COMPANY LAW

PAPER CODE: K- 401

PART I. FORMATION OF COMPANIES:

QUEST: - DISCUSS THE BRIEF HISTORY OF COMPANY LAW IN INDIA

ANS:-

1) Joint stock companies Act of 1850: Companies legislation in India owes its origin to the
English Company law. The companies acts passed from time to time in India have been
following the English companies acts with certain modifications to suit Indian conditions.
The first legislative enactment for "Registration of Joint stock companies" was passed in the
year 1850.
2) Joint Stock Companies Act of 1857: The Joint stock companies‘ act of 1850 was replaced
by the Joint stock companies‘ act of 1857. This act of 1857 conferred, for the first time in
India the benefit of limited liability on the members of companies. But this act did not
extend the benefit of limited liability to the members of banking companies and insurance
companies.
3) Joint Stock Companies Act of 1860: The Joint stock companies‘ act of 1857 was replaced
by the Joint stock companies‘ act of 1866. The Joint stock companies Act of 1860 extended
the benefit of limited liability to the members of Banking companies and insurance
companies.
4) The companies Act of 1866: The Joint stock companies Act of 1860 was replaced by the
companies Act of 1866. The companies Act of 1866 was the first comprehensive companies
Act passed in India. The companies Act of 1866 was based on the English companies Act of
1862. The companies Act of 1866 was intended to consolidate and amend the law relating to
the incorporation, regulation and winding up of trading companies and other associations.
5) Companies Act of 1913: The Indian Companies Act, 1913 did not take into account the
peculiar features of the Indian trade and commerce and some peculiar institution such as
"managing agency.‖ The Act was, therefore, found to be highly unsatisfactory in the course
of its operation. As such, this Act was subjected to a large number of amendments from time
to time.

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6) Companies Act of 1956: After the end of World War II, the need for a further revision of
the company law was felt. Many changes had taken place in the organization and
management of Joint stock companies. The government of India, therefore, appointed on
25th October, 1950. A committee of 12 members representing various fields under the
chairmanship of Shri. H. C. Bhabha for a comprehensive review of the Indian companies
Act 1913. The committee submitted its report on all aspects of company law in April 1952.
Based on the recommendation of the Bhabha Committee companies Act of 1956 was
passed. The companies Act of 1956 came into force from 1st April, 1956. This act contains
658 sections and 14 schedules.
7) Companies Act of 2013: The Companies Bill, 2012 was assented to by the President of
India on 29.08.2013 and notified in the Gazette of India on 30.08.2013. It finally became the
Companies Act, 2013.
HIGHLIGHTS OF THE COMPANIES ACT, 2013
Passed in Lok sabha December 18, 2012
Passed in Rajya Sabha August 08, 2013
President‘s assent August 29, 2013
Total number of sections 470
Total number of chapters 29
Total number of schedules 7
Act came into force 12 September 2013
THE NEW CONCEPTS INTRODUCED

The Companies Act 2013 has introduced new concepts supporting enhanced disclosure,
accountability, better board governance, better facilitation of business and so on. It includes the
following aspects:-

• Associate company

• One person company

• Small company

• Dormant company

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• Independent director

• Women director etc.

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QUEST :-DEFINE ‗COMPANY‘. WHAT ARE ITS ESSENTIAL CHARACTERISTICS?

ANS: - Meaning and Nature of Company

Meaning

Literally the word company means a group of persons associated for any common object such as
business, charity, sports, and research, etc. The word company ordinarily means an association of
a number of individuals formed for some common object. When such an association is registered
under the Companies Act, it becomes an artificial person with perpetual succession and a
common seal.

A company in a broad sense is a group of persons who have come together or who have
contributed money for some common purpose and have incorporated themselves into distinct
legal entity. Company is the amalgamation of two distinct words- ―com‖ and ―pain‖, the former
meaning with/together and the later meaning ―bread‖

According to Sec. 2 of Coimapanies Act 2013:

"Company" means a company incorporated under this Act or under any previous
company law.

The definition given in the companies Act is not exhaustive and does not reveal the true
characteristics of a company.

Lord Justice Lindley has given a comprehensive definition of a company. According to him, a
company is, “An association of many person who contribute money or money’s worth to a
common stock and employed for a common purpose. The common stock so contributed is
denoted in money and is capital of the company. The persons who contribute it or to whom it
belongs are members. The proportion of capital to which each member is entitled is his share.
Shares are always transferable although the right to transfer them is often more or less
restricted.”

Characteristics of a Company (Corporate Personality)

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A company as an entity has several distinct features, which together make it a unique
organization. The following are the defining characteristics of a company: -

1. Separate Legal Entity

On incorporation under law, a company becomes a separate legal entity as compared to its
members. The company is different and distinct from its members in law. It has its own name
and its own seal, its assets and liabilities are separate and distinct from those of its members. It is
capable of owning property, incurring debt, and borrowing money, having a bank account,
employing people, entering into contracts and suing and being sued separately. The importance
of the separate entity of the company was however firmly established in the following case.

Salomon v. Salomon & co. Ltd.(1897) A.C. 22. S sold his boots business to a newly formed
company for £ 30,000. His wife, one daughter and four sons took up one share of £ 1 each. S
took 23,000 shares of £1 each and £ 10,000 debentures in the company. The debentures gave S a
charge over the assets of the company as the consideration for the transfer of the business.
Subsequently when the company was wound up, its assets were found to the worth £ 6,000 and
its liabilities amounted to £ 17,000 of which £ 10,000 were due to S (secured by debentures) and
£ 7,000 due to unsecured creditors, the unsecured creditors claimed that S and the company were
one and the same person and that the company was a mere agent for S and was hence they
should be paid in priority to S.

HELD The company was, in the eyes of the law, a separate person independent from S and was
not his agent. S, though virtually the holder of all the shares in the company, was also a secured
creditor and was entitled to repayment in priority to the unsecured creditors.

2. Limited Liability

The liability of the members of the company is limited to contribution to the assets of the
company up to the face value of shares held by him. A member is liable to pay only the uncalled
money due on shares held by him when called upon to pay and nothing more, even if liabilities
of the company far exceeds its assets. On the other hand, partners of a partnership firm have
unlimited liability i.e. if the assets of the firm are not adequate to pay the liabilities of the firm,
the creditors can force the partners to make good the deficit from their personal assets. This

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cannot be done in case of a company once the members have paid all their dues towards the
shares held by them in the company.

For example, if the face value of the share in a company is Rs. 10 and a member has already paid
Rs. 5 per share, he can be called upon to pay not more than Rs. 5 per share during the lifetime of
the company.

3. Perpetual Succession

A company does not die or cease to exist unless it is specifically wound up or the task for which
it was formed has been completed. Membership of a company may keep on changing from time
to time but that does not affect life of the company. Death or insolvency of member does not
affect the existence of the company.

4. Separate Property

A company is a distinct legal entity. The company‘s property is its own. A member cannot claim
to be owner of the company‘s property during the existence of the company.

5. Transferability of Shares

Shares in a company are freely transferable, subject to certain conditions, such that no
shareholder is permanently or necessarily wedded to a company. When a member transfers his
shares to another person, the transferee steps into the shoes of the transferor and acquires all the
rights of the transferor in respect of those shares.

6. Common Seal

A company is a artificial person and does not have a physical presence. Therefore, it acts through
its Board of Directors for carrying out its activities and entering into various agreements. Such
contracts must be under the seal of the company. The common seal is the official signature of the
company. The name of the company must be engraved on the common seal. Any document not
bearing the seal of the company may not be accepted as authentic and may not have any legal
force.

7. Capacity to sue and being sued

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A company can sue or be sued in its own name as distinct from its members.

Disadvantages of incorporation

1) Lifting of corporate veil- though for all purposes of law a company is regarded as a
separate entity it is sometimes necessary to look at the persons behind the corporate veil.

The separate personality of a company is a statutory privilege and it must be used for legitimate
business purposes only. Where a fraudulent and dishonest use is made of the legal entity, the
individuals concerned will not be allowed to take shelter behind the corporate personality. The
Court will break through the corporate shell and apply the principle/doctrine of what is called as
―LIFTING OF OR PIERCING THE CORPORATE VEIL‖.

a) Determination of character- The House of Lords in Daimler Co Ltd. v.

Continental Tyre and Rubber Co., held that a company though registered in England would
assume an enemy character if the persons in de facto control of the company are residents of an
enemy country.

b) For benefit of revenue- The separate existence of a company may be disregarded when
the only purpose for which it appears to have been formed is the evasion of taxes. –
Sir DinshawManeckjee, Re / Commissioner of Income Tax v. Meenakshi Mills Ltd.

c) Fraud or improper conduct- In Gilford Motor Co v. Horne, a company was restrained

from acting when its principal shareholder was bound by a restraint covenant and had
incorporated a company only to escape the restraint.

d) Agency or Trust or Government company- The separate existence of a company may be

ignored when it is being used as an agent or trustee. In State of UP v. Renusagar Power Co, it
was held that a power generating unit created by a company for its exclusive supply was not
regarded as a separate entity for the purpose of excise.

e) Under statutory provisions- The Act sometimes imposes personal liability on persons
behind the veil in some instances like, where business is carried on beyond six months after the
knowledge that the membership of company has gone below statutory minimum(sec 45), when

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contract is made by misdescribing the name of the company(sec 147), when business is carried
on only to defraud creditors(sec 542).

2) Formality and expense- Incorporation is a very expensive affair. It requires a number of

formalities to be complied with both as to the formation and administration of affairs.

3) Company not a citizen- In State Trading Corporation of India v. CTO, the SC held that a
company though a legal person is not a citizen neither under the provisions of the Constitution
nor under the Citizenship Act

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QUEST: - WHAT ARE THE VARIOUS KINDS OF COMPANIES. EXPLAIN IN BRIEF?

ANS: - Companies may be classified into different kinds or types from different points of view:

1. Classification of companies from the point of view of incorporation or registration:

From the point of view of their incorporation, companies can be classified into three types.
They are.

a) Chartered companies: If a Company is incorporated under a special charter granted by the

monarch it is called a chartered company and is regulated by that charter. Chartered
companies were common in the 17th and 18th centuries. For e.g. British East India
companies, Bank of England, Chartered Bank of Australia etc. is examples of chartered
companies. This form of organization does not exist in India, as there is no monarchy.

b) Statutory Companies: A statutory Company is a company which is incorporated under a

special or separate act of the legislature (i.e.., parliament). A statutory company requires
special powers and privileges which it does not get under the companies Act. So, it is
registered under a special act of the legislature. The powers and activities of statutory
companies are regulated by the special act under which it is established. This method of
incorporation is adopted for companies of national importance and public utility companies,
such as railway companies, electricity supply companies, etc. The RBI, SBI, LIC, UTI, etc
are examples of statutory companies.

c) Registered Companies: A company is brought into existence by registration with the

registrar of companies under the companies Act of 1956, is called a registered company. The
activities of these companies are governed by the companies Act. These constitute the most
important Joint stock companies.

2. Classification of Registered Companies on the basis of the liability of members: From

the point of view of the liability of the members, registered companies may be classified into
three categories. They are:

a) Companies Limited by Shares: Companies limited by share are companies in which the
liability of a member is limited to the nominal or face value of the shares held by him. In
short, these are the companies in which the liability of a member is limited only to the

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amount unpaid on the shares held by him. These companies are mostly trading companies.
Most of the companies registered under the companies Act are of this type.

b) Companies Limited by Guarantee: Companies limited by guarantee are companies in

which the liability of each member is limited to a fixed amount which he has guaranteed ie.,
agreed to contribute to the assets of the company to meet the liabilities of the company in the
event of its winding up. The amount guaranteed by each member is mentioned in the
Memorandum of Association or Articles of Association of the Company. The members are
required to pay the amount guaranteed by them, not during the life of the company but only
when the company is wound up and the assets of the company are not sufficient to meet the
liabilities of the company. These are mostly non-trading companies formed for the purpose of
promoting art, culture, charity, science and education, etc.

c) Unlimited Companies: Unlimited companies are companies in which the liability of

members is unlimited i.e., members are liable for the debts of the company to an unlimited
extent in the event of its winding up. Each member is liable to contribute from his private
assets in proportion to his capital, in the company towards the amount required for the
payment of the entire or full liabilities of the company. If any of the members is unable to
contribute anything from his private assets, then, that additional deficiency is to be shared
among the remaining members in proportion to their respective capital in the company.

3. Classification of companies on the basis of ownership: On the basis of ownership,

companies may be classified into two kinds. They are:

a) Government companies: A Company in which not less than 51% of the share capital is held
by the central government and or by any state government or governments is called a
government companies. It may be a public company or a private company. Some of the
prominent government companies are: Hindustan Machine Tools, Bharat Electronic Limited,
Indian Telephone Industries and Hindustan Aeronautics limited.

A Government company may be permitted by the central government to drop the words
―Private Limited" or the word "Limited" from its name. The Central Government can by
notification in the official gazette, restrict or modify the application of certain provision of
the companies Act in regard to government companies.

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b) Non- Government companies: A non-government company is a company which is owned

and managed by private investors.

