COMPANIES ACT, 1956 MEANING AND DEFINITION OF COMPANY

In the ordinary common parlance, a company means a group of persons associated to achieve some common objective. Our object is to deal with a company which is formed for carrying on some business and providing for limited liability of its members. Keeping this type in mind we may define a company as a voluntary association for profit with capital divisible into transferable shares with limited liability, having a corporate body and common seal.

Nature/Characteristics of a Company 1) Incorporated Association: A company must be incorporated or registered under the Companies Act. Minimum number required for the purpose is 7, in case of a public company, and 2, in case of a private company. It may also be mentioned that as per Section 11, an association of more than 10 persons, in case of banking business, and 20 in case of any other business, if not registered as a company under the Companies Act, or under any other law for the time being in force, becomes an illegal association. 2) Artificial Person: A company is created with the sanction of law and is not itself a human being, it is, therefore, called artificial; and since it is clothed with certain rights and obligations, it is called a person. A company is accordingly an artificial person. 3) Separate Legal Entity: A company is regarded as an entity separate from its members. In other words, it has an independent existence. Any of its members can enter into contracts with it in the same manner as any other individual can and he cannot be held liable for the acts of the company even if he holds virtually the entire share capital. The companys money and property belong to the company and not to the shareholders (although the shareholders own the company). 4) Limited Liability: A company may be a company limited by shares or a company limited by guarantee. In a company limited by shares, the liability of members is limited to the unpaid value of the shares. For example, if the face value of a share in a company is Rs. 10 and a member has already paid Rs. 7 per share, he can be called upon to pay not more than Rs. 3 per share during the lifetime of the company. In a company limited by guarantee, the liability of members is limited to such amount as the members may undertake to contribute to the assets of the company, in the event of its being wound up.

5) Perpetual Existence: A company being an artificial person cannot be incapacitated by illness and it does not have an allotted span of life. The death, insolvency or retirement of its members leaves the company unaffected. Members may come and go but the company can go forever. The saying King is dead, long live the King very aptly applies to the company form of organization. 6) Common Seal: A company being an artificial person is not bestowed with a body of natural being. Therefore, it has to work through its directors, officers and other employees. But, it can be held bound by only those documents which bear its signature. Common seal is the official signature of a company. 7) Capacity to Sue: A company can and be sued in its corporate name. It may also inflict or suffer wrongs. It can in fact do or have done to it most of the things which may be done by or to a human being. 8) Separate Property: As a legal person, a company can own, enjoy and dispose of any property in its own name. A member does not even have insurable interest in the companys property. 9) Transferability of Shares: Since business is separate from its members in a company form of organization, it facilitates the transfer of member's interests. The shares of a company are transferable in the manner provided in the Articles of the company (S. 82). However, in a private company, certain restrictions are placed on such transfer of shares but the right to transfer is not taken away absolutely.

Difference between Partnership and Company

i)

Basis Regulating Act Legal Entity

ii)

A member is not an agent of the other members or of the company, his actions do not bind either. Each partner has unlimited liability Liability of its members is limited to the iv) Liability and is personally liable for all the extent of the value of shares held by them. debts of the firm. v) Number of In the case of firms carrying on A private company may have as many as membership business other than banking, the 50 members but not less than two and a
iii)

Agency

Partnership A partnership firm is governed by the provisions of the Indian Partnership Act, 1932. A firm does not enjoy separate legal existence. Partners are collectively termed as a firm and individually as partners. Every partner is an agent of the other partners, as well as of the firm.

Company A company is governed by the provisions of the Companies Act, 1956. It has a separate legal existence. A company is separate from its members.

vi)

Transfer of shares

number must not exceed 20 and in the case of banks such number must not exceed 10. A share in a partnership cannot be transferred without the consent of all the partners.

public company may have any number of members but not less than seven. A shareholder may transfer his shares, subject to the provisions contained in its Articles. In case of public company, a shareholder can transfer his shares freely without restriction. There is no such compulsion that profits must be distributed. Only when dividends are declared that the members get a share of profits. The right to control and manage the business is vested in the Board of Directors elected by the shareholders. A company registration is essential.

vii)

Distribution of profits

Profits are distributable among partners as per the partnership deed.

Management All the partners of a firm are entitled to take part in the management of the business. A partnership firm may or may not ix) Registration be registered. A partnership firm can be wound up No one member can require it to be wound x) Winding up at any time by any partner, if it is at up at will and winding up involves legal will, without legal formalities. formalities.
viii)

1) From the Point of View of Its Formation, Companies are of Three Kinds

i) Chartered Companies: Those companies, which are incorporated under a special charter granted by the King or Queen of England. For example, East India Co. A chartered company is governed by its charter which defines the nature of the company and at the same time incorporates it. ii) Statutory Companies: These are the companies formed by a special Act of Parliament. For example, Reserve Bank of India. The state Bank of India, the Life Insurance Corporation, the Industrial finances Corporation, the Unit Trust of India. These are mostly concerned with public utilities, for example, railways, tramways, gas and electricity companies and enterprises of national importance. The provisions of the Companies Act, 1956 apply to them, if they are not inconsistent with the provisions of the special Acts under which they are formed. iii) Registered Companies: Such companies, which are incorporated under Companies Act 1956, or were registered under any previous Companies Act.

2) From the Point of View of Liability, there are Three Types of Companies
i)

Limited Company: In case of such companies the liability of each member (shareholder) is limited to the extent of a face value of share held by him.

ii)

Unlimited Companies: Section 12 specifically provides that any 7 or more persons (2 or more in case of a private company) may form an incorporated company with or without limited liability. A company without limited liability is known as an unlimited company. In case of such a company every member is liable for the debts of the company, as in an ordinary partnership, in proportion to his interest in the company.

iii)

Guarantee Company: Where the liability of the members of a company is limited to a fixed amount which the members undertake to contribute to the assets of the company in case of its winding up, the company is called a company limited by guarantee (Section 12 (2) (b)]. The liability of its members is limited. The articles of such company must state the number of members with which the company is to be registered [Section 27(2)].

3) From the Point of View of Control, there are Two Types of Companies

i) Holding Company: A company is known as the holding company of another company if it has control over that other company. According to Section 4 (4), a company is deemed to be the holding company of another, but if only, that other is its subsidiary. ii) Subsidiary Company: A company is known as a subsidiary of another company when control is exercised by the latter (called holding company) over the former, called a subsidiary company. According to Section 4 (1), a company (say Company S) is deemed to be a subsidiary of another company (say, Company H) in the following three cases:
a) b) c)

Company controlling composition of Board of Directors. Holding of majority of shares. Subsidiary of another subsidiary.

4) From the Point of View of Ownership, there are Two Types of Companies were

i) Government Company: A government company means any company in which at least 51 percent of the paid-up share capital is held by the central government or by any state government or government, or partly by the central government and partly by one or more State governments. For example, State Trading Corporation of India, and Minerals and Metals Trading Corporation of India is government companies. The subsidiary of a government company is also a government company.

ii) Foreign Company: It means any company incorporated outside India which has a place of business in India. For example, where representatives of a foreign company frequently come and stay in a hotel in India for purchasing machinery, cotton etc., the foreign company has a place of business in India. Where a minimum of 50 percent of the paid up share capital (whether equity or preference or partly equity and partly preference) of a foreign company is held by one or more citizens of India or/and by one or more Indian companies, singly or jointly such company shall comply with such provisions as may be prescribed as if it were an Indian company.

5) From the Point of View of Number of Members, Company may be of Two Kinds

i) Private Company: A private company is one which by its Articles of Association.

a) b)

Restricts the right of the members to transfer shares; Limits the number of members to fifty excluding past or present employees of the company who are the members of the company;

c)

Prohibits any invitation to the public to subscribe for its shares or debentures.

A private company must have its own articles of association which contains the conditions as laid down in Section 3 (1) (iii).

ii) Public Company: Public company means a company, which is not a private company. In other words a public company means A company which by its articles:
a) b) c)

Does not restrict the right to transfer its shares. If any; Does not limit the number of its members; and Does not prohibit any invitation to the public to subscribe for any shares or debentures of the company.

Conversion of Public Company into a Private Company There is no direct or express provision in the Act for the conversion of a public company into a private company except a reference in the provison to Section 31 (1). A public company having a share capital, and membership within the limits imposed upon private companies by Section 3 (1) (iii), may become a private company by following the procedure as given below: 1) The company in general meeting has to pass special resolution for altering the articles so as to include therein the necessary restrictions, limitations and prohibitions, and to delete any provision inconsistent with the restrictions. For instance, a private company has to put certain restrictions on the right of members to transfer their shares.

2) The word Private should be added before Limited. 3) The approval of the central government to the alteration in the articles for converting a public company into a private company should be obtained. 4) Within one month of the date of the receipt of the order of approval, a printed copy of the altered articles must be filed with the Registrar. 5) Within 30 days of the passing of the special resolution, a printed or type-written copy thereof should be filed with the Registrar.

Difference between Private and Public Companies Basis

1)

Private Company Minimum-2 Maximum-50

Public Company Minimum-7 Maximum-no limit

Number of Members

2)

Name

It is necessary to add the word It is essential to add the word Private Limited after the name Limited after the name of the of the Private Company. Public Company. of 2 A minimum number of 3

3)

Number of Directors

minimum

number

directors are essential.

4)

directors are essential. company can invite

Invitation to Public

Private company cannot invite Public

public for issuing shares and public for issuing its shares and debentures.
5)

debentures.

Transfer of Shares

There is no freedom to transfer There is no restriction on the shares in a private company. transfer of shares.

6)

Issue of Prospectus

Private company cannot issue It is essential to issue statement prospectus and statement in lieu in lieu of prospectus in the of prospectus. absence of prospectus and send it to the Registrar.

7)

Statutory Meeting

It is not necessary for it to call It is essential for it to call statutory meeting. statutory meeting.

INCORPORATION OF A COMPANY
Before a company is formed, certain preliminary steps are necessary, for example, whether it should be a private company or a public company, what its capital should be, and whether it is worthwhile forming a new company or taking over the business of an already established concern. All these steps are taken by certain persons known as 'promoters'. They do the entire necessary preliminary work incidental to the formation of a company.
Floatation Registration Promotion

Certificate of Incorporation

Commencement of Business Figure: Stages of Formation of Company

Any 7 or more persons (2 or more in case of a private company) associated for any lawful purpose may form an incorporated company with or without limited liability. They shall subscribe their names to a Memorandum of Association and also comply with other formalities in respect of registration (Section 12). A company so formed may be:
a) b) c)

A company limited by shares, or A company limited by guarantee, or An unlimited company.

In the formation of a Company the various stages are involved as mentioned below.

Promotion The promoters, who are pioneers and who conceive the idea of forming a company and making it a going concern have to secure the minimum membership which is two in the case of a private company and seven in the case of a public company. They will have to prepare the memorandum of association; articles of association and in the case of a public company, promoters will also have to prepare draft prospectus and an underwriting contract. The promoters will have to approach the financiers to obtain their support to the floatation of a public company by securing underwriting facilities from them.

The promoters will have to perform the preliminary work and with the help of the secretary and the solicitors they would have the following documents ready:
1) 2) 3)

Memorandum of Association: Laying down the constitution of the company. Articles of Association: Prescribing regulations for internal management. Prospectus: For public issue of capital.

4) 5)

Preliminary Contracts, i.e., contracts of purchase of property and assets. Underwriting Contract: To insure capital issues.

