE AUDITOR. After appointment /reappointment of an auditor at the annual general meeting, the company shall give intimation to the auditor, so appointed within seven days thereof. On receipt of the intimation from the company, the auditor shall submit a return to the Registrar of Companies within 30 days of the receipt of the intimation, informing the Registrar whether he has accepted or refused to accept the appointment, in Form No. 23B as prescribed by Companies (Central Governments) General Rules and Forms, 1956. However, the first auditors are under no obligation to inform the Registrar. REAPPOINTMENT OF AUDITORS. At every Annual General Meeting, a retiring auditor shall be reappointed unless:1. He is not qualified for re-appointment; 2. 3. He has given the company notice, in writing, of his unwillingness to continue as auditor; A resolution has been passed at an annual general meeting appointing somebody or stating that he shall not be reappointed.

Section 224(3) of the Companies Act, 1956 provides that where at an annual general meeting no auditors are appointed or re-appointed, the Central Government may appoint a person to fill the vacancy. For this purpose, an application has to be made by the company to the Regional Director (to whom the powers have been delegated), within 7 days of the conclusion of the meeting, for appointment of an auditor and fixing his remuneration. CASUAL VACANCY [Section 224 (6)(a)]. A casual vacancy is a vacancy of a temporary nature that may occur during the currency of the year after the appointment is made by the company at its general meeting. The auditor appointed in a casual vacancy shall hold office till

the conclusion of the next annual general meeting. If the casual vacancy arises, the remaining auditors, if any, will continue to act as the auditors of the company. Where the casual vacancy arises due to death or disqualification, the Board of Directors may appoint another auditor. But where the casual vacancy is caused by resignation of an auditor, the Board cannot fill up the casual vacancy but the vacancy so caused by resignation, shall be filled by the company in general meeting. RESIGNATION OF AUDITOR. An auditor may resign before his term of office expires by depositing a notice in writing to that effect at the companys registered office. His resignation becomes effective on the date he lodges such notice or on such later date as may be specified in the notice. RETIRING AUDITOR CANNOT BE REMOVED BY THE BOARD [Section 224(7)]. The Board of Directors of the Company has no power to remove an auditor appointed by the company in general meeting, i.e., the auditors can be removed only by the company in general meeting and prior approval from the Central Government is also necessary for such removal of the auditors. REMUNERATION OF AUDITORS [Section 224(8)]. The Board fixes the remuneration of the First Auditors. Where the auditor is appointed or re-appointed by the general meeting, the remuneration is fixed by the general meeting, or it may be fixed in any manner as determined by a general meeting. Where Central Government is approached for appointing the auditor, the Government fixes the remuneration.(This power of the Central Government is delegated to the Regional Director). The remuneration fixed for an auditor is inclusive of all expenses allowed to him so that he cannot claim any amount additional to the remuneration fixed either as expenses or otherwise. QUALIFICATION & DISQUALIFICATION OF AUDITORS [Section 226]. Only individual, possessing the requisite knowledge and skill, can be appointed as auditor of the company. The auditor should be independent in carrying out his work so that he is able to give an unbiased opinion based on an objective assessment of facts. Thus, he should have no interest, financial or otherwise and whether directly or indirectly, in the company and/or its management. A person, who is Chartered Accountant within the meaning of Chartered Accountants Act, 1949 and holds a certificate of practice, or a partnership firm where of all the partners are Chartered Accountants holding certificates of practice, may be appointed as auditor of a company. However, in the latter case, the appointment as an auditor may be made in the firm name and any of its partners may act in the name of the firm. The following persons cannot be appointed as auditor of a Company: 1. An officer or employee of the company; 2. A person who is partner with an employee of the company or employee of an employee of the company; 3. Any person who is indebted to a company for a sum exceeding Rs. 1,000/- or who have guaranteed to the company on behalf of another person for a sum exceeding Rs. 1,000/-.

4. A person who is holding any security of that company, after a period of one year from the date of commencement of Companies (Amendment) Act, 2000. If an auditor, after his appointment, becomes subject to any disqualification mentioned above, he shall be deemed to have vacated as such. SPECIAL RESOLUTION FOR APPOINTMENT OF AUDITOR [Section 224A]. This Section provides for appointment or reappointment of auditors at an annual general meeting by a special resolution when 25% or more of the subscribed share capital of the company is held jointly or singly by a public financial institution, a Government company, Central Government, any State Government, any institution established by a State Act in which the State Government holds not less than 51% of the subscribed share capital, a nationalised bank or an insurance company. Certified copy of the special resolution so passed shall be filed with the Registrar within 30 days of passing, in Form No. 23. It is also to be noted that, if, after notice of the annual general meeting is issued in the usual course and before the holding of meeting, it happens that the holdings of the public financial institutions have reached 25% of the total subscribed share capital, then the meeting has to be adjourned and after issuing notice under this section, necessary special resolution is to be passed for appointing the auditor(s). SPECIAL NOTICE FOR APPOINTMENT OR REMOVAL OF AUDITORS [Section 225]. The Act provides that for appointing a person other than the retiring auditor or for not appointing the retiring auditor, power has been given to a member to serve a special notice on the company of his intention to move a resolution at the next Annual General Meeting. On receipt of the notice, the company has to send a copy thereof to the retiring auditor. The special notice should be given to the company at least 14 clear days before the meeting. Further the Company shall also give intimation of the same to all the members of the company immediately and where it is not possible to do so, then the company shall give notice to the members by advertisement in the newspaper circulating in the place of its registered office, not less than seven days before the meeting. Where the retiring auditor makes a representation, the company shall, if it is possible, circulate the same to all the members of the company before the meeting. If it is not possible to circulate the representation to the members, the auditor may require the same to be read at the meeting. However, on an application by the company or an aggrieved person, the Company Law Board may order that the copies of representation need not be sent to the members or read at the meeting. AUDITORS OF GOVERNMENT COMPANIES. Auditor of a Government Company shall be appointed or reappointed by the Comptroller & Auditor General of India. Remuneration of the auditor of a Government Company has to be fixed by the company in general meeting. However, the general meeting may, instead of fixing the remuneration of auditors, authorise the Board of Directors in this behalf. FOREIGN COMPANIES. In case of shipping and airlines companies, the accounts may be audited by the statutory auditors of foreign companies; in case of other foreign companies, the accounts must be audited by the practicing Chartered Accountants in India.

AUDIT OF ACCOUNTS OF BRANCH OFFICE [Section 228]. Where a company, whether a public or a private limited, has a branch office, its accounts should also be audited. The audit of the accounts of branch office can be done either by: i. the companys auditor; or

ii. by any other person who is qualified to act as the companys auditor However, if the branch is situated in a country outside India, a person who is duly qualified to act as auditor of the branch in accordance with the laws of that country, can also be appointed as auditor of branch. If the branch is not being audited by the companys auditor, he is then also entitled to visit the branch office if he considers it necessary to do so for the performance of his duties as the auditor. He has also a right of access at all times to books, accounts and vouchers of the company maintained at branch office. Only the auditor of the company, or where a firm is so appointed, only a partner in the firm practising in India, may sign the auditors report. [Section 229]. The auditor report is required to be read out at the Annual General Meeting and shall be open to inspection by any member of the Company. [Section 230]. Section 231 of the Companies Act, 1956 confers a right on the statutory auditor to attend and to be heard at any general meeting on matters of his concern. Thus, the Act seeks to ensure that the appointment of an auditor is not in the hands of the directors but is vested in the general body of shareholders and where the shareholders fails to exercise their power of appointing an auditor, the power vests with the Central Government. Therefore, Auditors are not mere puppets in the hands of the Directors of the Company. The auditor makes his report to shareholders through the company and is responsible to the company for any failure in the performance of his professional duty. The auditors carry out such investigation as will enable them to form an opinion on whether proper books have been kept and proper returns adequate for their audit have been received from branches not visited by them and whether balance sheet and profit and loss account are in agreement with the books and returns. In addition to verifying compliance with the Act, the auditors have also to acquaint themselves with their duties under the articles of the company, if any, so as to assure due compliance with them. The Companies Act lays down detailed provisions regarding various matters and casts an obligation upon officers and directors of the company to carry out the requirements of law. However, where there is contravention of legal requirements by a company which has a bearing on the accounts and transactions of the company, the auditor would in the normal course of his inquiry become aware of them and it would need to be brought to the notice of the shareholders. The duty of the auditor is that he must be honest; that he must not certify what he does not believe to be true and must take reasonable care and skill before he believes that what he certifies to be true. What is required of auditor is his subjective satisfaction after taking reasonable care and skill. In this process, he is not barred from relying

on the tried or trusted servants of the company. He is entitled to assume that they are honest, and to rely upon their representations, provided he takes reasonable care. Thus, Technical Competence and Professional Independence plays a crucial role in discharging the duties, in practice. It is extremely difficult to precisely define the role, scope, etc., of the auditors. The above-mentioned provisions of the Act will pave the way to achieve the desired objectives for which they are designed. Questions:
1. 2. 3. 4.

What is the essential requirement of an account of a company? State the format and contents of the accounts of a company. What is a qualification of an auditor of a company? State the procedure of appointing and removing of the auditor of the company. What are the rights and duties of the auditor of the company?

COMPANY REPORTS
The management of the company has lots of power and they also burdened with the responsibilities. It therefore important for them to make sure that the stakeholders of the company are aware of the functioning of company and also of its management. The company law provided various reporting system to communicate the companys performance.

Statutory Report:
At least 21 days before the day of Annual General Meeting the Board of Directors must forward to every member a report called the Statutory Report along with the notice of the meeting. It must state: 1. The total number shares allotted, distinguishing shares allotted as fully paid up or partly paid up otherwise than in cash and the consideration for allotment. 2. The total amount of cash received by the company in respect of all allotment. 3. An abstract of he receipts and payments upto date within 7 days of the date of the report and the balance in hand. 4. The receipts of the company from shares and debentures and other sources, and on account or an estimate of the preliminary expenses. 5. Any commission or discount paid or to be paid on the issue or sale of shares or debentures must be separately shown in the abstract. 6. The names, addresses and occupations of directors, auditors and also of manager and secretary of the company. 7. The particulars of any contracts or its modification if any.

8.

The extent to which any underwritten contract has not been carried out and the reasons thereof.

9. The arrears due on calls from every directors. 10. The particulars of any commission or brokerage paid or to be paid in connection with the issue or sale of shares or debentures to any director or manager. The secretary should prepare the report carefully and see that all particulars are incorporated in it. He should get it certified and correct by at least two directors or by the chairman as also by the auditors or the company.

Directors' Report
The report of the Board of Directors must be attached to every balance sheet presented at the annual general meeting. The report must contain information regarding the following matters:1. The state of affairs of the company 2. The amount, if any, which it proposes to carry to any reserves in such balance sheet 3. The amount of dividend recommended 4. Details of any material changes and commitments, if any, affecting the financial position of the company which have occurred between the end of the financial year of the company to which the balance sheet relates and the date of the report

5. Conservation of energy, technology absorption, foreign exchange earnings and outgo. 6. Names, designations and other particulars of all employees drawing more than Rs. 50000/- p.m. in the company 7. Details necessary for a proper understanding of the state of the company's affairs and which are not, in the Board's opinion, harmful to the business of the company or of any of its subsidiaries, in respect of changes which have occurred during the financial year :in the nature of company's business; in the company's subsidiaries or in the nature of the business carried on by them; and generally in the classes of business in which the company has an interest

i. ii. iii.

Annual Return
Section 159 requires every company having a share capital to file with the Registrar every year a formal return. (Called an annual return) containing the specified particulars relating to the company. It shall be filed within 60 days from the date of the holding of the annual general meeting. Where no annual general meeting is held in a particular year, then the annual return has to be filed within sixty days from the last day on which

the meeting should have been held in accordance with the provisions of the Act. The fact that no annual general meeting was held is no justification for not complying with the requirements of this section. The directors are under an obligation to the annual return even if the company ceased functioning. The object of filing the annual return is to enable the Register to record the changes that have occurred in the co0nstitution of the company during the year. At the same time if affords an opportunity of obtaining cer4tain additional information which would otherwise be available only at the companys office. The deportment of company Affairs has through its notification F. No. 3/24/94. C.L.V. Dated 15.5.1975. Substituted parts I and II of Schedule V. The annual return should be filed in the form given in Part II of Schedule V and must contain the particulars specified in Part I of Schedule V, regarding: a. Its registration office; b. The register of its debenture-holders; c. Its register of its debenture-holders;

d. Its shares and debentures; e. Its indebtedness; f. Its members and debenture holders, past and present;

g. Its directors, managing directors, managers and secretaries past and present. When any of the five preceding returns contains full particulars of members, and shares held and transferred by them, the return to be submitted may contain only change in membership and shareholding instead of the full particulars. Prior to the amendment, Section 159(1) required every company to file the complete or full annual return once in three years and to file changes of particulars during the intervening period. With a view to reducing unnecessary cost or burden on companies and, at the same time, without rectifying the purpose which the return under section 159 is meant to serve, the amendment Act of 1988 requires companies to file the annual return containing full particulars once in every six years. Where the company has converted any of its shares into stock and given notice to the Registrar, the amount of stock held by each of the member concerned should be mentioned instead of the shares so converted. In the case of a company not having a share capital, an annual return shall be filed with the Registrar within sixty days from the date of the annual meeting. It shall contain the following particulars regarding. (i) The address of the registered office of the company;

(ii) The names of members with dates on which they became members and the names of persons who have ceased to be members since the date of the last annual general meeting with dates; (iii) All such particulars with respect to the persons who, at the date of the return were the directors of the company, its manager and its secretary, (iv) A statement containing particulars of the total amount of indebtedness of the company in respect of all charges which are or were required to be registered with the Registrar (Section 160). (v) Further provision regarding annual return (Sec. 161). The copy of the annual return filed with the Registrar under Section 159 or 160 shall be signed both by a director and by the managers or secretary of the company. Where there is no manager or secretary, it shall be signed by two directors of the company, once of whom shall be the managing director, where there is one. The annual return is also required to be signed by a secretary in whole time practice, in the case of a company whose shares are listed on a recognized stock exchange. (Provision to section 161 (1) as added by the Amendment Act, 1988). The return shall be accompanied by a certificate signed by both the signatories of the return stating that the return contains the facts as they stand on the day of the annual general meeting correctly and completely and that since the date of the last annual return the transfer of all shares and debentures and the issue of all further certificates of shares and debentures have been appropriately recorded in the books maintained for the purpose. In the case of a private company, the certificate must further state that the company has not, during the year, issued any invitation to the public to subscribe to the shares or debentures of the company and that the number of members does not exceed fifty, excluding the past and present employees of the company. (Section 161). In the case of non compliance the company and every officer who is in default shall be punishable with fine up to Rs. 50 for every day during which the default continues. (Section 162).