4. Classifications of companies on the basis of nationality: On the basis of nationality,

companies may be classified into two kinds, They are.

a) Domestic companies: A Domestic company is a company which is inccrporated in India

.Today most of the Joint stock companies in India are domestic companies.

b) Foreign Company: A foreign Company is a Company which is incorporated in a foreign

country, but which has established a place of business in India. Although; foreign Companies
are not registered or incorporated in India, some of the provisions of the companies Act, are
applicable to them. The companies (Amendment) Act, 1974, has made several sections of the
Act applicable to foreign companies in order to bring into the ambit of the provisions
applicable to Indian companies.

5. Classification of companies on the basis of control: On the basis of control companies may
be classified into

Holding Companies and Subsidiary Companies: As per section 4 of the companies Act of
1956," a holding Company is a company which is controlling a subsidiary company". In other
words, a holding company is a company

a) Which holds more than 70% of the nominal value of The equity share capital of another
company or

b) Which controls the composition of the board of directors of another Company

c) Which controls more than 50% of the total voting power of another Company

d) Where a Company is a subsidiary of another Company which is a subsidiary of a holding

Company, that is, Company C is a subsidiary of Company B, whereas Company B is a
subsidiary of holding Company A.

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As per section 4 of the companies Act of 1956, ―a subsidiary Company is a Company which is
controlled by a holding Company". In other words, a Company becomes the subsidiary of
another Company if:

a) The other Company holds more than 50% of the nominal value of its equity share capital or

b) The other Company controls the composition of its board of directors or

c) The other Company controls more than 50% of its total voting powers

d) It is a subsidiary of another Company which is subsidiary of the controlling company

Eg. When Company A has a control over company B, company A is known as a holding
company and company B which is so controlled is known as a subsidiary company.

6. Classification of companies on the basis of number of members: Registered companies

with share capital may be divided into two classes from the point of view of the the number of
members

i) Private Companies: Section 3(1) (iii) of the companies Act of 1956 defines a private
company as a company which by its articles of association,

a) Restricts the right of its members to transfer shares, if any,

b) Limits the number of its member to fifty, excluding those members who are its present or
past employees

c) Prohibits any invitation to the public to subscribe to its shares or debentures

ii) Public Companies: Section 3 (I) (iv) of the companies Act of 1956 states that a "Public
company is a company which is not a private company". In other words, a public company is a
company

a) Which has at least 7 members

b) Which has no maximum limit to the number of members,

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c) Which can invite the public to subscribe to its shares or debenture, and which generally
does not restrict the right of its members to transfer shares.

7. Other Kinds of Companies:

a) One Man Companies / Family Companies: One man company refers to a company in
which one man holds practically the hole of or the substantial no. of shares of the
companies, and has controlling powers over the company and some dummy members
who are mostly his relations or friends, hold one or two shares each. The dummy
members are included only to comply with the statutory requirements of the minimum
no. of members.

b) Licensed Companies: Association formed not for profit, but for promoting non trading
purposes, such as art, science, education, sports, religion, charity, etc., can obtain a
licence from the central layout and get themselves registered as companies with limited
liability under Sec. 25 (U/S 25) of the companies act. They are called companies not for
profit or licence companies.

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QUEST:-DESCRIBE BRIEFLY THE PROCEDURE FOR EFFECTING THE

CONVERSION OF A PRIVATE COMPANY INTO A PUBLIC COMPANY. HOW
DOES A PRIVATE COMPANY DIFFERENT FROM PUBLIC COMPANY.
ANS: -
Conversion of Private. Company into Public Company

 By Default Where the maximum no. of members exceeds fifty, it allow to transfer shares
freely, incites subscription from public for its shares or debenture & accepts deposits from
the public the company law Board may relieve the company from being treated as a Pub. Co.
on such terms & conditions as it thinks just & equitable, if it is of opinion that the default was
due to accidental or some other sufficient cause.

 By Deliberate Conversion A private company may, at any time, pass a special resolution
deleting from its articles the four compulsory restrictions as to membership, transfer of
shares, public subscription, & acceptance of deposits from public and then from the date of
alteration it becomes a public company. Within 30 days of such Alteration, a copy of special
resolution, a copy of altered articles, together with a copy of prospectus must be filed with
the registrar. After becoming a Public Co. the company will have to increase the number of
its members to at least seven and to its directors at least 3.

Conversion of Public Company into Private Company

A public company may be converted into a private company without resorting to winding up of
the company for such purpose, a special resolution will be passed to alter the articles so as to
incorporate the four restrictions imposed upon a Private Company, and a copy of the same shall
be filed with the registrar of companies within 30 days of passing the resolution and reduce the
no. of members up to 2. The approval of central Govt. must be necessary. A Pub. Co. works as
a Pvt. Co. from the date of the order of approval.

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Difference between Private and publice company

Basis for Public Comapny Private Company
Comparision

Meaning A public company is a A private company is

company which is a company which is
owned and traded owned and traded
publicly privately.

Minimum members 7 2
Maximum members Unlimited 50
Minimum Directors 3 2
Minimum paid up 500000 100000
capital
Suffix Limited Private Limited

Statutory Meeting Compulsory Optional

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QUEST: - DISCUSS THE DIFFERENCE BETWEEN COMPANY AND PARTNERSHIP.

ANS.

Basis Company Partnership

1. Regulating Act. It is regulated under companies It is governed by the Indian

Act. 2013 partnership Act. 1932.

2. Legal status A company is a legal person in A firm is not a legal person in the eyes
the eye of law. of law.

3. Minimum Minimum number is 2 in private The minimum number of partners in a

Numbers company whereas in public firm is 2.
company it is 7.
4. Maximum The max no. of members in a Max. No. of partners in a firm
Number put company is 50 & there is no carrying banking business can be 10
limit in public company. and in any other business is 20.

Winding up of an insolvent The insolvency of a parternership firm

5. Insolvency company does not make the means insolvency of all the members.
members insolvent.
If company owes a debt from If a partner who owned money by his
6. Debts any of its members he can claim firm cannot prove against the firm‘s
payment out of its assets. assets in competition with its other
creditors.
7. Dissolution Companies dissolved according Partnership may be dissolved at any
to the provisions of the time by any partner‘s death,
companies Act. 1956. insolvency or retirement

8. Liability The liability of shareholder may A partner‘s liability is always

be limited either by shares or a unlimited
guarantee.

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9.Perpetual Succession A company has perpetual The death or insolvency of a

10. Audit of Accounts
succession, i.e. the death or partner dissolves the firm,
insolvency of a shareholder or unless otherwise provided.
all of them does not affect the
life of the company.
A company is required to have The accounts of a firm are
its accounts audited annually audited at the discretion of the
by a chartered accountant. partners.

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QUEST: DISTINCTION BETWEEN COMPANY AND HINDU UNDIVIDED FAMILY

BUSINESS

ANS: 1. A company consists of heterogeneous (varied or diverse) members, whereas a

Hindu Undivided Family Business consists of homogenous (unvarying) members since it
consists of members of the joint family itself.

2. In a Hindu Undivided Family business the Karta (manager) has the sole authority to
contract debts for the purpose of the business, other coparceners cannot do so. There is no such
system in a company.

3. A person becomes a member of a Hindu Undivided Family business by virtue of birth.

There is no provision to that effect in the company.

4. No registration is compulsory for carrying on business for gain by a Hindu Undivided

Family even if the number of members exceeds twenty [Shyamlal Roy v. Madhusudan Roy,
AIR 1959 Cal. 380 (385)]. Registration of a company is compulsory.

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QUEST: - WHAT FORMALITIES ARE REQUIRED FOR THE FORMATION OF A

COMPANY?

ANS:- It involves many steps which may be as followed;

a) Promotion
b) Incorporation
c) Floatation or raising of capital ; and
d) In case of public ltd. Company securing a certificate of commencement.

Promotions: It is the preliminary stage wherein necessary steps are taken for the registration of
the company. It is the process of organizing and planning the finances of a business enterprise
under the corporate form. The people who undertake the task of promotion are called promoters.

Meaning of Promoter

Promoter

Section 2 (69) of the Companies Act, 2013 defines the term ‗promoter‘ as under:-

―Promoter‖ means a person— (a) who has been named as such in a prospectus or is identified by
the company in the annual return referred to in section 92; or

(b) who has control over the affairs of the company, directly or indirectly whether as a
shareholder, director or otherwise; or

(c) in accordance with whose advice, directions or instructions the Board of Directors of the
company is accustomed to act.

Provided that sub-clause (c) shall not apply to a person who is acting merely in a professional
capacity.

By virtue of above definition, persons in accordance with whose advice, directions or

instructions the Board of Directors of the company is accustomed to act are also treated as
promoters. However, if a person is merely acting in a professional capacity i.e. giving only
professional advice to the Board of directors, he shall not be treated as a promoter.

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Further, according to SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009,
―promoter‖ includes: (i) the person or persons who are in control of the issuer;

(ii) the person or persons who are instrumental in the formulation of a plan or programme
pursuant to which specified securities are offered to public;

(iii) the person or persons named in the offer document as promoters.

A person who acts in ministerial capacity is not a promoter. A solicitor, who prepares on behalf
of the promoters the primary documents of the proposed company, an accountant or a valuer who
helps the promotion in his professional capacity, is not a promoter. But a person who helps the
company in getting a purchaser of its patent, or its shares, or in getting personnel for the
company is a promoter.

Duty and liability: Fiduciary relation

The Companies Act, 2013, contains some provisions regarding the duties of promoters. The
fiduciary duties of a promoter includes:

(a) As per section 102(4), where as a result of the non-disclosure or insufficient disclosure in
any explanatory statement annexed to the notice of a general meeting , by a promoter, director,
manager, if any, or other key managerial personnel, any benefit accrues to such promoter,
director, manager or other key managerial personnel or their relatives, either directly or
indirectly, the promoter, director, manager or other key managerial personnel, as the case may
be, shall hold such benefit in trust for the company, and shall, without prejudice to any other
action being taken against him under this Act or under any other law for the time being in force,
be liable to compensate the company to the extent of the benefit received by him.

In the case of default in complying with above provisions, every promoter, director, manager or
other key managerial personnel who is in default shall be punishable with fine which may extend
to 50,000 rupees or five times the amount of benefit accruing to the promoter, director, manager
or other key managerial personnel or any of his relatives, whichever is more.

(b) A promoter is not allowed to derive a profit from the sale of his own property to the company
unless all material facts are disclosed. If a promoter contracts to sell his own property to the

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company without making a full disclosure, the company may either repudiate the sale or affirm
the contract and recover the profit made out of it by the promoter. Either way the dishonest
promoter is deprived of his advantage.

(c) As per section 13(8), a company, which has raised money from public through prospectus
and still has any unutilised amount out of the money so raised, shall not change its objects for
which it raised the money through prospectus unless a special resolution is passed by the
company and the dissenting shareholders shall be given an opportunity to exit by the promoters
and shareholders having control in accordance with regulations to be specified by the Securities
and Exchange Board.

(d) As per section 27(2), the dissenting shareholders being those shareholders who have not
agreed to the proposal to vary the terms of contracts or objects referred to in the prospectus, shall
be given an exit offer by promoters or controlling shareholders at such exit price, and in such
manner and conditions as may be specified by the Securities and Exchange Board by making
regulations in this behalf.

(e) As per section 167(3), where all the directors of a company vacate their offices under any of
the disqualifications specified in sub-section (1), the promoter or, in his absence, the Central
Government shall appoint the required number of directors who shall hold office till the directors
are appointed by the company in the general meeting.

Function of Promoters

I. Discovery of Idea: Promotion starts with the discovery of idea to set up a business or to
expand the existing one. They also analyses the amount of capital required the degree of risk
involved in it.

II. Detailed Investigation: He starts doing details investigation regarding cost, profitability
fraud process, demand of the product.

III. Assembling of Resources: The promoters starts collecting all the resources necessary to
form company. Promoters makes contract for purchase of material land machinery etc.

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IV. Preparing Preliminary Documents: After assembling the physical &financial resources
he prepares the necessary documents which are compulsory for the formation of a Co.

V. Entering into Preliminary Contracts: Promoters sign a contract with different parties
before incorporation by the Co. after corporation.

VI. Naming a Company : He has to select a name of the Company keeping in mind that the
name should not be identical to the name of any other Company.

VII. Appointment of Bankers, Brokers, Solicitors & Underwriters : He appoints them to

ensure the availability of Capital by sale of Co.‘s securities.

REMEDIES AVAILABLE TO THE COMPANY AGAINST THE PROMOTER

If a promoter makes a secret profit or does not disclose it, the company has got a remedy against
him. This varies according to the circumstances, which can be divided into two possible
situations.

1. Where the promoter was not in a fiduciary position when he acquired the property which he is
selling to the company, but only when he sold it to the company. If a person acquires property or
has had it before he takes any active steps in the promotion of a company and sells it to the
company at a profit, he is entitled to retain that profit. Here the promoter, as in Salomon's case,
has had the property for a period of time. He can hardly be said to be in a fiduciary relation to the
company. As long as he makes a full disclosure of the fact that the property is his and he is the
real vendor, he may sell it to the company at a profit. If, however, he fails to disclose this fact the
company is entitled either to rescind the contract or claim damages for breach of duty of
disclosure.

2. Where the promoter was in fiduciary position when he acquired the property and when he sold
it to the company. This may happen in any of the following circumstances:

(a) Where the promoter bought property with a view to sell it to the company which he
intends to promote, he occupies fiduciary position vis-a-vis the company. He must disclose all
the facts to the company.