Registration Before a company is registered, it is desirable to ascertain from the Registrar of Companies (for the State In which the registered office of the company is to be situated) if the proposed name of the company is approved.

Availability of Name Section 20 states that a company cannot be registered by a name, which in the opinion of the Central Government is undesirable. Therefore, it is advisable that promoters find out the availability of the proposed name of the company from the Registrar of Companies. For the purpose, three names in order of priority should be filed. These names should conform to the guidelines issued by the Department of Company Affairs in this regard. Procedure Section 12 states that, any seven or more persons or where the company to be formed will be a private company, two or more persons, associated for any lawful purpose may, by subscribing their names to a memorandum of association and otherwise complying with the requirements of this Act in respect of registration, form an incorporated company, with or without limited liability. Thus, the promoters will have to get together atleast seven persons in the case of a public company, or two persons in the case of a private company to subscribe to the memorandum of association.

Documents to be Delivered Then the following documents duly stamped together with the necessary fees are to be filed with the Registrar: 1) Memorandum of Association: It should be duly stamped, signed by the subscribers, two for a private company and seven for a public company, and attested by the signature of a witness. The subscribers to the Memorandum are termed as original members of the company. 2) Articles of Association: This document should be properly stamped, duly signed by the signatories of the Memorandum and also attested (signed by a witness). 3) Notice of Address of Registered Office: This may be done within 30 days of registration also, if it cannot be filed at the time of registration.

4) Statutory Declaration: This declaration will announce that all the requirements of the Act (and the Rules with regard to incorporation) have been duly fulfilled. It may be signed by an advocate, solicitor or by a proposed director or secretary named in the Articles, as such director or secretary of the company. 5) Return (In Duplicate) Containing the Particulars of First Directors of the Company: The return giving the particulars of directors, etc., can also be filed within 30 days of their appointment. It is required for all companies so that at the Registrars office any one can know about the directors, etc., of any company. 6) Consent to Act as Director of a Company: A separate written consent is necessary to be signed by every proposed director in the case of a public company limited by shared. This is, however, not necessary for other companies, other than public limited companies. 7) Undertaking of a Director to take and Pay for Qualification Shares with Necessary Stamp Duty: In the case of a public limited company, this undertaking is necessary for directors other than those who have signed the memorandum of association. A signatory to the Memorandum need not file a separate undertaking for qualification shares. This document is not required for private company or a company without share capital. The documents relating to the directors, viz. Numbers 6 and 7 are not required in the formation of private companies. However first five documents are common for all companies.

Conclusiveness of Certificate of Incorporation A certificate of incorporation given by the Registrar in respect of a company is conclusive evidence that all the requirements of the Companies Act in respect of registration have been complied with and nothing can be inquired into as to the regularity of the prior proceedings and the certificate cannot be disputed on any grounds whatsoever (Section 35).

The certificate of incorporation has been held to be conclusive on the following points: 1) Those requirements of the Act in respect of registration of matters precedent and Incidental thereto have been complied with. If after the receipt of certificate of incorporation by a company it is discovered that there were certain irregularities with regard to its registration, these will not affect the validity of the company. 2) That the association is a company authorized to be registered under the Act, and has been duly registered.

3) That the date borne by the certificate of incorporation is the date of birth of the company, i.e., the date on which company comes into existence. Commencement of Business A private company may commence business immediately after obtaining the certificate of incorporation. A public company must obtain a Certificate to Commence Business from the Registrar before it can commence business. The Registrar will grant this certificate only when: 1) The Minimum subscription has been allotted; 2) The directors have taken up and paid for their qualification shares; 3) The statutory declaration and the prospectus or statement in lieu of prospectus have been filed.

Any new business (as mentioned under other objects in the memorandum) can be started only after obtaining approval of the shareholders by a special resolution, and after a declaration has been filed with the Registrar, verified by one of the directors or the secretary that the approval by special resolution has been given by the company in general meeting.

All contracts entered into between the date of incorporation and the dates of the commencement of business are provisional and would bind the company only after it is entitled to commence business. If the company does not commence business within one year of its incorporation the Court may order it to be wound up.

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MEMORANDUM OF ASSOCIATION
The memorandum of association of a company is its charter, which contains the fundamental conditions upon which alone the company can be incorporated. It tells us the objects of the companys formation and the utmost possible scope of its operations beyond which its actions cannot go. Thus, it defines as well as confines the powers of the company. If anything is done beyond these powers, that will be ultra vires (beyond powers of) the company and so void.

Purpose of Memorandum
1)

The prospective shareholders know the field in, or the purpose for, which their money is going to be used by the company and what risk they are undertaking in making investment.

2)

The outsiders dealing with the company know with certainty as to what the objects of the company are and as to whether the contractual relation into which they contemplate to enter with the company is within the objects of the company.

Contents of Memorandum The memorandum of association is the constitution or a charter or a charter of the company. This is the fundamental document and states:
1)

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.

2) 3)

The State in which the registered office of the company is to be situated. The object of the company which shall be classified as:
a) b) c)

The main objects of the company; Objects incidental or ancillary to the attainment of the main objects; and Other objects of the company not included in (a) and (b).

4)

In the case of companies (other than trading corporations) with objects not confined to one State, the States to whose territories the objects extend.

5)

Liability of the Members: The memorandum of a company limited by shares or by guarantee shall also state that the liability of its members is limited.

6)

Share Capital: In the case of a company having share capital the memorandum shall state the amount of share capital with which the company is to be registered and the division thereof into shares of a fixed amount.

11

The Memorandum shall conclude with the association and subscription clauses. Under this clause all the persons intending to form the company shall undertake to subscribe for the share capital in the company and shall specify the number of shares that would be taken by each one of them on incorporation of the company.

Form of Memorandum The memorandum of Association of a company 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.

The memorandum of association of a company shall be:

a) b) c)

Printed, Divided into paragraphs numbered consecutively, and Signed by 7 (2 in case of a private company) subscribers.

Each subscriber shall sign (and add his address, description and occupation, if any) in the presence of at least 1 witness who shall attest the signature and shall likewise add his address, description and occupation, if any (Section 15). Memorandum printed on computer laser printers is now accepted by the Registrar for registration of a company provided it is neatly and legibly printed.

Clause and Memorandum of Association 1) Name Clause: The first clause of a memorandum shall state the name of the proposed company. The name of a company establishes its identity and is the symbol of its existence. A company may subject to the following rules, select any suitable name: i) Undesirable Name to be Avoided: A company cannot be registered by a name which, in the opinion of the central government, is undesirable [Section 20 (1)]. Broadly speaking, a name is undesirable and therefore rejected if it is either:
a) b)

Too similar to the name of another company; or Misleading

ii) Injunction if Identical name adopted: If a company gets registered with a name which resembles the name of an existing company, the other company with whom the name resembles can apply to the Court for an Injunction to restrain the new company from adopting the identical name.

12

iii) Limited or Private Limited as the last word or Words of the Name: The memorandum shall state. The name of the company with Limited as the last word of the name in case of a public limited company, and with Private limited as the last words of the name in case of a private limited company. iv) Prohibition of Use of Certain Names: The Emblems and Name (Prevention of Improper Use) Act, 1950 prohibits, except with the previous permission of the central government, the use of, or registration of a company or firm with, any name or emblem specified in the schedule to the Act. The schedule specifies, amongst others, the following items, i.e., the name, emblem or official seal of the U.N.O. and the W.H.O., the Indian Flag, the name, emblem or official seal of the central government and state governments, the name and pictorial representation Mahatma Gandhi and the Prime Minister of India. v) Use of Some Key Words According to Authorized Capital: If a company uses some key words in its name, it must have a minimum authorized capital. For example, if a company uses the word Corporation' in its name, it must have a minimum authoriz ed capital of Rs. 5 crores. Likewise, if a company uses any of the words International, Globe, Universal, Inter-Continental, Asiatic or Asia, as the first word of its name, it must have a minimum authorized capital of Rs. 1 crore. If any of these words is used within the name, it must have a minimum authorized capital of Rs. 50 lakhs.

2) Registered Clause: Every company shall have an office registered from the day on which it begins to carry on business, or as from the 30th day after the date of its incorporation, whichever is earlier. All communications and notices are to be addressed to that registered office [Section 146 (1)]. Notice of the situation of the registered office and every change shall be given to the Registrar within 30 days after the date of incorporation of the company or after the date of change [Section 146 [2]|. If default is made in complying with these requirements, the company and every officer of the company who is in default shall be punishable with line which may extend to Rs. 50 for every day during which the default continues [Section 146 (4)].

3) Objects Clause: The objects clause defines as well as confines the spheres of business activities that the company would engage in. Any activity, which is not specifically and explicitly allowed by the object clause, cannot be carried on by the company. Such activities will be treated as ultra vires, which means outside the competence of the company.

13

The object that would be pursued by the company is divided into three classes, namely: i) The main objects to be pursued by the company on its incorporation; ii) The objects incidental or ancillary to the attainment of the main objects; and iii)Other objects, which are not included in the main objects of the company.

A company shall not commence business in respect of any object, which is not included in the main objects unless: a) The company has approve of the commencement of any such business by a special resolution passed in that behalf it in general meeting; and b) 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 as secretary, a secretary in whole time practice that the provisions relating to the commencement have been complied with. 4) Liability Clause: This clause states that the liability of members is limited by the face value of shares. The change in the liability can be brought by passing a special resolution to that effect. Directors may have an unlimited liability while members may have limited liability. For a company limited by guarantee this clause will mention the amount which every member undertakes to contribute to the assets of the company, for example, not exceeding Rs. 500/-, in the event of winding up. For unlimited company this clause is not needed. 5) Capital Clause: This clause states the amount of share capital with which the company is registered and the mode of its division into shares of fixed valued, i.e., the number of shares into which the capital is divided and the amount of each share. If there are both equity and preference shares, then the division of the capital is to be shown under these two heads. 6) Association Clause: At the end of the memorandum of every company there is an association or subscription clause or a declaration of association which reads something like this: We, the several persons whose name and addresses and occupations are subscribed, are desirous of being formed into a company in pursuance of this memorandum of association, and we respectively agree to take the number of shares in the capital of the company set opposite our respective names. Then follows the names, addresses, descriptions, occupations of the subscribers, and the number of shares each subscriber has taken and his signature attested by a witness. Alteration of Memorandum
1)

Change of Name: By special resolution. A company may change its name by a special resolution and with the approval of the central government. A change of name which merely involves the

14

deletion or addition of the word Private on the conversion of a private company into a public company or vice versa does not require the approval of the central government (Section 21).

By Ordinary Resolution: If through inadvertence or otherwise, a company is registered by a name which, in the opinion of the central government, is identical with, or too nearly resembles, the name of an existing company:
a)

The company may change its name, by ordinary resolution and with the previous approval of the central government.

b)

The company shall change its name if the central government so directs within 12 months of its first registration or registration by its new name, as the case may be.

2)

Change of Registered Office: This may involve:

a) b)

Change of registered office from one town to another town in the same state. Change of registered office from one state to another state.

In case (a), a notice is to be given within 30 days of the change to the Registrar (Section 146(2)].

In case (b), a special resolution is required to be passed at a general meeting of the shareholders and a copy of it is to be filed with the Registrar within 30 days. Then within 30 days of the removal of the office, a notice has to be given to the Registrar of the new location of the office.