DIVISIBLE PROFITS AND DIVIDEND


Dividend is the return on the investment of shareholders in a company. Only profits can be distributed as dividend. Dividend means the portion of the profits of the company which is distributed to the shareholders. The companies act does not define the term dividend specifically, sec 2 (14A) describes "dividend" includes any interim dividend. The following are the different types of dividend paid by the company: (1) Regular Dividend. By dividend we mean regular dividend paid annually, proposed by the board of directors and approved by the shareholders in general meeting. It is also known as final dividend because it is usually paid after the finalization of accounts. It sis generally paid in

cash as a percentage of paid up capital, say 10 % or 15 % of the capital. Sometimes, it is paid per share. No dividend is paid on calls in advance or calls in arrears. The company is, however, authorised to make provisions in the Articles prohibiting the payment of dividend on shares having calls in arrears. (2) Interim Dividend. If Articles so permit, the directors may decide to pay dividend at any time between the two Annual General Meeting before finalizing the accounts. It is generally declared and paid when company has earned heavy profits or abnormal profits during the year and directors which to pay the profits to shareholders. Such payment of dividend in between the two Annual General meetings before finalizing the accounts is called Interim Dividend. No Interim Dividend can be declared or paid unless depreciation for the full year (not proportionately) has been provided for. It is, thus,, an extra dividend paid during the year requiring no need of approval of the Annual General Meeting. It is paid in cash. (3) Stock-Dividend. Companies, not having good cash position, generally pay dividend in the form of shares by capitalizing the profits of current year and of past years. Such shares are issued instead of paying dividend in cash and called 'Bonus Shares'. Basically there is no change in the equity of shareholders. Certain guidelines have been used by the company Law Board in respect of Bonus Shares. (4) Scrip Dividend. Scrip dividends are used when earnings justify a dividend, but the cash position of the company is temporarily weak. So, shareholders are issued shares and debentures of other companies. Such payment of dividend is called Scrip Dividend. Shareholders generally do not like such dividend because the shares or debentures, so paid are worthless for the shareholders as directors would use only such investment is which were not . Such dividend was allowed before passing of the Companies (Amendment) Act 1960, but thereafter this unhealthy practice was stopped. (5) Bond Dividends. In rare instances, dividends are paid in the form of debentures or bounds or notes for a long-term period. The effect of such dividend is the same as that of paying dividend in scripts. The shareholders become the secured creditors are the bonds has a lien on assets. (6) Property Dividend. Sometimes, dividend is paid in the form of asset instead of payment of dividend in cash. The distribution of dividend is made whenever the asset is no longer required in the business such as investment or stock of finished goods. But, it is, however, important to note that in India, distribution of dividend is permissible in the form of cash or bonus shares only. Distribution of dividend in any other form is not allowed. Procedure for declaring Final Dividend
1.

Issue notice for holding a meeting of the Board of directors The notice must be in accordance with Section 286 of the Companies Act. It must contain time, date and venue of the meeting and details of the business to be transacted thereat and must be sent to all the directors for the time being in India and to all other directors, at their usual address in India. In case of Listed Companies as per Clause 19(a) of the Listing Agreement a prior intimation of at least 7 days about the date

of the Board meeting should be given to Stock exchanges where the securities of the company are listed, simultaneously with notice under section 286..
2.

Hold Board meeting. The Board meeting should pass following resolutions: a. approving the annual b. recommending the quantum of final dividend to be declared at the next AGM and the source of funds for the payment thereof, i.e. :

out of profits of the company after providing for depreciation for the current financial year and also for earlier years, if not already provided and amount to be transferred from the current profits to reserves as per provisions of the Companies (Transfer of Profits to Reserves) Rules, 1975; or out of reserves in accordance with the provisions of the Companies (Declaration of Dividend out of Reserves), Rules, 1975. c. fixing time, date and venue for holding the next annual general meeting of the company. d. approving notice for the annual general meeting and authorising the company secretary to issue the notice on behalf of the Board of directors of the company to all the members, directors and auditors of the company and other persons entitled to receive the same. determining the dates of closure of the register of members under section 154 of the Companies Act 1956 and the share transfer register of the company as per requirements the listing agreements (in the case of listed companies).

e.

In the case of listed companies, It is prudent to consult in advance the regional stock exchange and then fix the dates for closure of books. Care should be taken to ensure that the date of commencement of closure of the transfer books should not be on a day following a holiday and the dates so fixed should also not clash with the clearance programme in the stock exchanges.
3.

Intimate the Board decision to Concerned Stock Exchange The company will, immediately on the date of the meeting of its Board of Directors held to consider or decide the same, intimate to the Exchange within 15 minutes of the closure of the Board Meetings by Letter/fax, (or, if the meeting be held outside the City of Mumbai, by fax/telegram) all dividends recommended or declared or the decision to pass any dividend. (Clause 20 of the Listing Agreement)

4.

Notice of the closure of the Share transfer Register to Stock Exchanges.

The company must give to the Stock Exchange in which the shares are listed a notice in advance of at least twenty one days (fifteen days in case of such securities which are announced by SEBI from time to time for compulsory delivery in dematerialized form by all investors), or of as many days as the Exchange may from time to time reasonably prescribe, stating the dates of closure of its Transfer Books (or, when the Transfer Books are not to be closed, the date fixed for taking a record of its shareholders or debenture holders ie, record date).The Company must also send copies of such notices to the other recognised stock exchanges in India.(Clause 16 of the listing Agreement)
5.

Notice of closure of register of members to Stock Exchange In the case of listed companies give 42 days notice of book closure( Register of members) to the stock exchanges

6.

Publish Notice of Book Closure in News paper Publish the notice of book closure in a newspaper circulating in the district in which the registered office of the company is situated at least seven days before the date of commencement of book closure.

7.

Update Share Transfer Register Register all the transfers/transmissions received prior to the date of closure and prepare a list of shareholders who are entitled to dividend

8.

Close the register of members &Share Transfer Register Close the register of members and the share transfer register of the company.

9.

Hold the annual general meeting and declare final dividend Hold the annual general meeting and pass an ordinary resolution declaring the payment of dividend to the shareholders of the company as per recommendation of the Board. The shareholders cannot declare the final dividend at a rate higher than the one recommended by the Board. However, they may declare the final dividend at a rate lower than the one recommended by the Board

10.

Prepare a statement of dividend A statement of dividend in respect of each shareholder containing the following details should be prepared a. Name and address of the shareholder with ledger folio No. b. No. of shares held. c. Dividend payable.

11.

Deposit the amount payable in a separate bank account. Open a bank account and credit the dividend payable with the said bank account within five days of declaration of dividend. Dividend should be paid out of such bank account within thirty days of declaration

12.

Print sufficient number of dividend warrants In consultation with the companys banker appointed for the purpose of dividend, print sufficient number of dividend warrants. In case of dividend warrants with MICR facility get approval of the RBI for printing the same. The dividend warrants must be filled in and signed by the persons authorised by the Board.

13.

Intimate the date of dividend payable to Stock exchanges In the case of listed companies inform the stock exchanges at least 21 days in advance, of the date from which the dividend shall be payable.(Clause 21 of the listing Agreement)

14.

Pay dividend Tax The Company has to pay dividend tax subject to the provisions of the Income tax Act 1961.Presently no tax is deducted at Source.

15.

Make arrangement with the bank for payment of dividend The company must make arrangements with banks for payment of dividend at par. In case of listed companies arrangements have to make with bankers for payment of dividend at all centres as per requirement of the listing agreements with the stock exchanges. Dividend should be paid out of such bank account within thirty days of declaration. (ss-3 Para 5.1)

16.

Maintain an unpaid dividend A/c The company must open an account called Unpaid Dividend Account. In case the instrument of transfer has been received by company but transfer of such shares has not been registered, then the dividend payable should be kept in the said Unpaid Dividend Account. However the registered holder of these shares authorises company in writing to pay dividend to the transferee specified in the said instrument of transfer, the company can pay dividend to said transferee. Dispatch dividend warrants The company must send the dividend warrants within thirty days of the declaration of dividend [Refer Section 207]. In case of joint shareholders, dispatch the dividend warrant to the first named shareholder. In the case of defaced, torn or decrepit Dividend warrants, a duplicate warrant may be issued before the expiry of the validity period of the Dividend warrant on surrender to the company of such defaced, torn or decrepit warrant.

17.

18.

Preservation of Dividend Warrants Where the company has given an undertaking to the Bank for preservation or safe keeping of paid Dividend warrants for a specified period, the warrants returned by the

Bank, after payment thereof, should be preserved for such period or eight years from the date of the warrant, whichever is longer.
19.

Maintain Register of dividend Warrants/Register of Duplicate Dividend warrants Particulars of every Dividend warrant issued should be entered in a Register of Dividend Warrants, indicating the name of the person to whom the Dividend warrant is issued, the number and amount of the Dividend warrant and the date of issue of such warrant. In case of Duplicate dividend warrant is issued, particulars of every such duplicate Dividend warrant issued should be entered in a Register of Duplicate Dividend Warrants, indicating the name of the person to whom the Dividend warrant is issued, the number and amount of the Dividend warrant in lieu of which the duplicate warrant is issued and the date of issue of such duplicate warrant.

20.

Notice of dispatch of dividend warrants to members. In the case of listed companies, a notice must be published in a newspaper circulating in the district in which the registered office of the company is situated to the effect that dividend warrants have been posted and advise those members of the company who do not receive them to get in touch with the company for appropriate action within a period of fifteen days.

21.

Issue bank drafts and/or Cheques ,if required Issue bank drafts and/or Cheques to those members who inform that they received the dividend warrants after the expiry of their currency period or their dividend warrants were lost in transit after satisfying that the same have not been encashed. Transfer of unpaid or unclaimed dividend to a special account The unpaid /unclaimed amount should be payable to a special account named Unpaid dividend A/c within 7 days after expiry of the said period of 30 days.

22.

23.

Reconcile the amount of unpaid/unclaimed dividend with bakers The company should maintain the details of unpaid or unclaimed Dividend and reconcile the amounts thereof with the concerned bankers, periodically. (Para 6.1 of SS-3)

24.

Give individual intimation to the Members, whose unclaimed Dividend is transferred to IEPF After the expiry of the period of seven years from the date from which unclaimed and unpaid Dividends were transferred to the Unpaid Dividend Account, no claims shall lie against the Fund or the company in respect of any such amounts. Hence, the company should intimate the concerned Members individually of the amount of Dividend remaining unclaimed which is liable to be transferred to the Investor Education and Protection Fund and advising the Member to claim such amount of Dividend from the company before such transfer.

25.

Transfer unpaid dividend to Investor Education and Protection Fund After the expiry of seven years from the date of transfer to unpaid dividend A/c, unpaid dividend has to transfer to Investor Education and Protection Fund. The company when crediting to the account of the fund, should separately furnish to RoC a statement in Form 1 of IEPF Rules duly certified by chartered accountant or a company secretary or a cost accountant practising in India or by the statutory auditors of the company. The transfer to the Investor Education and Protection Fund should be made within thirty days of the expiry of seven years from the date of transfer to the Unpaid/Unclaimed Dividend Account. (Para 6.2 of the SS-3) If the Unpaid Dividend Account is kept as a fixed deposit or in any account on which interest is earned, the interest earned should be transferred to the Investor Education and Protection Fund. (Para 6.4 of the SS-3)

26.

Preparation and preservation of Dividend Register The Company must prepare a Dividend Register and the same should be kept in safe custody for eight years.

27.

Make Disclosures in Annual Reports. The company should make the following disclosures in Annual Reports
1.

The Balance Sheet of the company should disclose under the head current liabilities and provisions, the amount lying in the Unpaid Dividend Account together with interest accrued thereon, if any. The Annual Report of the company should disclose the total amount lying in the Unpaid Dividend Account of the company in respect of the last seven years. The amount of Dividend, if any, transferred by the company to the Investor Education and Protection Fund during the year should also be disclosed. The amounts lying in the Unpaid Dividend Account and the amounts transferred to the Investor Education and Protection Fund should be disclosed in the Directors Report. The Annual Return of the company should mention that the amount of Dividend remaining unpaid or unclaimed for a period of seven years from the date such Dividend became payable by the company, together with interest accrued thereon, if any, has been credited to the Investor Education and Protection Fund.

2.

3.

Declaration of dividend out of reserves: In the event of inadequacy or absence of profits in any year, dividend may be declared by a company for that year out of the accumulated profits earned by it in previous years and transferred by it to the reserves, subject to the conditions that-

i.

the rate of the dividend declared shall not exceed the average of the rates at which dividend was declared by it in the five years immediately preceding that year or ten per cent of its paid-up capital, whichever is less; the total account to be drawn from the accumulated profits earned in previous years and transferred to the reserves shall not exceed an amount equal to one-tenth of the sum of its paid up capital and free reserves and the amount so drawn shall first be utilised to set off the losses incurred in the financial year before any dividend in respect of preference or equity shares is declared ; and the balance of reserves after such drawl shall not fall below fifteen per cent of its paidup share capital.

ii.

iii.

Explanation: For the purposes of this rule, "profits earned by a company in previous years and transferred by it to the reserves" shall mean the total amount of net profits after tax, transferred to reserves as at the beginning of the year for which the dividend is to be declared ; and in computing the said amount, the appropriations out of the amount transferred from the Development Rebate Reserve (at the expiry of the period specified under the Income-tax Act, 1961 (43 of 1961) shall be included and all items of Capital Reserves including reserves created by revaluation of assets shall be excluded.

Questions:
1. 2. 3.

What are the various types of dividends? State the procedure of issuing the dividend Under what circumstances a company can issue a dividend out the reserves?

PREVENTION OF OPPRESSIONA AND MISMANAGMENT


The management of a Company is based on the majority rule, but at the same time the interests of the minority cant be completely overlooked. While talking of majority and minority, we are not talking of numerical majority or minority but of majority or minority voting strength. The reason for this distinction is that a small group of shareholders may hold the majority shareholding whereas the majority of shareholders may, among them, hold a very small percentage of share capital. Once they acquire control, the majority can, for all practical purposes, do whatever they want with the Company with practically no control or supervision, because even if they are questioned on their acts in the general meeting, they always come out winners because of their greater voting strength. So, the modern Companies Acts contain a large number of provisions for the protection of the interests of minorities in companies. Oppression:

Section 397 of the companies act, 1956 provides relief to the oppressed minority. Basically oppression means exercise of power in an unjust manner. The law has not defined oppression for purposes of this section, and it is left to Courts to decide on the facts of each case whether there oppression under section 397 has been committed or not. Although the word oppressive is not defined, it is possible, by way of illustration, to figure a situation in which majority shareholders, by an abuse of their predominant voting power, are treating the company and its affairs as if they were their own property to the prejudice of the minority share-holders. In Scottish Co-operative Whole Sale Society Ltd. v. Meyer (1958) 3 All ER 66 (HL)) it was held that oppression is the lack of probity and fair dealing in the affairs of a company to the prejudice of some portion of its members or to public interest. In Elder v. Elder & Watson Ltd., oppression has been defined as the conduct complained of should at the lowest involve a visible departure from the standards of fair dealing, and a violation of the conditions of fair play on which every shareholder who entrusts his money to the company is entitled to rely. The oppressed minority has to show the conduct which is unfair to him and causes prejudice to him in the exercise of his legal and proprietary rights as a shareholder. Prevention of oppression: Section 397(1) of the Companies Act provides that any member of a company who complains that the affair of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members may apply to the Tribunal for an order thus to protect his /her statutory rights. Sub-section (2) of Section 397 lays down the circumstances under which the tribunal may grant relief under Section 397, if it is of opinion that :(a) the companys affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members ; and (b) to wind up the company would be unfairly and prejudicial to such member or members , but that otherwise the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound. The tribunal with the view to end the matters complained of, may make such order as it thinks fit. Who can apply: Section 397 of the Companies Act states the members of a company shall have the right to apply under Section 397 or 398 of the Companies Act. According to Section 399 where the company is with the share capital, the application must be signed by at least 100 members of the company or by one tenth of the total number of its members, whichever is less, or by any member, or members holding one-tenth of the issued share capital of the company. Where the company is without share capital, the application has to be signed by one-fifth of the total number of its members. A single member cannot present a petition under section 397 of the

Companies Act. The legal representative of a deceased member whose name is again on the register of members is entitled to petition under Section 397 and 398 of the Companies Act. Under Section 399(4) of the Companies Act, the Central Government if the circumstances exist authorizes any member or members of the company to apply to the tribunal and the requirement cited above, may be waived. The consent of the requisite no. of members is required at the time of filing the application and if some of the members withdraw their consent, it would in no way make any effect in the application. The other members can very well continue with the proceedings. Conditions for Granting Reliefs To obtain relief under section 397 the following conditions should be satisfied:1. There must be oppression- The Punjab and Haryana High Court in Mohan Lal Chandmall v. Punjab Co. Ltd has held that an attempt to deprive a member of his ordinary membership rights amounts to oppression. Imposing of more new and risky objects upon unwilling minority shareholders may in some circumstances amount to oppression. However, minor acts of mismanagement cannot be regarded as oppression. The Court will not allow that the remedy under Section 397 becomes a vexatious source of litigation. But an unreasonable refusal to accept a transfer of shares held as sufficient ground to pass an order under Section 397 of the Companies Act, 1956. Thus to constitute oppression there must be unfair abuse of the powers and impairments of the confidence on the part of the majority of shareholders. Facts must justify winding up- It is well settled that the remedy of winding up is an extreme remedy. No relief of winding up can be granted on the ground that the directors of the company have misappropriated the companys fund, as such act of the directors does not fall in the category of oppression or mismanagement.[8]To obtain remedy under Section 397 of the Companies Act, the petitioner must show the existence of facts which would justify the winding up order on just and equitable ground. The oppression must be continued in nature It is settled position that a single act of oppression or mismanagement is sufficient to invoke Section 397 or 398 of the Companies Act. No relief under either of the section can be granted if the act complained of is a solitary action of the majority. Hence, an isolated action of oppression is not sufficient to obtain relief under Section 397 or 398 of the Act. Thus to prove oppression continuation of the past acts relating to the present acts is the relevant factor , otherwise a single act of oppression is not capable to yield relief. The petitioners must show fairness in their conduct-It is settled legal principle that the person who seeks remedy must come with clean hands. The members complaining must show fairness in their conduct. For ex-Mere declaration of low dividend which does not affect the value of the shares of the petitioner ,was neither oppression nor mismanagement in the eyes of law.