(b) Where the promoter resells property to the company at an increased price, the property
which he purchased after he has commenced to act in the capacity of a promoter, he cannot retain
the profit which he has not disclosed to the company.

(c) Where a person is a promoter for acquiring the property for the company, the rules of
agency will apply, so that any profit he makes will belong to the company.

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 COMPANY LAW

3. Where, the promoter bought the property with a view to sell it to the company he promotes,
the company may either— (a) rescind the contract and if he has made a profit on some ancillary
transaction that may also be recovered; or

(b) retain the property, paying no more for it than what the promoter has paid, depriving
him of his profit; or

(c) where the above remedies would be inappropriate, such as when the property has been
altered so as to render recession impossible and the promoter has already received his inflated
price, the company may sue him for misfeasance (breach of duty to disclose). The measure of
damages will be the difference between the market value of the property and the contract price.

Pre-Incorporation Contract

The promoter is obligated to bring the company in the legal existence and to ensure its successful
running, and in order to accomplish his obligation he may enter into some contract on behalf of
prospective company. These types of contract are called ‗Pre-incorporation Contract'.

Nature of Pre-incorporation contract is slightly different to ordinary contract. Nature of such

contract is bilateral, be it has the features of tripartite contract. In this type of contract, the
promoter furnishes the contract with interested person; and it would be bilateral contract between
them. But the remarkable part of this contract is that, this contract helps the perspective
company, who is not a party to the contract.

One might question that ‗why is company not liable, even if it a beneficiary to contact' or one
might also question that ‗doesn't promoter work under Principal-Agent relationship'.

Answer to those entire questions would be simple. The company does not in legal existence at
time of pre-incorporation contract. If someone is not in legal existence, then he cannot be a party
to contract, and ‗Privity to Contract' doctrine excludes company from the liability. In Kelner v
Baxter, Phonogram Limited v Lane this position was confirmed.

In pure common law sense, Pre-incorporation contract does not bind the company. But there are
certain exceptions to this contract, and these exceptions were developed in USA, India and later
in England.

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 COMPANY LAW

Liability of Promoter Concerning Pre-Incorporation Contract

Before the passing of the Specific Relief Act 1963, the position in India, regarding pre-
incorporation contract, was similar to the English Common Law. This was based on the general
rule of contract where two consenting parties are bound to contract and third party is not
connected with the enforcement and liability under the terms of contract. And because company
does not come in existence before its incorporation, so the promoter signs contract on behalf of
company with third party, and that is why the promoter was solely liable for the pre-
incorporation contract under the established ruling of Kelner v Baxter.

Effects of pre-incorporation contracts

 Company cannot be sued on pre-incorporation contracts A company, when it comes

into existence, cannot be sued on pre-incorporation contracts. In English and Colonial Produce
Co, Re, a solicitor on the request of promoters prepared a company‘s documents and spent time
and money in getting it registered. But the company was not held to be bound to pay for those
services and expenses.
 Company cannot sue on pre-incorporation contracts- A company cannot by adoption
or ratification obtain the benefit of a contract made on its behalf before the company came into
existence. In Natal Land and Colonization Co v. Pauline Colliery Syndicate, the promoters of
a proposed company obtained an agreement from a landlord that he would grant lease of coal
mining rights to the company. The company could not, after incorporation, enforce this contract.
 Agents may incur personal liability- The agents who contract for a proposed company
may sometimes incur personal liability. In Kelner v. Baxter, the promoters of a projected hotel
company purchased wine from the plaintiff on behalf of the company. The company came into
being but, before paying the price went into liquidation. They were held personally liable to the
plaintiff .

Commencement of Business

A private Co. can start business from the date of incorporation. But a public Co. having shares
Capitals has to obtain a certificate of commencement before it can start business.

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 COMPANY LAW

If Co. has a shares Capitals and had issued a prospectus inviting the public to subscribe for its
shares or debentures, it cannot commence business until

 Shares payable in cash have been allotted to the extent of the minimum subscription.
 Every director has paid in cash the application & allotment money on the shares taken by
him.
 No money is liable to be repaid to the applicants for failure to apply or obtain permission
for the shares or debentures to be dealt in on any recognized stock exchange;

A statutory declaration duty verified by one of the directors or the secretary or when the Co. has
not been appointed a secretary, a secretary in the whole time practice in the prescribed from that
the above condition have been compiled has been filed with the Registrar. (S-149(1))

NOTES

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 COMPANY LAW

QUEST:-EXPLAIN THE PROCEDURE FOR REGISTRATION OF A COMPANY?

ANS:-

Sec 33 of the Companies Act deals with registration of a company. To obtain registration an
application has to be filed to the Registrar of Companies. The application must be accompanied
by the following documents:

a) Memorandum of Association
b) Articles of Association, if necessary.
c) A copy of the agreement, if any, which the company proposes to enter into with any
individual for his appointment as the managing or the whole-time director or the manager.
d) A declaration that all the requirements of the Act have been complied with.

Articles are compulsory only for unlimited companies, companies limited by guarantee and
private companies limited by shares(s 26). The declaration must be signed by an advocate of the
SC, or of a HC, or an attorney or a pleader entitled to appear before a HC, or any proposed
director, manager or secretary of the company or by a secretary or chartered accountant who is in
whole time practice in India[s 33(2)].

Section 12, which states the mode of forming an incorporated company, enables any seven
persons (two for private company) to associate for any lawful purpose and to get themselves
incorporated into a company with or without limited liability. They can do so by subscribing
their names to a memorandum of association and by complying with other documents.

If the Registrar finds the documents to be satisfactory, he registers them and enters the name of
the company in the Register of Companies and issues a certificate called the Certificate of
Incorporation. Certificate of Incorporation brings the company into existence as a legal person. It
is the conclusive evidence that all the requirements under the Act in respect of registration and
matters precedent and incidental thereto have been complied with and that the association is a
company authorized to be registered and duly registered under the Act.

Certificate of Incorporation (sec 34 and 35)

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 COMPANY LAW

Certificate of Incorporation is the certificate issued by the Registrar of Companies ion

registration of a company. It brings the company into existence as a legal person. It marks the
birth of the company, and the date mentioned on it is conclusive, even if wrong

Certificate of Incorporation is the conclusive evidence that all the requirements under the Act in
respect of registration and matters precedent and incidental thereto have been complied with and
that the association is a company authorized to be registered and duly registered under the Act(s
35). This is illustrated by the Privy Council in Moosa Goolam Ariff v. Ebrahim Goolam Ariff,
in which the memorandum of a company was signed by two adult members and by a guardian on
behalf of the other five members, who were minors. The Registrar, however, registered the
company. The plaintiff‘s contention that the Certificate of Incorporation should be declared void
was rejected as the certificate is conclusive for all purposes

However, the illegal objects of the company do not become legal by the issue of the certificate.
The certificate is subject to judicial review where it happens to be issued to a company which on
account of illegal objects should not have been registered. This is so because a company cannot
be registered for illegal purposes.

NOTES

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 COMPANY LAW

QUEST: - WHAT DO YOU UNDERSTAND BY ―MEMORANDUM OF

ASSOCIATION‖? DISTINGUISH BETWEEN MEMORANDUM OF ASSOCIATION
AND ‗ARTICLE OF ASSOCIATION.

ANS:- Meaning of Memorandum of Association

Acc. to S-2 (28) of comp. Act. 1956 ―Memorandum means the memorandum of Association of a
Company. as originally framed or as altered from time to time in pursuance of any previous
companies Law or of this Act.‖ It establishes the relationship of the company with the outside
world. The first step in the formation of a company is to prepare a document called the
memorandum of association. This document contains the constitution of the company. It has to
be divided into five clauses. [Ss. 12 & 13]

Acc. to Lord Mc Milan ―The MAO sets out the constitution of Company. It is the charter of the
Company and provides the foundation on which the structure of the Company is built‖

Significance of Memorandum

 It is the basis of incorporation and a Company cannot be registered without a MAO.

 It is the charter of the Company, which defines the objects of the Company‘s formation
and the utmost possible scope of its operations.
 It can be the foundation stone, upon which the future structure of the Company will stand.
 It determines the limits of a Company‘s activities.
 It makes known to the shareholders the extent of their liability.
 It indicates the names and address of the people who have promoted the Company.
Clauses in Memorandum of Association

1) Name Clause: It states the name of the proposed company. The name of a company
establishes its identity and is the symbol of its existence. It does not contain the name which is
undesirable by the Central Government. . Generally, a name is undesirable when it is identical
with, or too nearly resembles, the name of another company. The name should not mislead as to
the nature of the company's business or its scale. and always bear limited or Pvt. Ltd. As the last
words with the name of the Company. . The Central Government may, however, permit a
company to drop the word "limited" from its name if: (1) the company is formed for the

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 COMPANY LAW

promotion of commerce, art, religion, science, charity or any other useful object, and (2) the
company is to apply its income in promoting its objects and prohibits the payment of dividends
to its members. Such companies are known as Section 25 companies. They have been exempted
from the requirement of having a minimum amount of share capital as required by the
amendment of Section 3 by the Companies (Amendment) Act, 2000.
2) Registered Office Clause The second clause of the memorandum states the State in
which the registered office of the company shall be situate. After incorporation the exact address
of the registered office should be sent to the Registrar. Every Co. Shall have an office registered
from the day on which it begins to carry on business, or as from the day after the date of its
incorporation, whichever is earlier all Communications and notices are to be addressed to that
registered off (u/s 146 (1)).
3) Object Clause: The third clause of the memorandum states the objects of the proposed
company. The company carries on business with other people's money and, therefore, the
investors must be informed of the objects in which their money is going to be employed. People
are more willing to invest in one kind of object than in others. Secondly, the creditors of the
company are paid out of the company's assets and they feel protected when they know that the
assets can be used only for the authorized objects. Financial institutions also need information as
to objects. It defines as well as confines the spheres of business activities that the company
would engage in. The object that would be pursued by the company is divided into three classes.
 Main Object: is to be pursued by the company on its incorporation.
 Ancillary Objects: attain for the attainment of main object.
 Other Object: not included in the main object.
4) Liability Clause: The fourth clause has to state the nature of liability that the members
incur. The clause will state whether the liability of the members shall be limited, and, if so,
whether limited by shares or by guarantee, or unlimited. It states 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.
5) Capital Clause: The last clause states the amount of capital with which the company is
proposed to be registered and the kinds, number and value of shares into which the capital is to
be divided.

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 COMPANY LAW

The Companies (Amendment) Act, 2000 has, by amending Section 3, prescribed the requirement
that a public company must have a minimum paid up capital of five lakh rupees or such higher
amount as may be prescribed. A private company is required to have a minimum paid up capital
of 1 lakh rupees or such higher amount as may be prescribed by its articles.
6) Association Clause: At the end of MOA of every Co. there is an association or
subscription clause or a declaration of association.
 Alteration of Memorandum
1) Change of Name:
a. By special resolution: A Co. may change its name by a resolution and with the approval
of the central Govt. but in case of conversion of Pvt. Into pub Co. & vice versa, approval of the
Central Government does not require.
b. By ordinary Resolutions: The Co. may change its name by ordinary resolution with the
previous approval of the Central Govt. with 12 months of its registration by its new name.
2) Change of Registered Office:
a. From one city to another: a notice in this regard is to be given within 30 days of the
change to the Registrar. u/s 146 (1)
b. From one State to another: a special resolution is required to be passed at a general
meeting the shareholders and a copy of it is to be passed at a general meeting of the shareholders
and a copy of it is to be filed with the Registrar with 30 days u/s 146 (7).
3) Alteration of objects clause: u/s – 17 (1) the objects of a Company may be altered by a
special resolution.
4) Change in liability clause: A Co. Limited by a shares on guarantee cannot change its
memorandum so as to impose any additional liability on the members or to compel them to be if
additional shares, unless the entire member agree in writing to such change. U/s (323). -----
 Articles of Association

Meaning

The Laws & regulations which govern the management of its internal affairs & the conduct of its
business. It defines the duties, rights, powers & authority of the management, and the mode in
which the business of the company is to be carried out. U/s 2 (2).

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 COMPANY LAW

An article of association is the second important document Which in the case of some companies
has to be registered along with the memorandum. Companies which must have articles are
unlimited companies, guarantee companies and private companies limited by shares. [So 26]

Articles are internal regulations and by-laws. Schedule 1 of the Act sets out tables of model
forms of articles for different companies. Table A is applicable to companies limited by shares.
[So 28(1)] Such a company may either frame its own articles or adopt Table A and the Table
automatically applies to the extent to which it is not excluded. The chief advantage of adopting
Table A is that its provisions are legal beyond all doubt. The document has to be divided into
paragraphs numbered consecutively and must be signed by every subscriber.

Contents

AOA may prescribe such regulations for the company as the subscribers to the memorandum
deem expedient. The Act gives the subscribers a free hand. Any stipulations as to the relation
between the company and its members or members inter se may be inserted in the articles. But
everything stated therein is subject to the Companies Act. Usually, articles contain provisions
relating to the following matters:

1) Share capital, rights of shareholders, share certificates, payment of commission.

