The Companies Act, 1956 The Indian Companies Act, 1913 was repealed by the present Companies Act,

(of 1956) which came into force on 1st April, 1956. The present Companies Act is based largely on the recommendations of the Company Law Committee (Baba Committee) which submitted its report in March, 1952. This Act is the largest piece of legislation ever passed by our Parliament. It consists of 658 sections and 15 schedules. Moving the Bill in 1955 in the Parliament, Mr. C.D. Deshmukh, the Finance Minister at that time said the following about the Bill: It is that the joint stock companies must move with the times and advance in times with prevailing ideas. The country is tolerant of the concentration of economic power and disparity of wealth. We can ignore these trends only at our own peril. The main features of the Companies Act, 1956 are: i. Full and fair disclosure of various matters in prospectus. ii. Detailed information of the financial affairs of a company to be disclosed in its accounts. iii. Provision for intervention and investigations by the Government into the affairs of a company. iv. Restrictions on the powers of managing agents and other managerial Personnel. v. Enforcement of proper performance of their duties by company Management. vi. Protection of minority shareholders. Definition of a Company A company can be defined as a group of persons associated together for the purpose of attaining a common objective, social or economic. According to Lord Justice Lindley a company is an association of many persons who contribute money or moneys worth to a common stock and employs it in some trade or business and who share the profit and loss there from. The common stock so contributed is denoted in money and is the 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. The shares are always transferable although the right to transfer is often more or less restricted. Justice Marshall defines a company as an artificial being, invisible, intangible, existing only in contemplation of the law. Being a mere creation of law, it possesses only the properties, which the charter of its creation confers upon it, either expressly or as incidental to its very existence. According to Haney a company is an incorporated association which is an artificial person created by law, having separate entity, with a perpetual succession and a common seal. Section 2 (1) of the company Act (cap 486) provides that a company means a company formed and registered under this Act or an existing company. Existing company only means a company formed and registered under any of the repealed ordinances. For the purposes of companies Act, the companies includes: a) A registered company under this Act. b) An existing company. c) An unregistered company covered under section 357-364. d) A produce company covered under section 388. e) A foreign company covered under section 365-381. Characteristics of a company

The Certificate of Incorporation issued by the Registrar of the Companies brings the company in to existence as a legal person. There are several advantages by the Incorporation. At the same time, there are also some disadvantages too. Advantages of Incorporation 1. INDEPENDENT CORPORATE EXISTENCE The company is a juristic person. It has separate legal entity. The company is an association of persons formed for the purpose of some business or undertaking carried on in the name of association. But at the same time it has its own independent corporate existence which is called Corporate Personality. It is also known as Rule of Salomon vs. Salomon. It is formed with the members and at the same time it is independent of its members. It is corporate aggregate. It functions like a corporate sole. The company is at law a different person altogether from its members. This is also called as The Veil of Corporation. The theory of corporate entity is indeed, the basic principle on which the whole law of corporation is based. The theory which explains about the Corporate Personality is known as Organic Theory. In England legal personality of a company was recognized in 1867 in Oakes vs Turquand. Importance or separate entity was firmly established by Salomon vs. Salomon (1897) AC 22. SALMON vs. SALMON & Co. LTD (1897 AC 22) It is the leading case showing independent corporate existence Brief facts: Salmon was a boot and shoe manufacturer and had a good reputation and profitability too. He formed Salmon &Co. Ltd. With the share capital of 30,000/- pounds. His wife, one daughter and four sons and himself, totally 7 members, were the subscribers to the company. Each share was @ 1 pound. Salmon paid his share amount. He also paid 10,000/- pounds towards debentures in the company. After some years the company was in a loss, and was wound up. At the time of winding up, the company had left property worth 6,000/- pounds, and the liabilities were 17,000/- pounds (10,000/- pounds towards debentures of Salmon and 7,000/- pounds towards due to unsecured creditors= totally 17,000/- pounds). Unsecured creditors claimed their importance over the property of 6,000/- pounds. Salmon also claimed that he had charge over the company and he was secured creditor, being he was the holder of debentures worth of 10,000/- pounds, which created a charge over the company. The unsecured creditors contended that the company created by Salmon and his family members and in fact Salomon and the company were one and the same person and that the company was a mere agent for Salomon, and therefore they should be paid in priority than salmon. Judgment: The House of Lords gave the judgment in favor of Salmon, treating his debentures being secured debt, created a charge on the property of the company, and also declared that the company was in the eyes of the law, a separate person independent from Salmon. Salmon was not the agent or trustee of the company. In the case Lord Machagater observed the company is at law quite different person altogether from the subscribers of the memorandum and though it might be that after incorporation the business is precisely the same as it was before and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee liable in any shape or form except to the extent and in the manner provided by the Act. Other case laws in support of separate legal personality are the Lee vs Lee Air Farming Ltd and the Maccaura vs. Northern Assurance Company Limited 1952 Act 6119. 2. LIMITED LIABILITY It means the liability of the member is limited to the extent of his share only. In a partnership firm, the partner is liable to the complete extent, even personal liability also. In a partnership firm, A and B partners invest `. 1, 00,000