2.

3.

4.

5. Oppression and mismanagement should be specifically pleaded- It is settled law that , in case of oppression a member has to specifically plead on five facts:a) what is the alleged act of oppression ; b) who committed the act of oppression; c) how it is oppressive; d) whether it is in the affairs of the company; e) and whether the company is a party to the commission of the act of oppression Mismanagement Generally if the affairs of a company are being running by the Board in a manner which is prejudicial to the interest of the company or to the public it is said to be mismanaged. In Re, Albert David (1964) CWN 163, 172 it was held that if a company was being run by the Board in their own interest overriding the wishes and interest of the majority of shareholders is deemed to be mismanagement. Courts have also ruled that erosion of a companys substratum, abuse of fiduciary duties, and misuse of funds are all instances of mismanagement that come within the ambit of section 398. Section 398(1) of the Companies act provides that any members of a company who complain:That the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company; or a material change has taken place in the management or control of the company, whether by an alteration in its Board of directors, or manager or in the ownership of the company's shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company; may apply to the Company Law Board for an order of relief provided such members have a right so to apply as given below. If, on any such application, the Company Law Board is of opinion that the affairs of the company are being conducted as aforesaid or that by reason of any material change as aforesaid in the management or control of the company, it is likely that the affairs of the company will be conducted as aforesaid, the court may, with a view to bringing to an end or preventing the matters complained of or apprehended, make such order as it thinks fit. Right to Complain mismanagement1. The following members of a company shall have the right to apply as above:a) in the case of a company having a share capital, not less than one hundred members of the company or not less than one tenth of the total number of its members, whichever is less, or any member or members holding not less than one-tenth of

the issued share capital of the company, provided that the applicant or applicants have paid all calls and other sums due on their shares; b) in the case of a company not having a share capital, not less than one-fifth of the total number of its members. 2. 3. Where any share or shares are held by two or more persons jointly, they shall be counted only as one number. Where any members of a company, are entitled to make an application, any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them. The Central Government may, if in its opinion circumstances exist which make it just and equitable so to do, authorize any member or members of the company to apply to the Company Law Board, notwithstanding that the above requirements for application are not fulfilled. The Central Government may, before authorizing any member or members as aforesaid, require such member or members to give security for such amount as the Central Government may deem reasonable, for the payment of any costs which the Court dealing with the application may order such member or members to pay to any other person or persons who are parties to the application. If the managing director or any other director, or the manager, of a company or any other person, who has not been impleaded as a respondent to any application applies to be added as a respondent thereto, the Company Law Board may, if it is satisfied that there is sufficient cause for doing so, direct that he may be added as a respondent accordingly.

4.

5.

6.

Notice to be given to Central Government of application The Company Law Board must give notice of every application made to it as above to the Central government, and shall take into consideration the representations, if any, made to it by that Government before passing a final order. Right of Central Government to apply The Central Government may itself apply to the Company law Board for an order, or because an application to be made to the Company Law Board for such an order by any person authorized be it in this behalf. Powers of Tribunal Under Section 402 of the Companies Act ,1956 the powers of the Tribunal under Sections 397 and 398 are very wide .These are :1. the regulation of the conduct of the company's affairs in future; 2. the purchase of the shares or interests of any members of the company by other members thereof or by the company

3. 4.

in the case of a purchase of its shares by the company as aforesaid, the consequent reduction of its share capital; the termination, setting aside or modification of any agreement, howsoever arrived at, between the company on the one hand, and any of the following persons, on the other namely:a) the managing director; b) any other director; c) the manager;

Upon such terms and conditions as may, in the opinion of the Company Law Board, be just and equitable in all the circumstances of the case ;the termination, setting aside or modification of any agreement between the company and any person not referred to in clause (d), provided that no such agreement shall be terminated, set aside or modified except after due notice to the party concerned and provided further that no such agreement shall be modified except after obtaining the consent of the party concerned; the setting aside of any transfer, delivery of goods, payment, execution or other act relating to property made or done by or against the company within three months before the date of the application, which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference. Any other matter for which in the opinion of the Company Law Board it is just and equitable that provision should be made. Effect of alteration of memorandum or articles of company by order: Where an order makes any alteration in the memorandum or articles of a company, then, notwithstanding any other provision of this Act, the company shall not have power, except to the extent, if any permitted in the order, to make without the leave of the Company Law Board, any alteration whatsoever which is inconsistent with the order, either in the memorandum or in the articles. The alterations made by the order shall, in all respects, have the same effect as if they had been duly made by the company in accordance with the provisions of this Act. A certified copy of every order altering or giving leave to alter, a company's memorandum or articles, must within thirty days after the making thereof, be filed by the company with the Registrar who shall registrar the same. If default is made in complying with the above provisions, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five thousand rupees. Consequences of termination or modification of certain agreements: Where an order terminates, sets aside or modifies an agreement:- The order shall not give rise to any claim whatever against the company by any person for damages or for compensation for loss of office or in any respect, either in pursuance of the agreement or otherwise; no managing or other director or manager whose agreement is so terminated or set aside, shall for a period of five years from the date of the order terminating the agreement,

without the leave of the Company Law Board, be appointed, or act, as the managing or other director or manager of the company. Any person who knowingly acts as a managing or other director or manager of a company in contravention of the above provision, every director of the company, who is knowingly a party to such contravention shall be punishable with imprisonment for a term which may extend to one year, or with fine which may extend to five thousand rupees, or with both. The Company Law Board will not grant leave for appointment as managing director or director or manager of the company unless notice of the intention to apply for leave has been served on the Central Government and that Government has been given an opportunity of being heard in the matter. Powers of Central Government to prevent oppression or mismanagement: The Central Government may appoint such number of persons as the Company Law Board may, by order in writing, specify as being necessary to effectively safeguard the interests of the Company or its shareholders or public interests, to act as directors thereof for such period not exceeding 3 years on any one occasion as it deems fit if the Company Law Board:On a reference being made to it by the Central Government ; or on an application of not less than one hundred members of the company or of members of the company holding not less than one-tenth of the total voting power therein, is satisfied, after such inquiry as it deems fit to make, that it is necessary to make the appointment or appointments in order to prevent the affairs of the company being conducted either in a manner which is oppressive to any members of the company or in a manner which is prejudicial to the interests of the company or to public interest. However, in lieu of passing order as aforesaid, the Company Law Board may, if the company has not availed itself of the option given to it of proportional representation to minority shareholders on the Board of the company, direct the company to amend its articles in the manner provided section 265 and make fresh appointments of directors in pursuance of the articles as so amended within such time as may be specified in that behalf by the Company Law Board. In case the Central Government passes such an order it may, if thinks fit, direct that until new directors are appointed in pursuance of the order aforesaid, not more than two members of the company specified by the Company law Board shall hold office as additional directors of the company. The Central Government shall appoint such additional directors on such directions. The person appointed as a director by the Central Government in accordance with the above provisions, need not hold any qualification shares or need to retire by rotation. However, his office as director may be terminated at any time by the Central Government and another person appointed in his place. No change in the constitution of the Board of Directors can take place after an additional director is appointed by the Central Government in accordance with these provisions unless approved by the Company Law Board. The Central Government in such cases may also issue such directions to the company as it may consider necessary or appropriate in regard to its affairs. Power of the Tribunals to prevent change in Board of Directors :

Where a complaint is made to the Company Law Board by the managing director or any other director or the manager of a company that, as a result of a change which has taken place or is likely to take place in ownership or any shares held in the company, a change in the Board of directors is likely to take place which (if allowed) would affect prejudicially the affairs of the company, the Company Law Board may, if satisfied, after such inquiry as it thinks fit to make that it is just and proper to do so, by order direct that no resolution passed or that may be passed or no action taken or may be taken to effect a change in the Board of directors after the date of the complaint shall have effect unless confirmed by the Company Law Board. Any such order shall have effect notwithstanding anything to the contrary contained in any other provision of this Act or in the memorandum or articles of the company, or in any agreement with, or any resolution passed in general meeting by, or by the Board of directors or, the company. The Company Law Board shall have power when any such complaint is received by it, to make an interim order to the effect set out above, before making or completing the inquiry aforesaid. Nothing contained above shall apply to a private company, unless it is a subsidiary of a public company. Powers of Inspectors [S.240]: Where an inspector investigating the affairs of the company thinks it necessary to investigate the affairs of another company in the same management or group , he is empowered to do so. However as mentioned in section 239(2), he has to obtain prior approval of the Central Government for that purpose.[13] Section 240 has been amended by the Amendment of 2000 .Sub-section (1) was substituted. The new sub-section provides that it shall be the duty of all officers and other employees and agents of the company and those of any other body corporate whose affairs are being investigated under Section 239: a) to preserve and to produce to an inspector or any other person authorized by him in this behalf with the previous approval of the Central Government, all books and papers of or relating to the other body corporate, which are in their custody or power; and

b) otherwise to give to the inspector, all assistance in connection with the investigation which they are reasonable able to give. For facilitating the task of the inspector it is the duty of all officers in charge of the management of the company to produce to the inspector all books and papers of the company which are in the custody and power and to give to the inspector all assistance in connection with the investigation which they are reasonably able to give.]The inspector may examine on oath any such person and for this purpose require his personal attendance. If a person required to appear or to produce books, makes a default that is a punishable offence.[16]Where an inspector finds a person, whom he has no power to examine on oath, ought to be so examined the inspector may do so with the previous approval of the Central Government. Notes of any such examination are to be taken in writing and signed by the person examined and may be used in evidence against him .A refusal to answer any question is also punishable.

Oppression and mismanagement are part and parcel of business. During the course of business, oppression of small/minority shareholders takes place by the majority shareholders who are in control of the company. Similarly, mismanagement of business is not uncommon. When we talk of mismanagement we mean mismanagement of resources. Mismanagement could mean siphoning of funds, causing losses due to rash decision, not maintaining proper records, not calling requisite meetings. Finer version of mismanagement could arise where the management does not act/react to a business situation leading to downfall of business. The concept of oppression and mismanagement is more relevant or common to family owned concerns. The reasons are very obvious. Family owned concerns are owned by family members who over time develop vested interest in business vested interest in their own heirs being the most common - thereby leading to oppression of other family members. Here typically, the controlling member of the family appropriates the family holdings by means of either a fresh issue or fraudulent transfers in his favor or reconstitutes the board in such a manner as to alienate the other family members. The result is the other family members get oppressed. Secondly, the family owned concerns are not professional managed and their system of functioning is usually personal. They lack probity and fair play. They generally do business in a manner where they begin to benefit personally to the exclusion of other members. This leads to oppression of other family members/mismanagement of companies. In order to check all these discrepancies the need was felt to have any measure to prevent the Oppression and mismanagement and thus under Chapter 6th of Part 6th of Companies Act , 1956 provides for the judicial as well as administrative remedies to check Oppression and mismanagement. It is a powerful tool which provides such power that even a singer member can approach Company Law Board if any of his right has been infringed or in order to prevent the Oppression and mismanagement in the company. Questions: 1. What do you mean by oppression? State the provision in company law to prevent the oppression. 2. What do you mean by mismanagement? State the provision in company law to prevent the mismanagement. 3. State the powers of central government against oppression and mismanagement.

WINDING UP OF COMPANY
Meaning: A company is created by law and the end of the company also takes place only by a legal procedure. The term winding up of a company means the end of a companys affairs and operations. All the assets of a company are sold and debts are paid out of the proceeds. If there is any surplus left with the company that is dividend among the different members of the company.

According to Professor Gower, Winding up of a company is the process whereby its life is ended and its property administered for the benefit of its creditors and members. An administrator called a liquidator, is appointed and he takes control of the company, collects its assets, pays its debts and finally distributes any surplus the members in accordance with their rights Modes of Winding up: The company may be wound up in any of the following ways under Sec. 425 (1) of the companies Act. 1. Compulsory Winding Up under the order of the Court. 2. Voluntary Winding up (Members or creditors Voluntary Winding up) 3. Winding up subject to supervision of the Court. Winding up by Court (Sec. 433) A company may be wound up in the following circumstances under the order of the Court. 1. By special resolution When special resolution has been passed in the meeting of the company that the company be wound up by the Court. The powers of the Court are discretionary and court may not issue any order for winding up if it finds against the company or public interest. 2. Default in holding statutory meeting or in delivering statutory report: If the Company makes any default in holding statutory meetings or in submitting the statutory report to the Register then court issue a winding up order on the request of the Registrar or by a contributory. The request can only be made to the court on expiry of the days from the last date on which such meeting ought to have been held. 3. Not to commence business or to suspend business: If the company does not commence its business within one year from its incorporation or suspend its business for whole year, the power of the court is discretionary and court does not issue order for winding up of the company if it finds that there is a good reason for the delay and there is a better prospectus of the company. 4. Reduction in number of members below Minimum: If the number of members is reduced below the legal limit (i.e. seven in case of public company or two in case of a private company), the court may order the company to be wound up. 5. Inability to pay its debts:

A company may be ordered to be wound up in case of inability for the payment of its debts. A company is deemed to be unable to pay its debts in the following circumstances. a. When a company fails in paying its debts within three weeks from the date of demand by the creditors exceeding to Rs. 500. But the debt mist be real. Justified and immediately payable without dispute. Where a company fails to satisfy a court decree in favour of creditor either in whole or it part.

b.

c. Where it is proved to the satisfaction of the Court that the company is unable to pay its debts 6. Just and equitable: It is not established that the last, clause in Sec. 433, the just and equitable clause leaves the entire matter to the wide and wise judicial discretion of the Court depending upon the facts and circumstances of each case. (i) When the substratum of a Company is gone. a. When the subject matter of the Company is gone b. When the main object for which the company was incorporated has substantially failed or become impracticable. c. When it is not possible to carry out the business of the Company d. When the existing and probable assets of the Company are insufficient to meet its existing liabilities. (ii) When the majority shareholders of the Company are using their powers unfairly or have adopted on oppressive policy towards the minority or when the Management is carried on in such a way what the minority is disregarded or appressed. Where there is a deadlock in the Management of a company. Where director has voting Control refuses to hold meeting produce accounts or pay dividends, Lack Vs. John Blackwook Ltd (1974) is a leading case in this regard. When the Management is carried on in such a way that the minority is disregarded, the winding up of the Company would be just and equitable. Where the Compnay is formed to carry out illegal or fraudulent business or when the business of the company illegal. When the Company is a mere bubble and it does not carry on any business or does not have any property Rs: London and Country Coal Co. (1866) is a leading case in this regard.