2) Lien on shares.
3) Call on shares.
4) Transfer of shares.
5) Transmission of shares.
6) Forfeiture of shares.
7) Conversion of shares into stock.
8) Share warrants.
9) Alteration of capital.
10) General meetings and proceedings there at.
11) Voting rights of members, voting and poll, proxies.
12) Directors, their appointment, remuneration, qualifications, powers and proceedings of
Board of Directors.
13) Manager.

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 COMPANY LAW

14) Secretary.
15) Dividends and reserves.
16) Accounts, audit and borrowing power.
17) Capitalization of profits. Winding up.

Importance of Articles of Association

Under sec 36, the memorandum and the articles when registered, shall bind the company and its
members to the same extent as if it had been signed by them and had contained a covenant on
their part that the memorandum and the articles shall be observed. With respect to the above
section, the importance of articles of association can be summed up as follows:

a) Binding on members in their relation to the company- the members are bound to the
company by the provisions of the articles just as much as if they had all put their seals to them.
b) Binding on company in relation to its members- just as members are bound to the
company, the company is bound to the members to observe and follow the articles.
c) Neither company, nor members bound to outsiders- articles bind the members to the
company and company too the members but neither of them is bound to an outsider to give effect
to the articles.
d) Binding between members inter se- the articles define rights and liabilities of the
members. As between members inter se the articles constitute a contract between them and are
also binding on each member as against the other or others. Such contract can be enforced only
through the medium of the company.

Difference b/w MOA & AOA

Basic Memorandum of Association Article of Association

Status It is the charter of the Co. & the defines the It is the rules & regulations framed to
fundamental conditions & objects of the govern the internal mgmt. of the Co.
Company.
Scope Its defines objects & powers. Rules & regulations for day to day
working of the company.

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 COMPANY LAW

Purpose Every company must prepare and file it. A public co. limited by shares may adopt
Necessity table A.

Alteration It is the constitution of the Co. clauses of the Members have a right to alter the Articles
memorandum cannot be easily altered. by a special resolution.

Provisions Memorandum is subordinate to the companies Articles are subordinate to the companies
Act so it cannot include any clause contrary to Act as well as Moa It should be
the prov. Of the companies Act. consistent with the prov. Of Co. Act.

Defines relation b/w the Co. the Outsides. It regulate the relation b/w the Co. & its
Relationship members an b/w the members an b/w the
members
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33
 COMPANY LAW

QUEST: -WHAT IS A PROSPECTUS? STATE THE VARIOUS CONTENTS OF A

PROSPECTUS.

ANS:- Introduction

Prospectus is a document that invites the public to subscribe to the share capital or debentures of a
company. If it does not do that, it cannot be called a prospectus. According to the Companies Act, an
invitation to the public inviting deposits is also deemed to be a prospectus. Some companies do not
directly to the public themselves, but allot the entire share capital to an intermediary, which then offers
the shares to the public by an advertisement of its own. Any document by which such offer for sale to
public is made is deemed to be a prospectus.

After getting the company incorporated, promoters will raise finances. The public is invited to purchase
shares and debentures of the company through an advertisement. A document containing detailed
information about the company and an invitation to the public subscribing to the share capital and
debentures is issued. This document is called ‗prospectuses. Private companies cannot issue a prospectus
because they are strictly prohibited from inviting the public to subscribe to their shares. Only public
companies can issue a prospectus.

Definition

Section 2 (36) of the Companies Act defines prospectus as, ―A prospectus means any document
described or issued as prospectus and includes any notice, circular, advertisement or other documents
invent deposits from public or inviting offers from the public for the subscription or purchase of any
shares in or debentures of a body corporate.‖

Essentials of Prospectus

 There must be an invitation offering to the public.

 The invitation must be made on behalf of the company or intended company.
 The invitation must to be subscribed or purchase.
 The invitation must relate to shares or debentures

A prospectus must be filed with the Registrar of companies before it is issued to the public. The issue of
prospectus is essential when the company wishes the public to purchase its shares or debentures. If the

34
 COMPANY LAW

promoters are confident of obtaining the required capital through private contacts, even a public
company may not issue a prospectus. The promoters prepare a draft prospectus containing required
information and this document is known as ‗a statement is lieu of prospectus.‘ A prospectus duly dated
and signed by all the directors should be field with Register of Company before it is issued to the public.

A prospectus brings to the notice of the public that a new company has been formed. The company tries
to convince the public that it offers best opportunity for their investment. A prospectus outlines a detail
the terms and conditions on which the shares or debentures have been offered to the public. Every
prospectus contains an application from on which an intending investor can apply for the purchase of
shares or debentures. A company must get minimum subscription within 120 days from the issue of
prospectus. If it fails to obtain minimum subscription from the members of the public within the
specified period, then the amount already received from public is returned. The company cannot get a
certificate of commencement of business because the public is not interested in that company.
Object of a prospectus
The objects of issuing a prospectus are as under:
a) To invite the public to invest in the shares or debenture of a market.
b) To give a bureau of a condition on which the public is invited to invest in shares and debentures.
c) To make a declaration that the directors of the company are liable for the condition stated in the
prospectus.
Nature of prospectus
As said earlier that the prospectus is an invitation to the public to invest in the shares or debentures of a
company. But the term public is nowhere defined in the Companies Act. So, far as it is related to
prospectus, public is meant to be the ordinary common people. Whether or not the invitation for
investment is made to the ‗public‘ depends upon some situation, such as:
 How many copies of the prospectus were printed?
 To how many members of the public were the copies distributed.
 How many members of the public accepted the copies?
 Under what conditions did the member of the public accept the prospectus?

Golden rule in prospectus

Prospectus is the basis of the contract between the company and the person‘s who incest in the
company‘s shares or debentures. The officers of the company have knowledge of the company‘s

35
 COMPANY LAW

present status and its prospects in future or have the means to acquire such knowledge. But the
potential investor has no such knowledge, nor the means to acquire it. It, therefore, becomes the
duty of those who issue the prospectus that they not only projects the company‘s image in the
right perspective but also makes sure that no vital information which could be of interest to the
potential investors in the company‘s shares and debentures is left out from the company‘s
prospectus. it therefore become important that the prospectus states the basic important facts
about the company with utmost honesty and good faith and that no information that is important
is twisted or partially presented. That is what is refers to as the ‗golden rule for making a
prospectus‘
In short the following must be kept in mind when preparing the prospectus of a company:
 The prospectus must be an honest statement of the company‘s profile; there must be no
misleading, ambiguous or erroneous reference to the company in its prospectus.
 Every important aspect of a contract of the company should be clarified.
 The contents of the prospectus should conform to the provision of the Companies Act.
 The restrictions on the appointment of directors must be kept in mind.
 The conditions of civil liability as laid down must be strictly adhered to issue and
registration of prospectus or legal requirement regarding issue of prospectus[
Contents of prospectus

The main contents of a prospectus are:

1) Main object of the company with the names, addresses, description and occupation of signatories
to the memorandum and the number of shares subscribed for by them.
2) Number and classes of shares and the nature and extent of the interest of holders thereof in the
property and profits of the company.
3) The number of redeemable preference shares intended to be issued and the date of redemption or
where no date is fixed; the period of notice required for redeeming the share s and proposed method of
redemption.
4) The number of shares. If any, fixed by the Article as the qualification of a director and the
remuneration of the directors for the service.

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 COMPANY LAW

5) The names, occupation and addresses of directors, managing director and manager together with
any provision in the Articles or a contract regarding their appointment remuneration or compensation for
loss of office.
6) The time of opening of the subscription list should be given in the prospectus
7) The amount payable on application and allotment on each share should be stated. If any
prospectus is issued within two years, the details of the shares subscribed for any allotted.
8) The particular about any option or preferential right to be given to any person to subscribe for
shares or debentures of the company.
9) The number of shares or debentures which within the two preceding year been issued for a
considerations other than cash.
10) Particulars about premium received on shares within two preceding years or to be received.
11) The amount or rate of underwriting commission.
12) Preliminary expenses
13) The names and addresses of auditors, if any, of the company.
14) Where the shares are of more than one class, the rights of voting and rights as to capital and
dividend attached to several classes of shares.
15) If nay reserve or profits of the company have been capitalized, particulars of capitalizations and
particulars of the surplus arising from any revaluation of the assets of the company.
16) A reasonable time and place at which copies of all accounts on which the report of auditors is
based may be inspected. -------------------------------------------
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37
 COMPANY LAW

QUEST:- WRITE A SHORT NOTES ON STATEMENT IN LIEU OF PROSPECTUS

ANS:-
Introduction
If a company does not want to issue a prospectus to the public for subscription of the shares, this
statement is required to be issued to the public for necessary information. It must be signed by every
person named in it as director or by his agent authorized in writing.The nature of the information of this
document is more or less similar to that given in the prospectus. A copy of this statement must be filed
with registrar within prescribed time. This provision does not apply to private company.
Contains
A statement in lieu of the prospectus contains the information as described below:-
1- Name of the company
2- Statement of capital
3- Description of the business
4- Names, addresses, and occupation of directors
5- Estimated initial expenses
6- Names of vendors and details of property
7- Material contracts
8- Director's interest
9- Minimum subscription
When issued
Section 70(1) requires a public company having a share capital to file with the Registrar of Companies a
statement called ―Statement in lieu of prospectus‖ in the following cases:
a) Where it does not issue a prospectus (because it feels that it can raise enough capital without
inviting a subscription from the public); or
b) Where it issues a prospectus but has not proceeded to allot any of the shares offered to the public
for subscription (because the issue has been a failure and the minimum subscription has not been
received)

Statement in lieu of prospectus must be filed with Registrar of Companies at least three days before any
allotment of shares or debenture is made.

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 COMPANY LAW

Consequences/Penalty for misstatement in, or not filing of, statement in lieu of prospectus: If the
allotment of shares or debenture is made without filing the statement in lieu of prospectus.

a) The allottee may avoid the allotment within two months after the statutory meeting, or where no such
meeting is held, within two months of the allotment [section 71(1)]
b) The person who authorized the delivery of SLP may be punished with imprisonment upto 2 years or
with fine Rs. 50,000 or with both. [section 70(5)]

Form of statement in lieu of prospectus: Schedule III contains a model form of a statement in lieu of
prospectus in pursuance of section 70; Schedule IV contains a model form of a statement in lieu of
prospectus when a private company is converted into a public company in pursuance of section 44

Conclusion
A public company raises its capital from the public and it issues prospectus for this purpose.
Sometimes, the promoters of a company decide not to approach the public for raising necessary
capital. They are hopeful of raising funds from the friends and relations or through underwriters.
In that case a prospectus need not be issued but a Statement in Lieu of Prospectus must be filed
with the registrar at least three days before the first allotment of shares. Such a statement must be
signed by every person who is named therein as a director or proposed director of the company.

NOTES

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39
 COMPANY LAW

QUEST: - WHAT ARE THE VARIOUS THROUGH WHICH A PERSON MAY

BECOME MEMBERS OF A COMPANY?
ANS: - Introduction
A company has to maintain register of members. The inclusion of a name in the register
differentiate the term ‗member ‗and ‗shareholder‘. Usually, both the term are used
interchangeably. Generally, every shareholder is a member and every member is a shareholder.
There may be certain exception like, a person ‗X‘ become the shareholder by transfer i.e. he may
hold the share of ‗ Y‘ but he is not a member until this transfer is not written on the register of
the company. Similarly, ‗x‘ will remain as member in the company though he does not hold the
share until his name is removed from the register and write the name of ‗Y‘ in the register of the
company
All the subscribers of the Memorandum of Association shall be deemed to Membership have
agreed to become members of the company and on registration of a company shall be entered as
members in the Register of members
Section 41 deals with definition of member which provide as under:—
a) The subscribers of the Memorandum of a company shall be deemed to have agreed to
become members of the company, and on its registration, shall be entered as members in its
register of members
b) Every other person who agrees in writing to become a member of a company and whose
name is entered in its register of members, shall be a member of the company
c) Every person holding equity share capital of a company and whose name is entered as
beneficial owner in the records of the depository shall be deemed to be a member of the
concerned company.
Modes of Acquiring Membership A person may become a member of the company in any
following ways:
a) By subscribing to the memorandum of association.
b) By agreeing to take qualification shares.
c) By application and allotment.
d) By transfer of shares.
e) By transmission of shares.
f) By holding out as a member.