towards the capital of the firm, each @ `.50, 000/-. The firm brings `.1, 00,000/- loan and becomes insolvent. B also becomes insolvent. A is solvent. The creditors sue A for the recovery of one lakh rupees. A is liable to pay entire amount, being the partner of the firm. He is personally also liable. In the partnership firms, the principle of principal and agency is applied. A partnership firm does not contain separate legal existence. It is not a juristic person. But a company incorporated protects the members of it in way of limited liability. In a company, the principle of principal and agency does not apply. The share holder is liable to the extent of his share amount only, not exceeding that. This is the main distinction between partnership firm and company. 3. PERPETUAL SUCCESSION A man dies. But an incorporated company never dies. It is an entity with perpetual succession. Blackstone explains: Perpetual succession, therefore, means that the membership of a company may keep changing from time to time, but that does not affect the companys continuity, in the like manner as the river Thames is still the same river, though the parts which compose it are changing every instant. 4. SEPARATE PROPERTY The company is a juristic person. It has its own legal entity. It has its own property. It is liable for its own debts. It is independent to the members. The members liability is limited to the extent of their shares only. 5. TRANSFRRABLE SHARES The shares of a public company can easily be transferrable. The transferee and transferor shall have to sign on Form No. 7-c and other necessary forms under Sec.108 and shall submit them along with the original share certificate to the Registrar of Companies and register the name of the transferee. The name of the transferee shall also be entered in the Register of Members of the concerned company, and the name of the transferor shall be struck out. 6. CAPACITY TO SUE AND BE SUED The company comes into existence from the date on which the Certificate of Incorporation is granted. This Certificate brings the company into existence as a legal person. It can sue be sued in its own name. 7. ACCUMULATION OF LARGE CAPITAL A large capital can be accumulated by way of incorporation. Such large amount cannot be procured by a proprietorship or partnership firm. All multi- national companies have accumulated huge capital. The budget of some of the multi- national corporation exceeds several folds than Indias annual budget. The budget of Microsoft, a multi- national corporation of Bill Gate of America is several times greater than our countrys budget.

Lifting the Corporate Veil Since a company is a legal person distinct from its members there is assumed to be a curtain, a veil or a shield between the company and its members. The principle of separate legal entity was established in the case of Salomon vs Salomon and Company Ltd. Thus once a company is formed there is a veil between the company and its members. Based on this principle it is not easy to go behind the curtain and see who are the real persons composing the company. There are however cases when the corporate veil has to be lifted to look at the individual members who are in fact the real beneficial owners of all corporate property. Thus lifting corporate veil means identification of a company with its members and when the corporate veil is lifted the individual members may be held liable for its acts or entitled to its property. Some of the instances when the corporate veil may be lifted include where it is for the benefit of revenue, where it is essential to secure justice and where it is in public interests. The corporate veil may be lifted by: -

a) b)

The courts The statute

a) Lifting by the courts 1. Determination of the character of the company. A company may be declared an enemy character when its directors are residents of an enemy country. Therefore courts may lift the veil to ascertain the nationality of persons controlling the company. In Daimler Company Ltd vs. Continental Tyres and Rubber Company Ltd (1916 AC 307) Daimler company was sued by continental tyre company for recovery of a debt of Tyres supplied. Continental tyres was incorporated in England for purpose of selling in England tyres made in Germany. The shareholders of continental tyres were Germany except one and all directors were from Germany. During the First World War continental tyres commenced an action to recover a debt from Daimler. Daimler contested arguing that a continental tyre was an enemy company. It was held that a continental tyre was an alien company and the payment of debt would amount to trading with an enemy.