3)

Alteration of Objects: The objects clause is the most important clause in the memorandum. The legal personality of a company exists only for the particular purposes of incorporation as defined in the objects clause. By Section 17 (1), the objects of a company may be altered by a special resolution so as to enable the company:
a) b) c) d)

To carry on its business more economically or more efficiently. To attain its main purpose by new improved means. To enlarge or change the local area of its operations. To carry on some business which under existing circumstances may conveniently or advantageously be combined with the objects specified in the memorandum.

e) f)

To restrict or abandon any of the objects specified in the memorandum. To sell or dispose of the whole or a part of the undertaking, or any of the undertakings of the company; or

g)

To amalgamate with any other company or body of persons.

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ARTICLES OF ASSOCIATION
Meaning and Purpose Articles of Association The articles of association of a company and its byelaws are regulations, which govern the management of its internal affairs and the conduct of its business. They define the duties, rights, powers and authority of the shareholders and the directors in their respective capacities and of the company, and the mode and form in which the business of the company is to be carried out.

Contents of Articles Articles usually contain provisions relating to the following matters:
1)

Share capital, rights of shareholders, variation of these rights, payment of underwriting commission.

2) 3) 4) 5) 6) 7) 8) 9) 10) 11) 12)

Lien on shares. Calls on shares Transfer of shares. Transmission of shares. Forfeiture of shares. Conversion of shares into stock. Share warrants. Alteration of capital. General meetings and proceedings there at. Voting rights of members, voting and poll, proxies. Directors, their appointment, remuneration, qualifications, powers and proceedings of Board of Directors.

13) 14) 15) 16) 17) 18)

Manager. Secretary. Dividends and reserves. Accounts, audit and borrowing powers. Capitalization of profits. Winding up.

16

Companies, which must have their Own Articles The following companies shall have their own articles, namely: 1) Unlimited companies. 2) Companies limited by guarantee, 3) Private companies limited by shares.

Registration of Articles Section 26 states that a public company limited by shares may register articles of association signed by the subscribers to the memorandum. If, however, it does not register its own articles, then the articles given in Table A, of Schedule I automatically become applicable. Further, even if it does register articles of its own, Table A will still apply automatically unless it has been excluded or modified. There are actually three possible alternatives in which such company may adopt articles:
i) ii) iii)

It may adopt Table A in full, It may wholly exclude Table A and set out its own regulations in full, or It may set out its own articles and adopt part of Table A.

In any case, the articles of a company must be:

i) ii) iii)

Printed, Divided into paragraphs, numbered consecutively, Signed by subscribers to the memorandum in the presence of at least one witness who shall attest the signatures. Also, articles are to be stamped with requisite stamp and filed along with the memorandum (Section 3).

Alteration of Articles Companies have been given very wide power to alter their articles. It is a statutory power and any provision in the Articles making the articles unalterable is regarded as bad in law. If, for example, the articles of a company contain any restriction that the company shall not alter its articles it will be contrary to the Companies Act and therefore inoperative.

Procedure for Alteration A company may, by passing a special resolution, alter regulations contained in its articles anytime. Again any new regulations in the Articles may be adopted which could have been lawfully included in the original articles. A copy of every special resolution altering the articles shall be filed with the

17

register within 30 days of its passing. Any alteration so made in the articles shall be as valid as if originally contained in the articles.

Limitations of Alteration 1) Must not be inconsistent with the Act. 2) Must not conflict with the memorandum. 3) Must not sanction anything illegal. 4) Must be for benefit of the company. 5) Must not increase liability of members. 6) Alteration by special resolution only. 7) Approval of central government when a public company is converted into a private company. 8) Breach of contract 9) No power of the Court to amend Articles 10) Alteration may be with retrospective effect.

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ARTICLES AND MEMORANDUM

Their Relation
1)

The Articles are subordinate to Memorandum. The Articles cannot give powers to a company which are not conferred by the Memorandum nor can they purport to create rights which are inconsistent with the Memorandum. This is so because the object of the Memorandum is to state the purpose for which the company has been established, while the Articles provide the manner in which the internal management of the company is to be carried.

2)

The Memorandum must be read in conjunction with Articles. This is the case when it is necessary
i) ii)

To explain any ambiguity in the terms of the Memorandum or To supplement the Memorandum upon any matter about which it is silent except as regards matters which must by Statute be provided by the Memorandum. The Articles may explain or supplement the Memorandum, but can not extend or enlarge its scope.

3)

The terms of the Memorandum cannot be modified or controlled by the Articles. If, however, there is any ambiguity in the Memorandum. The Articles may be referred to for clarification. But so far as the fundamental conditions in the Memorandum are concerned, they cannot .be explained with the aid of the Articles.

Distinction between Articles and Memorandum of Association Basis

1)

Memorandum of Association

Articles of Association

Scope

Constitution of the company, defines Rules and regulations for day-to-day its objects and powers. working of the company.

2)

Drafting or Necessity

Every company must prepare and A public company limited by shares file it. may adopt Table A.

3)

Purpose

To define the objects and powers of To lay down rules and regulations for a company. management of internal affairs.

4)

Status

Main document Constitution of the Subsidiary to Memorandum. company.

5)

Provisions

Must not contain anything contrary Must not contain anything contrary to to the Companies Act. the Companies Act and the

memorandum.
6)

Relationship

Regulates relations between the Regulates relations between company company and outsiders. and members, members and members.

19

7)

Alteration

Difficult,

permission or

of

Central Easy, a special resolution of the Law company required.

Government

Company

Board necessary.
8)

Legal effects

Anything done beyond it is void.

Anything done beyond it can be ratified by a special resolution.

Legal Effect of Memorandum and Articles The memorandum and the articles, when registered, bind a company and the members thereof to the same extent as if they respectively had been signed by the company and each member.

The effect of these provisions is to constitute, through memorandum and Articles of Association of the company, a contract between each member and the company. The legal implications of these documents may be discussed as to how far these documents bind:
1)

Members to the Company: As between the members and the company, the Memorandum and Articles constitute a binding contract. The effect of this is that each member is bound to the company to conform to the memorandum and the articles as if each member has actually signed the same.

2)

Company to the Members: A company is bound to the members in the same manner as the members are bound to the company. It can therefore, exercise its rights, as against any member, only in accordance with the Memorandum and the articles. A member can obtain an injunction restraining a company from doing an ultra vires act.

3)

Members Inter Se: As between the members inter se (among themselves) the Memorandum and the Articles constitute a contract between them and are also binding on each member against the other or other. Such a contract can, however, be enforced through the medium of the company.

4)

Company to the Outsiders: The Articles do not constitute any binding contract between the company and an outsider. An outsider cannot take advantage of the Articles to found a claim thereon against the company. This is based on the general rule of law that a stranger to a contract cannot acquire any rights and liabilities under that contract. If the Articles provide that the company on incorporation shall purchase certain property and appoint the vendor as one of the directors, the vendor, on becoming a shareholder, cannot sue the company on the basis of the articles.

20

PROSPECTUS
Definition of a Prospectus A prospectus, as per Section 2 (36), means any document described or issued as prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in or debentures of a body corporate. Thus, a prospectus is not merely an advertisement; it may be a circular or even a notice. A document shall be called a prospectus if it satisfies two things:
1) 2)

It invites subscriptions to share or debentures or invites deposits. The aforesaid invitation is made to the public.

Registration of Prospectus [Section 60] A prospectus can be issued by or on behalf of a company or in relation to an intended company only when a copy thereof has been delivered to the Registrar for registration. The registration must be made on or before the date of publication thereof. The copy must be signed by every person who is named therein as director or proposed director of the company, or by his agent authorized in writing. Further, the prospectus must state on the face of it that a copy of it has been delivered to the Registrar for registration. It must also specify that necessary documents and consent of the experts have been attached to or indorsed on the copy so delivered.

The prospectus must be issued within 90 days of the date on which a copy thereof is delivered for registration. If a prospectus is not issued within this period, it is deemed to be a prospectus, a copy of which has not been delivered to the Registrar.

Penalty for Non-Registration of Prospectus If a prospectus is issued without a copy thereof being delivered to the Registrar for registration, or without the necessary documents or the consent of the experts, the company and every person, who is knowingly a party to the issue of prospectus, shall be punishable with fine which may extend to Rs. 5,000.

Objects of Registration These are:

1)

To keep an authenticated record of the terms and conditions of issue of shares or debentures, and

21

2)

To pinpoint the responsibility of the persons issuing the prospectus for statements made by them in the prospectus.

The object of the promoters or directors in issuing a prospectus is to make it as attractive as possible. The object of the Legislature is to prevent the public from being mislead and defrauded.

Contents of a Prospectus Prospectus is the window through which an investor can look into the soundness of a companys venture. The investors must, therefore, be given a complete picture of the companys intended activities and its position. This is done through prospectus which must secure the fullest disclosure of all material and essential particulars and lay the same in full view of all the intending purchasers of shares.

Section 56 lays down that a prospectus issued shall:

1) 2)

State the matters specified in Part I of Schedule II, and Set out the reports specified in Part II of Schedule II.

The provisions as stated above have effect subject to the provisions contained in Part III of Schedule II.

The Government has revised the format of prospectus given in Schedule II of the Companies Act, 1956. The revised format is effective from Ist November, 1991.

Part I of Schedule II
1)

General Information: Under this head information is given about:

i) ii) iii)

Name and address of registered office of the company. Name/(s) of stock exchange/(s) where application for listing is made. Declaration about refund of the issue if minimum subscription of 90 per cent is not received within 90 days from closure of the issue.

iv)

Declaration about the issue of allotment letters/refunds within a period of 10 weeks and interest in case of any delay in refund, at the prescribed rate, under section 73.

22

v) vi) vii) viii)

Date of opening of the issue. Date of closing of the issue. Name and address of auditors and lead managers. Whether rating from CRISIL or any rating agency has been obtained for the proposed debentures/ preference shares issue. If no rating has been obtained, this should be answered as No.

ix) 2)

Names and address of the underwriters and the amount underwritten by them.

Capital Structure of the Company

i) ii)

Authorized, issued, subscribed and paid-up capital. Size of the present issue, giving separately reservation for preferential allotment to promoters and others.

3)

Terms of the Present Issue

i) ii) iii)

Terms of payment. How to apply. Any special tax benefits.

4)

Particulars of the Issue

i) ii) iii)

Objects. Project cost. Means of Financing (including contribution of promoters).

5)

Company Management and Project

i) ii) iii) iv) v) vi) vii)

History and main objects and present business of the company. Promoters and their background. Location of the project. Collaborations, if any. Nature of the product(s) export possibilities. Future prospects. Stock market data for share/debentures of the company including high and low price in each of the last three years and monthly high and low during the last six months, if applicable.

6)

Certain prescribed particulars in regard to the company and other listed companies under the same management which made any capital issue during the last 3 years.

7)

Outstanding litigations relating to financial matters or criminal proceedings against the company or directors under Schedule XII.

23

8)

Management perception of risk factors (e.g., sensitivity to foreign exchange rate fluctuations, difficulty in availability of raw materials or in marketing of products, cost/time over-run, etc.).

Part II of Schedule II General Information

1) 2)

Consent of Directors, Auditors, etc., their names and addresses. Change, if any, in directors and auditors during the last 3 years, and reasons thereof.

The following reports shall also be set out in the prospectus:

1)

Report by the Auditors: A report by the auditors of the company with respect to:
i)

Its profits and losses (distinguishing items of non-recurring nature) and assets and liabilities; and

ii)

The rates of dividends paid by the company during the preceding 5 financial years.