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 COMPANY LAW

a) Membership by subscription: Every subscriber to the memorandum of association is

deemed to have agreed to become its member and on its registration must be put on the register
of members. Two conditions are necessary to make such a person a member: (i) He will
subscribe his name to the memorandum of association. (ii) The company must be registered
under the companies act. In their case neither allotment of shares not registration of their names
in the register of members is essential. He acquires as soon as the company is registered the full
status of a member with all the rights and liabilities. A subscriber cannot repudiate his contract
on the ground of misrepresentation or that he subscribed to the memorandum subject to certain
reservations.
b) Membership by Qualification shares: Directors of the company on delivering to the
registrar written undertaking to take their qualification shares and to pay for them become
members of the company, and they are in the same position as if they were subscribers to the
memorandum. They are deemed to have become members automatically on the registration of
the company.
c) Membership by application and allotment: A person may become a member of a
company by an application for shares subject to the formal acceptance by the company. The
ordinary law of contracts applies to the agreement to take shares in a company. An application
for share may be absolute or conditional. If it is absolute, a simple allotment and notice thereof to
the applicant will constitute the agreement. If it is conditional, the allotment must be on the basis
of the conditions specified. Where there is a conditional allotment of shares and an unconditional
allotment, there is no contract constituted.
d) Membership by transfer: The shares of a company are transferable but the mode of
transfer is left to be decided by the articles of the company. A person may purchase shares and
apply to the company to register him as a member. On transfer of shares duly affected the
transferee becomes a member of the company.
e) Membership by Transmission: On the death of a member his shares vest in his legal
representatives. The legal representatives can sell the shares without being registered, but subject
to the provisions of the articles he is entitled to be put on the register of members if he so
chooses. The official assignee is likewise entitled to be a member in place of a shareholder who
is adjudicated insolvent. This process of acquiring membership is known as transmission. It takes

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 COMPANY LAW

place on the death or insolvency of a member or if the member is a company on its going into
liquidation. In these cases no instrument of transfer need be delivered to the company.
f) Membership by holding Out: A person is deemed to be a member of the company who
allows his name to appear in the register of members apart from any agreement to become a
member, to be on the register of members or otherwise hold himself out or allows him to be held
out as a member. A person may not have applied for the shares but if he assents to his name
being on the register, he is to be considered as a member of the company.
 Termination of Membership

A person will cease to be a member of the company when his name is removed from the register
of members. It may take place in any of the following ways:

a) When a person transfers his shares. In such a case the transferor ceases to be a member as
soon as the transferee is registered but not before

b) When his shares are validly forfeited by the company.

c) When a person makes a valid surrender of his shares of the company.

d) . When a company sells the shares in exercise of its right of lien over them.

e) When he dies.

f) When he is declared insolvent and the official assignee either disclaims or transfers the
shares.

g) When he repudiates the contract on the ground of false or misleading statement in the
prospectus of the company.

h) When he is holding redeemable preference shares and such shares are redeemed.

i) When share-warrants are issued in exchange of fully paid-up shares and the articles do
not recognize holders of share-warrants as members.

j) When the share are sold in execution of a decree of the court. When the company is
wound-up. But he remains liable as a contributory.

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 COMPANY LAW

NOTES
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 COMPANY LAW

QUEST: - EXPLAIN THE MEANING AND CONSEQUENCES OF DOCTRINE OF

ULTRA VIRES ?
ANS:- Meaning

This doctrine implies that those transactions or acts of a Company which are outside the ambit of
its objects clause or which are beyond the power of the Company. Therefore, all such
transactions which are ultra virus the memorandum of Association shall be completely null void
and can never be ratified.

The Company has only capacity to do only those things which it is implored to do by the object
clause of its memorandum of Association:

Effects of Ultra Vires Transactions

1. Personal liability of directors: The funds of a Company, under the Act can only be
applied in carrying out its authorized objects. If a director of a Company makes any ultra vires
payment then he can be compelled to refund the money to the Company. Director will also be
personally liable to anyone who suffers any loss because of ―breach of warranty of authority‖ on
their part.
2. Ultra Vires acquired Property: If the money of Company‘s has been spent in
purchasing some ultra vires property, the Company‘s right over that property must be secure.
The asset, which is wrongly acquired, would be represents as the corporate capital.
3. Ultra Vires Contracts: A contract which is ultra vires the Company is wholly void and
of no legal effect. As a result if anyone entering into an ultra vires, contract then he cannot make
the company liable for his claim.
4. Ultra Vires lending: Person borrowing money from the Company under a contract
which is ultra Vires, can be sued by the Company to recover the amount so lent.
5. Ultra Vires torts: A Company cannot be by its officers in connection with a business
which is entirely outside its objects. It can be made liable in torts only if these are consisted in
the course of intra vires activities by its servants or officers within the course of their
employment.

Exceptions to the Doctrine of Ultra Vires

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 COMPANY LAW

1. Any act or transaction is beyond the limit of director but within the authority of Co., such
act or transactions can be approved.
2. Acts beyond articles, can be approved by amending it.
3. If an act, which is within the limits of the Company‘s activity is done in an irregular
manner, the shareholders can approve of such act.
4. If a Co. loans any money to a third party under a contract, it can sue for the repayment of
such loan.
5. If a Co. takes a loan from a third party under a contract which is beyond authority and
utilizes the amount ot pay off its business debts, the party giving such loan to the Co. is deemed
to be a creditor of the Co. in place of those creditors who have been paid off.

NOTES
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 COMPANY LAW

Part. II. Corporate Capital

Q:-WHAT IS SHARE CAPITAL? EXPLAIN ITS NATURE, MEANING AND KINDS OF SHARE
CAPITAL?

A share is the interest of a shareholder in a company. The capital of a company is divided into
certain indivisible units of a fixed amount. ‗Share‘ means share in the share capital of a company. A share is
evidenced by a share certificate. A share certificate is issued by a company under its common seal. Each
share in a company having share capital is distinguished by its appropriate number. Most companies are
started by their promoters with limited capital which is insufficient for running business in long term and for
expansion .So shares are issued to general public with a view to raise capital and give partial ownership of
company .This offer to public is called Public Issue.

Meaning of share and share capital:

A share is one unit into which the total share capital is divided. Share capital of the company can be
explained as a fund or sum with which a company is formed to carry on the business and which is raised by
the issue of shares. The amount collected by the company from the public towards its capital, collectively is
known as share capital and individually is known as share. A share is not a sum of money but is an interest
measured by a sum of money and this interest also contains bundle of rights and obligations contained in the
contract i.e. Article of Association. Investment in the shares of any company is a basis of ownership in the
company and the person who invest in the shares of any company, is known as the shareholder, member and
the owner of that company.

Definition:

Section 2(84) of the Act defines a share as ―a share in the share capital of a company, and
includes stock except where a distinction between stock and shares is expressed or implied.
Nature of Shares

The shares of company are movable property and are transferable in the manner provided in the Articles of
Association. A share is undoubtedly a movable property in the same way in which a bale of cloth or a bag of
wheat is a movable property. Such commodities are not brought in to existence by legislation but a share in
a company belongs to a totally different category of property. It is incorporeal in nature and it consists
merely of a bundle of rights and obligations.

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 COMPANY LAW

Kinds of Shares

Shares in the company may be related that is they may carry the same rights and liabilities and confer on
their holders the same rights, liabilities and duties. There are two types of shares under Indian Company
Law that is

a) Equity shares and

b) Preference Shares.
Section 43 of the Companies Act, 2013 permits a company limited by shares to issue two
classes of shares,
namely:
(a) Equity share capital—
(i) with voting rights; or
(ii) with differential rights as to dividend, voting or otherwise in accordance with such rules
as may
be prescribed.
(b) Preference Share Capital.
.

Types of Preference Shares

a) Cumulative or Non-Cumulative: A non-cumulative or simple preference shares gives right to

predetermined percentage dividend of profit of each year. In case no dividend thereon is stated in
any year because of absence of profit, the holders of preference shares get zero nor can they claim
unpaid dividend in the subsequent year or years in respect of that year. Cumulative preference
shares still give the right to the preference shareholders to demand the unpaid dividend in any
year during the succeeding year or years when the profits are available for distribution. In this
case dividends which are not paid in every year are accumulated and are paid out when the profits
are available.
b) Redeemable and Non- Redeemable: Redeemable Preference shares are preference shares which
have to be repaid by the company once the term of which for which the preference shares have
been issued. Irredeemable Preference shares means preference shares need not repaid by the
company apart from on winding up of the company. But, under the Indian Companies Act, a

47
 COMPANY LAW

company cannot issue irredeemable preference shares; in fact, a company restricted by shares
cannot issue preference shares which are redeemable after more than 10 years from the date of
issue. In other words the highest tenure of preference shares is 10 years. If a company is incapable
to redeem any preference shares within the specific period, it may, with consent of the Company
Law Board, issue further redeemable preference shares equivalent to redeem the
old preference shares including dividend thereon. A company can issue the preference shares
which from the commencement are redeemable on a fixed date or after definite period of time not
more than 10 years provided it comprises of following conditions :-

 It must be certified by the articles of association to make such an issue

 The shares will be only redeemable if they are completely paid up.

 The shares may be redeemed out of profits of the company which or else would be available for
dividends or out of proceeds of new issue of shares made for the purpose of redeem shares.

 If there is premium to be paid on redemption it must have provided out of profits or out of
shares premium account before the shares are redeemed.

 When shares are redeemed out of profits an amount equivalent to nominal amount of
shares redeemed is to be transferred out of profits to the capital redemption reserve account.
This sum should then be utilized for the purpose of redemption of
redeemable preference shares. This reserve can be used to issue of wholly paid bonus shares to
the members of the company.

c) Participating Preference Share or Non-Participating Preference Shares:

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

Equity shares:

Equity share can be defined as the share, which is not preference shares. In other words equity shares
are those shares, which do not have the following preferential rights:

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 COMPANY LAW

a) Preference of dividend over others.

b) Preference for repayment of capital over others at the time of winding up of the company.

These shares are also known as ‗Risk Capital‘, because they get dividend on the balance of profit if
any, left after payment of dividend on preference shares and also at the time of winding up of the
company, they are paid from the balance asset left after payment of other liabilities and preference
share capital. Apart from this they have to claim dividend only, if the company in its A. G. M.
declares the dividend. The rate of dividend on such shares is not pre-determined, but it depends on the
profit earned by the company. The equity shareholders have the right to vote on each and every
resolution placed before the company and the holders of these shares are the real owners of the
company.

Key Differences between Equity Shares and Preference Shares

1. Equity shares cannot be converted into preference shares. However, Preference shares could be
converted into equity shares.

2. Equity shares are irredeemable, but preference shares are redeemable.

3. The next major difference is the ‗right to vote‘. In general, equity shares carry voting rights,
although preference shares do not carry voting rights.

4. If in a financial year, dividend on equity shares is not declared and paid, then the dividend for
that year lapses. On the other hand, in the same situation, the preference shares dividend gets
accumulated which is paid in the next financial year except in the case of non-cumulative
preference shares.

5. The rate of dividend is consistent for preference shares, while the rate of equity dividend
depends on the amount of profit earned by the company in the financial year, thus it goes on
changing.

Sub-division of share capital:

The word capital in connection with a company may mean any of the following divisions of
capital:

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 COMPANY LAW

a) Authorized capital: An authorized capital refers to that amount which is stated in the ‗Capital
Clause‘ of the Memorandum of Association as the share capital of the company. This is the
maximum limit of the company which it is authorized to raise and beyond which company
cannot raise unless the capital clause in the Memorandum is altered in accordance with the
provisions of Sec. 94 of the Companies Act, 1956.
b) Issued capital: An issued capital refers to the nominal value of that part of authorized capital,
which has been (1) subscribed for by the signatories to the Memorandum of Association, (2)
allotted for cash or for consideration other than cash and (3) allotted as Bonus shares.
c) Subscribed capital: Subscribed capital refers to the paid-up value of the issued capital i.e. the
total amount called by the company less calls-in-arrear. It is only the actual liability for the
company hence it will be only be added while totalling the liability side.
d) Called Up Capital It is that part of subscribed capital, which is called by the company to pay
on shares allotted. It is not necessary for the company to call for the entire amount on shares
subscribed for by shareholders. The amount, which is not called on subscribed shares, is called
uncalled capital.
e) Paid-up Capital It is that part of called up capital, which actually paid by the shareholders.
Therefore it is known as real capital of the company. Whenever a particular amount is called
and a shareholder fails to pay the amount fully or partially, it is known an unpaid calls or calls
in arrears.
Paid-up Capital = Called up capital - calls in arrears
f) Reserve Capital It is that part of uncalled capital which has been reserved by the company by
passing a special resolution to be called only in the event of its liquidation. This capital cannot
be called up during the existence of the company. It would be available only in the event of
liquidation as an additional security to the creditors of the company.

Notes

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 COMPANY LAW

Q. WHAT IS THE PROCEDURES REGARDING ALLOTMENT OF SHARES?

The company secretary has to see that the statutory conditions regarding the allotment of shares are
fulfilled before the Board proceeds to allot the shares. The following are the statutory conditions
which need to be fulfilled:

a) Valid offer and acceptance: There should be a valid offer and acceptance for the allotment to
be a valid one. Here the company is the offertory and the acceptors are the general public. If
there is no company to offer then there would be no public to accept.
b) Unconditional Allotment: The allotment must be absolute and unconditional and also as per the
terms and conditions mentioned in the application. The allotment should be unbiased, and not
according to the caste, creed, religion. It is not that rich shareholders pay more on the shares and
the poor share holders pay less on the shares. All have to pay the same price on the shares.
c) Collection of minimum subscription amount: The minimum subscription amount as noted in
the prospectus has been received within 120 days of the issue of prospectus.
d) Receipt of application money: Not less than 5% of the nominal value of the share has been
secured and has been received along with the applications.
e) Deposition of application of money in a scheduled bank:All application money received along
with the applications must be deposited in a scheduled bank. It cannot be withdrawn until the
company gets trading certificate or where such certificate is already received or till the minimum
subscription amount is received.
f) Filing of prospectus with the registrar: A copy of the prospectus or statement in lieu of
prospectus has been duly filed with the registrar and at least three days have elapsed after such
filing before the allotment is taken up.
g) Time of allotment: No allotment of shares can be effected until the beginning of the fifth day
from the date of issue of prospectus. The subscription list must be opened for at least 3 days as
disclosed in the prospectus.
h) Proper communication: The allotment must be duly communicated to the applicant through
post i.e. registered post with necessary details.
i) Allotment strictly as per documents issued: The Board of Directors have to make the
allotment of shares strictly as per the documents issued which include the prospectus and the

51
 COMPANY LAW

application form. The provisions made in the Memorandum of Association and the Articles of
Association must also be given due consideration

Procedure of issue of shares

When company has been registered, the following procedure is adopted by the company to
collect money from the public by issuing of shares:

Step-1

Issue of prospectus: When a Public company intends to raise capital by issuing its shares to the
public, it invites the public to make an offer to buy its shares through a document called
‗Prospectus‘. According to Section 60 (1), a copy of prospectus is required to be delivered to the
Registrar for registration on or before the date of publication thereof. It contains the brief
information about the company, its past record and of the project for which company is issuing
share. It also includes the opening date and the closing date of the issue, amount payable with
application, at the time of allotment and on calls, name of the bank in which the application
money will be deposited, minimum number of shares for which application will be accepted, etc.