2. Prevention of fraud or improper conduct. The veil may also be lifted if a company is formed for a fraudulent purpose or to avoid legal obligations. Professor Leower says that the veil of a corporate body will be lifted where the corporate personality is being blatantly used as a clock for fraud or improper conduct. 3. Where a company is a Sham. This refers to a situation where a company is formed and used for some illegal or improper purpose. 4. Where the company is acting as the agent of the shareholders. When a company is acting as an agent of its shareholders or of another company, it will be liable for its acts. There may be express agreement to the effect or an agreement (of agency) may be implied from the circumstances of each particular case. Case law relating to this is the F.G Film Ltd in Re (1953) I ALL E.R 615. An American company financed the production of a film in India in the name of a British company. The president of the British company, the board of trade of Great Britain refused to register the film as a British film. The decision was held as a valid in view of the fact that British company acted merely as the agent or nominee of the American company. 5. Protection of Revenue. This is especially the case when a company is formed to assist shareholders evade taxes. In such case the shareholders may be held liable to pay income tax. 6. Protecting public policy. Courts lift the corporate veil to protect the public policy and prevent transactions contrary to public policy. Where there is a conflict between the separate entity principled and public policy the courts ignore form and take into account the substance. Lifting by statute.

1. When members fall below statutory minimum, as per section 33 of the Act, a business is not allowed to carry on business for more than six months if membership falls below seven in case of a public company and below two in case of a private company. Anyone aware of the fall of membership and continues to carry on business will be held liable for all debts of the company contracted after six months. 2. Misdescription of the company. Sec 109 of the Act states that the name of the company must be fully and properly mentioned on all documents issued by it. Where an officer of a company signs, on behalf of the company, a bill of exchange, promissory note, Cheque, order for money or goods in which the companys name is not mentioned the officer is personally liable to the holder of the bill of exchange. 3. Holding and subsidiary companies. Although both holding and subsidiary companies are separate entities there are instances where a subsidiary may loose its separate identity to a certain extent. a) Where at the end of the financial year a company has subsidiaries, it may lay before the members in a general meeting not only its own account but also a set of group accounts showing the profits and loss earned by the company and its subsidiaries and their collective state of affairs at the sixth schedules. b) Section 167 empowers the inspector appointed by the court to regard the company as one entity for the purpose of investigation. subsidiary and the holding

4. Investigation of company membership. Section 173 (s) empowers the Registrar to appoint one or more competent inspectors to investigate and report on the membership of any company for the purpose of determing the true persons who are or have been financially interested in the success or failure of the company or able to control or to influence the policy of the company, to investigate whether the corporate veil is lifted, or to ascertain the real persons controlling it. 5. Take over Bids. Section 210 provides that where scheme or contract inviting the transfer of shares or class of shares in the company to another company has been approved by the holders of not less than nine tenths in the value of shares whose transfer is involved the transferee company may at any time within two months after the making of the offer by the transferor company, give notice in the prescribed manner to any dissenting shareholder that it deserves to acquire his shares. 6. Fraudulent conduct of Business. Section 323 of companys Act in the course of winding up of a company it appears that any business of the company has been carried on with intention to defraud creditors, the court may declare that any person who were knowingly, parties to the carrying on such business are to be personally liable for the debts and other liabilities of the company. 7. Prosecution of delinquent officers and members of company. Section 325 of Act, if in the course of winding up of a company it appears that any past or present officer or any member of the company has been guilty of any offence in relation to the company then the court may declare such a person liable for his offence.

Advantages of Incorporation.