(iii) (iv)

(v) (vi) (vii)

Petition: Under Sec. 439 of the Companies Act, the petition for winding up of a company may be presented by any one of the following: 1. 2. Petition by the company: A petition can be filed by Company for winding up when the special resolution have been passed in the meeting of the Company. Creditors Petition: Creditors can also file petition if the Company is unable to pay its debts. The prospective creditor is also empowered to file petition. The creditors petition will not be taken into account if the claim of the creditors is time based under the Limitation Act. Contributors Petition: A contributory shall be entitled to present petition for winding up of a company though he may be holder of fully paid shares or that the company may have no surplus assets for dissolution after the payment of its liabilities. Any provision in the articles depriving the members of their rights for winding up is void. A contributory may present a petition for winding up if the company makes any default in filing statutory report of holding the statutory meeting or when there is deadlock in the management or the company does not commence its business in the prescribed time. Registrars Petition: The Registrar can present a petition for winding up only on the following grounds: a. If a default is made in submitting the statutory report or in holding the statutory meeting. b. If the company fails to commence business within a year from its incorporation or suspends its business for a whole year. c. If the numbers of members falls below the minimum members required under the Act.

3.

4.

d. If the company is unable to pay its debts. e. If the Court considers it just and equitable. 5. Petition by any person authorized by the Central Government: The Central Government may authorize any person for winding up in case falling under Sec. 43. This section states that if the Companys business is being considered to defraud the Creditors, members or any other person as per investigation made by the investigator.

Commencement of Winding up: On a winding up order being issued by the Court against a company, the winding up shall be deemed to have commence from the time of filing the petition. But where before the presentation of a petition for winding up of a Company by the court, a resolution has been

passed by the company for winding up, the winding up of the company shall be deemed to have commenced at the time of passing of the resolution. If a winding up order has been made on more than one petition, the winding up shall commence from the date of the presentation of the earlier petition (Sec. 441).

Powers of the Court: According to Section 442 and 443 the court has the following powers on receipt of a winding up petition against a company: (i) Restrain proceedings against the company: At any time after the presentation of a winding up petition but before a winding up order has been made, the court has the power to restrain any suit or proceeding pending against the company in any other court in such terms as it thinks it. The application to the court for this purpose should be made by the company or any creditor or contributory. In case many suits or proceedings are pending in the Supreme Court or in any other Higher Court, the application should be made to the concerned court in which the proceedings are pending which shall then order for the stay of the proceedings (Sec. 422) Hearing Petition: On receiving the petition for the winding up of a company, the court will issue a notice to the company to appear and state its case on a specified date. The court shall also cause the issue of a public notice to all creditors and contributories to inform them about the receipt of winding up petition by the court and to enable them to state their objections, if any, on the date of hearing. The notice shall be issued at least 14 days before the date fixed for hearing (Sec. 443). On hearing the petition the Court may: a. Dismiss it, with or without costs, or b. Adjourn the hearing conditionally or unconditionally, or c. Make any interim order that it thinks fit, or

(ii)

d. Make an order for the winding up of the company with or without cost or any other order as it thinks fit. Consequences of Winding up order: In case the court issues a winding up order against the company, the following consequences will follow: (i) The Court shall immediately send the intimation of the fact to the official liquidator and the Registrar (Sec. 444) (ii) It shall also be the duty of the petition and the company to fill with the Registrar a certified copy of the courts order within thirty days from the date of making of the order. The Registrar shall make record of this fact in his books relating to the company and shall notify in the official Gazette that such an order has been made [Sec. 445 (1 & 20].

(iii) The Winding up order shall be deemed to be notice of discharge to officer and employees of the company except when the business of the company is continued [Sec. 445(3)]. (iv) The power of the board of directors will terminate and they will now vest in the official Liquidator, who shall by virtue of his office become the liquidator of the company. Official Liquidator: The liquidator is the official who helps the court in the completion of the winding up proceedings. In the case of compulsory winding up, only the official liquidator can acts as the companys liquidator. The court has no power to appoint any private person as liquidator (Sec. 449). Provisional Liquidator: Upon the presentation of a petition for winding up the court may appoint Official Liquidator as Provisional Liquidator after giving due notice to the company and also a reasonable opportunity to it to explain its position. The powers of the provisional liquidator will be the same as that of the official Liquidator unless the court otherwise orders. On the passing of the winding up order the official liquidator shall cease to hold office as provisional Liquidator and shall become the liquidator of the company. Sec. 450). It is to be noted that only an individual can be appointed as liquidator of a company irrespective of the form of winding up. Liquidators Powers, Duties and Liabilities: (i) Powers of the Liquidator: Under Sec. 457(1) of the Companies Act, the liquidator shall exercise the following powers with the sanction of the Court. 1. Powers to institute or defend any suit, prosecution or other legal proceedings, civil or criminal, in the name and on behalf of the company. 2. Power to carry on the business of the company so for may be necessary for its beneficial winding up. 3. Powers to sell movable or immovable property and actionable claim of the company and power to transfer the whole or part of such property. 4. To raise money on the security of the assets of the company. 5. To do all other things as may be necessary for the winding up of the affairs of the company. (ii) Duties of the Liquidator: The duties of the liquidator may be enumerated below: 1. To conduct the proceedings in Winding up: The primary duty of a liquidator is to conduct equitably and impartially, and in accordance with the provisions of the Act, the proceedings in he winding up of the Act,

the proceedings in the winding up of the company whose liquidator he is appointed. He may perform all such duties as the court may impose (Sec. 451). 2. To submits preliminary report: Immediately on the receipt of affairs from the directors and within six months after the date of the winding up order, liquidator shall submit to the court and preliminary report with regard to capital issued, subscribed and paid, the estimated amount of assets and liabilities, offence have been committed by directors and other officers of the company and if any further enquiry is desirable as to any matter relating to the promotion, formation, failure of the company or the conduct of its business (Sec. 455) Custody of companys property: On a winding up order being made the liquidator must take into custody all the property, and actionable claims to which the company is or appears to be entitled. On the passing of an order of winding up, the assets of the company are to be treated as being in the custody of the court (Sec. 456) It may be noted that the official liquidator is only a custodian of the companys liquidator is only a custodian of the companys property and the property does not vest in him. The liquidator is a trustee of the property of the company for the creditors. 4. To obey the Directors: It is the duty of the liquidator to follow the directions given by the creditros, or contributories or by the committee of inspection. Any directions givne by creditors or contributories at general meeting shall be deemed to override any directions given by the inspection committee in case of conflict [Sec. 460 (1) and (2)]. 5. To summon meetings of creditors and contributories: He may summon general meetings of the creditors or contributories whenever he thinks fit for the purpose of ascertaining their wishes. But he must summon such meetings at such times as the creditors or contributories may by resolution direct or whenever requested in writing to do so not less than one tenth in value of the creditors or contributories as the case may be [Sec. 460 (3)]. 6. Directions form the court: He shall use his own direction in the administrator of the companys assets and in the distribution of such assets among the creditors but he shall always be working subject to the control of the court. Any creditors or contributory may, subject to the control of the court, inspect any such books, personally or by his agent (Sec. 461). 7. To maintain proper books: The liquidator must keep proper books in the prescribed manner to record entries minutes of all proceedings at meetings and of such other matters as may be prescribed.

3.

Any creditor or contributory may, subject to the control of the court, inspect any such books, personally or by his agent (Sec. 461). 8. To present an account of his receipts and payments to the court: The official liquidator shall at least twice in each year present to the court an account of his receipts and payments in the prescribed form, in duplicate. The court gets the accounts audited, keep one copy thereof in its record and delivers the other copy of the Register for filing. Each copy shall however, be open to the inspection of any creditor, contributory or person interested. The liquidator is also required to send a printed copy of the accounts so audited by post to every creditor and to every contributory. 9. Appointment of Committee of Inspection: The liquidator will have to appoint a committee of inspection to assist him if the court so directs. He should convene a meeting of the creditors within two months from the date of the courts direction for the purpose of determining who are to be the members of the committee. He should also within fourteen days of the creditors meeting, convene a meeting of the contributories to consider the decision of the creditors meeting with the respect to the membership of the committee. In case the contributories do not accept the decision of the creditors meeting in its entirely, the liquidator should apply to the court for direction regarding the composition of the committee. [Sec. 464] 10. To submit information as to pending liquidation: If the winding up of a company is not completed within one year after its commencement, the liquidator shall within two months of the expiry of such year and thereafter until the winding up is concluded at intervals of not more than one year, file a statement in the prescribed form and containing the prescribed particulars regarding proceedings in and position of liquidation. (iii) Liabilities of Liquidators; A Company liquidator is liable for negligence: 1. If he distributes its assets without making due provision for liabilities or contingent claims of which he has notice, e.g. where the company having assigned a lease is under a contingent liability for thee rend [Rd. Winds or Steam Coal Co. Ltd., (1929) 1 Ch. 151 (C.A.)], or where he knows of possible claims by workmen for injuries not covered by insurance [Re. Armstrong with worth securities Co. Ltd. (1947) 1 Ch. 673] If he applies the assets of the company in paying a doubtful claim without taking proper legal advice or direction from the court [Re. Home and Colonial Insurance Co. Ltd. (1930) 1 Ch.102]

2.

3. It there is a breach of any of his statutory duties, he will be liable in damages to a creditor or a contributory for injury to him. Statement of Affairs: The directors have to submit a statement as to to affairs of the company within 21 days of the passing of the winding up order or appointment of provisional liquidator as the case may be (Sec. 454). The statement should be submitted to the liquidator and should contain the following particulars. a. The assets of the company, stating separately the case balance in hand, at the bank and negotiable instruments, if any held by the company.

b. Companys debts and liabilities. c. The names, residences and occupations of its creditor, stating separately the amount of secured and unsecured debts, and in case of secured debts, particulars of securities given whether by the company or an officer thereof, their value and the dates on which they were given. d. e. The debts due to the company and the names, residences, and occupations of persons from whom they are due and the amount likely to be realized on account thereof. Each further or other information as may be prescribed or as the official liquidator may require.

The statement is required to be made in the prescribed form and duly verified by an affidavit and signed by a Director and the Manager, Secretary or other Chief Officer of the Company. Committee of Inspection (Sec. 464): Committee of Inspections in a Compulsory Winding up is appointed to represent and safeguard the interests of the creditors and contributors. It may also exercise a certain degree of control and supervisions over the activities of the liquidator. It has also the right to inspect the accounts of the liquidator at all reasonable times. The provisions of he Act regarding this committee have been given in Sections 464 and 465 of the Act. List of contributories: The liquidator prepares two lists of contributories A List and B List. The A List includes the names of all present members who are liable to contribute. They are primarily liable to contribute to the assets of the company to meet its debts and obligations. The B List includes the names of he past members i.e., those who have ceased to be members within one year of the commencement of the winding up. The liability of these contributories will be called upon to contribute to the extent of the unpaid amount on their shares if the present members are unable to pay. The liquidation then files the lists ot the court and obtrains appointment for setting the lists with notice of 14 days to every person included in the lists. After the lists have been settled the liquidator gives notice to every contributory whose names is finally placed on the lists.

Voluntary Winding up: When a company is wound up at the instance of either the members or the creditors, the winding up is termed as voluntary winding up. The following are the conditions for voluntary winding up of a company under Sec. 484 of the Companies Act. 1956. Circumstances in which company may be wound up voluntarily are given below: a. Expiry of duration or happening of event: if the duration of the company fixed by the articles has expired or the event, if any on the occurrence of which the Articles provide to dissolve the company.

b. Passing of special resolution: when the special resolution has been passed that the company be wound up voluntarily. Types of Voluntary winding up: The voluntary winding up of a company may be classified into the following tow parts: a. Members Voluntary Winding up b. Creditors Voluntary Winding up Members voluntary winding up requires the filing of a statutory declaration of solvency by the majority of the directors of the company with the Registrar. The question of Creditors Voluntary winding up will arise in a case where the company is not in a position to pay off its liabilities in full. In such a case declaration of solvency shall not be made and filed with the Registrar. Members Voluntary Winding up is possible only in case when the company is solvent and has to carry out the following: 1. Declaration of Solvency: According to Section 488 of the companies Act, the Board of Directors will have to make a declaration of solvency wherein they will have to state that the Board has made full enquiry and is of the option that the Company is able to pay its debts in full within three years from the commencement of the winding up. It must be made within five weeks from the date of passing of resolution for winding up of a company and one copy of the same must be delivered to the Registrar for Registration. 2. Appointment of Liquidator and determination of his remuneration: The meeting is called of the members for winding up of the company, liquidator is appointment in the same meeting and his remuneration is also fixed. Very often the secretary of the company is appointed as liquidator of the Company (Sec. 490) 3. Boards power to cease on an appointment of liquidator: After the appointment of liquidator, all the powers of Directors, Managing Director, Secretary or Manager come to an end (Sec. 491)

4. To fill the vacancy of the liquidator in the general meeting of the company: If the office of the liquidator is vacated due death, resignation or any other reason then liquidator is appointed in the general meeting according to an agreement made with the Creditors (Sec. 492) 5. Notice of appointment of the liquidator to be given to the Registrar: The company must give information to the Registrar regarding the appointment of liquidator and any change in it within 10 days of the same (Sec. 493) 6. Restrictions of liquidator to accept shares: The liquidator cannot accept shares of the company without the sanction of a special resolution of the company (Sec. 494) 7. To call the general meeting at the end of each year: The liquidator must all every year the general meeting of the company and must layout the progress of winding up before the members (Sec. 496) 8. Final meeting and dissolution: The liquidator calls the last meeting of the company when all the affairs have been compeletely over. This meetings is called by giving notice in the official Gaette and in leading newspapers but the time should not be less than one month. The object of holding such meeting is to discuss the details of accounts and explanations of them in the general meeting of the company. Creditors Voluntary Winding up: A winding up where a solvency declaration is not made, is referred as creditors Voluntary winding up. Thus, questions of creditors Voluntary winding up shall arise only in case of an insolvent company. In such a case the creditors are given a controlling voice in the winding up of the company. Provisions applicable to the creditors voluntary winding up: Section 500 to 509 contains the following provisions regarding Creditors voluntary winding up: (i) Meeting of Creditors: The meeting of Creditors is called on the same or on the next day in which the meeting of members has been called regarding the winding up of the company. Information of the meeting must be given through official gazettee and in the two leading newspapers. (Sec. 501 and 502) All the statement of affairs are placed in the meeting of creditors specifying therein the name of the creditors and their claims against the Company [Sec. 500(3)]. Filing of copy of the resolution with the Registrar: A copy of the resolution for winding up of the company must be filled with the Registrar within 10 days (Sec. 501)

(ii) (iii)

(iv)

Appointment of liquidator and committee of inspection: The members and the creditors while passing resolution for winding up of the company also appoint the liquidator. If the liquidator appointed by the Creditors and that by the member are different persons then the liquidator appointed by the creditors shall be the liquidator (Sec. 502). The creditors, in the same meeting also appoint a committee of inspection consisting of members but not more than five in number. The powers of such committee are the same as of the committee appointed in case of compulsory winding up (Sec. 503). Fixing a liquidators remuneration: The remuneration of the liquidator is fixed either by the committee of inspection or by creditors. It is not fixed by both then it is decided by the court itself. (Sec. 504). Boards powers to lease on the appointment of liquidator: Just after the appointment of liquidator all the powers of the Board ceases (Sec. 505). To fill the casual vacancy in the office of liquidator: If the vacancy exists due to death, resignation or otherwise, such vacancy is filled by the creditors in the general meeting of the company (Sec. 506) Restriction on the liquidator to accept shares: The liquidator cannot take shares of any other company as a consideration for the transfer without the permission of the court or the committee of inspection (Sec. 507). Final meeting and dissolution: When all the affairs of the company are wound up, the liquidator calls the final meeting of the members and creditors. The entire Books of Accounts are presented there in the meeting. The information must be made by giving an advertisement in the leading newspapers and in official Gazette also Lastly, the liquidator files the copy of last meeting proceeding with the Registrar and the Registrar on receipt of the copy enters it in his registrar. The Company in this way is wound up after 3 months from the date of registration.