Step-2

To receive application: After reading the prospectus if the public is satisfied then they can
apply to the company for purchase of its shares on a printed prescribed form. Each application
form along with application money must be deposited by the public in a schedule bank and get a
receipt for the same. The company cannot withdraw this money from the bank till the procedure
of allotment has been completed (in case of first allotment, this amount cannot be withdrawn
until the certificate to commence business is obtained and the amount of minimum subscription
has been received). The amount payable on application for share shall not be less than 5% of the
nominal amount of share.

Step-3

Allotments of shares: Allotments of shares means acceptance by the company of the offer made
by the applicants to take up the shares applied for. The information of allotment is given to the
shareholders by a letter known as ‗Allotment Letter‘, informing the amount to be called at the

52
 COMPANY LAW

time of allotment and the date fixed for payment of such money. It is on allotment that share
come into existence. Thus, the application money on the share after allotment becomes a part of
share capital. Decision to allot the share is taken by the Board of Directors in consultation with
the stock exchange. After the closure of the subscription list, the bank sends all applications to
the company. On receipt of applications, each application is carefully scrutinised to ascertain that
the application form is properly filled up and signed and the money is deposited with the bank.

Step-4

To make calls on shares: The remaining amount left after application and allotment money due
from shareholders may be demanded in one or more parts which are termed as ‗First Call‘ and
‗Second Call‘ and so on. A word ‗Final‘ word is added to the last call. The amount of call must
not exceed 25% of the nominal value of the shares and at least 1 month have elapsed since the
date which was fixed for the payment of the last preceding call, for which at least 14 days notice
specifying the time and place must be given.

Modes of issue of shares:

A company can issue shares in two ways:

1. For cash.

2. For consideration other than cash.

Issue of shares for cash: When the shares are issued by the company in consideration for cash
such issue of shares is known as issue of share for cash. In such a case shares can be issued at par
or at a premium or at a discount. Such issue price may be payable either in lump sum along with
application or in installments at different stages (e.g. partly on application, partly on allotment,
partly on call).

Issue of shares at par: Shares are said to be issued at par when they are issued at a price equal
to the face value. For example, if a share of Rs. 10 is issued at Rs. 10, it is said that the share has
been issued at par. Issue of shares at premium: When shares are issued at an amount more than
the face value of share, they are said to be issued at premium. For example, if a share of Rs. 10 is
issued at Rs. 15; such a condition of issue is known as issue of shares at premium. The difference

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 COMPANY LAW

between the issue price and the face value [i.e. Rs. 5 (Rs.15 – Rs.10)] of the shares is called
premium. It is a capital profit for the company and will show credit balance; hence it will be
shown in the liability side of the Balance Sheet under the heading ‗Reserves and Surplus‘ in a
separate account called ‗Security Premium Account‘. Shares of those companies can be issued at
premium which offer attractive rate of dividend on their existing shares, having a good profit
track for last few years and whose shares are in demand. The amount of premium depends upon
the profitability and demand of shares of such company.

Note: The Company may collect the amount of security premium in lump sum or in installments.
Premium on shares may be collected by the company either with application money or with the
allotment money or even with one of the calls. In absence of any information, the amount of the
premium is to be recorded with allotment.

Notes

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 COMPANY LAW

Q. WHAT IS THE PROCEDURE OF ALTERATION OF SHARE CAPITAL?

ALTERATION OF SHARE CAPITAL

Section 61 of the Companies Act, 2013 provides that a company limited by shares or guarantee
and having a share capital may, if so authorised by its articles, alter, by an ordinary resolution, its
memorandum in the following ways:

(a) It may increase the authorized share capital by such amount, as it thinks expedient;

(b) It may consolidate and divide, all or any of its existing shares into a larger denomination
than of its existing shares e.g., by consolidating ten shares of Rs10 each into one share of Rs100
each. Proviso to Section 61(1)(b) states that no consolidation and division which results in
changes in the voting percentage of shareholders shall take effect unless it is approved by the
Tribunal on an application made in the prescribed manner; (Proviso to Section 61(1)(b) is yet to
be notified).

(c) It may convert all or any of its fully paid-up shares into stock or reconvert that stock into
fully paid-up shares of any denomination.

(d) It may sub-divide its existing shares or any of them into smaller denomination than fixed by
its Memorandum but it must keep the existing proportion between the paid-up and unpaid
amount e.g., one share of Rs 100 each, Rs 60 paid up and be sub-divided into ten shares of Rs 10
each, Rs 6 paid-up per share.

(e) It may cancel shares which have not been taken up or agreed to be taken by any person and
diminish the amount of the share capital by the amount of the shares so cancelled. However, such
cancellation of shares will not be deemed to be a reduction of share capital, within the meaning
of Section 66 of the Companies Act, 2013. In other words, it is cancellation of unissued share
capital not being taken or agreed to be taken up by any person.

In order to alter its capital clause in the Memorandum, the company requires authority in its
articles. But if the articles give no power to this effect, the articles must be amended by a special
resolution before the power to alter the capital clause can be exercised by the company [Re.
Patent Invert Sugar Co. (1885) 31 Ch. D. 166].

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 COMPANY LAW

Further, the power to alter capital clause should be exercised bona fide and in the interest of the
company and not for the benefit of any group. An ordinary resolution will be enough for altering
capital clause in the Memorandum of Association.

Section 64(1) states that when—

(a) a company alters its share capital in any manner specified in sub-section (1) of section 61;

(b) an order made by the Government under sub-section (4) read with sub-section (6) of section
62 has the effect of increasing authorized capital of a company; or

(c) a company redeems any redeemable preference shares, the company shall file a notice in the
prescribed form with the Registrar within a period of thirty days of such alteration or increase or
redemption, as the case may be, along with an altered memorandum.

Rule 15 of Companies (Share Capital and Debentures) Rules, 2014 states that

When a company alters its share capital in any manner specified in sub-section (1) of section 61,
or an order is passed by the Government increasing the authorized capital of the company in
pursuance of sub-section (4) read with sub-section (6) of section 62 or a company redeems any
redeemable preference shares, the notice of such alteration, increase or redemption shall be filed
by the company with the Registrar in Form No. SH.7 along with the fee.

As per Section 64(2) Contravention in this case will make the company and every officer of the
company who is in default liable to a fine extending up to ` 1000 per day during which the
default continues or ` 5 lakh, whichever is less (Section 64).

Q. WHEN SHARE CAPITAL STANDS AUTOMATICALLY INCREASED?

Under Section 64 read with section 62 of the Act, the share capital of a company stands
automatically increased when any Government, by its order made under Section 62(4) of the Act,
directs that any debentures issued to, or the loans obtained from the Government by a company
or any part thereof shall be converted into shares in the company, on such terms and conditions
as are considered by that Government to be reasonable in the circumstances.

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 COMPANY LAW

However, where the terms and conditions of such conversion are not acceptable to the company,
it may, within sixty days from the date of communication of such order, appeal to the Tribunal
which shall after hearing the company and the Government pass such order as it deems fit.

Where the Government has, by an order made under section 62(4), directed that any debenture or
loan or any part thereof shall be converted into shares in a company and where no appeal has
been preferred to the Tribunal under that section or where such appeal has been dismissed, the
memorandum of such company shall, where such order has the effect of increasing the
authorised share capital of the company, stand altered and the authorised share capital of such
company shall stand increased by an amount equal to the amount of the value of shares which
such debentures or loans or part thereof has been converted into. [Section 62(6)].

CASE LAWS

Judicial Pronouncement about a company‘s power to alter its share capital

1. The powers under Section 95 of the Act [Corresponds to section 61 of the Companies Act,
2013] can be exercised by the members only if authorised by the articles. In Re North Cheshire
Brewery Co., 1920 WN 149. Re Metropolitan Cementry Co., (1934) SC 65

2. The power should be exercised bona fide in the interest of the company and not for benefiting
any group. [Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd.
(1981) 1 Com Cases 743 (SC)].

3. The consent of meeting of classes of shareholders will not be required as the increase of any
kind of share capital cannot be said to ‗vary‘ or ‗affect‘ class rights. The increased capital may
consist of preference shares, provided that this is not inconsistent with rights given by the
Memorandum of Association. [Andrews v. Gas Meter Co. (1897) 1 Ch 361: (1895) All Eng. Rep
1280 (CA)].

4. The notice convening the meeting to pass the resolution for increase must specify the amount
of the proposed increase. [Mac Connell v. E. Prill & Co. Ltd., (1916) 2 Ch 57 : (1916-17) All
Eng. Rep Ext 1344].

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 COMPANY LAW

5. Where shares were issued beyond the authorized amount and a resolution was subsequently
passed at a general meeting ratifying the issue, it was held that although the original issue was
not in accordance with the articles, the ratification was effective and the allottees were bound
[Sewell‘s case (1868) 3 Ch App 131].
Q. WHEN SHARE CAPITAL STANDS REDUCED?

REDUCTION OF SHARE CAPITAL (SECTION 66)(SECTION 66 IS YET TO BE

NOTIFIED)

REDUCTION OF CAPITAL TO BE APPROVED BY SPECIAL RESOLUTION AND

CONFIRMED

BY THE TRIBUNAL [SECTION 66(1)]

(1) Subject to confirmation by the Tribunal on an application by the company, a company limited
by shares or limited by guarantee and having a share capital may, by a special resolution, reduce
the share capital in any manner and in particular, may—

(a) extinguish or reduce the liability on any of its shares in respect of the share capital not paid-
up; or

(b) either with or without extinguishing or reducing liability on any of its shares,—

(i) cancel any paid-up share capital which is lost or is unrepresented by available assets; or

(ii) pay off any paid-up share capital which is in excess of the wants of the company,

alter its memorandum by reducing the amount of its share capital and of its shares accordingly:

No Reduction of Capital would be allowed in case of Arrears In the Repayment of Deposits

and Interest thereon [Proviso to Section 66(1)]

It may be noted that reduction of capital shall not be made if the company is in arrears in the
repayment of any deposits accepted by it, either before or after the commencement of this Act, or
the interest payable thereon.
NOTICE BY TRIBUNAL [SECTION 66(2)]

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 COMPANY LAW

The Tribunal shall give notice of every application made to it under sub-section (1) to

• the Central Government,

• Registrar

• the Securities and Exchange Board, in the case of listed companies, and

• the creditors of the company

It shall take into consideration the representations, if any, made to it by that Government,
Registrar, the Securities and Exchange Board and the creditors within a period of three months
from the date of receipt of the notice.

If no representation has been received from the Central Government, Registrar, the Securities
and Exchange Board or the creditors within the said period, it shall be presumed that they have
no objection to the reduction [Proviso to Section 66(2)]

CONFIRMATION OF REDUCTION OF CAPITAL [SECTION 66(3)]

The Tribunal may, if it is satisfied that the debt or claim of every creditor of the company has
been discharged or determined or has been secured or his consent is obtained, make an order
confirming the reduction of share capital on such terms and conditions as it deems fit:

No sanction for reduction unless complied with accounting standards.

Proviso to Section 66(3) provides that –

No application for reduction of share capital shall be sanctioned by the Tribunal unless the
accounting treatment, proposed by the company for such reduction is in conformity with the
accounting standards specified in section 133 or any other provision of this Act and a certificate
to that effect by the company‘s auditor has been filed with the Tribunal.

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Q. WHAT ARE THE RIGHTS TO SHARE CAPITAL CALLED TO BE PRE- EMPTIVE

RIGHTS?

Shareholders‘ Pre-emptive Rights with regard to further issue of share capital (Right

Shares) To preserve the shareholders‘ proportionate dividend, liquidation and voting rights, pre-
emptive rights are often recognized, but their existence and scope can be effected by provisions
in the articles. However, Section 62 of the Companies Act, 2013 secures shareholders‘ pre-
emptive rights with regard to the further issue of share capital by the company. The Section lays
down:

―(1) Where at any time, a company having a share capital proposes to increase its subscribed
capital by the issue of further shares, such shares shall be offered to persons who, at the date of
the offer, are holders of equity shares of the company in proportion, as nearly as circumstances
admit, to the paid-up share capital on those shares by sending a letter of offer subject to the
condition that unless the articles of the company otherwise provide, the offer aforesaid shall be
deemed to include a right exercisable by the person concerned to renounce the shares offered to
him or any of them in favour of any other person and the notice of offer shall contain a statement
of this right [Sub-clause (a)].