1. Limited liability. Limited companies are off springs of preview necessity, that is, men should be entitled to engage in a commercial pursuit without involving the whole of their fortune in that particular pursuit in which they are engaged. 2. Transferability of shares. Shares in a company can be transferred (subject to restrictions in the articles of associations) from one person to another without the consent of other members. 3. Separate Legal entity. A company is not affected by the death, insanity or bankruptcy of a member. 4. Control Control can be gained by acquisition of majority shares, which carry voting power. 5. Permanent existence. A companys life is permanent. 6. Separation of ownership and management. Shareholders are owners of the company. Shareholders elect their representatives to the board of directors, which manages the affairs of the company. 7. Expert management. Companies run large-scale business and have adequate financial resources and as such can afford the services of specialists. Thus companies are run professionally. 8. Public confidence. Formation and running of a company is regulated by the provisions of the companies Act and various other acts. Provisions regarding the appointment and remuneration of directors, compulsory audit and publication of accounts protection of minority shareholders have created greater public confidence. 9. Social Advantages A company helps to gather savings from the public and invests them in sound industrial and commercial ventures. Companies provide employment opportunity to many and since they operate in large scale they ensure economic use of national resources and provisions of goods and services to the public at lower prices. Disadvantages of incorporation 1. Formation of companies is a complicated procedure and is costly. Documents required like the memorandum of Association, the articles, the prospectus or statement in lieu of prospectus are usually drawn by legal experts who charge high fees for their preparation. 2. There is no secrecy regarding the affairs of a company. Wide publicity of the company affairs may lead to economic sabotage by its rivals. 3. It is very expensive to administer a company. This relates to requirements pertaining the holding of general and statutory meetings and returns of annual accounts. The accounts and audit reports require expenses. 4. Doctrine of ultra vires. A company can only trade on the business specified in its object clause of the memorandum of association.

5. Taxation. A company must pay taxes as a legal person while this is not a requirement for partnerships. 6. There are many formalities before a business starts trading. 7. The winding up of a company is widely published thus exposing the position. property of the company to an insecure

Kinds of Companies

1. Chartered companies: The Crown in the exercise of the royal prerogative has power to create a
corporation by the grant of a charter to persons assenting to be incorporated. Such companies or corporations are known as Chartered Companies. Examples of this type of companies are bank of England (1694), East India Company (1600). The powers and nature of business of a chartered company are defined by the charter which incorporates it.

2. Statutory Company: A company may be incorporated by means of a special Act of the parliament or any
state legislature. Such companies are called statutory companies. Such companies are generally formed to carry out some special public undertaking, for example, railway, waterworks, gas, electric generation, etc. Instances of statutory companies in India are Reserve Bank of India, the Life Insurance Corporation of India, the Food Corporation of India, Unit Trust of India, State Trading Corporation, etc.

3. Registered Companies: Companies registered under the Companies act, 1956 or the earlier Companies
Acts are called registered companies. Such companies come into existence when they are registered under the Companies Act and a certificate of Incorporation is granted to them by the Registrar. Section 12(2) provides that a company registered under the Act may be a) A company limited by shares, b) a company limited by guarantee c) unlimited company (a) Companies limited by shares: - The vast majority of registered companies are companies limited by shares. They are so numerous that the word company has come to mean a company limited by shares. Such companies must have a share capital, whereas companies limited by guarantee and unlimited companies may or may not have a share capital. In a company limited by shares the liability of the members is limited by the memorandum to the amount. If any, unpaid on the shares respectively held by them. The liability can be enforced during the existence of the company as well as during the winding up. This principle of limited liability has gone a long way in making this type of companies the most popular form of business organization. The companies limited by shares may be either private or public companies. (b) Companies limited by guarantee: It is a registered public company or private company, in which the liability of members is limited to such amounts as they may respectively undertake by the memorandum to contribute to the assets of the company in the event of its being wound up. In the case of such companies, as in the case of companies limited by shares, the liability of its members is unlimited, to the amount of guarantee undertaken by them. The members are not required to contribute while the company is a going concern. A company limited by guarantee may or may not have a share capital. If it has a share capital, the liability of the members is two fold: i. Liability to pay the share amount; and ii. The amount guaranteed.