(v)

(vi) (vii)

(viii)

(ix)

Members Vs Creditors Voluntary Winding up: The distinction between members voluntary winding up and creditors voluntary winding up are listed below: Members Voluntary Winding up 1. Creditors Voluntary Winding up

Such winding up takes place only 1. Such winding up takes place only in case when the company is in a position to when the company is not in a position to pay is debts. pay its debts. 2. No such declaration is made 3. Meeting of members and creditors is called 4. The liquidator in fact is appointed by the

2. Declaration of solvency is made by the Directors 3. Only meeting of members is called 4. The liquidator is appointed and

remuneration is company itself. 5. No committee appointed 6. of

fixed

by

the is

creditors and remuneration is fixed by the committee of inspection. 5. Committee of inspection is appointed

inspection

The liquidators can exercise some 6. The liquidator exercises power with the sanction of the court. powers with the sanction of a special resolution of the company. Meeting of members is called on 7. Meeting of members and creditors is called completion of proceedings of winding when the proceeding for winding up has been completed. up.

7.

Winding up subject to the Supervision of the Court: When the Voluntary Winding up of a company has been started, thereafter, if the creditor or contributory or the liquidator is not satisfied, they may apply to the court for winding up of the company under the supervision of the court. The grounds on which they may not be satisfied may be. 1. The liquidator is partial or negligent. 2. The majority is playing fraud with the minority and 3. The rules regarding winding up of a company have not been fully complied with. The court may make an order that winding up of company shall continue subject to the supervision of the court and no such terms and conditions as it thinks fit. Such type of winding up is also known as Supervisory winding up. The court in this type of winding up is empowered to appoint liquidators. The liquidator so appointed will have the same power as if he had been appointed as a liquidator in a voluntary winding up (Sec. 525). Section 527 of the Companies Act further empowers the court for compulsory winding up of the company is case of need. In such mode of winding up of the company, the procedure followed regarding meeting of members and creditors, submission of account and returns etc is similar to voluntary winding up. The company is dissolved by the order of the court. Winding up of unregistered companies: An unregistered company is not a Company as defined by the companies Act. Nevertheless. Sec. 583 makes provision for the winding up of such a company by the court. According to Sec. 582, unregistered company means a partnership, association or company consisting of more than seven members at a time when the petition for its winding up is presented before the court. But it does not include. a. A railway company incorporated by the Act of Parliament of any other Indian law or by the Act of the Parliament of U.K. b. A company registered under the companies Act., 1956; or

c.

A company registered under any previous companies Act and not being a company with its registered office in Burmah, Aden or Pakistan before their separation from India.

Winding up of Defunct Companies: A Defunct Company is one which has never started operation or has stopped operation and has no assets to divide. Such a company can be dissolved by the order of he company can be dissolved by the order of the court without going through the process of winding up. Restoration: If the company or any member or creditors feels aggrieved by the company being struck off he may apply to the court within twenty years of the dissolution for the restoration of the company to the register and the court may order it to be restored if it is of the opinion that the time of the dissolution it was carrying on business or in operation, or that it would be just to do. The court may also make such provisions and direction as seen just for planning the company and other person in the same position as they would have been if the company had not been struck off. Questions: 1. What are the various types of company liquidation? 2. State the procedure of voluntary liquidation. 3. Under what conditions a court can order the winding up of a company. 4. What are the rights and duties of the liquidator?

ANNEXURE-3

Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988


In exercise of the powers conferred by section 642 read with clause (e) of sub-section (1) of section 217 of the Companies Act, 1956 (1 of 1956), the Central Government hereby makes the following rules, namely :1. (1) These rules, may be called the Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988. (2) They shall come into force on the 1st day of April, 1989. 2. Every company shall, in the report of its board of directors, disclose particulars with respect to the following matters namely :A. Conservation of energy : (a) energy conservation measures taken ; (b) additional investments and proposals, if any, being implemented for reduction of consumption of energy ; (c) impact of the measures at (a) and (b) above for reduction of energy consumption and consequent impact on the cost of production of goods ; (d) total energy consumption and energy consumption per unit of production as per Form A of the Annexure in respect of industries specified in the Schedule thereto. B. Technology absorption : (e) efforts made in technology absorption as per Form B of the Annexure : C. Foreign exchange earnings and outgo : (f) activities relating to exports; initiatives taken to increase exports ; development of new export markets for products and services ; and export plans ; (g) total foreign exchange used and earned.

ANNEXURE

FORM A (See rule 2) Form for Disclosure of Particulars with respect to Conservation of Energy. A. Power and fuel consumption 1. Electricity (a) Purchased Unit Total amount Rate/unit (b) Own generation (i) Through diesel generator Unit Units per ltr. of diesel oil Cost/unit (ii) Through steam turbine/generator Units Units per ltr. of fuel oil/gas Cost/units 2. Coal (specify quality and where used) Quantity (tonnes) Total cost Average rate 3. Furnace oil Quantity (k. ltrs.) Total amount Average rate 4. Others/internal generation (please give details) Quantity Total cost Rate/unit B. Consumption per unit of production Current year Previous year

Standards (if any)

Current year 1

Previous year 2

Products (with details) unit Electricity Furnace oil Coal (specify quality) Others (specify) NOTES: (1) Please give separate details for different products/items produced by the company and covered under these rules. (2) Please give reasons for variation in the consumption of power and fuel from standards of previous year. (3) In case of production of different varieties/specifications consumption details ma y be given for equivalent production. SCHEDULE (See rule 2) List of Industries which should furnish information in Form A 1. Textile 2. Fertilizer 3. Aluminium 4. Steel 5. Refineries 6. Petro-chemicals and chemicals 7. Cement 8. Dairy and food processing 9. Cold storage plant 10. Electric arc furnaces 11. Chlor alkali 12. Edible oil 13. Engineering (Steel forging and re-rolling) 14. Glass 15. Jute 16. Paper

17. Refractory and pottery 18. Tea 19. Tyre 20. Sugar 21. Drugs and pharmaceuticals FORM B (See rule 2) Form for disclosure of particulars with respect to absorption. Research and development (R & D) 1. Specific areas in which R & D carried out by the company. 2. Benefits derived as a result of the above R&D 3. Future plan of action 4. Expenditure on R & D : (a) Capital (b) Recurring (c) Total (d) Total R & D expenditure as a percentage of total turnover Technology, absorption, adaptation and innovation 1. 2. 3. Efforts, in brief, made towards technology absorption, adaptation and innovation. Benefits derived as a result of the above efforts, e.g., product improvement, cost reduction, product development, import substitution, etc. In case of imported technology (imported during the last 5 years reckoned from the beginning of the financial year), following information may be furnished : (a) Technology imported. (b) Year of import. (c) Has technology been fully absorbed? (d) If not fully absorbed, areas where this has not taken place, reasons there for and future plans of action.

CONTEMPORARY ISSUES
Learning Objectives: This chapter is collection of articles on the emerging issues under the company law Mergers and acquisition Corporate restructuring Corporate governance Limited liability partnership Companies bill 2009

MERGERS AND ACQUISITION


A merger is a combination of two companies where one corporation is completely absorbed by another corporation. The less important company loses its identity and becomes part of the more important corporation, which retains its identity. It may involve absorption or consolidation. Merger is also defined as amalgamation. Merger is the fusion of two or more existing companies. All assets, liabilities and the stock of one company stand transferred to Transferee Company in consideration of payment in the form of: (i) (ii) (iii) (iv) Equity shares in the transferee company, Debentures in the transferee company, Cash, or A mix of the above mode

Motives Behind Mergers Of The Company (i) Economies of Scale: This generally refers to a method in which the average cost per unit is decreased through increased production (ii) Increased revenue /Increased Market Share: This motive assumes that the company will be absorbing the major competitor and thus increase its to set prices.

(iii) Cross selling: For example, a bank buying a stock broker could then sell its banking products to the stock brokers customers, while the broker can sign up the bank customers for brokerage account. (iv) Corporate Synergy: Better use of complimentary resources. It may take the

form of revenue enhancement and cost savings. (v) Taxes: A profitable can buy a loss maker to use the targets tax right off i.e. wherein a sick company is bought by giants. (vi) Geographical or other diversification: This is designed to smooth the earning results of a company, which over the long term smoothens the stock price of the company giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders.

Types Of Mergers
From the perception of business organizations, there is a whole host of different mergers. However, from an economist point of view i.e. based on the relationship between the two merging companies, mergers are classified into following: (1) Horizontal merger- Two companies that are in direct competition and share the same product lines and markets i.e. it results in the consolidation of firms that are direct rivals. E.g. Exxon and Mobil, Ford and Volvo, Volkswagen and Rolls Royce and Lamborghini Vertical merger- A customer and company or a supplier and company i.e. merger of firms that have actual or potential buyer-seller relationship eg. Ford- Bendix Conglomerate merger- generally a merger between companies which do not have any common business areas or no common relationship of any kind. Consolidated firma may sell related products or share marketing and distribution channels or production processes.

(2)

(3)

On a general analysis, it can be concluded that Horizontal mergers eliminate sellers and hence reshape the market structure i.e. they have direct impact on seller concentration whereas vertical and conglomerate mergers do not affect market structures e.g. the seller concentration directly. They do not have anticompetitive consequences. The circumstances and reasons for every merger are different and these circumstances impact the way the deal is dealt, approached, managed and executed. .However, the success of mergers depends on how well the deal makers can integrate two companies while maintaining day-to-day operations. Each deal has its own flips which are influenced by various extraneous factors such as human capital component and the leadership. Much of it depends on the companys leadership and the ability to retain people who are key to companys on going success. It is important, that both the parties should be clear in their mind as to the motive of such acquisition i.e. there should be censusad- idiom.

Profits, intellectual property, costumer base are peripheral or central to the acquiring company, the motive will determine the risk profile of such M&A. Generally before the onset of any deal, due diligence is conducted so as to gauze the risks involved, the quantum of assets and liabilities that are acquired etc. Laws Regulating Merger Following are the laws that regulate the merger of the company:(I) The Companies Act, 1956. Section 390 to 395 of Companies Act, 1956 deal with arrangements, amalgamations, mergers and the procedure to be followed for getting the arrangement, compromise or the scheme of amalgamation approved. Though, section 391 deals with the issue of compromise or arrangement which is different from the issue of amalgamation as deal with under section 394, as section 394 too refers to the procedure under section 391 etc., all the section are to be seen together while understanding the procedure of getting the scheme of amalgamation approved. Again, it is true that while the procedure to be followed in case of amalgamation of two companies is wider than the scheme of compromise or arrangement though there exist substantial overlapping.

The procedure to be followed while getting the scheme of amalgamation and the important points, are as follows:(1) Any company, creditors of the company, class of them, members or the class of members can file an application under section 391 seeking sanction of any scheme of compromise or arrangement. However, by its very nature it can be understood that the scheme of amalgamation is normally presented by the company. While filing an application either under section 391 or section 394, the applicant is supposed to disclose all material particulars in accordance with the provisions of the Act. (2) Upon satisfying that the scheme is prima facie workable and fair, the Tribunal order for the meeting of the members, class of members, creditors or the class of creditors. Rather, passing an order calling for meeting, if the requirements of holding meetings with class of shareholders or the members, are specifically dealt with in the order calling meeting, then, there wont be any subsequent litigation. The scope of conduct of meeting with such class of members or the shareholders is wider in case of amalgamation than where a scheme of compromise or arrangement is sought for under section 391 (3) The scheme must get approved by the majority of the stake holders viz., the members, class of members, creditors or such class of creditors. The scope of conduct of meeting with the members, class of members, creditors or such class of creditors will be restrictive some what in an application seeking compromise or arrangement.

(4) There should be due notice disclosing all material particulars and annexing the copy of the scheme as the case may be while calling the meeting. (5) In a case where amalgamation of two companies is sought for, before approving the scheme of amalgamation, a report is to be received form the registrar of companies that the approval of scheme will not prejudice the interests of the shareholders. (6) The Central Government is also required to file its report in an application seeking approval of compromise, arrangement or the amalgamation as the case may be under section 394A. (7) After complying with all the requirements, if the scheme is approved, then, the certified copy of the order is to be filed with the concerned authorities. (II) The Competition Act, 2002. Following provisions of the Competition Act, 2002 deals with mergers of the company:(1) Section 5 of the Competition Act, 2002 deals with Combinations which defines combination by reference to assets and turnover (a) exclusively in India and (b) in India and outside India. For example, an Indian company with turnover of Rs. 3000 crores cannot acquire another Indian company without prior notification and approval of the Competition Commission. On the other hand, a foreign company with turnover outside India of more than USD 1.5 billion (or in excess of Rs. 4500 crores) may acquire a company in India with sales just short of Rs. 1500 crores without any notification to (or approval of) the Competition Commission being required. (2) Section 6 of the Competition Act, 2002 states that, no person or enterprise shall enter into a combination which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India and such a combination shall be void. All types of intra-group combinations, mergers, demergers, reorganizations and other similar transactions should be specifically exempted from the notification procedure and appropriate clauses should be incorporated in subregulation 5(2) of the Regulations. These transactions do not have any competitive impact on the market for assessment under the Competition Act, Section 6. (III) Foreign Exchange Management Act, 1999. The foreign exchange laws relating to issuance and allotment of shares to foreign entities are contained in The Foreign Exchange Management (Transfer or Issue of Security by a person residing out of India) Regulation, 2000 issued by RBI vide GSR no. 406(E) dated

3rd May, 2000. These regulations provide general guidelines on issuance of shares or securities by an Indian entity to a person residing outside India or recording in its books any transfer of security from or to such person. RBI has issued detailed guidelines on foreign investment in India vide Foreign Direct Investment Scheme contained in Schedule 1 of said regulation. (IV) SEBI Takeover Code 1994. SEBI Takeover Regulations permit consolidation of shares or voting rights beyond 15% up to 55%, provided the acquirer does not acquire more than 5% of shares or voting rights of the target company in any financial year. [Regulation 11(1) of the SEBI Takeover Regulations] However, acquisition of shares or voting rights beyond 26% would apparently attract the notification procedure under the Act. It should be clarified that notification to CCI will not be required for consolidation of shares or voting rights permitted under the SEBI Takeover Regulations. Similarly the acquirer who has already acquired control of a company (say a listed company), after adhering to all requirements of SEBI Takeover Regulations and also the Act, should be exempted from the Act for further acquisition of shares or voting rights in the same company. The Indian Income Tax Act (ITA), 1961. Merger has not been defined under the ITA but has been covered under the term 'amalgamation' as defined in section 2(1B) of the Act. To encourage restructuring, merger and demerger has been given a special treatment in the Income-tax Act since the beginning. The Finance Act, 1999 clarified many issues relating to Business Reorganizations thereby facilitating and making business restructuring tax neutral. As per Finance Minister this has been done to accelerate internal liberalization. Certain provisions applicable to mergers/demergers are as under: Definition of Amalgamation/Merger Section 2(1B). Amalgamation means merger of either one or more companies with another company or merger of two or more companies to form one company in such a manner that: (1) All the properties and liabilities of the transferor company/companies become the properties and liabilities of Transferee Company. (2) Shareholders holding not less than 75% of the value of shares in the transferor company (other than shares which are held by, or by a nominee for, the transferee company or its subsidiaries) become shareholders of the transferee company. The following provisions would be applicable to merger only if the conditions laid down in section 2(1B) relating to merger are fulfilled: (1) Taxability in the hands of Transferee Company Section 47(vi) & section 47 (a) The transfer of shares by the shareholders of the transferor company in lieu of shares of the transferee company on merger is not regarded as transfer and hence gains arising from the same are not chargeable to tax in the

(V)

hands of the shareholders of the transferee company. [Section 47(vii)] (b) In case of merger, cost of acquisition of shares of the transferee company, which were acquired in pursuant to merger will be the cost incurred for acquiring the shares of the transferor company. [Section 49(2)] (VI) Mandatory permission by the courts. Any scheme for mergers has to be sanctioned by the courts of the country. The company act provides that the high court of the respective states where the transferor and the transferee companies have their respective registered offices have the necessary jurisdiction to direct the winding up or regulate the merger of the companies registered in or outside India. The high courts can also supervise any arrangements or modifications in the arrangements after having sanctioned the scheme of mergers as per the section 392 of the Company Act. Thereafter the courts would issue the necessary sanctions for the scheme of mergers after dealing with the application for the merger if they are convinced that the impending merger is fair and reasonable. The courts also have a certain limit to their powers to exercise their jurisdiction which have essentially evolved from their own rulings. For example, the courts will not allow the merger to come through the intervention of the courts, if the same can be effected through some other provisions of the Companies Act; further, the courts cannot allow for the merger to proceed if there was something that the parties themselves could not agree to; also, if the merger, if allowed, would be in contravention of certain conditions laid down by the law, such a merger also cannot be permitted. The courts have no special jurisdiction with regard to the issuance of writs to entertain an appeal over a matter that is otherwise final, conclusive and binding as per the section 391 of the Company act. (VII) Stamp duty. Stamp act varies from state to State. As per Bombay Stamp Act, conveyance includes an order in respect of amalgamation; by which property is transferred to or vested in any other person. As per this Act, rate of stamp duty is 10 per cent.