Notes

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Q. WHAT IS COMPANY MEETING? EXPLAIN IN BRIEF THE VARIOUS KINDS OF

MEETING. IS IT COMPULSORY TO CALL UPON THE MEETING OF ALL THE
COMPANIES.

Company Meetings

A meeting is said to be take place when two or more than two person‘s meet.Acc. To P.K. Ghosh
―Any gathering, assembly or coming together of two or more persons for the transaction of some
lawful business of common concern is called meeting.‖

Characteristics

1. It is a get – together of two or more persons who are members of the Company.
2. For discussing & taking a decision on some lawful business.
3. Before conducting a meeting, a notice about the meeting must be given.
4. A meeting is held at a specific place & time.
5. Company‘s meeting is held according to the prop. Pf the Companies Act.

Requirement or Essentials of Valid Meetings:

1. Proper Authority: The proper authority to convene a general meeting of a Company is

board of Directors who should pass a resolution to call the meeting at a duly convened board
meeting.
2. Notice: 21 days prior notice of or meeting should be given to the members.
3. Quorum: It means the minimum no. of members who must be present in order to
constitute a meeting and transact business threat.
4. Chairman of Meeting: A chairman is necessary to conduct a meeting.
5. Minutes of Meeting: Every Co. must keep a record fall proceedings of every meeting.

Kind of Company Meetings

Several types of meetings take place in the business organizations. Especially the company
meetings can be shown by following:

1) Shareholders meeting/ statutory (legal) Meeting: When the meeting is held with the
shareholders of the company it is called shareholders meeting.

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Definition:
Statutory meeting is the first meeting of the members of a public company. It is held once in
the life of a public company. Statutory means legal so this meeting is totally based on law.
Law enforced the company to call this meeting.
Occasion:
This meeting must be held after 3 months, but before 6 months of obtaining the certificate of
commencement of business.
Notice of Meeting:
The directors will send a notice of the meeting to all the members of the company at least 21
days before the meeting. And also send statutory report to the shareholders.

 Statutory meeting: According to Company laws, after getting the letter of commence, the
company arranges a meeting after one month of six months. This is the first general meeting
of the company and during the life of the company this type of meeting held once. The
company gives the circular before 21 days of the meeting. The decisions of the meeting are
called statutory decision.

 Annual general meeting: After registration of the company, the company is bound to
invites the first general meeting with in eighteen months. Then the general meeting will be
held in every year. The differences of the two general meeting cannot be more than fifteen
months. The decisions of the meeting are called general decision.

 Extra-ordinary general meeting: If necessary of the company this type of meeting can be
held on any time. The director or some shareholders can invite this meeting one tenth of the
shareholders may give the requisition to the Board of directors to arrange this type of
meeting. After getting the requisition of the board of Directors fail to arrange a meeting with
in twenty one days, the shareholder can invite the meeting within three months. The
decision taken by the meeting is called special decision.

2) Directors meeting: When the meeting is held among the directors of the company it is called
directors meeting. It is classified into two parts. They are:

 Board meeting: According to article of association. The board of directors meetings called
Board Meeting. If nothing about this type of meeting in the article of association, then by

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Table- A rules of the company law this type of meeting can be held on. According to rules
of company law the company is bound to arrange the meeting once in one month and at
least four times within a year the Quorum: is filled up by 3/1 rd of the directors present or at
least two directors present. Each director is preserved one vote and if any case the directors
vote can be divided equally, then the president give the casting vote and take the decision.

 Committee meeting: According to article of association the Board of Directors sometimes

make special committee to complete in any special work among some directors of the
company. This committee member sometimes meets together for coordinating the work
properly. This type of seating is called committee meeting

3) Special meeting: For any special situation, when the meeting is arranged by the company, it is
called special meeting. The types of the special meetings are as follows:

 Class-meeting: The Company has different kinds of shares. When the meeting is arranged
by any one kind of shareholders it is called class meeting.

Creditors meeting: The directors or their appointed lower can invite this type of meeting.
Moreover this type of meeting may be arranged by the order of the court. If necessary to
reconstruct or to dissolve or to any amalgamate the company to preserve the rights of the creditor
this type of meeting is invited by their proper authoritative person. The creditors who will be
present in the meeting or the presence of three-fourth credit holders of the total credit can take
the decision and the court will give the instruction on the basis of this decision and the creditors
are bounded to abide by the decision.

Notes

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Q:- WHAT ARE THE PROVISIONS RELATING TO ANNUAL GENERAL MEETING?

Ans: - Annual general meeting of the company is an annual meeting of the body of the member
held every year. Companies to hold AGM: Every company can hold annual general meeting
whether having shares capital or not, whether limited or unlimited.

Time limit:

First Annual general meeting:

A company may hold its first annual general meeting within a period of 18 month from the date
of incorporation. However this should not be more than 9 months from close of financial years.

Subsequent meeting:-

1. There must be one meeting held in each year.

2. The gap between two annual general meetings must not be more than 15 years.

3. Meeting must be held not later than 6 months from close of financial year.

Extension of time: the registrar has the power to extend the time of 15 months by 3 more
months in special cases.

Day, hour and place of meeting: The meeting can be held at any working place, on any
working day and working hours.

If the day scheduled for meeting is declared by the Central Government to be a public holiday
after the issue of the notice, it shall not be deemed as a holiday.

Notice of the meeting: 21 clear days notice or any shorter notice if agreed by all shareholders
must be given.

Business to be transected

(1) Ordinary business:-

(a) To present the balance sheet, report of Board of Directors, etc.

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(b) To declare dividends.

(c) To appoint directors.

(d) To appoint auditors and fixation of their remuneration

Special Business:-

Any other business which is not an ordinary business

Default in holding Annual general meeting

The Company Law Board on petition from member shall call or direct the calling of the general
meeting of the company.

Penalty:

If default is made in holding AGM, the company and every officer in default shall be punishable
with fine which may extend to RS. 50,000/- . In case the default continues, a further fine upto Rs.
2,500/- per day may be levied till such default continues.

Notes

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Q. What is Oppression and Mismanagement?

Class Action is one of the youngest additions to Indian jurisprudence particularly, in

Indian Corporate Jurisprudence. Class Action aims to prevent Oppression and Mismanagement
in Companies. The Provisions relating to Oppression and Mismanagement are in Chapter XVI of
the Companies Bill, 2012.

In this post, I will cover Section 241 – 244 which deals with normal provisions.

In next post, I will discuss Section 245 dealing with Class Action and after that Section 246 read
with Section 373 to 341.

APPLICATION IN CASE OF OPPRESSION & MISMANAGEMENT (SECTION 241):

Any member, who has right to apply under Section 244, may apply to the Tribunal under this
Section 241.

An application may be filed for a complaint that:

(a) The affairs of the company have been or are being conducted

in a manner prejudicial to the public interest, or;

In an manner prejudicial or oppressive to him or any other member or members, or;

In a manner prejudicial to the interests of the company; or

(b) The material change has taken place in the management or control of the company, whether
by;

An alteration in the Board of Directors, or Manager, or

In the ownership of the company‘s share, or

If it has no share capital, in its membership, or

In any other manner whatsoever, and

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that by reason of such change, it is likely that the affairs of the company will be conducted in a
manner prejudicial to its interests or its members or any class of members. These changes should
not be a change brought about by, or in the interests of, any creditors, including debenture
holders or any class of shareholders of the company.

The Central Government, if it is of the opinion that the affairs of the company are being
conducted in a manner prejudicial to public interest, it may itself apply to the Tribunal for an
order under this Chapter.

RIGHT TO APPLY UNDER SECTION 241 (SECTION 244):

In case of company having sharing share capital:

(a) Not less than one hundred members of the company, or

(b) Not less than one – tenth of the total numbers of its members,

Whichever is less shall have right to apply under Section 241.

However, any member or members holding not less than one – tenth of the issued share capital
of the company, subject to the condition that the applicant or applicants has or have paid all calls
and other sums due on his or their shares, shall also have right to apply under Section 241.

In case of a company not having a share capital, not less than one – fifth of the total number of
its members shall have right to apply under Section 241.

Tribunal may, on an application made to it in this behalf, waive all or any of the requirements
specified, so as to enable the members to apply under section 241.

Where any members of a company are entitled to make an application, any one or more of them
having obtained the consent in writing of the rest, may make the application on behalf and for the
benefit of all of them.

POWER OF TRIBUNAL (SECTION 242, SUB – SECTION 1, 3):

On any application made under Section 241, the Tribunal shall frame its opinion on two points:

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(a) that the company‘s affairs have been or are being conducted in a manner prejudicial or
oppressive to any member or members or prejudicial to public interest or in a manner prejudicial
to the interests of the company; and

(b) that to wind up the company would unfairly prejudice such member or members, but that
otherwise the facts would justify the making of a winding-up order on the ground that it was just
and equitable that the company should be wound up, the Tribunal may with a view to bringing to
an end the matters complained of, make such order as it thinks fit.

A certified copy of the order of the Tribunal under sub-section (1) shall be filed by the company
with the Registrar within thirty days of the order of the Tribunal.

This means the Tribunal has unlimited power under this Section. However, this Section asks the
Tribunal to give particular details in its order.

Details in Order Passed by Tribunal (Section 242, Sub – Section 2):

The Order shall provide for:

(a) the regulation of conduct of affairs of the company in future;

(b) the purchase of shares or interests of any members of the company by other members thereof
or by the company;

(c) in the case of a purchase of its shares by the company as aforesaid, the consequent reduction
of its share capital;

(d) restrictions on the transfer or allotment of the shares of the company;

(e) the termination, setting aside or modification, of any agreement, howsoever arrived at,
between the company and the managing director, any other director or manager, upon such terms
and conditions as may, in the opinion of the Tribunal, be just and equitable in the circumstances
of the case;

(f) the termination, setting aside or modification of any agreement between the company and
any person other than those referred to in clause (e)but no such agreement shall be terminated,

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set aside or modified except after due notice and after obtaining the consent of the party
concerned;

(g) the setting aside of any transfer, delivery of goods, payment, execution or other act relating
to property made or done by or against the company within three months before the date of the
application under this section, which would, if made or done by or against an individual, be
deemed in his insolvency to be a fraudulent preference;

(h) removal of the managing director, manager or any of the directors of the company;

(i) recovery of undue gains made by any managing director, manager or director during the
period of his appointment as such and the manner of utilization of the recovery including transfer
to Investor Education and Protection Fund or repayment to identifiable victims;

(j) the manner in which the managing director or manager of the company may be appointed
subsequent to an order removing the existing managing director or manager of the company
made under clause (h);

(k) appointment of such number of persons as directors, who may be required by the Tribunal to
report to the Tribunal on such matters as the Tribunal may direct;

(l) imposition of costs as may be deemed fit by the Tribunal;

(m) any other matter for which, in the opinion of the Tribunal, it is just and equitable that
provision should be made.

CONSEQUENCE OF TERMINATION OR MODIFICATION OF AGREEMENTS

(SECTION 243):

Where an order made under section 242 terminates, sets aside or modifies an agreement—

(a) such order shall not give rise to any claims whatever against the company by any person for
damages or for compensation for loss of office or in any other respect either in pursuance of the
agreement or otherwise;

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(b) no managing director or other director or manager whose agreement is so terminated or set
aside shall, for a period of five years from the date of the order terminating or setting aside the
agreement, without the leave of the Tribunal, be appointed, or act, as the managing director or
other director or manager of the company. Tribunal shall not grant leave under this clause unless
notice of the intention to apply for leave has been served on the Central Government and that
Government has been given a reasonable opportunity of being heard in the matter.

Conclusion

Oppression and mismanagement are part and parcel of business. During the course of business,
oppression of small/minority shareholders takes place by the majority shareholders who are in
control of the company. Similarly, mismanagement of business is not uncommon. When we talk
of mismanagement we mean mismanagement of resources. Mismanagement could mean
siphoning of funds, causing losses due to rash decision, not maintaining proper records, not
calling requisite meetings. Finer version of mismanagement could arise where the management
does not act/react to a business situation leading to downfall of business.

The concept of oppression and mismanagement is more relevant or common to family owned
concerns. The reasons are very obvious. Family owned concerns are owned by family members
who over time develop vested interest in business vested interest in their own heirs being the
most common - thereby leading to oppression of other family members. Here typically, the
controlling member of the family appropriates the family holdings by means of either a fresh
issue or fraudulent transfers in his favor or reconstitutes the board in such a manner as to alienate
the other family members. The result is the other family members get oppressed.

Secondly, the family owned concerns are not professional managed and their system of
functioning is usually personal. They lack probity and fair play. They generally do business in a
manner where they begin to benefit personally to the exclusion of other members. This leads to
oppression of other family members/mismanagement of companies.