If, however, no accounts have been made up in respect of any part of the period of 5 years ending on a date 3 months before the issue of the prospectus, the report shall contain a statement of that fact. If the company has subsidiaries, the report shall, in addition, deal with either the combined profits and losses and assets and liabilities of its subsidiaries or each of the subsidiaries, so far as they concern the members of the company.

2)

Reports by the Accountants

i)

A report by the accountants (who shall be qualified under the Act for appointment as auditors of a company and who shall be named in the prospectus) on the profits or losses of the business for the preceding 5 financial years, and on the assets and liabilities of the business on a date which shall not be more than 120 days before the date of the issue of the prospectus. This report is required to be given if the proceeds of the issue of the shares or debentures are to be applied directly or indirectly in the purchase of any business.

ii)

A similar report on the accounts of a body corporate by an accountant (who shall be named in the prospectus) if the proceeds of the issue are to be applied in the purchase of shares of a body corporate so that the body corporate becomes a subsidiary of the acquiring company.

Statutory and Other Information

1) 2)

Minimum subscription. Expenses of the issue giving separately fee payable to:

24

i) ii) iii) iv) 3)

Advisors. Registrars to the issue. Managers to the issue. Trustees for the debenture-holders.

Previous public or rights issue, if any: (during last 5 years)

i)

Date of Allotment: Date of Refunds:

Closing Date: Date of listing on the stock exchange:

ii) iii)

If the issue is at premium or discount, the amount thereof. Premium, if any, on each share which had been issued within the 2 years preceding the date of the prospectus.

4) 5) 6)

Commission or brokerage on previous issue. Issue of shares otherwise than for cash. Debentures and redeemable preference shares and other instruments issued by the company outstanding as on the date of prospectus.

7)

Details of Purchase of Property: If the company proposes to acquire a business which has been carried on for less than 3 years, the length of time during which the business has been carried on.

8)

Details of directors, proposed directors, whole-time directors, their remuneration, appointment and remuneration of managing directors, Interests of directors, their borrowing powers and qualification shares.

9)

Rights of members regarding voting, dividend, lien on shares and the process for modification of such rights and forfeiture of shares.

10) 11) 12)

Restrictions, if any, on transfer of shares/debentures. Revaluation of assets, if any (during last 5 years). Material contracts and inspection of documents.

Part III- Provisions Applying to Parts I and II of Schedule II

1)

Every person shall, for the purposes of this Schedule, be deemed to be a vendor who has entered into any contract, absolute or conditional, for the sale or purchase of any property to be acquired by the company, in any case where:
i) ii)

The purchase money is not fully paid at the date of the issue of the prospectus; The purchase money is to be paid or satisfied, wholly or in part, out of the proceeds of the issue offered for subscription by the prospectus;

iii)

The contract depends for its validity or fulfillment on the result of that issue.

25

2)

In the case of a company which has been carrying on business for less than 5 financial years, reference to 5 financial years means reference to that number of financial years for which business has been carried on.

3)

Reasonable time and place at which copies of all balance sheets and profit and loss accounts on which the report of the auditors is based, and material contracts and other documents may be inspected.

Civil Liability
1)

Compensation: The above persons shall be liable to pay compensation to every person who subscribes for any shares or debentures for any loss or damage sustained by him by reason of any untrue statement included therein. It has been held that the measure of the damages is the loss suffered by reason of the untrue statements, omissions, etc., the difference between the value which the shares would have had and the true value of the shares at the time of the allotment.

2)

Damages for Deceit or Fraud: Any person induced to invest in the company by fraudulent statement in a prospectus can sue the company and person responsible for damages. The shares should be first surrendered to the company before the company is sued for damages. Fraud occurs when any statement is made without belief in the truth or carelessly. A statement made with knowledge that it is false, will constitute fraud or deceit. In the leading case on the point, it has been held that if the person making the statement honestly believes it to be true, he is not guilty of fraud even if the statement is not true. The facts of this case were: The Tramway Company had power by special Act to make tramways and to use steam power with the consent of the Board of Trade. The plans of the company were approved. The directors of the company honestly believed that since the plans were approved, permission to use steam power from Board of Trade was only a formality and would be granted. Prospectus was issued wherein the directors stated that the consent to use steam power was obtained by the company. Subsequently, the consent was refused and the company had to be wound up. On the action by plaintiffs for deceit it was held that the directors were not liable for fraud as they honestly believed that the consent would be obtained, though the statement was untrue.

3)

Recission of the Contract for Misrepresentation: Recission means avoiding the contract. Any person can apply to the Court for recission of the contract if the statements on which he has taken the shares are false or caused by misrepresentation whether innocent or fraudulent.

26

The misrepresentation must be false. It must be of material fact and not of law. The applicant of shares must have acted on the statements contained in the prospectus or must have been induced to act on the statements. It should be noted that a person cannot claim recission of contract on misrepresentation, if he had the means of discovering the truth with ordinary diligence.
4)

Liability for Non Compliance with Section 56: A director or other person responsible for not setting out matters and reports required to be set out in the prospectus as provided under Section 56 of the Act, shall be punishable with fine which may extend to Rs. 50,000.

5)

Liability under General Law: Any person responsible for the issue of prospectus may be held liable under the general law or under the Act for mis-statements or fraud.

6)

Penalty for Contravening Sections 57 or 58: If any prospectus is issued in contravention of Section 57 (experts to be unconnected with formation or management of company), or Section 58 (experts consent to issue of prospectus containing statement by him), the company and every person who is knowingly a party to the issue thereof, shall be punishable with fine which may extend to Rs. 50,000 [Section 59(1)].

7)

Penalty for Issuing the Prospectus without Delivering for Registration: If a prospectus is issued without a copy thereof being delivered to the Registrar, the company and every person who is knowingly a party to the issue of the prospectus shall be punishable with fine which may extend to Rs. 50,000 [Section 60(5)].

Statement in Lieu of Prospectus A company having a share capital which does not issue a prospectus or, which has issued a prospectus but has not proceeded to allot any of the shares offered to the public for subscription, shall not allot any of its shares or debentures, unless at least 3 days before the allotment of shares or debentures, there has been delivered to the Registrar for registration a statement in lieu of prospectus signed by every person who is named therein as a director or a proposed director of the company or by his agent authorized in writing, in the form and containing the particulars set out in Part I of Schedule III and setting out the reports specified in Part II of Schedule III subject to the provisions contained in Part III of that Schedule.

Statement in lieu of Prospectus by a Private Company on Becoming Public A private company on becoming a public company shall deliver to the Registrar a statement in lieu of prospectus in the form containing the particulars specified in Part I of Schedule IV with Reports set out in Part II of Schedule IV subject to the provisions contained in Part III of that Schedule.

27

Liability
1)

If a company allots shares or debentures without so delivering to the Registrar a statement in lieu of prospectus and every director who willfully authorizes or permits such allotment, shall be punishable with fine which may extend to Rs. 10000 [Section 70(4)].

2)

Where a statement in lieu of prospectus includes any untrue statement, any person who authorized the delivery of the statement in lieu of prospectus for registration shall be punishable with imprisonment for a term which may extend to 2 years or with fine which may extend to Rs. 50000 or with both, unless he proves either that the statement was immaterial or that he had reasonable ground to believe and did up to the time of the delivery for registration of the statement in lieu of prospectus believe, that the statement was true. The civil and criminal liability for mis-statements or misrepresentations is the same as in the case of a prospectus [Section 70(5)].

28

MANAGEMENT OF COMPANIES
Separation of Management from Ownership In the world of business, ownership, managerial right and risk-bearing function generally go together and all these three aspects are unite in one and the same person in proprietary forms of business organizations such as sole trader and partnership.

However, in company organization we find almost complete separation or divorce between the ownership on the one side and management on the other side.

The following are the reasons for a clear-cut separation between ownership and management: 1) Distinctive Legal Personality: The people who organize a corporate enterprise are not the corporation but merely owners of the enterprise. The corporation so created as a form of organization has an independent legal status of life and it is absolutely separable from the owners, i.e., general body of members as well as separable from the managers, i.e., Board of Directors. 2) Very Large Membership: A public limited company may have thousands or lacs or shareholders. All members obviously cannot actively participate in company management. Hence, we generally adopt a representative form of management. Directors are the chosen or elected representatives of members and they form a Board of Directors to look after the management of a company. 3) Wide Distribution of Membership: Not only the membership is very large, but also it may be widely scattered or diffused over a very wide area. It is physically impossible for all the proprietors of the company to look after the routine management of the company even in the Jambo-jet age. 4) Uninterested Members: Investors invest their savings in the shares of a number of companies not for securing management rights but to secure steady and rising income on their financial investments. They are primarily interested in income or dividends and not in the day-to-day management of the company. 5) Ever-Changing Membership: Shares of a public limited company can be quoted on a stock exchange and they are considered as transferable as well as marketable assets. Hence, membership may be ever changing. How can members, therefore, be called upon to manage the business of the company?

29

6) Specialized Management: Company organization is very suitable for a big business because it provides ample scope for division of labor and specialization in management. All owners cannot be specialists or experts in business management. It demands the services of able and competent managers and technicians. Owners may not possess the requisite ability and skill to manage the companys business.

Pattern of Company Management In practice, company management has a decentralized and pyramidal character and the flow of authority and powers flow from the top to the bottom, whereas, the flow of responsibility goes in the reverse direction, i.e., from the bottom to the top. Authority and powers flow from the top to the bottom through delegation or transfer of managerial rights and functions. 1) Shareholders (as Companys Proprietors): Owners, i.e., shareholders enjoy fundamental and ultimate voice in the company management. They elect periodically their agents or representatives who are called the directors or members of a governing council of management. On certain vital or important matters general meeting sanction is essential and members are given necessary voting rights to exercise their voice in the management. 2) Directors: Individually neither a member nor a director may have any managerial powers. But collectively members as well as directors can exercise managerial powers of the company, in a body, i.e., through a meeting and through resolutions passed at such meetings. Subject to the Companys Act, Memorandum of Association and Articles of Association, Board of Directors enjoy wide and very comprehensive powers of management. 3) Company Executives: The emergence of professional managerial executives in business administration and industrial management has brought about a silent managerial revolution.

Directors A company is an artificial person, invisible, intangible and existing only in the eyes of Law. It has neither a mind nor a body of its own. Hence, we have to entrust its business to human agents. Therefore control of its management and the exercise of its powers must necessarily be delegated. Directors have to act as agents of the company which delegates to them most of its powers through the memorandum and articles of association. The general body of shareholders entrust the management and the conduct of the business of the company to their representatives who form the Board of Directors. The directors are responsible for contemplating and determining the general policy of management and directing the companys business in the best manner possible.

30

Number of Directors The articles of a company generally prescribe the number of directors that may be appointed, but a public company must have at least three directors, and a private company including a private company which is regarded as a public company under Section 43A, must have at least two directors (Section 252). Only an individual A man or a woman Can be a director (Section 253).

Appointment of Directors
1)

First Directors:
i)

The Articles of a company usually name the first directors by their respective names or prescribe the method of appointing them.

ii)

If the directors are not named in the Articles, the number of directors and the names of the first directors are determined in writing by the subscribers of the memorandum or a majority of them.

iii)

If the first directors are not appointed in the above manner, the subscribers of the memorandum who are individuals become directors of the company. They hold office until directors are duly appointed in the first annual general meeting.