Intellectual Property Due Diligence In Mergers And Acquisitions. The increased profile, frequency, and value of intellectual property related transactions have elevated the need for all legal and financial professionals and Intellectual Property (IP) owner to have thorough understanding of the assessment and the valuation of these assets, and their role in commercial transaction. A detailed assessment of intellectual property asset is becoming an increasingly integrated part of commercial transaction. Due diligence is the process of investigating a partys ownership, right to use, and right to stop others from using the IP rights involved in

sale or merger ---the nature of transaction and the rights being acquired will determine the extent and focus of the due diligence review. Due Diligence in IP for valuation would help in building strategy, where in:(a) If Intellectual Property asset is underplayed the plans for maximization would be discussed. (b) If the Trademark has been maximized to the point that it has lost its cachet in the market place, reclaiming may be considered. (c) If mark is undergoing generalization and is becoming generic, reclaiming the mark from slipping to generic status would need to be considered. (d) Certain events can devalue an Intellectual Property Asset, in the same way a fire can suddenly destroy a piece of real property. These sudden events in respect of IP could be adverse publicity or personal injury arising from a product. An essential part of the due diligence and valuation process accounts for the impact of product and company-related events on assets management can use risk information revealed in the due diligence. (e) Due diligence could highlight contingent risk which do not always arise from Intellectual Property law itself but may be significantly affected by product liability and contract law and other non Intellectual Property realms. Therefore Intellectual Property due diligence and valuation can be correlated with the overall legal due diligence to provide an accurate conclusion regarding the asset present and future value

Legal Procedure for Bringing About Merger Of Companies


(1) Examination of object clauses: The MOA of both the companies should be examined to check the power to amalgamate is available. Further, the object clause of the merging company should permit it to carry on the business of the merged company. If such clauses do not exist, necessary approvals of the share holders, board of directors, and company law board are required. (2) Intimation to stock exchanges: The stock exchanges where merging and merged companies are listed should be informed about the merger proposal. From time to time, copies of all notices, resolutions, and orders should be mailed to the concerned stock exchanges. (3) Approval of the draft merger proposal by the respective boards: The draft merger proposal should be approved by the respective BODs. The board of each company should pass a resolution authorizing its directors/executives to pursue the matter further.

(4) Application to high courts: Once the drafts of merger proposal is approved by the respective boards, each company should make an application to the high court of the state where its registered office is situated so that it can convene the meetings of share holders and creditors for passing the merger proposal. (5) Dispatch of notice to share holders and creditors: In order to convene the meetings of share holders and creditors, a notice and an explanatory statement of the meeting, as approved by the high court, should be dispatched by each company to its shareholders and creditors so that they get 21 days advance intimation. The notice of the meetings should also be published in two news papers. (6) Holding of meetings of share holders and creditors: A meeting of share holders should be held by each company for passing the scheme of mergers at least 75% of shareholders who vote either in person or by proxy must approve the scheme of merger. Same applies to creditors also. (7) Petition to High Court for confirmation and passing of HC orders: Once the mergers scheme is passed by the share holders and creditors, the companies involved in the merger should present a petition to the HC for confirming the scheme of merger. A notice about the same has to be published in 2 newspapers. (8) Filing the order with the registrar: Certified true copies of the high court order must be filed with the registrar of companies within the time limit specified by the court. (9) Transfer of assets and liabilities: After the final orders have been passed by both the HCs, all the assets and liabilities of the merged company will have to be transferred to the merging company. (10) Issue of shares and debentures: The merging company, after fulfilling the provisions of the law, should issue shares and debentures of the merging company. The new shares and debentures so issued will then be listed on the stock exchange. Waiting Period In Merger. International experience shows that 80-85% of mergers and acquisitions do not raise competitive concerns and are generally approved between 30-60 days. The rest

tend to take longer time and, therefore, laws permit sufficient time for looking into complex cases. The International Competition Network, an association of global competition authorities, had recommended that the straight forward cases should be dealt with within six weeks and complex cases within six months. The Indian competition law prescribes a maximum of 210 days for determination of combination, which includes mergers, amalgamations, acquisitions etc. This however should not be read as the minimum period of compulsory wait for parties who will notify the Competition Commission. In fact, the law clearly states that the compulsory wait period is either 210 days from the filing of the notice or the order of the Commission, whichever is earlier. In the event the Commission approves a proposed combination on the 30th day, it can take effect on the 31st day. The internal time limits within the overall gap of 210 days are proposed to be built in the regulations that the Commission will be drafting, so that the over whelming proportion of mergers would receive approval within a much shorter period. The time lines prescribed under the Act and the Regulations do not take cognizance of the compliances to be observed under other statutory provisions like the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (SEBI Takeover Regulations). SEBI Takeover Regulations require the acquirer to complete all procedures relating to the public offer including payment of consideration to the shareholders who have accepted the offer, within 90 days from the date of public announcement. Similarly, mergers and amalgamations get completed generally in 3-4 months time. Failure to make payments to the shareholders in the public offer within the time stipulated in the SEBI Takeover Regulations entails payment of interest by the acquirer at a rate as may be specified by SEBI. [Regulation 22(12) of the SEBI Takeover Regulations] It would therefore be essential that the maximum turnaround time for CCI should be reduced from 210 days to 90 days. With the FDI policies becoming more liberalized, Mergers, Acquisitions and alliance talks are heating up in India and are growing with an ever increasing cadence. They are no more limited to one particular type of business. The list of past and anticipated mergers covers every size and variety of business -- mergers are on the increase over the whole marketplace, providing platforms for the small companies being acquired by bigger ones. The basic reason behind mergers and acquisitions is that organizations merge and form a single entity to achieve economies of scale, widen their reach, acquire strategic skills, and gain competitive advantage. In simple terminology, mergers are considered as an important tool by companies for purpose of expanding their operation and increasing their profits, which in faade depends on the kind of companies being merged. Indian markets have witnessed burgeoning trend in mergers which may be due to business consolidation by large industrial houses, consolidation of business by multinationals operating in India, increasing competition against imports and acquisition activities. Therefore, it is ripe time for business houses and corporates to watch the Indian market, and grab the opportunity. Corporate Insolvency And Restructuring.

Generally speaking, it is almost impossible to conceive of a business that is completely insolvency-free. Laws relating to corporate insolvency and restructuring seek to serve several objectives, namely, to restore the debtor company to profitable trading where this is practicable; to maximize the return to creditors as a whole where the company itself cannot be saved; to establish a fair and equitable system for the ranking of claims and the distribution of assets among creditors, involving a redistribution of rights; and to provide a mechanism by which the causes of failure can be identified and those guilty of mismanagement brought to book, and where appropriate, deprived of the right to be involved in the management of other companies. And we all know that the legal framework for businesses to enable sustainable economic reform having focus on emerging economic scenario, good corporate governance and protection of the interests of the stakeholders, including investors, need efficient and speedy procedures for exit as much as for start-up. World over, insolvency procedures help entrepreneurs close down unviable businesses and start up new ones. This ensures an overall economic growth. Even though India has made much progress on economic reform since 1991, the economy is still limping by excessive rules and a powerful bureaucracy with broad discretionary powers which often goes against the general interests of business. Although the Indian insolvency law has been an ardent follower of the UK insolvency laws, yet, while the UK has moved to a consolidated insolvency law, the similar well directed move is not forthcoming. Much has been said and done to bail out corporate insolvency and restructuring process in order to make the laws efficient and effective; many a doctors have prescribed and administered fair dose; numerous law making processes deliberated in recent years involving law makers, professionals and different interest groups, yet, for reasons unknown, the requisite teeth is still missing. It is wondered as to how a just less than a month is needed to register a business in India, but when it comes to winding up and revival of a company, it can drag as long as 10 years or even more in appropriate case! Apparently, weaknesses in the root of the Indian corporate insolvency & restructuring system are as follows: The Companies Act, 1956 governing liquidation has been working more of as time-consuming machine; Companies Act 1985 (SICA) governing restructurings has been an abject failure being subject complete abuse by debtors seeking to delay creditors; Rampant asset stripping; Lack of machinery to provide credit bureau information to track delinquent debtors;

of sanctions against management resulting in poor corporate governance in insolvency situations. Another concern which cripples as to who calls the shot for regulating the companies when it comes to corporate governance, there is a classic dichotomy in regulation. On the one hand, it is the Ministry of Company Affairs that is largely responsible for the implementation of the Companies Act, 1956, while it is SEBI (for listed companies) that is responsible for implementation of the corporate governance norms, which is contained in Clause 49 of the listing agreement. These are not mutually exclusive and there is bound to be overlap. However, a certain amount of confusion does prevail as to the separation of powers between the Ministry of Company Affairs and SEBI. On a different note though, according to the Reserve Bank of India's (RBI in short) Review of the Recommendations of the Advisory Groups constituted by the Standing Committee on International Financial Standards and Codes in 2004, considerable progress has been made in improving bankruptcy laws in the country from the time the Standing Committee on International Financial Standards and Codes submitted its Report in 2002. Although it is far from satisfactory, when evaluated against the best practice norms, the situation has markedly changed since then. Several legal changes have materialized. Though a comprehensive law has not been enacted, the objectives of the same have been sought to be achieved through the changes to the Companies Act, 1956 by repeated amendment. In general, there has been an improvement in the corporate insolvency and restructuring regime. Laws, Law-Making Initiatives And Their Effects. Laws relating to insolvency of companies in India is governed by the Companies Act 1956 and restructuring of sick or potentially sick companies in certain specified industries are covered under the Sick Industrial Companies (Special Provisions) Act 1985 (SICA in short). The Securitisation, Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI in short) provides for the establishment of asset reconstruction companies (ARC in short), which would undertake the management/realisation of non-performing loans acquired from secured creditors by taking over, change the management. While winding-up and schemes of arrangement are carried out under the aegis of the Courts, the Board for Industrial and Financial Reconstruction (BIFR in short) has been set up (under SICA) for the restructuring/rescue of sick companies. There are other categories of companies incorporated under various specific statutes, including public sector banks and insurance companies are to go by liquidation and reconstruction process in accordance with government regulatory process and such are more of administrative in nature. In 1981, the RBI appointed T. Tiwari Committee to examine the legal and other problems faced by the banks and financial institutions in rehabilitation of sick industrial units and to suggest remedial measures for effectively tackling the problem

of sickness. Following the recommendations of the Tiwari Committee, the Government of India enacted the Sick Industrial Companies (Special Provisions) Act, 1985, (SICA) in order to provide for timely detection of sickness in industrial companies and for expeditious determination of the preventive, ameliorative, remedial and other measures and for enforcement of the measures. Although, the object of the Act was laudable, the Act was factually misused by the erring promoters' to defeat the object of the Act, the most notable of such provisions was the protection under Section 22 of the Act. Due to such inherent defects of SICA and again, for some unexplained reasons, BIFR failed to fulfil the purpose and mandate as envisaged therein. Then came Justice V.B. Balakrishna Eradi Committee Report in 1999 recommending, inter alia, setting up of a National Company Law Tribunal (NCLT in short) to be vested with the functions and power with regard to rehabilitation and revival of sick industrial companies, a mandate presently entrusted with BIFR under SICA and forming of a liquidation committee consisting of creditors of the company in the lines of Section 141 of the Insolvency Act, 1986 of UK to assist the Liquidator and by adopting the necessary principles enunciated under International Monetary Funds propagated norms for Orderly and Effective insolvency procedures. The statement (financial) of affair, which took the most time, is now to be filed, in case of voluntary winding up, along with the winding up application, and in case of an involuntary proceeding, at the time of the first defence. The liquidation program is bound to be time bound. In 2001 came the Report of the Advisory Group on Bankruptcy Laws, called the N L Mitra Committee appointed by the RBI which made several recommendations on bankruptcy law reforms, the first among which was consolidation of bankruptcy laws into a separate code. However, no legislative steps have still been taken in this regard. In line with the Eradi Report and long felt need and widespread criticism from different quarters, we saw the Companies (Amendment) Act, 2002 and repeal of SICA proposed to the new regime of tackling corporate rescue and insolvency procedures in India with a view to creating confidence in the minds of investors, creditors, labour and shareholders. The amended Act has suggested for change by combining the powers of the Courts, the BIFR and the CLB in one specialized NCLT in respect of liquidation of companies, schemes of arrangement/compromises and restructuring of sick companies, thus streamlining the regime. However, six years on, the intended Tribunal is yet to be constituted. Then we saw JJ Irani Committee Report 2005 formulated to review the laws concerning liquidation and restructuring of the companies recommended several revisions to the Companies Act, more particularly for a transparent and globally acceptable insolvency and restructuring procedures, in short. According to the report, it is important that the basic principles guiding the operation of corporate entities

from registration to winding up or liquidation should be available in a single, comprehensive, centrally administered framework. Having recognised the need for a single centre of control, the report goes off on a tangent on this issue. For instance, about the need to demarcate the respective jurisdictions of the MCA and SEBI, the Irani Report states that this perception is misplaced. More importantly, the report does not recommend which government or regulatory agency should be held principally accountable if there is gross incompetence or worse in the management of companies. Almost three years have passed since the Irani Report was finalised and submitted, companies law currently being revamped, yet to be put in place. In the meanwhile, tireless efforts of the RBI need to be noted. The RBI approval is given to asset reconstruction companies under SARFAESI Act. Amongst approved, Asset Reconstruction Company India Limited (ARCIL in short), a loan player, thereby, has been very active in assets reconstruction of the sick or potentially sick companies who are in default of repayment of loans. Recent changes in foreign investment policy allowing foreign direct investment in asset reconstruction companies is expected that pending licence applications will be processed expeditiously. According to the guidelines issued by the RBI, Indian banks excepting foreign banks and financial institutions have entered into contractual arrangements for the Corporate Debt Restructuring (CDR) of companies with multi-lender involvement. The RBI has recently issued a revised set of CDR guidelines. The RBI recently issued separate guidelines for the restructuring of small to medium-sized enterprises (with less than Rs100 million in plant and machinery). Lastly, the new Credit Information Companies Act of 2005 covers the rights and responsibilities of credit bureaus to both maintain accurate credit reporting and safeguard customer confidence. Enforcement Of Security Interest And Equity. Corporate insolvency and restructuring proceedings are based on equity and it may be an arguable issue as to whether a non-judicial body as the NCLT can deliver equitable justice. Despite welcome changes by Eradi and Irani Committee Reports, there is still a need for a thorough overview, from viewpoint of consistency, of at least two significant related fields: As far as reorganization proceedings are concerned, the provisions inserted in the Companies Act are substantially a restatement of the existing provisions of the SICA. First of all, there is no delineation of the circumstances in which reorganization under Section 424A will be applicable, and those under which a winding up order may be passed under Section 433. For example, inability to pay a debt is a ground for winding up, which is also a ground for treating a company as a sick company. A creditor may possibly make reference/application under either provision, and since the adjudicating body is the same under both the provisions, there ought to be clear guidelines as to cases where revival should be the first consideration and those where liquidation shall be ordered. For instance, under the US Bankruptcy law, the Court