In order to check all these discrepancies the need was felt to have any measure to prevent the
Oppression and mismanagement and thus under Chapter 6th of Part 6th of Companies Act , 1956
provides for the judicial as well as administrative remedies to check Oppression and
mismanagement. It is a powerful tool which provides such power that even a singer member can

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approach Company Law Board if any of his right has been infringed or in order to prevent the
Oppression and mismanagement in the company.

Notes

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Q. WHAT IS THE PROCEDURE INVESTIGATION INTO AFFAIR OF COMPANY?

Investigation into the Affairs Of Company

I. Investigation Into Affairs Of Company (Section 210):

Where the Central Government is of the opinion, that it is necessary to investigate into the affairs
of a company,—

on the receipt of a report of the Registrar or inspector;

on intimation of a special resolution passed by a company that the affairs of the company ought
to be investigated; or

in public interest,

it may order an investigation into the affairs of the company.

Where an order is passed by a court or the Tribunal in any proceedings before it that the affairs
of a company ought to be investigated, the Central Government shall order an investigation into
the affairs of that company.

Ii. Establishment Of Sfio (Section 211):

The Serious Frauds Investigation Office (SFIO) shall be established by the Central Government
with the object of investigating frauds relating to a company. Provided that until the SFIO is
established under this section, the SFIO set up earlier vide Government of India resolution
No.45011/16/2003-Admn1 dated 2nd July 2003 shall be deemed to be the SFIO for the purpose
of this section.

The appointment of Director in the SFIO shall be done by the Central Government by a
notification in the Official Gazette. The person to be appointed Director shall not be below the
rank of a Joint Secretary to the Government of India having knowledge and experience in
dealing with matters relating to corporate affairs.

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The Central Government may appoint such experts and other officers and employees in the
Serious Fraud Investigation Office as it considers necessary for the efficient discharge of its
functions under this Act.

III. Investigation By Serious Frauds Investigation Office (Sfio) Into The Affairs Of A
Company (Section 212):

The Central Government may by order assign the investigation into affairs of a company to the
Serious Frauds Investigation Office on the basis of an opinion formed based on the following:

on receipt of report of the Registrar or Inspector under section 208;

on intimation of a special resolution passed by a company requesting an investigation into its

affairs;

in public interest; or

on the request of any Department of Central Government or a State Government.

On receipt of Central Government order, the Director may designate such number of inspectors
as he may consider necessary for the purpose of such investigation.

The Serious Fraud Investigation Office, shall conduct the investigation in the manner and follow
the procedure provided in this Chapter; and submit its report to the Central Government within
such period as may be specified in the order.

IV. Investigation Into Company‘s Affairs In Other Cases (Section 213): (Not Yet Enforced)

V. SECURITY FOR PAYMENT OF COSTS AND EXPENSES OF INVESTIGATION

[SECTION 214]

Where an investigation is ordered by the Central Government under section 210(1) or pursuant to
Tribunal‘s order under section 213, then before appointing an Inspector, the Central Government
may require the applicants to give a security not exceeding Rs. 25,000/- towards the costs and
expenses of investigation as per the following criteria:

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Turnover up to Rs. 50 crore- Rs. 10,000/-

Turnover more than Rs. 50 crore and up to 200 crore- Rs. 15,000/-

Turnover more than Rs. 200 crore- Rs. 25,000/-

The security shall be refunded to the applicant if the investigation results in prosecution.

VI. Firm, body corporate or association not to be appointed as inspector. (Section 215)

No firm, body corporate or association shall not to be appointed as inspector for inspection and
investigation of the company.

VII. Investigation Of Ownership Of Company (Section 216):

Where it appears to the Central Government that there is a reason so to do, it may appoint one or
more inspectors to investigate and report on matters relating to the company, and its membership
for the purpose of determining the true persons—

who are or have been financially interested in the success or failure, whether real or apparent, of
the company; or

who are or have been able to control or to materially influence the policy of the company.

The Central Government may define the scope of the investigation and may limit the
investigation to particular shares or debentures.

VIII. Power Of Inspector To Conduct Investigation Into The Affairs Of Other Related
Companies (Section 219)

An inspector appointed under section 210 or section 212 or section 213 to investigate into the
affairs of a company may consider it necessary for the purposes of the investigation, to
investigate also the affairs of any other body corporate—

which is or has been at the relevant time been the company‘s subsidiary or holding or subsidiary
of its holding company;

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which is or has been at the relevant time been managed by any person as a managing director or
manager who is or was at the relevant time the managing director or the manager of the
company;

whose Board of Directors‘ comprises nominees of the company or is accustomed to act in

accordance with the directions of the company or any of its directors; or

in case any person is or has at any relevant time been the company‘s managing director or
manager or employee.

The inspector in the above said situations shall undertake investigation with the prior approval of
the Central Government so for as the results of the investigation are relevant to the investigation
of the affairs of the company for which he is appointed.

XI. Seizure Of Documents By The Inspector (Section 220)

Where in the course of investigation, the inspector has reasonable grounds to believe that books
and papers relating to any company, body corporate, managing director or manager of such
company are likely to be destroyed, mutilated, altered, falsified or secreted he may:

enter the place where such books and papers are kept, and

seize books and papers after allowing the company to take copies or extracts therefrom at its
costs.

The books and papers shall be kept by the inspector in his custody until the conclusion of
investigation and thereafter return to the person from whose custody they were seized. Before
returning, the inspector may take copies or extracts or place identification marks on them or any
part thereof .

The provisions of Criminal Procedure Code 1973 relating to searches or seizures shall apply
mutatis mutandis to every search or seizure made under section 220.

X. Freezing Of Assets Of The Company On Inquiry And To The Investigation (Section

221):

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(THIS SECTION IS NOT YET NOTIFIED)

XI. Inspector‘s Report (Section 223)

Interim and Final Report

Depending on the nature of directions given by the Central Government, an inspector may
submit interim reports and on conclusion of the investigation, he shall submit a final report.

Report to be in writing

Every report shall be in writing or printed or the Central Government may direct in this regards.

Right to obtain copy of the report

A person may obtain a copy of the report by making an application to the Central Government.

Authentication and Admissibility in legal proceedings

Every report to be authenticated by :

the seal of the company whose affairs have been investigated; or

a certificate of the public officer having custody of the report as provided in Section 76 of the
Evidence Act, 1872.

The report shall be admissible in any legal proceeding as evidence of the matter contained in the
report.

Exception: Nothing in this section shall apply to a report referred to in Section 212.

XII. Investigation Of Foreign Companies (Section 228)

Provisions relating to inspection, inquiry and investigation are applicable mutatis mutandis to
foreign companies also.

XIII. Penalty For Furnishing False Statement, Mutilation, Destruction Of Documents

(Section 229):

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A person who is required to provide an explanation or make a statement during the course of
inspection, inquiry or investigation or an officer or other employee of a company or other body
corporate which is also under investigation:

Destroys, mutilates, or falsifies or conceals or tampers or unauthorized by removes or is a party

to such destruction, mutilation or falsification etc. of documents relating to property, assets or
affairs of the company or the body corporate.

makes a party to making of false entry in any document concerning the company or body
corporate; or

provides an explanation which is false or which he knows to be false.

he shall be punishable for fraud in the manner as provided in Section 447.

Notes

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Q. What is National Company Law Tribunal? Describes its composition and functioning of
N National Company Law Tribunal

Introduction

There was a growing need for empowering the Company Law Board and reducing the burden of
High Courts by constituting a high-power Tribunal, which could take up all matters relating to
Company Law and other Corporate Laws at one Forum. Keeping this in view, the 2002
Amendment inserted new Parts IB & IC in the Principal Act for formation of National Company
Law Tribunal (NCLT or Tribunal) and National Company Law Appellate Tribunal (Appellate
Tribunal) respectively. Necessary Section - Section 10FA was also inserted to provide for
dissolution of the present Company Law Board.

Accordingly, on and from the commencement of the Companies (Second Amendment) Act, 2002
the Board of Company Law Administration constituted under sub-section (1) of Section 10E
shall stand dissolved and all matters or proceedings or cases pending before the Company Law
Board on or before the constitution of the Tribunal u/s. 10FB, shall, on such constitution, stand
transferred to the National Company Law Tribunal and the said Tribunal shall dispose of such
cases in accordance with the provisions of this Act.

By a Notification No. 344(E) dated 31.03.2003, the Central Government had brought into force
Sections 2 and 6 of the Companies (Second Amendment) Act, 2002 with effect from 1.04.2003.
Section 2 of the Second Amendment Act relates to definitions, while Section 6 relates to
insertion of new Parts IB & IC relating to National Company Law Tribunal and the Appellate
Tribunal. Immediately thereafter the Central Government came out with a Press Note on
4.04.2003, clarifying that the above Notification of 31st March, 2003 was issued only to enable
the Government to initiate necessary steps to establish the NCLT and make it operational. It was
further clarified that the subject Notification bringing into effect Section 6 of the Second
Amendment Act will only set in.

Constitution

Section 10 FC of the legislation gives the constitution of the NCLT. It shall consist of the total
63 members. One will be the President and 31 members each as judicial and technical members.

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The NCLT will be constituted of 2 member bench and there will be 31 benches located
throughout India. The rationale behind having 31 benches is to have benches in places which
have a High Court jurisdiction because this tribunal covers the functions of High Courts in
matters of Company Law. However, some scholars are of the view that this type of equal
distribution might not serve the purpose in a best possible way. This is because, metropolitan like
Kolkata, Mumbai will have more matters than Ranchi or Patna, and so, they suggest that
distribution of benches should be based depending upon the volume of cases and not equally
distributed across geographical location

Functioning

For the disposal of any case relating to rehabilitation, restructuring or winding up of the
companies, the President will constitute one or more Special Benches consisting of 3 or more
Members each of whom shall necessarily be a Judicial Member, a Technical Member and a
Member appointed under Clause (g) or clause (h) of Section 10FD(3).

After the Special Bench passes an order in respect of a company to be wound up, the winding up
proceedings of such company may be conducted by a Bench consisting of a single Member.

If the Members of a Bench differ in opinion on any point or points, it shall be decided according
to the majority, if there is a majority, but if the Members are equally divided, they shall state the
point or points on which they differ, and the case shall be referred by the President of the
Tribunal for hearing on such point or points by one or more of the other Members of the Tribunal
and such point or points shall be decided according to the opinion of the majority of Members of
the Tribunal who have heard the case, including those who first heard it.

The Central Government will decide upon the number of Benches to be constituted but in
addition to this there shall be a Principal Bench at New Delhi presided over by the President of
the Tribunal, which will inter-alia have powers of transfer of proceedings from one Bench to the
other after recording the reasons for doing so in writing. The Tribunal shall have power to review
its own ordes (Section 10FN).
Qualifications of members

The constitution of the NCLT will be having technical members and judicial members. But, the
eligibility criterion for choosing a technical member leaves much to be desired. A technical

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member can be chosen from various fields of experience including administrative services. It
must be understood by the drafters that the post of a technical member does not really require
experience in bureaucracy. What is neede is the technical know-how which can come by taking
members from public policy think tanks, researchers, professors but the experience in
administration or the IAS officials are not endowed with qualities required of a technical
member. So, the researcher feels that the provision relating to inclusion of administrative
members as technical members should be deleted. The other kinds of persons who constitute the
NCLT are the judicial members. The persons working in the Labour Court, National Tribunal as
magistrates should be considered for eligibility to function as judicial members. The researcher
again reiterates that posts of judicial members should only be occupied by practicing advocates
or members from judiciary like magistrates and members from administration should not be
made eligible for the post. This is because, what is required of a judicial member is the working
knowledge of law which can come only to lawyers or members of judiciary. The legislation
states that the date of retirement of the President will be 67 years and the members age of
retirement will be 65 years. It is given under section 10FE of the legislation. Both President and
Members will have tenure for a period of 3 years and they would be eligible for re-appointment.
What is the troubling factor in all of this is that – the power to re-appoint the President as well as
the members lies with the Executive and this can hamper the independence of the members of
the NCLT. So, the researcher feels that the appointment and re-appointment should be done by a
bi-partisan body and this work should not be left with the executive.

Power of NCLT

The constitution of Benches of the Tribunal is given under section 10FL and the principal bench
will be in New Delhi. The principal bench will be presided over by the President of the NCLT.
The power of giving orders and rectifying the orders are derived from section 10FM (1) and
section 10FM (2) of the Act. Under section 10 FM (1), the tribunal will hear the parties
concerned and then pass order and under section 10 FM (2), the tribunal can re-hear the matter
under 2 years and can rectify the order if there is a mistake of law. Section 10FP gives power to
the tribunal to ask for assistance from the Chief Metropolitan Magistrate and DM to enforce its
decree against the company or persons connected with the order.

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However, the decision of the Tribunal or the Appellate Tribunal is not binding and there is a provision for
filing an appeal to Supreme Court under section 10GF . However, proviso to section 10GF syas that that
appeal has to be filed within 60 days from the date of communication of order of tribunal. However, the
Supreme Court may allow belated filing of application if the cause for delay is genuine. If there is delay
in filing the application, then the law can be circumvented by filing an appeal under Article 136 of the
Constitution under Special leave Petition. Then, it is upon the Supreme Court to allow or not allow the
appeal under Article 136. the researcher is of the view that a time period of 60 days to file an appeal is
less and the time must be extended to 90 days, so that aggrieved people are not deprived of the right to
appeal because of short limitation period

Notes

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