2)

Appointment of Directors by Company: According to Section 255, directors must be appointed by the company in general meeting. The appointment of directors by company in general meeting is governed by the following provisions: i) At the first annual general meeting of a public company or a private company which is a subsidiary of a public company, held after the general meeting at which the first directors are appointed and at every subsequent annual general meeting, 1/3rd (or the number nearest to 1/3rd) of the directors liable to retire by rotation must retire from office. ii) The directors to retire by rotation at every annual general meeting must be those who have been longest in the office since their last appointment. iii) At the annual general meeting at which a director retires by rotation, the company may fill up the vacancy (thus created) by appointing the retiring director or some other person. iv) If the place of the retiring director is not filled up, the meeting stands adjourned till the same day in the next week. If at the adjourned meeting also, the place of the retiring director is not filled up, the retiring director is deemed to have been re-appointed at the adjoined meeting unless:

31

a) At the meeting or at the previous meeting a resolution for the re-appointment of such director is put to the meeting and lost; or b) The retiring director has, by a notice in writing addressed to the company or its Board of Directors, expressed his unwillingness to be so reappointed; or c) He is not qualified or is disqualified for appointment or d) A special or ordinary resolution is required for appointment or re-appointment. v) If a new director is to be appointed, a notice by him or some member intending to propose him in writing should be given to the company at least 14 days before the meeting along with a deposit of Rs. 500. The deposit shall be refunded if the person succeeds in getting elected as a director. In case he is not elected as a director, the amount deposited shall be forfeited by the company. vi) Every person (other than a director retiring by rotation) proposed as a candidate for the office of a director must sign and file with the company his consent in writing to act as a director if appointed (Section 264). vii) Appointment of directors of a public company must be done individually by separate ordinary resolutions.
3)

Appointment of Directors by the Board of Directors: The Board of Directors may appoint directors: i) As Additional Directors [Section 260]: Such additional directors hold office only up to the date of the next annual general meeting of the company. ii) In a Casual Vacancy [Section 262]: In the case of a public company, or a private company which is a subsidiary of a public company, the office of any director appointed by the company in general meeting may be vacated before his term of office expires in the normal course. In such a case, the resulting casual vacancy may be filled by the Board of Directors at a meeting of the board. iii) As Alternate Director [Section 313]: The Board of Directors of a company may, if so authorized by its articles or by a resolution passed by the company in general meeting, appoint an alternate director. He is to act for a director, called the original director, during his absence for a period of at least three months from the state in which meetings of the board are ordinarily held.

4)

Appointment of Directors by Third Parties: The articles under certain circumstances give power to the debenture-holders or other creditors, for example, a banking company or a financial corporation, who have advanced loans to the company to appoint their nominees to the board. The

32

number of directors so appointed must not exceed 1/3rd of the total number of directors, and they are not liable to retire by rotation.
5)

Appointment of Directors by Proportional Representation: The Articles of a company may provide for the appointment of not less than 2/3rd of the total number of directors of a public company, or of a private company which is a subsidiary of a public company, according to the principle of proportional representation, whether by the single transferable vote or by a system of cumulative voting or otherwise. The appointment must be made once in 3 years and internal casual vacancies must be filled in the manner as provided in the Articles (Section 265).

6)

Appointment of Directors by the Central Government [Section 408]: The central government may appoint such number of directors on the board of a company as the Company Law Board may specify as being necessary to effectively safeguard the interest of the company, its shareholders or the public interest. The period of appointment shall not succeed 3 years on any one occasion.

Powers of Directors [Section 291 and 292] The Board of Directors derives their powers from:
i) ii) iii) iv) v)

The Companies Act; Articles of Association; Board resolutions; Resolutions in general meetings; Agreements or contracts with the company.

1) General Powers of the Board (Section 291): The Board of Directors of a Company is entitled to exercise all powers and to do all acts and things which the company is authorized to exercise and do. This is however subject to the provisions of the Act. This means that the powers of the Board of Directors are co-extensive with those of the company. The proposition is, however, subject to two conditions:
i) ii)

First, the Board shall not do any act which is to be done by the company in General Meeting. The Board shall exercise its powers subject to the provisions contained in that behalf in the Companies Act, or in the Memorandum or the Articles of the company or in any regulations made by the company in General Meeting [section 29 (1)]. Further, no regulation made by the company in general meeting shall invalidate any prior act of the Board which would have been valid if that regulation had not been made [Section 291 (2)].

33

2) Powers to be Exercised only at Meeting (Section 292): The Board of Directors of a company (public as well as private) must exercise the following powers on behalf of the company by means of resolutions passed at meetings of the Board, viz., the powers to:
i) ii) iii) iv) v)

Make calls on shares; Issue debentures; Borrow money otherwise than on debentures (say public deposits); Invest the funds of the company; and Make loans.

There are certain other powers which must be exercised only at the meeting of the Board. These powers are:
i) ii)

To fill vacancies in the Board (Section 262); To sanction or give consent for certain contracts in which particular directors, their relatives and firms are interested (Section 297); To receive notice of disclosure of directors interest in any contract or arrangement with the company (Section 299);

iii)

iv) v)

To receive notice of disclosure of shareholdings of directors (Section 308); To appoint as managing director or manager a person who is already managing director or manager of another company (Section 316 and 386);

vi)

To make investments in companies in the same group (Section 372).

Restrictions on Powers of Directors [Section 293]: Section 293 provides that the Board of Directors of a public company or a private company which is a subsidiary of a public company cannot exercise the following powers without the consent of the shareholders in general meeting:
1)

Sell, lease or otherwise dispose of the whole, substantially the whole, of the undertaking of the company, or where the company owns more than one undertaking, of the whole or substantially the whole, of any such undertaking. However, this restriction does not apply to the case of a company whose ordinary business is to sell or lease properly.

2)

Remit or give time for the re-payment of any debt due by a director except in the case of renewal or of continuance of an advance made by a banking company to its director in the ordinary course of business.

34

3)

Invest, otherwise than in trust securities, the amount of compensation received by the company in respect of compulsory acquisition of any fixed assets of the company.

4)

Borrow money exceeding the aggregate of the paid-up capital of the company and its free reserves. Borrowing does not include temporary loans obtained from the companys bankers in the ordinary course of business.

5)

Contribute in any year, to charitable and other funds not directly relating to the business of the company or the welfare of its employees, any amount exceeding Rs. 50,000 or 5% of its average net profit for the last three financial years, whichever is greater. However, contributions of National Defence Fund or any other fund approved by the Central Government for the purpose of national defence are exempted from the above provisions. Any amount may be contributed without obtaining the sanction of the company in general meeting.

Duties of Directors Duties of directors may be divided under two heads:

1)

Statutory Duties:
i)

To File Return of Allotments: Section 75 charges a company to file with the registrar, within a period of 30 days, a return of the allotments stating the specified particulars. Failure to file such return shall make directors liable as officer in default. A fine upto Rs. 500 per day till the default continues may be levied.

ii)

Not to Issue Irredeemable Preferences Shares or Shares Redeemable after 10 Years: Section 80, forbids a company to issue irredeemable preference shares or preference shares redeemable beyond 10 years. Directors making any such issue may be held liable as officer in default and may be subject to fine upto Rs. 1,000.

iii)

To Disclose Interest [Ss.299-300]: A director who is interested in a transaction of the company must disclose his interest, to the Board. The disclosure must be made at the first meeting of the Board held after he has become interested. This is because a director stands in a fiduciary capacity with the company and therefore, he must not place himself in a position in which his personal interest conflicts with his duty. Interest should be such which conflicts with the duties of the director towards the company.

iv)

To Disclose Receipt from Transferee of Property: Section 319 provides that any money received by the directors from the transferee in connection with the transfer of the company's property or undertaking must be disclosed to the members of the company and approved by the company in general meeting. Otherwise the amount shall be held by the directors in trust for

35

the company. This money may be in the name of compensation for loss of office but in essence may be on account of transfer of control of the company. But if it is bona fide payment of damages of the breach of contract, then it is protected by section 321(3).
v)

To Disclose Receipt of Compensation from Transferee of Shares: If the loss of office results from the transfer (under certain conditions) of all of the shares of the company, its directors would not receive any compensation from the transferee unless the same has been approved by the company in general meeting before the transfer takes place (section 320). If the approval is not sought or the proposal is not approved, any money received by the directors shall be held in trust for the shareholders who have sold their shares. Section 320 further provides that in pursuance of any agreement relating to any of the above transfers, if the directors receive any payment from the transferee within one year before or within 2 years after the transfer, it shall be accounted for to the company unless the director proves that it is not by way of compensation for loss of office. Section 321 further provides that if the price paid to a retiring director for his shares in the company is in excess of the price paid to other shareholders or any other valuable consideration has been given to him, it shall also be regarded as compensation and should be disclosed to the shareholders.

2)

General Duties of Directors

i)

Duty of Good Faith: The directors must act in the best interest of the company. Interest of the company implies the interests of present and future members of the company on the footing that the company would be continued as a going concern. A director should not make any secret profits. He should also not exploit to his own use the corporate opportunities.

ii)

Duty of care: Directors should carry out their duties with such care, skill and diligence as is reasonably expected from persons of their knowledge and status. If they fail to exercise due care in the exercise of their duties, they are guilty of negligence. The standard of care, skill and diligence would, however, vary with:
a) b) c) d)

The type and nature of work; The division of power between directors and other officers; The general usages and customs of that type of business; and Whether directors work gratuitously or remuneratively.

36

iii)

Duty to Attend Board Meetings: A number of powers of the company are exercised by the Board of Directors in their meetings held from time to time. Although a director is not expected to attend all the meetings but if he fails to attend three consecutive meetings or all meetings for a period of three months, whichever is longer, without permission, his office shall automatically fall vacant.

iv)

Duty not to Delegate: Director being an agent is bound by maxim delegates non protest delegate which means a delegate cannot further delegate. Thus, a director must perform his functions personally. A director may, however, delegate in the following cases:
a) b)

Where permitted by the Companies Act or articles of the company; Having regarded to the exigencies of business certain functions may be delegated to other officials of the company.

Some other duties are; to convene statutory, annual general meeting and also extraordinary general meeting when required by the shareholders of the company; to prepare and place at the AGM along with the balance sheet and profit and loss account a report on the companys affairs; to make a declaration of solvency in the case of a Members voluntary winding up. The duties of the directors are usually regulated by the companys articles. While performing their duties, they must display reasonable care, honesty, good faith, skill and diligence. As they stand in a fiduciary relationship to the company and they are agents and trustees in certain respects, they are bound to exercise in the performance of their duties a reasonable degree of skill and care.

Liabilities of Directors
1)

Liability to Third Parties: This may arise:

i)

Under the Act: Liability of directors to third parties may arise in connection with the issue of a prospectus which does not contain the particulars required by the Act, or which contains material misrepresentations. They may also incur such liability:
a)

Where they fail to repay application money if minimum subscription has not been subscribed [Section 69 (5)].

b) c)

Where the allotment of shares has been irregular [Section 71(3)]. Where they fail to repay application money if the application for the securities to be dealt in on a recognized stock exchange is not made or is refused [Section73 (2)].

ii)

Independently of the Act: Directors, as agents of a company, are not personally liable on contracts entered into as agents on behalf of the company. For whatever an agent is liable,

37

those directors would be liable; where the liability would attach to the principal only, the liability is the liability of the company. In general, the directors, who contract as agents, incur no personal liability, but there are a number of exceptions to this rule. If they fail to exclude personal liability, for instance, while signing a negotiable instrument without mentioning the companys name, they are personally liable to the holder of such instrument. They are also personally liable if they act in their own name.