must be satisfied that the recoveries under a reorganization plan will not be worse than those in case of a liquidation. Secondly, enforcement of security interests, and enforcement of claims of special creditors is dealt with by several statues in India, including the SARFAESI Act in case of secured creditors being banks, Recovery of Debts due to Banks & Financial Institutions Act 1993 in case creditors being banks or financial institutions, and State Finance Corporations Act in case of creditors being State Finance Corporations, etc. So often it is found that enforcement overlaps with each other, thus creating confusion. Most of these laws provide for sweeping security enforcement provisions, without regard to the equities and interests that Corporate insolvency and restructuring laws seek to preserve. Enforcement of security interests by the secured creditor is a global norm, but in India, a special position has been conferred on the workers by proviso to Section 529, and Section 529A of the Companies Act. Workers have been put at par with the interests of the secured creditor: if this is true for winding up, it is difficult to understand why this should not be true in cases which will certainly lead to winding up. For instance, if floating charge-holders were allowed to enforce security interests under the SARFAESI by declaring a default, there would be no assets left with the company. While this is sure to lead to bankruptcy of the company, the interests of workers that Section 529/529A seek to preserve are completely frustrated. General Discussion. Having said so, we have found that the primary drawback of the Indian corporate insolvency and restructuring regime is the lack of a comprehensive law to do timely and equitable justice in todays complex business scenario. Another argument rounds the corner is that the Indian in general has teething problems as regards its application and implementation. And hence, despite there being so much of deliberation, enactment and issuance of guidelines etc., laws as such remain allowed to be an academic realm rather than practitioners delight in its proper perspectives what it ought to be. The Irani Committee has observed that there is a need to balance liquidation and restructuring processes, and has recommended the easy conversion of proceedings from one process to another, providing a reasonable opportunity for rehabilitation. It has further suggested that the option of rehabilitation should be extended to all insolvent companies, not just those with industrial undertakings. Further, the test for determining sickness should be based on the principle of liquidity rather than that of negative net worth. Further, the committee favours a limited standstill period where specifically requested with the approval of majority

creditors. However, the committees recommendations are still under government scanner and have not been given a legislative force. The SICA requires that a mandatory reference to the Board (BIFR) be made upon net-worth erosion. This criterion often results in a scenario where there is limited scope for rehabilitation. Further, the overall process takes a long time, with up to three or four years elapsing before the BIFR explores possible rehabilitation options and decides on winding-up by recommending to the High Court, proceedings begin afresh and the appointment of the official liquidator takes some time. And since the windingup process is a protracted affair, resulting in low realisable value for creditors. Several chambers of commerce and industry have suggested that the winding up provisions should be separated from the company law and a new insolvency Act enacted as Indias judicial system is more akin to that of the UK, the Insolvency Act, 1986 of the UK may be more suitable to the Indian circumstances. The insolvency law must take into consideration the protection to creditors and to enforce their respective claims against the company under liquidation, expeditiously, effectively and fairly. Another concept of the Eradi Committee recommendation for a fund for revival, rehabilitation of companies and for preservation and protection of assets of the companies may be created under the supervision and control of the Government. Companies formed and registered after the establishment of the proposed NCLT are required to contribute annually a specified percentage, say 0.1 per cent of its turnover, immediately after commencement of the business. Existing companies have to contribute annually from the financial year immediately succeeding the year in which the tribunal is established. According to some, this may not be desirable. The charge is not against profits but against turnover which will put an extra burden for newly set up companies. How to define the term commencement of business is something is hotly debated, yet no convincing answer forthcoming. The same could lead to further litigations as has been our experience in the case of Income-Tax Act. Final Words. We have seen that genuine efforts have been made to formulate laws through recommendations, enactment etc. Yet, like any other branches of law, corporate insolvency and restructuring laws in India lacks teething. Authorities concerned need courage of conviction with clear mindset and will at heart in order to make the current laws more efficient and effective with an element of a definitive and predictable time frame. And the judicial process ought to take commercial approach towards revival of the sick companies. All supporting pillars i.e. accounting and auditing; statutory & legal framework; monitoring & enforcement; education & training; need to be strengthened and disciplined. The corporate insolvency and restructuring laws should prescribe a flexible but transparent system for disposal of assets efficiently and at maximum value. Secured creditors claim should rank pari passu with workmen and government dues. The law

should also provide for mechanism to recognize and record claims of unsecured creditors as well. Finally, in the model of Public-Private-Partnerships (PPP) to facilitate corporate insolvency and restructuring, an Insolvency Fund with optional contributions by companies may be created with Government grants and incentives to encourage contributions by companies to the Fund. Companies which make contributions to the Fund should be allowed certain drawing rights in the event of insolvency. And since proposed Insolvency Fund shall have commercial element, the same may not be linked/credited to Consolidated Fund of India (or of a State).

CORPORATE GOVERNANCE
Introduction:
Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, management, and the board of directors. Other stakeholders include employees, customers, creditors, suppliers, regulators, and the community at large. Corporate governance has emerged as an important both in India and globally. Expectations of stakeholders are extremely high and the scrutiny by regulators and investors incredibly stringent. As a consequence, Indian companies are proactively implementing measures for the same. Going forward, one of the most important challenges for Board members is to build a foundation of trust with management, the investment community, regulatory agencies and the public.

Legal framework under company law:


The Companies Act, 1956 is the central legislation in India that empowers the Central Government to regulate the formation, financing, functioning and winding up of companies. It applies to whole of India and to all types of companies, whether registered under this Act or an earlier Act. It provides for the powers and responsibilities of the directors and managers, raising of capital, holding of company meetings, maintenance and audit of company accounts, powers of inspection, etc. That is, it empowers the Central Government to inspect the books of accounts of a company, to direct special audit, to order investigation into the affairs of a company and to launch prosecution for violation of the Act. These inspections are designed to find out whether the companies conduct their affairs in accordance with the provisions of the Act, whether any unfair practices prejudicial to the public interest are being resorted to by any company or a group of companies and to examine whether there is any mismanagement which may adversely affect any interest of the shareholders,

creditors, employees and others. The main objectives with which this Act has been introduced are to:- (i) help in the development of companies on healthy lines; (ii) maintain a minimum standard of good behaviour and business honesty in company promotion and management; (iii) protect the interests of the shareholders as well as the creditors; (iv) ensure fair and true disclosure of the affairs of companies in their annual published balance sheet and profit and loss accounts; (v) ensure proper standard of accounting and auditing; (vi) provide fair remuneration to management and Board of Directors as well as to company's employees; etc. The Companies Act, 1956 has elaborate provisions relating to the Governance of Companies, which deals with management and administration of companies. It contains special provisions with respect to the accounts and audit, directors remuneration, other financial and non-financial disclosures, corporate democracy, prevention of mismanagement, etc. Every company shall in each year, hold in addition to any other meetings, a general meeting as its annual general meeting and shall specify the meeting as such in the notices calling it; and not more than fifteen months shall elapse between the date of one annual general meeting of a company and that of the next. At each annual general meeting, every company shall appoint an auditor or auditors to hold office from the conclusion of that meeting until the conclusion of the next annual general meeting and shall, within seven days of the appointment, give intimation thereof to every auditor so appointed. Every auditor of a company shall have a right of access at all times to the books and accounts and vouchers of the company, whether kept at the head office of the company or elsewhere, and shall be entitled to require from the officers of the company such information and explanations as the auditor may think necessary for the performance of his duties as auditor. The auditor shall inquire:- (i) whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are not prejudicial to the interests of the company or its members; (ii) whether transactions of the company which are represented merely by book entries are not prejudicial to the interests of the company; etc. In the case of every company, a meeting of its Board of directors shall be held at least once in every three months and at least four such meetings shall be held in every year. Every director of a company, who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into, by or on behalf of the company, shall disclose the nature of his concern or interest at a meeting of the Board of directors. No director of a company shall, as a director, take any part in the discussion of, or vote on, any contract or arrangement entered into, or to be entered into, by or on

behalf of the company, if he is in any way, whether directly or indirectly, concerned or interested in the contract or arrangement; nor shall his presence count for the purpose of forming a quorum at the time of any such discussion or vote; and if he does vote, his vote shall be void. Every company shall keep one or more registers in which shall be entered separately particulars of all contracts or arrangements, including the following particulars to the extent they are applicable in each case, namely:- (i) the date of the contract or arrangement; (ii) the names of the parties thereto; (iii) the principal terms and conditions thereof; (iv) in the case of a contract or arrangement to which this Act applies, the date on which it was placed before the Board; (v) the names of the directors voting for and against the contract or arrangement and the names of those remaining neutral. Further, every company shall keep at its registered office a register of its directors, managing director, managing agent, secretaries and treasurers, manager and secretary. The remuneration payable to the directors of a company, including any managing or whole-time director, shall be determined, either by the articles of the company, or by a resolution or, if the articles so require, by a special resolution, passed by the company in general meeting; and the remuneration payable to any such director determined as aforesaid shall be inclusive of the remuneration payable to such director for services rendered by him in any other capacity. However, any remuneration for services rendered by any such director in any other capacity shall not be so included if:(i) (ii) the services rendered are of a professional nature; and in the opinion of the Central Government, the director possesses the requisite qualifications for the practice of the profession.

A director may receive remuneration by way of a fee for each meeting of the Board, or a committee thereof, attended by him. A director who is neither in the whole-time employment of the company nor a managing director may be paid remuneration, either by way of a monthly, quarterly or annual payment with the approval of the Central Government; or by way of commission if the company by special resolution authorises such payment. However, the remuneration paid to such director, or where there is more than one such director, to all of them together, shall not exceed:- (i) one per cent of the net profits of the company, if the company has a managing or whole-time director, a managing agent or secretaries and treasurers or a manager; (ii) three per cent of the net profits of the company, in any other case. Every public company having paid-up capital of not less than five crores of rupees shall constitute a committee of the Board knows as 'Audit Committee' which shall consist of not less than three directors and such number of other directors as the Board may determine of which two thirds of the total number of members shall be

directors, other than managing or whole-time directors. The annual report of the company shall disclose the composition of the Audit Committee. The auditors, the internal auditor, if any, and the director-in-charge of finance shall attend and participate at meetings of the Audit Committee but shall not have the right to vote. The Audit Committee should have discussions with the auditors periodically about internal control systems, the scope of audit including the observations of the auditors and review the half-yearly and annual financial statements before submission to the Board and also ensure compliance of internal control systems. It shall have authority to investigate into any matter in relation to the items specified by the Board and for this purpose, shall have full access to information contained in the records of the company and external professional advice, if necessary. The recommendations of the Audit Committee on any matter relating to financial management, including the audit report, shall be binding on the Board. If the Board does not accept the recommendations of the Audit Committee, it shall record the reasons thereof and communicate such reasons to the shareholders. Besides, a listed public company may, and in the case of resolutions relating to such business as the Central Government may, by notification, declare to be conducted only by postal ballot, shall, get any resolution passed by means of a postal ballot, instead of transacting the business in general meeting of the company. Where a company decides to pass any resolution by resorting to postal ballot, it shall send a notice to all the shareholders, along with a draft resolution explaining the reasons thereof, and requesting them to send their assent or dissent in writing on a postal ballot within a period of thirty days from the date of posting of the letter. If a resolution is assented to by a requisite majority of the shareholders by means of postal ballot, it shall be deemed to have been duly passed at a general meeting convened in that behalf. However, if a shareholder sends his assent or dissent in writing on a postal ballot and thereafter any person fraudulently defaces or destroys the ballot paper or declaration of identify of the shareholder, such person shall be punishable with imprisonment for a term which may extend to six months or with fine or with both. In the competitive and technology driven business environment, while corporates require greater autonomy of operation and opportunity for self-regulation with optimum compliance costs, there is a need to bring about transparency through better disclosures and greater responsibility on the part of corporate owners and management for improved compliance. In response to such changing corporate climate, the Companies Act, 1956 has been amended from time to time so as to provide more transparency in corporate governance and protect the interests of small investors, depositors and debenture holders, etc. Guidelines/Principles At International Level In the changing global scenario, it has become necessary to bring in effective governance practices in the corporate sector. Various important and valuable lessons have been learned from the series of corporate collapses that occurred in different

parts of the world. Accordingly, several codes, guidelines and principles have been made and implemented covering varied aspects of corporate governance. They were introduced in order to restore investors' confidence as well as to enhance corporate transparency and accountability. They seek to establish the accountability standards of Directors and CEOs; as well as define the roles and responsibilities of the Board of Directors and stakeholders in the company. Over the years, the issue of corporate governance has received a high level of attention. There are several reports and recommendations of the International Committees/ Associations, etc. on the development of appropriate framework for promoting good corporate governance standards, codes and practices to be followed globally. These are:Cadbury Committee Report-The Financial Aspects of Corporate Governance (1992) Greenbury Committee Report on Directors' Remuneration (1995) Hampel Committee Report on Corporate Governance (1998) The Combined Code, Principles of Good Governance and Code of Best Practice, London Stock Exchange (1998) CalPERS' Global Principles of Accountable Corporate Governance (1999) Blue Ribbon Report (1999) King Committee On Corporate Governance (2002) Sarbanes Oxley Act (2002) Higgs Report: Review of the role and effectiveness of non-executive directors (2003) The Combined Code on Corporate Governance (2003) ASX Corporate Governance Council Report (2003) OECD Principles of Corporate Governance (2004) The Combined Code on Corporate Governance (2006) UNCTAD Guidance on Good Practices in Corporate Governance Disclosure (2006) The Combined Code on Corporate Governance (2008) These recommendations and principles have been mainly focused on structure of the company, financial and non-financial disclosures, compliance with codes of corporate governance, competitive remuneration policy, shareholders rights and responsibilities, financial reporting and internal controls, etc. All these efforts at international level, in

turn, helps to bring favourable changes in the operating systems of Board of Directors, Company's management and administration; as well as improve face of relationship between supervisory and executive bodies.

LIMITED LIABILITY PARTNERSHIP


LLP is a new corporate form that enables professional expertise and entrepreneurial initiative to combine, organize and operate in an innovative and efficient manner For a long time, a need has been felt to provide for a business format that would combine the flexibility of a partnership and the advantages of limited liability of a company at a low compliance cost. The Limited Liability Partnership format is an alternative corporate business vehicle that provides the benefits of limited liability of a company but allows its members the flexibility of organizing their internal management on the basis of a mutually arrived agreement, as is the case in a partnership firm. This format would be quite useful for small and medium enterprises in general and for the enterprises in services sector in particular. Internationally, LLPs are the preferred vehicle of business particularly for service industry or for activities involving professionals. In our country, several expert groups have examined the need for such a concept since 1972 and recommended from time to time, the enactment of a law that would enable the setting up and functioning of the LLPs. These include the Abid Hussain Committee 1997, the Naresh Chandra Committee on Private Companies and Partnerships 2003 and the Irani Committee for new Company Law, 2005. As proposed in the Bill, LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession. While the LLP will be a separate legal entity, liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLP. Further, no partner would be liable on account of the independent or unauthorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partners wrongful business decisions or misconduct. Today, the world is in the grip of an unprecedented financial crisis, which is adversely affecting economies of most of the countries, including our own. In such a situation, availability of LLP as an alternative business vehicle to our trade and industry will be an important step. Service industry has grown considerably in India and it accounts for nearly half of our GDP. We believe that the LLPs would further contribute to the growth of the service industry in the future. An earlier version of the LLP Bill was introduced in the Rajya Sabha around 2 years ago on 15th December, 2006 and was referred to the Parliamentary Standing Committee on Finance. The Standing Committee submitted its report on 27th November, 2007. Taking into consideration the suggestions of the August Committee,

the revised Bill, namely the Limited Liability Partnership Bill, 2008 was introduced in the Rajya Sabha on 21st October, 2008. The House passed it on 24th October, 2008. The salient features of the LLP Bill, 2008 are as under:(i) The LLP will be an alternative corporate business vehicle that would give the benefits of limited liability but would allow its members the flexibility of organizing their internal structure as a partnership based on an agreement. The proposed Bill does not restrict the benefit of LLP structure to certain classes of professionals only and would be available for use by any enterprise which fulfils the requirements of the Act. While the LLP will be a separate legal entity, liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLP. Further, no partner would be liable on account of the independent or un-authorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partners wrongful business decisions or misconduct. LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession. Indian Partnership Act, 1932 shall not be applicable to LLPs and there shall not be any upper limit on number of partners in an LLP unlike a ordinary partnership firm where the maximum number of partners cannot exceed 20. An LLP shall be under obligation to maintain annual accounts reflecting true and fair view of its state of affairs. Since tax matters of all entities in India are addressed in the Income Tax Act, 1961, the taxation of LLPs shall be addressed in that Act. Provisions have been made in the Bill for corporate actions like mergers, amalgamations etc. (vii) While enabling provisions in respect of winding up and dissolutions of LLPs have been made in the Bill, detailed provisions in this regard would be provided by way of rules under the Act.