A guarantee company without share capital does not obtain its initial and working funds from its members, but from some other source or sources, for example, grants, endowments, fees, subscriptions and the like. But a guarantee company having a share capital raises its initial capital from its members, while the normal working funds would be provided from other sources such as fees, charges, etc. in this case the guarantee is intended to reinforce the financial position of the company as in the case of company limited by shares which has created a reserve liability under section 99 of the Act. The companies limited by guarantee may also be either private or public companies. A guarantee company may not be suitable for ordinary business purposes. Clubs, trade associations, research associations and societies for promoting various objects are the examples of guarantee companies. Many of such companies obtain permission from the Central Government to dispense with the word limited. (c) Unlimited companies: A company not having any limit on the liability of its members is termed as unlimited company. In such a company the liability of each member extends to the whole amount of the companys debts and liabilities but he will be entitled to claim contribution from other members. The articles shall state the number of members with which the company is to be registered and if the company has a share capital, the amount of share capital with which the company is to be registered. Such a company may purchase its own shares as; section 77 does not apply to the case of an unlimited company. Such companies are rarely formed. Such companies are not popular in India. The unlimited companies may be either private or public companies. An unlimited company must not incorporate limited as the last word. It need not have a share capital, but it must file the articles and memorandum. Salient features of unlimited companies. a. It need not deliver copies of its annual accounts, directors and auditors reports to the Registrar with its annual return. It enjoys privacy as regards its financial affairs. This privilege is not extended to an unlimited company, which is a subsidiary or holding of a limited company, or unlimited company, which is potentially under control of two or more limited companies.

b. Alteration of capital do not apply to unlimited companies. A company may alter its capital structure by a special resolution altering the articles. Notice of any alteration must be given to the Registrar within one month unless, alteration increases the companys nominal capital, then notice must be given within 15 days.

c. An unlimited company may acquire any of its own shares if its articles authorize it to do so, even though it uses its own assets to purchase them. If at the time it acquires the shares, the company knows that its existing assets and amounts which it could expect to extract from its members on winding up will not be enough to satisfy its liabilities, the acquisition of the shares will be set a side as a fraud on its creditors. d. An unlimited company need not give more than seven days notice to its members in an extra ordinary general meeting called to pass a resolution other than a special one. The period for other companys is 14 days. e. An unlimited company may issue shares of no proper value. f. An unlimited company has no statutory power to issue redeemable preference shares, but since it can purchase its own shares if articles provide, it could in practice issue redeemable preference shares.

Other instances of unlimited liability a) Section 31

Under this if a company carries on business for more than six months with less than seven members (or two in a private company), every member who knows of the fact is liable for the debts of the company which are incurred for the period of six months, has expired. The section does not apply as regards damages after awarded e.g. a breach of contract by the company. b) Section 332 The section applies if the company is being wound up. The court must be satisfied that the companys business has been carried on with intent to defraud creditors. Person carrying on business fraudulently must be made personally liable for the companys debts. Example, directors could be held liable if knowing that the company is unable to pay its debts as they fall due, they ordered goods on credit or received money from customers for goods, which the company might not be able to supply. c) Section 202 The memorandum of a company may provide or be altered to provide, that the liability of its members shall be limited but the liability of its directors shall be unlimited. This alternative is hardly ever adopted in practice. There are two varieties of each of these companies. A company may be either public company or private company. PRIVATE AND PUBLIC COMPANIES Private Company: A private company is a very suitable form for carrying on the business of family and small concerns as the minimum number of members required is only two. Section 3 (i) (iii) of the Companies Act, 1956 deals with the definition of a private company. The provisions of section 3 (i) (iii) have been misused to form shell companies. Shell companies are companies created with virtually no capital and which do not carry on any activity. Today a private company can be registered with Rs.20 as subscribed capital with each of the two subscribers taking one share of Rs.10 each. As a result, there has been a proliferation of companies which have existed only on papers. The Companies (Amendment) Act 2000 intends to put a stop to this by providing that every private company should have a minimum paid up capital of one lakh rupees. The definition of private company as contained in section 3 (i) (iii) has been amended by the (Amendment) Act 2000 Companies

It means a company which has a minimum paid up capital of one lakh rupees or such higher paid up capital as may be prescribed and by its articles: i. Restricts the rights to transfer its shares. ii. Limits the number of its members to fifty (excluding members who are or were in the employment of the company). iii. Prohibits any invitation to the public to subscribe for any shares or debentures of the company; and iv. Prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives. Where two or more persons hold one or more shares in a company jointly, they shall be treated as a single member. There should be at least two persons to form a private company and the maximum number of members in a private company cannot exceed 50. A private limited company is required to add the words Private Limited at the end of its name. A private company is in the nature of a partnership of persons with mutual faith in each other and its articles place absolute restrictions on transfer of shares. A private company is prohibited from issuing any invitation, oral or written to the public (as opposed to a member of the public) to subscribe for shares or debentures of the company. An offering of shares to the kith and kin of a director is not an invitation to the public to buy shares. Consequently, a private company must raise its capital privately as for example, from the members, or a bank or other financial institutions. If a private company fails to comply with any of the restrictions contained in the articles, it ceases to be entitled to some of the privileges of a private company.