2)

Liability to the Company: The liability to the company may arise from:
i)

Breach of Fiduciary Duty: Where a director acts dishonestly in disregard to the interests of the company, he will be held liable for breach of fiduciary duty. Most of the powers of directors are powers in trust and therefore, should be exercised in the interest of the company and not in the interest of the directors or any section of members Thus, where the directors, in order to forestall a take-over bid, transferred the unissued shares of the company to trustees to be held for the benefit of the employees and an interest-free loan from the company was advanced to the trustees to enable them to pay for the shares, it was held to be a wrongful exercise of the fiduciary powers of the directors

ii)

Ultra-Vires Acts: Directors are supposed to act within the parameters of the provisions of the Companies Act, Memorandum and Articles of Association since these lay down the limits to the activities of the company and accordingly to the powers of the Board of Directors. The directors shall be held personally liable for acts beyond the aforesaid limits, being ultra-vires. Thus, where the directors pay dividends or interest out of capital, they will be liable to indemnify the company for any loss or damage suffered due to such act.

iii)

Negligence: The directors shall be deemed to have acted negligently in discharge of their duties and consequently liable for any loss or damage resulting there from where they fail to exercise reasonable care, skill and diligence. However, error of judgment will not be deemed as negligence. It may be noted that the directors cannot be absolved of the liability for negligence by any provision in the Article (section 201). The court may award relief to directors against such liability under section 633.

iv)

Misfeasance: Directors are also liable to the company for misfeasance which means misconduct of directors for which they may be sued in a Law Court. But in order to amount to misfeasance, the misconduct must be willful. Where any director, or for that matter any officer of the company (and also promoter or liquidator) has misapplied or retained money or property of the company or has been guilty of breach of trust or misfeasance, the Court may

38

examine into his conduct and order him to repay or restore the money or property or to pay compensation.

3)

Liability for Breach of Statutory Duties: There are numerous provisions of the Companies Act which is the duty of the directors to carry out. Most of these duties relate to maintenance or proper accounts, filing of returns or observance of certain statutory formalities. If they fail to perform these statutory duties, they render themselves liable to penalties.

4)

Liability for Acts of his Co-Directors: A director is not liable for the acts of his co-directors of which he has no knowledge and in which he has taken no part. This is because his co-directors are not his servants or agents who can be their acts impose liability on him.

Removal of Directors Directors may be removed by:

1)

Shareholders (Section 284): The shareholders may, by passing an ordinary resolution at their general meeting, remove a director (not being a director appointed by the Central Government) before the expiry of his period of office. A special notice (a clear cut 14 days notice) is required of any proposed resolution to remove a director. On receipt of notice, the company must inform the members of the proposed resolution. It must also forthwith send a copy thereof to the director concerned.

2)

Central Government (Sections 388-B to 388-E): The Central Government may state a case against a director of a company and refer the same to the Company Law Board with a request that the Company Law Board may inquire into the case and record a finding whether he is a fit or proper person to hold the office of director.

The central government may exercise this power where in its opinion there are circumstances suggesting:
a)

That the director concerned in the conduct and management of the affairs of the company is or has been guilty of fraud, misfeasance, persistent negligence or default in carrying out his obligations and functions under the law, or breach of trust: or

b)

That the business of the company is not or has not been conducted and managed by the director in accordance with sound business principles or prudent commercial practices; or

c)

That the company is or has been conducted and managed by the director in a manner which is

39

likely to cause, or has caused, serious injury or damage to the interest of the trade, industry or business to which such company pertains; or
d)

That the business of the company is or has been conducted and managed by the director with intent to defraud its creditors, members or any other person or against public interest.

3)

Company Law Board (Section 402): Where, on an application to the Company Law Board for prevention of oppression (under Section 397) or mismanagement (under Section 398), the Company Law Board finds that the relief ought to be granted, it may by an order provide for the termination, setting aside or modification of any agreement between the company and the director. When the appointment of a director is so terminated or set aside, he cannot sue the company for damages or compensation for loss of office.

Meetings of Directors Directors of 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 [Section 285]: In the case of every company (public as well as private), a meeting of its Board of Directors must be held at least once in every 3 months and at least 4 such meetings must be held in every year. The central government may, by notification in the official gazette, direct that this provision shall not apply in relation to any class of companies. Example: The meetings of Board of Directors of Cherry Ltd., a public company, were held on 1st January, 30th June, 1st July, and 31st December, during the calendar year 1990. The requirements of Section 285 are met as one meeting was held in each quarter and 4 such meetings were held during the year. 2) Notice of Meetings [Section 286]: Notice of every meeting of the Board of Directors of a company must be given in writing to every director for the time being in India, and at his usual address in India. 3) Quorum for Meetings: i) The quorum for a meeting of the board is 1/3rd of its total strength (any fraction contained in that 1/3rd being rounded off as one), or 2 directors, whichever is higher. ii) If a meeting of the Board cannot be held for want of quorum, it automatically stands adjourned till the same day in the next week. However, the Articles may provide otherwise. iii) Where a meeting of the Board is called but could not be held for want of quorum, there is no contravention of Section 285.

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MEETINGS
Meaning of Meeting Apart from face-to-face communication with individuals, another vital application of oral communication in business is the meetingthe best medium for group discussion and group decisions in an organization. A meeting means the act of coming together of two or more than two persons (by previous notice or by mutual arrangement) for discussion and transaction of some lawful business.

Kinds of Meetings The meeting of shareholder can be classified in the following ways as shown in figure below:
Classification of Meeting

Meeting of Shareholders

Meeting of Creditors

Meeting of Director

Statutory Meeting Annual General Meeting Extraordinary General Meeting Class Meeting

1) Meeting of Shareholders
i)

Statutory Meeting (Section 165): This is the first meeting of the shareholders of a public company. It must be held within a period of not less than 1 month or more than 6 months from the date at which the company is entitled to commence business. It is held only once in the lifetime of a company. A private company and a company limited by guarantee and not having a share capital need not hold such a meeting. The Board of Directors must, at least 21 days before the day on which the meeting is to be held, forward a report, called the 'statutory report to every member of the company. This report contains all the necessary information relating to formational aspects of the company for the information of the shareholders. Object of the Meeting and Report: The purpose of a statutory meeting with its statutory report is to put the shareholders of the company in possession of all the important facts relating to the new company, what shares have been taken up, what moneys received, etc. This also provides an opportunity to the shareholders of meeting and discussing the whole situation, the management and prospects of the company.

ii)

Annual General Meetings: The annual general meetings are held periodically every year to

41

enable the members, who are the owners of the company, to exercise an ultimate control over the affairs and management of the company. Many powers of the company can be exercised only through general meetings of members. The directors are obliged to submit their annual report and accounts every year to the annual general meeting for approval. Importance of Annual General Meeting: It is only at the annual general meeting of a company that the shareholders can exercise any control over its affairs. The shareholders also get an opportunity to discuss the affairs and review the working of the company. They can also take the necessary steps for the protection of their interests. Appointment of auditors is also made at the annual general meeting. Annual accounts are presented for consideration of the shareholders and dividends are declared in this meeting.
iii)

Extraordinary General Meeting [Section 169): Any general meeting other than an annual general meeting is called an extraordinary general meeting (Art. 47 of Table A, Schedule I). It is called for transacting some urgent or special business which cannot be postponed till the next annual general meeting. It may be convened:
a) b)

By the Board of Directors on its own or on the requisition members; By the requisitionists themselves on the failure of the Board to call the meeting.

The Board of Directors may call such a meeting whenever it thinks fit.
iv)

Class Meetings: The class meetings may be held for securing the consent of a particular class of shareholders for altering their rights and privileges or for conversion of one class into another. There may be a meeting of the preference shareholders for reducing their rate of dividends, a meeting of the deferred shareholders for conversion of deferred shares into ordinary shares, etc.

2) Meetings of Creditors: The meetings of debenture holders and creditors may be required to

secure their support in effecting some scheme of compromise or arrangement in which they may be required to surrender their rights partially by way of voluntary sacrifice in order to enable the company to extricate itself from some financial embarrassment. In the scheme of reorganization, reconstruction and amalgamation we may have such meetings of debenture holders and creditors. At the time of winding up also creditors meetings may be convened from time to time when the winding up is under the supervision of creditors.

3) Meetings of Directors: The meetings of the directors are required for setting the general business

policy and over-all supervision of management. All major questions of policy are discussed at board meetings, which are held at regular intervals either once in a fortnight or once in a month.

42

Many powers of the company are to be exercised by the directors as per articles of association. These powers can be exercised only in a body and hence, there must be a meeting of the directors unless the articles provide for a circular resolution. If the power of delegation is granted by the articles, the board may appoint from time to time small committees of the management and administration.

Requisites of Valid Meetings It is necessary for you to understand that the following conditions must be satisfied for a meeting to be called a valid meeting:
1) 2) 3)

It must be properly convened. The persons calling the meeting must be authorized to do so. Proper and adequate notice must have been given to all those entitled to attend. The meeting must be legally constituted. There must be a chairperson. The rules of quorum must be maintained and the provisions of the Companies Act, 1956 and the articles must be complied with.

4)

The business at the meeting must be validly transacted. The meeting must be conducted in accordance with the regulations governing the meetings.

Resolutions [Section 189] Resolutions mean decisions taken at a meeting. A motion, with or without amendments is put to vote at a meeting. Once the motion is passed, it becomes a resolution. A valid resolution can be passed at a properly convened meeting with the required quorum.

1)

Ordinary Resolution [Section 189(1)]: An ordinary resolution is one which can be passed by a simple majority i.e. if the votes (including the casting vote, if any, of the chairman), at a general meeting cast by members entitled to vote in its favor are more than votes cast against it. Voting may be by way of a show of hands or by a poll provided 21 days notice has been given for the meeting.

2)

Special Resolution [Section 189(2)]: A special resolution is one in regard to which is passed by a 75 % majority only i.e. the number of votes cast in favor of the resolution is at least three times the number of votes cast against it, either by a show of hands or on a poll in person or by proxy. The intention to propose a resolution as a special resolution must be specifically mentioned in the notice of the general meeting. Special resolutions are needed to decide on important matters of the company. Examples where special resolutions are required are:

43

i)

To alter the domicile clause of the memorandum from one State to another or to alter the objects clause of the memorandum.

ii) iii) iv)

To alter / change the name of the company with the approval of the central government To alter the articles of association To change the name of the company by omitting Limited or Private Limited. The Central Government may allow a company with charitable objects to do so by special resolution under section 25 of the Companies Act, 1956.

3)

Resolution Requiring Special Notice [Section 190]: There are certain matters specified in the Companies Act, 1956 which may be discussed at a general meeting only if a special notice is given regarding the proposal to discuss these matters at a meeting. A special notice enables the members to be prepared on the matter to be discussed and gives them time to indicate their views on the resolution. In case special notice of resolution is required by the Companies Act, 1956 or by the articles of a company, the intention to propose such a resolution must be notified to the company at least 14 days before the meeting. The company must within 7 days before the meeting give the notice of the proposed resolution to its members. Notice of the resolution is required to be given in the same way in which notice of a meeting is given, or if that is not practicable, the company may give notice by advertisement in a newspaper having an appropriate circulation or in any other manner allowed by the articles, not less than 7 days before the meeting. The following matters requiring Special Notice before they are discussed before the meeting:
i)

To appoint at an annual general meeting appointing an auditor a person other than a retiring auditor.

ii) iii) iv) v)

To resolve at an annual general meeting that a retiring auditor shall not be reappointed. To remove a director before the expiry of his period of office. To appoint another director in place of removed director. Where the articles of a company provide for the giving of a special notice for a resolution, in respect of any specified matter or matters. Please note that a resolution requiring special notice may be passed either as an ordinary resolution (Simple majority) or as a special resolution (75 % majority).