(ii)

(iii)

(iv)

(v)

(v) (vi)

COMPANIES BILL 2009


The Companies Act, 1956 is the principal landmark legislation that governs companies in India. The Act prescribes provisions for protection of the interests of the investors, creditors and public at large but at the same time permits the management to utilize its resources for optimum results and prosperity. Over the years, the functioning and operation of the Act brought to light several lacunae and defects in its provisions. In order to remove these defects, the Act

was amended from time to time, comprehensively. But, despite these extensive amendments and alterations, the Act continues to comprise of certain deficiencies. In light of this, the Ministry of Company Affairs carried out a comprehensive review of the provisions of the Companies Act, 1956 on the basis of a detailed consultative process. Further a `Concept Paper on new Company Law was placed on the website of the Ministry on 4th August, 2004. The inputs received were put to a detailed examination in the Ministry. The Government constituted an Expert Committee on Company Law under the Chairmanship of Dr. J.J. Irani on 2nd December 2004 to advice on new Companies Bill. The Committee submitted its report to the Government on 31st May 2005. In addition to this, detailed consultations were carried out with various Ministries, Departments and Government Regulators. The Companies Bill was accordingly drafted in consultation with the Legislative Department of the Central Government. In furtherance of the same, the Companies Bill, 2008 was introduced in the Lok Sabha on 23rd October, 2008. But due to dissolution of the Fourteenth Lok Sabha, the Bill lapsed. Recently on August 2009, the Government decided to re-introduce the Companies Bill, 2008 as the Companies Bill, 2009, without any change except for the Bill year and the Republic year. The Companies Bill, 2009 is divided in 28 Chapters consisting of 426 Sections, as opposed to the 658 Sections of the existing Companies Act, 1956. The Bill, inter alia, reinforces shareholders democracy, facilitates e-Governance in company processes, recognizes the liability of Boards, directors and senior management personnel of companies, provides for a new scheme for penalties and punishment for non compliance or violation of the law, harmonizes corporate regulation with action by sectoral regulators, incorporates a new framework for mergers and amalgamations of companies and provides an extensive Insolvency Code based on the latest principles recommended by the United Nations Commission on International Trade Law (UNCITRAL). Some of the important provisions of the Bill, in comparison with the Companies Act, 1956, are as follows: Incorporation of Companies: The procedure for incorporation of companies has been stream-lined and made easier. This is primarily in light of e-Governance facilities. The principal changes are as follows: 1. The provisions under the current Companies Act, which prescribed minimum paid-up share capital for private and public companies have been scrapped. Chapter I of the Act provides for incorporation of a one-person company and a small company.

2.

A one-person company is a company which has only one person as its member. It can have a minimum of one director. The Memorandum of a One Person

Company shall indicate the name of the person, or any changes thereto, who shall become the member of the company in the event of the subscribers death, disability or otherwise. If the liability is limited, the company should add the words OPC Limited at the end of its name. Further, a One Person Company is exempt from holding its Annual General Meeting. A small company means a company, other than a public company: (i) whose paid-up share capital does not exceed such amount as may be prescribed and the prescribed amount shall not be more than five crore rupees; or (ii) (ii) whose turnover as per its last profit and loss account does not exceed such amount as may be prescribed and the prescribed amount shall not be more than twenty crore rupees. But this does not include a holding or a subsidiary company, a company formed for charitable objects and a company formed under a Special Act. 3. Under the current Companies Act, a company formed for charitable purposes is prescribed under Section 25. But under the Companies Bill, 2009 the same provisions have been incorporated under Section 4. The provisions relating to Certificate of Commencement of Business have been dispensed with. But a public company has to file with the Registrar a declaration as to payment of shares by the subscribers to the Memorandum and a verification of the registered office of the company. It is proposed to relax the restrictions limiting the number of partners in entities such as partnership firms, banking companies to a maximum 100, with no such ceiling as to professional associations regulated by Special Acts.

4.

5.

Securities and Share Capital: 1. Under the Companies Bill, 2009 a company may issue Global Depository Receipts after passing a special resolution at the general meeting of the company. A company shall not be permitted to issue shares at discount (with the exception of sweat-equity shares) and any such issue shall be void. In case of infrastructure projects, a company may issue redeemable preference shares for a period beyond 20 years, subject to the redemption of such percentage of shares as may be prescribed on an annual basis at the option of such preferential shareholders.

2. 3.

4. Further if a company is not in a position to redeem any preference shares

or to pay dividend, if any, on such shares in accordance with the terms of issue, it may, with the consent of the holders of three-fourths in value of such preference shares and with the approval of the Tribunal on a petition made by it in this behalf, issue further redeemable preference shares equal to the amount due, including the dividend thereon, in respect of the unredeemed preference shares, and on the issue of such further redeemable preference shares, the unredeemed preference shares shall be deemed to have been redeemed. 5. Certain changes have been made with respect to issue of share certificates. The certificates of all securities allotted, transferred or transmitted shall be delivered:

(a) within two months after incorporation, in the case of subscribers to the memorandum; (b) within two months from the date of allotment, in the case of any allotment of any of its shares; (c) within one month from the date of receipt by the company of the instrument of transfer under sub-section (1) or, as the case may be, of the intimation of transmission under sub-section (2), in the case of a transfer or transmission of securities; (d) within six months from the date of allotment in the case of any allotment of debenture. 6. 7. A company has been prohibited form issue of shares with differential voting rights. In case of reduction of share capital, an application should be made to the National Company Law Tribunal. The Tribunal shall give notice of such application to the Central Government and to the Securities and Exchange Board, in the case of listed companies, and the creditors of the company. The Tribunal shall take into consideration the representations, if any, made to it by that Government, the Securities and Exchange Board and the creditors within a period of three months from the date of receipt of such notice.

Deposits and Charges:


1. Under the Bill, a company is not permitted, after commencement of this Act, to invite, accept or renew deposits from the public except on fulfillment of the conditions prescribed. The conditions are that, a company may, subject to the passing of a resolution in general meeting and subject to such rules as may be prescribed in consultation with the Reserve Bank of India, accept deposits from its members on such terms and conditions, as may be agreed upon between the company and its members, subject to the fulfilment of the following conditions:

(a) issuance of a circular to its members including therein a statement showing the financial position of the company, the credit rating obtained, the total number of depositors and the amount due towards deposits in respect of any previous deposits accepted by the company and such other particulars in such form and in such manner as may be prescribed; (b) filing a copy of the circular along with such statement with the Registrar thirty days before the date of issue of the circular; (c) depositing such sum which shall not be less than fifteen per cent. of the amount of its deposits maturing during a financial year and the financial year next following, in a Deposit Repayment Reserve Account; (d) providing such deposit insurance in such manner and to such extent as may be prescribed; (e) certifying that the company has not defaulted in the repayment of deposits accepted either before or after the commencement of this Act or payment of interest on such deposits; and (f) providing such security for the due repayment of the amount of deposit or the interest thereon including the creation of such charge on the company property or assets. 2. Further if a company makes any default in repayment of deposit, it shall not be permitted to reduce its share capital or declare any dividend on its equity shares. If any person obtains an order for the appointment of a receiver for, or of a person to manage, the property, subject to a charge, of a company or if any person appoints such receiver or person under any power contained in any instrument, he shall, within such time as may be prescribed, give notice of such appointment to the company and the Registrar along with a copy of the order or instrument and the Registrar shall, on payment of the prescribed fee, register particulars of the receiver, person or instrument. Any person so appointed shall, on ceasing to hold such appointment, give to the company and the Registrar a notice to that effect and the Registrar shall register such notice. A suit may be filed by any person, group of persons or any association of persons affected by any misleading statement or the inclusion or omission of any matter in the prospectus.

3.

4.

Management and Administration:


1. Under the Companies Bill, 2009, every company is required to maintain, in

addition to a Register of Members or Debenture Holders, a Register of any other Security Holders. 2. In respect of Annual Return, a company is required to make further disclosures over and above those prescribed under the current Companies Act. The time period within which a company is required to file the annual return has been shortened. The Annual Return is required to be filed within 30 days from the date of the Annual General Meeting or last date on which the meeting should have been held. In addition, if a company does not have a Company Secretary, then the Annual Return is required to be signed by a Company Secretary in whole-time practice. The provisions relating to Statutory Meeting and Statutory Report have been dispensed with. The First Annual General Meeting of the company is required to be held within nine months (as opposed to 18 months as prescribed under the current Companies Act) from the end of the first financial year. Business Hours requisite to hold the Annual General Meeting, have been defined as 9 A.M. to 6 P.M. Separate provisions have been prescribed in respect of Representation of Presidents, Governors and Body Corporates at meetings of the company by such person as it thinks fit. Notice of the general meetings is required to be given to each Director of the company. Further, notice of the general meetings may be given through approved electronic modes. In respect of Explanatory Statement, if any item of special business to be transacted at a meeting of the company relates to or affects any other company, the extent of shareholding interest in that other company of every director, manager, if any, and of every other key managerial personnel of the first mentioned company shall, if the extent of such shareholding is not less than two per cent. of the paid-up share capital of that company, also be set out in the statement. Under the current Companies Act, in the case a company having a share capital, poll can be demanded by the members present in person or by proxy and having not less than one-tenth of the total voting power or holding shares on which an aggregate sum of not less than 50,000 rupees has been paid up. Under the Companies Bill, the minimum paid up amount has been raised to 5,00,000 Rupees.

3. .

5. 6.

7.

8.

9.

10. Under the current Companies Act, the provisions with respect to voting by postal ballot are applicable only to a listed company. But under the Companies Bill, such provisions are applicable to all company.

11. A new provision has been made by which, every listed public company shall prepare in the prescribed manner a report on each annual general meeting including the confirmation to the effect that the meeting was convened, held and conducted as per the provisions of this Act and the rules made there under, within thirty days of the conclusion of the annual general meeting.

Declaration and Payment of Dividends:


1. Under the Companies Bill, it is left to the discretion of the company to determine the percentage of profits to be transferred to reserves and the minimum requirement of 10 percent has been dispensed with. Under the current Companies Act, if the company has incurred any loss in any previous financial year or years, which falls or fall after the commencement of the Companies (Amendment) Act, 1960, then, the amount of the loss or an amount which is equal to the amount provided for depreciation for that year or those years whichever is less, shall be set off against the profits of the company for the year for which dividend is proposed to be declared or paid or against the profits of the company for any previous financial year or years, arrived at in both cases after providing for depreciation. But this provision has been omitted under the Companies Bill. If owing to inadequacy or absence of profits in any financial year, the company proposes to declare dividend out of the accumulated profits earned by it in the previous financial year or years and transferred by it to the reserves, such declaration shall be made by a resolution passed at a meeting of the Board with the consent of all the directors and the approval of the financial institutions whose term loans are subsisting, and thereafter in accordance with a special resolution passed by the shareholders at an annual general meeting. In addition, a company is permitted to declare interim dividend out of profits of part of the year.

2.

3.

4.

Accounts:
1. A company has been permitted to keep books of accounts and other relevant papers in electronic mode in such manner as maybe prescribed.

2. Annual Financial Statement is required to include the cash flow statement. 3. A holding company is required to prepare and file, in addition to its own financial statements, a consolidated financial statement of its subsidiary and itself. Under the Bill, the Central Government is required to prescribe the auditing standards (as opposed to the Institute of Chartered Accountants of India (ICAI)

4.

under the current Companies Act). It shall be mandatory for companies to follow these auditing standards in addition to the accounting standards. 5. If the financial statements are adopted at the Annual General Meeting, then they shall be filed with the Registrar provisionally within 30 days form the date of the meeting. The Directors Responsibility Statement to be filed along with the financial statements of the company shall state that

6.

(a) in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures; (b) the directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit and loss of the company for that period; (c) the had taken proper and sufficient care for the maintenance of adequate accounting directors records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities; (d) the directors had prepared the annual accounts on a going concern basis; and (e) he directors, in the case of a listed company, had laid down internal financial controls to be followed by the company and that such internal financial controls have been complied with. Auditors and Audit: 1. 2. If at the Annual General Meeting the auditor is not appointed or re-appointed, then the existing auditor shall continue to be the auditor of the company. If an Audit Committee has been constituted, then the appointment and filing of casual vacancy shall be made based on the recommendations of the Audit Committee.

3. In case of appointment of cost auditor, resolution should be passed at the Board meeting and no Central Government approval is necessitated. 4. Stringent provisions have been introduced, to prevent interested parties from being appointed as auditors. The following persons shall not be eligible for appointment as an auditor of a company, namely: (a) a body corporate; (b) an officer or employee of the company; (c) a person who is a partner, or who is in the employment, of an officer or

employee of the company; d) a person who, or his relative or partner i) is holding any security of the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company, of value in terms of such percentage as may be prescribed; is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company; or has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, for such amount as may be prescribed;

(ii) (iii)

(e) a person or a firm who has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company of such nature as may be prescribed; (f) a person whose relative is in the employment of the company as a director or key managerial personnel; (g) a person who is in employment elsewhere or a person or firm who holds appointment as an auditor in companies exceeding such number as may be prescribed on the date of his appointment. 5. If an auditor is to removed before the expiry of his term, a special resolution is required to be passed at the Annual General Meeting of the company. Similarly a special resolution is mandated when a retiring auditor is not reappointed or another auditor is appointed in his place. The auditor appointed by a company should attend the general meetings of the company, unless specifically exempt by the company. He/she has the right to be heard in such meetings. The auditor is permitted to render the following services to the company only pursuant to the approval of the Board of Directors or the Audit Committee. (a) accounting and book keeping services; (b) internal audit; (c) design and implementation of any financial information system; (d) actuarial services; (e) investment advisory services;

6.

7.

(f) investment banking services; (g) endering of outsourced financial services; and (h) management services. 8. The Audit report required under the Companies Bill, 2009 imposes certain compliance requirements in addition to the provisions of the current Companies Act, 1956.The audit report prepared by the auditor should state in case of listed companies, whether the company has complied with the internal financial controls and directions issued by the Board and in case of listed companies, whether the company has complied with the internal financial controls and directions issued by the Board. Further, the report must be in accordance with the auditing standards.

Conclusion:
The Companies Bill, 2009 is intended to modernize the structure for corporate regulation in India and represents a major reform statement by the Government to promote the development of the Indian corporate sector through enlightened regulation. In view of various reformatory and contemporary provisions proposed in the Companies Bill, 2009 together with omission of existing unwanted and obsolete compliance requirements, the companies in the country would be able to comply with the requirements of the proposed Companies Act in a better and more effective manner. Chapter I-X of the Bill deals with various substantive and procedural aspects relevant to a company. On the other hand, existing unwanted and obsolete compliance requirements have been omitted and on the other stringent provisions have been introduced to fill the lacunae and under the existing Companies Act, 1956. The Companies Bill, 2009, thus, will enable the corporate sector in India to operate in a regulatory environment of best international practices that foster entrepreneurship, investment and growth.

REFERENCES
Books: Elements of Mercantile Law, by N.D. Kapoor, Published by, Sultan Chand & Sons ICSI executive level Modules for Company Law Company Law- Law & Practice, By N.K. Jain, Published by Deep & Deep publication Elements of Company Law, by V.S. Datey, Published by Taxmanns Websites: www.legalserviceindia.com www.lawyersclublindia.com www.dateyvs.com www.mca.gov.in