Public Company: The definition of a public company has undergone a substantial change with passing of the companies (Amendment) Act, 2000. According to the amended section 3 (i) (iv) of the Companies act, 1956, A public company means a company which ii. iii. i. Is not a private company Has a minimum paid up capital of five lakh rupees or such higher paid up capital, as may be prescribed Is a private company which is a subsidiary of a public company.

Thus, a public company is one that is not a private company. In addition, it has to satisfy the condition of having the minimum prescribed share capital of five lakh rupees. Further, a private company which is a subsidiary of a public company will also be a public company. Hence, from the day the Amendment Act has come into force (i.e. December 13, 2000) all private companies that are subsidiaries of public companies have themselves become public companies. As per section 3 (i) (iv), an entry barrier has been created in respect of public companies. Every public company will be required to have a minimum paid-up capital of five lakh rupees. Further, every public company, existing on the commencement of the companies ( Amendment) Act, 2000, with a paid up capital of less than five lakh rupees, shall, within a period of two years from such commencement, enhance its paid up capital to five lakh rupees. There must be at least seven persons to form a public company. It is of the essence of a public company that its articles do not contain provisions restricting the number of its members or excluding generally the transfer of its shares to the public or prohibiting any invitation to the public to subscribe for its shares or debentures or acceptance of deposits from persons other than its members, directors or their relatives. Generally speaking, any member of the public may acquire shares in a public company on payment of the share money. The articles of a public company may, however, contain restrictions on the issue or transfer of shares. The company remains a public company despite such restrictions. Only the shares of a public company are capable of being dealt in on a stock exchange. A company is a public company unless it is clear from its constitution that it is a private company. Distinction between a public company and a private company 1. Minimum number of members The minimum number of persons required to form a public company is seven, whereas in a private company it is only two. 2. Maximum number of members There is no limit on the maximum number of members of a public company, but a private company cannot have more than fifty members excluding past and present employees. 3. Minimum paid up capital A company to be incorporated as a private company must have a minimum paid-up capital of one lakh rupees and a public company must have a minimum paid-up capital of five lakh rupees. 4. Restriction on name The name of public company must end with the word Limited. But, a private company must add the words private limited at the end of its name. 5. Commencement of business A private company can commence its business as soon it is incorporated. But, a public company shall not commence its business immediately unless it has been granted the certificate of commencement of business.

6. Invitation to public A public company by issuing a prospectus may invite public to subscribe to its shares whereas a private company cannot extend such invitation to the public. 7. Transferability of shares There is no restriction on the transfer of shares in the case of a public company whereas a private company by its articles must restrict the right of members to transfer the shares. 8. Issue of share warrants A public company can issue share warrants but such a right is denied to a private company. 9. Further issue of capital A public company proposing further issue of shares must offer them to the existing members. A private company is free to allot new issue to outsiders. 10. Number of directors A public company must have at least three directors whereas a private company may have two directors. 11. Statutory meeting A public company must hold a statutory meeting, to file with the Registrar a statutory report. But a private company has no such obligations. 12. Quorum If the articles of a company do not otherwise provide the quorum is five members personally present in the case of a public company. The quorum in the case of private companies is two members personally present. 13. Restrictions on the appointment of directors A director of a public company shall file with the Registrar consent to act as such. He shall sign the memorandum and enter into a contract for qualification shares. He cannot vote or take part in the discussion on a contract in which he is interested. Two thirds of the directors of a public company must retire by rotation. These restrictions do not apply to a private company. 14. Managerial remuneration Total managerial remuneration in the case of a public company cannot exceed 11% of net profits, but in the case of inadequacy of profits a minimum of `. 50,000 can be paid. These restrictions do not apply to a private company. 15. Financial assistance for the purchase of shares In a private company any person can get financial assistance for the purchase of companys own shares. But a public company is prohibited from providing financial assistance for the purchase of its own shares. MEMORANDUM OF ASSOCIATION A Memorandum of Association sets the fundamental conditions upon which the company is allowed to be incorporated. It defines the relationship of the company and creditors the outside public as well as the shareholders. It also enables creditors and the outside public knows the range of permitted business of the company.