Circulation of Members Resolution Generally, the Board of Directors prepares the agenda of the meeting to be sent to all members of the meeting. A member, by himself has very little say in deciding the agenda. However, there are provisions in the Companies Act which enable members to introduce motions at a meeting and give

44

prior notice of their intention to do so to all other members of the company. If members having one twentieth of the total voting rights of all members having the right to vote on a resolution or if 100 members having the right to vote and holding paid-up capital of Rs1,00,000 or more, require the company to do so, the company must:
1)

Give to the members entitled to receive notice of the next annual general meeting, notice of any resolution which may be properly moved and is intended to be moved at that meeting; and

2)

Circulate to members entitled to have notice of any general meeting sent to them, any statement of not more than 1,000 words with respect to the matter referred to in any proposed resolution, or any business to be dealt with at that meeting.

The expenses for this purpose must be borne by the requisitionists and must be tendered to the company. The requisition, signed by all the requisitionists, must be deposited at the registered office of the company at least 6 weeks before the meeting in the case of resolution and not less than 2 weeks before the meeting in case of any other requisition together with a reasonable sum to meet the expenses. However, where a copy of the requisition requiring notice of resolution has been deposited at the registered office of the company and an annual general meeting is called for a date six weeks or less after the requisition is deposited, the copy though not deposited within the prescribed time is deemed to have been properly deposited.

The company is required to serve the notice of resolution and/ or the statement to the members as far as possible in the manner and so far as practicable at the same time as the notice of the meeting ; otherwise as soon as practicable thereafter.

However, a company need not circulate a statement if the Court, on the application either of the company or any other aggrieved person, is satisfied that the rights so conferred are being abused to secure needless publicity or for defamatory purposes. Secondly a banking company need not circulate such statement, if in the opinion of its Board of directors, the circulation will injure the interest of the company. It is required to register the resolutions and agreements.

Registration of Resolutions and Agreements A copy of each of the following resolutions along with the explanatory statement in case of a special business and agreements must, within 30 days after the passing or making thereof, be printed or typewritten and duly certified under the signature of an officer of the company and filed with the Registrar of Companies who shall record the same:

45

1) 2)

All special resolutions. All resolutions which have been unanimously agreed to by all the members but which, if not so agreed, would not have been effective unless passed as special resolutions.

3)

All resolutions of the board of directors of a company or agreement executed by a company, relating to the appointment, re-appointment or renewal of the appointment, or variation of the terms of appointment, of a managing director.

4)

All resolutions or agreements which have been agreed to by all members of any class of members but which, if not so agreed, would not have been effective unless passed by a particular majority or in a particular manner and all resolutions or agreements which effectively bind all members of any class of shareholders though not agreed to by all of those members.

5)

All resolutions passed by a company conferring power upon its directors to sell or dispose of the whole or any part of the companys undertaking; or to borrow money beyond the limit of the paidup share capital and free reserves of the company; or to contribute to charities beyond Rs50000 or 5 per cent of the average net profits.

6) 7)

All resolutions approving the appointment of sole selling agents of the company. All copies of the terms and conditions of appointment of a sole selling agent or sole buying or purchasing agent.

8)

Resolutions for voluntary winding up of a company.

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WINDING UP OF A COMPANY
Meaning of Winding Up Winding up is a process to bring about the dissolution or end of the company. All assets of the company are collected and realized. The amount so recovered is used for the payment of all debts and obligations of the company. If there be any surplus amount, it is duly returned to its members. In this way the affairs of the company are wound up and its life as a legal entity is terminated. 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 among the members in accordance with their rights.

Modes of Winding up There are three modes of winding of a company, viz. 1) Winding up by the Court; or 2) Voluntary winding up. This may be:
i) ii)

Members voluntary winding up, or Creditors voluntary winding up.

3) Winding up subject to the supervision of the Court.

Winding up by the Court [Section 433] It is sometimes called compulsory winding up. The following are the circumstances in which a company may be would up by the Court: 1) Special Resolution: Special resolution for winding up by the Court is passed by the members in a general meeting. 2) Default in Statutory Meeting/Report: If a default is made in delivering the statutory report of a public company to the Registrar or in holding the statutory meeting of the company, the Court may make a winding up order. 3) Commencement of Business: A company is wound up on this ground if it does not commence its business within a year from its incorporation or suspends its business for a whole year, unless:
i) ii)

There are reasonable prospects of the company starting business within a reasonable time, and There are good reasons for the delay as, for example, when the company is waiting for the

47

trade depression to pass. 4) Membership below Minimum Limit: Reduction of membership below the legal minimum limit, i.e., below 7 in a public company and 2 in a private company. The company may be ordered to be wound up. 5) Inability to Pay its Debts [Section 433 [e)]: A company may be ordered to be wound up, if it is unable to pay its debts. A company is deemed to be unable to pay its debts:
i)

If a creditor for a sum exceeding Rs. 500 has served on the company at its registered office a demand for payment and the company has for 3 weeks thereafter neglected to pay or otherwise satisfy him. The debt must be presently payable and the company should not have any bona fide dispute about it.

ii)

If execution or other process issued on a decree or order of any Court in favor of a creditor of the company is returned unsatisfied in whole or in part.

iii) If

it is proved to the satisfaction of the Court that the company is unable to pay its debts. In

determining whether a company is unable to pay its debts, the Court must take into account the contingent and prospective liabilities of the company also (Section 434). 6) Just and Equitable Clause: If the Court is of opinion that it is just and equitable that the company should be wound up.

Petition [Section 439] An application to the Court for compulsory winding up of a company shall by a petition. Only the following persons are entitled to apply to the Court: i) The company ii) Any creditor of the companySecured or unsecured. iii) A contributory. iv) Aforesaid parties togetherall or any two. v) Registrar of Companies with the previous sanction for the Central Government. vi) A person so authorized by the Central Government to the basis of a report of Inspectors.

Voluntary Winding Up Voluntary winding up of a company means winding up by the members or creditors of the company without interference by the Court. The object of a voluntary winding up is that the company, i.e., the members as well as the creditors are left free to settle their affairs without going to the Court of law. They may, however, apply to the Court for any directions, if any, when necessary (Section 518).

48

A company may be wound up voluntarily under the following circumstances: 1) Expiry of the duration fixed by the articles of the happening of the event provided by the Articles and the passing of a resolution for winding up voluntarily. 2) Special resolution that the company be wound up voluntarily is passed at a general meeting.

Within 14 days of passing the resolution, the company shall give the public notice of resolution in the official gazette and in local newspapers.

The voluntary winding up will commence from the date of the passing of the resolution. The company shall cease to carry on its business except for the benefits of winding up proceedings.

Consequences of Voluntary Winding Up The consequences of voluntary winding up are as follows:

1)

A voluntary winding up is deemed to commence at the time when the resolution for voluntary winding up is passed (Section 486). This will be so even when after passing a resolution for voluntary winding up, a petition is presented for winding up by the Tribunal (Section 441).The company, from the commencement of winding up, must cease to carry on its business except so far as may be required to secure a beneficial winding up although the corporate state and powers of the company continue until final dissolution (Section 487).

2)

All transfer of shares and alterations in the status of members, made after the commencement, are void unless sanctioned by the liquidator (Section 536).

3)

A resolution to wind up voluntarily operates as notice of discharge to the employees of the company except: (a) when the liquidation is only with a view to reconstruction or (b) when business is continued by the liquidator for the beneficial winding up of the company.

4)

On the appointment of the liquidator, all the powers of the Board of Directors, managing director or manager shall cease except (Section 491): (a) for the purpose of giving notice to the Registrar about the name of the liquidator appointed, or (b) in so far as the company in general meeting or the liquidator may sanction the continuance of their powers.

Types of Voluntary Winding Up Under the Act there is a clear distinction between i) Members voluntary winding up, and ii) Creditors winding up when the company is insolvent.

49

1)

Members Voluntary Winding Up: This is possible only in the case of a solvent company. A winding up in the case of which a declaration has been made by the board and filled with the Registrar is referred to as members voluntary winding up. Procedure of Members Voluntary Winding Up i) Appointment of liquidators: The Company in general meeting shall appoint one or more liquidators for the purpose of winding up the affairs and distributing the assets of the company. ii) Board's Powers to Cease on Appointment of Liquidator: On the appointment of a liquidator, all the powers of the Board of Directors, and manager, if there be any of these, shall cease, except when the company in general meeting or the liquidator sanctions them to continue (Section 491). iii)Power to Fill Vacancy in Office of Liquidator: If a vacancy occurs by death, resignation or otherwise in the office of any liquidator appointed by the company, the company in general meeting may fill the vacancy. iv) Notice of Appointment of Liquidator to be given to Registrar: The Company shall give notice to the Registrar of the appointment of a liquidator or liquidators within 10 days of the appointment (Section 493). v) Duty of Liquidator to Call Creditors Meeting in Case of Insolvency: If the liquidator is at any time of opinion that the company will not be able to pay its debts in full within the period stated in the declaration, he shall summon a meeting of the creditors and lay before it a statement of the assets and liabilities of the company [Sections 495 (1)] vi) Duty to Call General Meeting at the End of the Year: The liquidator shall call a general meeting of the company at the end of every year from the commencement of the winding up. vii) Final meeting and dissolution: As soon as the affairs of the company are fully wound up, the liquidator shall make up an account of the winding up, showing how the winding up has been conducted and how the property of the company has been disposed of. He shall then call a general meeting of the company and lay before it the accounts showing how the winding up has been conducted. This is the final meeting of the company. Creditors Voluntary Winding Up: If the declaration of solvency has not been made by directors, the winding up is referred to as creditors voluntary winding up. In the absence of the

2)

50

solvency declaration, voluntary winding up will naturally be controlled and supervised by the creditors.

Procedure for the Creditors Voluntary Winding Up i) Meeting of Creditors: The Board of Directors will convene two separate meetingsone of members and the other of creditorseither on the same day or one after the other, i.e., on the two consecutive days. Both the notices will be simultaneously sent and advertised duly in the Official Gazette and also in two regional newspapers. ii) Notice of Resolution to be given: Within 10 days of the passing of the resolution for voluntary winding up at the creditors meeting, a copy of the same must be filed with the Registrar. iii) Appointment of Liquidator: In the company meeting and the creditors meeting, resolution for voluntary winding up will be passed and each meeting will appoint a liquidator for winding up the affairs and distributing the assets of the company. iv) Committee of Inspection: The creditors at their meeting may appoint a committee of inspection (not more than 5 persons). On such a committee, the shareholders meeting may also nominate (not more than 5 persons) as their representatives on the committee. The creditors may object to such members nominees and in that case the Court can be approached for the final decision. The committee of inspection shall have frequent meetings. Any member or liquidator can convene the meeting of the committee of inspection as and when necessary. The committee will consider the problems arising out of winding up and give necessary guidance to the liquidator. The quorum for its meeting shall be 1/3rd of the total number of members or two, whichever is higher. Maximum membership of the committee shall be 12. The committee shall have the right to inspect the accounts of the liquidator. v) Liquidators Remuneration: The remuneration of the liquidator will be fixed by the committee of inspection or by the creditors. There may be one or more liquidators. All the powers of the Board will be transferred to the liquidator. The committee of inspection or the creditors meetings shall, of course, control the activities of the liquidator. vi) Board's Powers to Cease on Appointment of Liquidator: On the appointment of a liquidator, all the powers of the Board of Directors shall cease. But the committee of

51

inspection, or if there is no such committee the creditors in general meeting, may sanction the continuance of the Board (Section 505). vii) Duty of Liquidates to Call Meeting of Company and of Creditors at the End of Each Year: The liquidator will call the meetings of members and creditors at the end of the first year and lay before the meeting his report and accounts. viii) Final Meeting and Dissolution: As soon as the affairs of the company are fully wound

up, he shall call the final meetings and submit his final report. Within one week of such meetings, a copy of the account will be filed with the Registrar, within 3 months of the registration, the company shall be deemed to be dissolved. Winding Up Under the Supervision of the Court [Section 522 527] At any time after a company has passed a special resolution for voluntary winding up, the Court may make an order that the voluntary winding up shall continue, but subject to the Court supervision, and on the terms and conditions specified by the Court. Any contributory, creditor or the voluntary liquidator himself may apply for a supervision order and the Court may permit for such a winding up under its supervision.

Winding up under the supervision of the Court will naturally protect the interests of all parties, viz., the members, creditors and the company. The Court will protect the minority against any fraudulent or aggressive majority of members or creditors. In case of need, the Court may also pass an order for the compulsory winding up superseding the voluntary winding up.

CONSEQUENCES OF WINDING UP
1) Consequences as to Shareholders: In the case of Limited Company, the share are partly paid shares, the present as well as past members (called contributories on A and B Lists respectively) shall be called upon to contribute to the extent of unpaid amount on the shares. For instance a share of Rs.100 is paid up to the extent of Rs. 60. The members will be required to pay Rs.40 per share to meet the companys debts and obligations. In the case of a Guarantee Liability Company, the member shall have to pay the guaranteed amount as per Memorandum of Association. 2) Consequences as to Proceedings Against the Company: From the point of view of the company, winding up does not indicate the end or the dissolution. Even during the proceedings of winding

52

up, the company enjoys separate legal existence. However, the management and administration of a company under winding up shall be in charge of the Liquidator. 3) Consequences as to Creditors:
i)

The Companys creditors cannot file suits or continue any pending suits against the company. They are required to lodge their claims and prove their debts.

ii)

A secured creditor need not prove his debts in the Court, unless his securities are worthless. He may rely on his security if it can recover his claim. He may realize his security, i.e., sell off the mortgaged property and prove for the balance. He may decide to surrender his security and act as an unsecured creditor proving his debt in the Court.

4) Consequences as to Servants and Officers: A winding up order by the Court (compulsory winding up) gives the notice to the companys servants regarding the termination of their services. But this will not be applicable to a voluntary winding up. 5) Consequences as to Board of Director: The Board of Directors ceases to function and their powers come to an end. The Liquidator will take over all the powers and duties of the Board. 6) Consequences at to Company Assess: Any disposal of companys property and assets shall be inoperative and void unless such disposals are permitted by the Court or the Liquidator. 7) Consequences as to Costs: All costs and expenses of winging up will be payable out of the companys assets.

Winding up versus Dissolution i) Winding up precedes dissolution. It is the first step and dissolution is the final step in dropping the curtain over a company. ii) Winding up involves the collection and realization of the Companys assets and the distribution of the proceeds among the creditors and if there is a surplus, among the contributories. Dissolution announces that all these formalities are over at the date of the dissolution or end of the Company. iii) The liquidator can represent the company in the process of winding up. On the dissolution he can no longer represent the company as it ceases to exist. iv) Creditors can prove their debts in the winding up but never on the dissolution of the company.

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GUIDELINES
Steps to be taken to incorporate a new company Steps to be taken to get a new company incorporated:

Select, in order of preference, at least one suitable name upto a maximum of six names, indicative of the main objects of the company.

Ensure that the name does not resemble the name of any other already registered company and also does not violate the provisions of emblems and names (Prevention of Improper Use Act, 1950) by availing the services of checking name availability on the portal.

Apply to the concerned RoC to ascertain the availability of name in eForm1 A by logging in to the portal. A fee of Rs. 500/- has to be paid alongside and the digital signature of the applicant proposing the company has to be attached in the form. If proposed name is not available, the user has apply for a fresh name on the same application.

After the name approval the applicant can apply for registration of the new company by filing the required forms (that is Form 1, 18 and 32) within 60 days of name approval

Arrange for the drafting of the memorandum and articles of association by the solicitors, vetting of the same by RoC and printing of the same.

Arrange for stamping of the memorandum and aticles with the appropriate stamp duty. Get the Memorandum and the Articles signed by at least two subscribers in his/her own hand, his/her father's name, occupation, address and the number of shares subscribed for and witnessed by at least one person.

Ensure that the Memorandum and Article is dated on a date after the date of stamping. Login to the portal and fill the following forms and attach the mandatory documents listed in the eForm Declaration of compliance - Form-1

Notice

of

situation

of

registered

office

of

the

company

Form-18.

Particulars of the Director's, Manager or Secretary - Form-32. Submit the following eForms after attaching the digital signature pay the requisite filing and registration fees and send the physical copy of Memorandum and Article of Association to the RoC

After processing of the Form is complete and Corporate Identity is generated obtain Certificate of Incorporation from RoC.

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Additional

steps

to

be

taken

for

formation

of

Public

Limited

Company:

To obtain Commencement of Business Certificate after incorporation of the company the public company has to make following compliance

File a declaration in eForm 20 and attach the statement in lieu of the prospectus(schedule III) OR File a declaration in eForm 19 and attach the prospectus (Schedule II) to it. Obtain the Certificate of Commencement of Business. steps to be taken for registration of a Part IX Company:

Additional

The Part IX Company is required to file eForm 37 and eForm 39 apart from filing eForm 1, 18 and 32. The company is required to file eForm 1 first and then the company can file all the other eForms (18, 32, 37 and 39) simultaneously or separately. Filing statutory applications under Section 211 Applications seeking exemption under Section 211 of the Companies Act should be accompanied by :

Specific Board resolution in support of the proposal indicating specific paras of Part II of Schedule VI and the financial year in respect of which exemption is sought.

Copies of approvals under Section 211 obtained, if any, during the last three financial years.

The following The following information should invariably be furnished with the application in the fields forming part of the eForm

The financial year for which exemption is sought. Precise reasons/justification for seeking exemption. If the company had been complying with the requirements in the past, reasons as to how the company has been complying in the past.

It should be indicated as to whether the company is maintaining proper purchase/ sales/ stock registers so as to furnish true and fair view of its state of affairs in compliance of Sections 209/211 read with Schedule VI to the Act.

Details of total turnover and exports made by the company during the financial year in respect of which exemption is sought.

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The companies may have to furnish any other additional information as may be asked for by the Department. Filing statutory applications under Section 212 Applications seeking exemption under Section 212 of the Companies Act should be accompanied by :

Specific Board resolution in support of the proposal mentioning inter-alia the names of subsidiaries and their financial year in reference.

Copies of approvals under Section 212 obtained, if any, during the last three financial years.

The following information should invariably be furnished with the application in the fields forming part of the eForm:

The financial year for which exemption is sought. This year should also be the year mentioned in the accompanying board resolution.

Precise reasons/justification for seeking exemption. Names of subsidiaries in respect of which exemption is sought. Dates on which the companies became subsidiaries of the applicant company. The financial years of the holding and subsidiary companies under reference.

The companies may have to furnish any other additional information as may be asked for by the Department. Submitting application under Section 295 PLEASE ENSURE WHILE SUBMITTING THE APPLICATION IN RESPECT OF

LOANS/CORPORATE GUARANTEE OR FURNISHING SECURITY UNDER SECTION 295 OF THE COMPANIES ACT, 1956 THAT THE FOLLOWING INFORMATION/DOCUMENTS HAVE BEEN FURNISHED: 1. The rate of interest proposed on the loan should not be less than four percent above the prevailing bank rate being the standard rate made public under section 49 of the R.B.I Act, 1934 2. The quantum of loan along with other loans taken, if any, should not exceed 25 times of gross salary drawn in the preceding six months prior to making of the application.

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3. No guarantee commission shall be allowed to be paid to anyone in respect of the proposals.

The application should be accompanied by the following documents: 4. The proposal should be approved at the meeting of the Board of Directors. A certified copy of resolution passed should be submitted indicating the proposal of the company, terms and conditions, interest of the directors/relatives if any, clearly specifying (a) the rate of interest chargeable, (b) the schedule and terms of repayment,(c) the loan is not being made out of borrowed funds of the company (d) any other major or important condition having bearing on the loan/financial position of the company. 5. Wherever required, members specific approval be obtained for the proposal The resolution along with explanatory statement should contain all the relevant details as mentioned in point 6 above. A certified copy of the resolution along with explanatory statement so passed should also be enclosed. 6. The proposal should be accompanied with the declaration that the company has not defaulted in making repayments to the investors the amounts as and when they become due to them. 7. Shareholding pattern of the companies (applicant & borrower) 8. List of Directors of the Board of both the companies (applicant & borrower companies wherever applicable) and disclosing inter-se interest, if any. 9. Copy of draft loan agreement. 10. If the loan is backed by any guarantees, then the name and particulars of the guarantors with their consent. 11. Company should give a declaration to the effect that funds proposed to be loaned are not required for its working capital requirements at least for a year. 12. A certified copy of the loan scheme for the employees of the company, if any. 13. Justification for quantum of loan/guarantee or furnishing security by the company. 14. In respect of all proposals, a certificate from the statutory auditors or a company secretary in whole time practice to the following effect be enclosed stating therein that: a. The proposal is in conformity within the provisions of Section 372A of the Companies Act, 1956.

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b. the company has not defaulted in:1. the repayment of any fixed deposits accepted by the company under Section 58 A of the Companies Act, 1956 or part thereof or interest thereon 2. Payment of dividend 3. Redemption/repayment of debenture and timely payment of interest thereon 4. Redemption of preference shares and c. The Company is regular in filing all forms / returns as required to be filed under the Companies Act 1956. d. The applicant company is not in any default on account of undisputed dues of the Central Govt. e.g. Income Tax, Central Excise etc. For this purpose, the status of disputed and undisputed dues shall be made available so as to enable the Ministry to form a view in the matter vis--vis the coverage thereof available and assessed against the Net Worth/Profits of the applicant company.

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CONCLUSION
In India, the Companies Act, 1956, is the most important piece of legislation that empowers the Central Government to regulate the formation, financing, functioning and winding up of companies. The Act contains the mechanism regarding organizational, financial, and managerial, all the relevant aspects of a company. 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. If an inspection discloses a prima facie case of fraud or cheating, action is initiated under provisions of the Companies Act or the same is referred to the Central Bureau of Investigation. The Companies Act, 1956 has been amended from time to time in response to the changing business environment.

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BIBLIOGRAPHY
www.mca.gov.in/Ministry/companies_act www.mca.gov.in www.companiesact.in www.bharatlaws.com/../companies-act-1956 www.mca.gov.in/Ministry

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