In Ashbury Railway Carriage and Company vs. Rich it was noted that the memorandum is as it were, the area beyond which the action of the company can not go inside that area the shareholders may make such regulations for their own government as they think fit. Importance of memorandum a) Provides basis of incorporation. b) It determines the areas of operations of the company. c) It defines the relationship of the company with the outsiders. d) It is a charter of the company, which can be altered only under special circumstances. Purpose of memorandum There are two purposes of memorandum: a) To enable shareholders know where their funds are to be used and risks they are undertaking in making such investments. b) To enable outsiders of the company know the objectives of the company and whether the contracts they intend to make with the company are within the objects of the company. Preparation of the memorandum Schedule 1 of the act gives examples of various types of memoranda. Promoters can adopt any of these tables with necessary modifications. These prescribe forms of memoranda are as under: Table B for a company limited by shares, Table C for a company limited by guarantee and not having share capital, Table D for a company limited by guarantee and having share capital, Table E for unlimited company that has share capital. Section 5 provides that memorandum of every company shall be in English and printed. Section 6 states that memorandum shall be signed by each subscriber (with postal address and occupation) in the presence of at least one witness who shall affect the signature and shall likewise add his address and occupation if any. Contents of memorandum Section 5 of the companies Act stipulated the memorandum should compose the following clauses. Clause 1: The name Promoters must enquire from the register as to whether the proposed name of the company is available for registration and is not considered undesirable; this should be done before filling the memorandum or even before its preparation. Section 19 provides that promoters may reserve a name pending registration of the company for a period of thirty to sixty days.

Section 5 (1) requires a company if limited to use the word limited as the word in its name. Section 21 provides that a company may drop the word limited if it obtains a license to do so from the Attorney General. Such license is given if the Attorney General is satisfied that: (i) The company to be formed is to promote commerce, art science, religion, charity or any useful object. (ii) It intends to apply its profits or other income to promoting its objects. (iii) It prohibits the payment of any dividends to its members. Under section 20, a company can change its name by special resolution and with the approval of the Registrar signed in writing. A special resolution usually requires three fourths majority of the votes at general meeting. The above section provides that the company may change its name if it is almost like that of an existing company, if the Registrar so directs within six months of its registration. The name does not affect any rights or obligations of the company or any legal proceedings by or against it (section 20 (4)). Clause 2: Registered office Every company must have a registered office from the day on which it begins to carry on business or within fourteen days after incorporation whichever is earliest; to which notices and all communications can be made (section 107). Section 108 states that notice of the address of the registered office, and of any change therein must be given to the Registrar within 14 days after incorporation or of the change. The registered office is not necessarily the headquarters of the company. Documents that must be kept at the registered office include: (i) Register of members and index of members, unless made up elsewhere or kept by an agent (section 112&113). (ii) Minute books of general meetings section 146. (iii) The register of directors interests in shares or debentures. (iv) A copy of every instrument creating any charge requiring registration. (v) The companys register of charges affecting property of the company. Clause 3: The objectives of the company Objects clause defines the sphere of the companys activities, it aims that its formation seeks to achieve and the kind of activities or business that it proposes to conduct. Objects give protection to the shareholders and creditors as they are sure where the funds will be applied. Objects also help outsiders know the powers of the company.

Choice of the companys objects Subscribers to the memorandum may choose any object for the proposed company. When drawing the object the subscribers should note the following: (i) Objects should not include committing an illegality. (ii) The objects should not contradict the Act. (iii)Objects should not be against public policy. Objects clause in the memorandum has to state. (i) The main objects of the company and objects incidental or auxiliary to the attainment of the main objects (ii) Other objects of the company not included in (i) above. A company cannot continue to peruse subsidiary objects after the main object has come to an end. Incidental acts: A company may do anything which is fairly related to its core business. Anything incidental to the attainment or pursuit of any of the express objects of the company will unless expressly prohibited to be within the implied powers of the company. 1. Evans vs. Brunner, Mond and company (1921) 1 ch 359. A company engaged in manufacture of chemicals proposed to devote substantial sum of money to the encouragement of scientific education. It was proved that this will in the end benefit the company, but a shareholder objected that this was beyond the powers of the company. It was held that the proposal was fairly incidental to the companys objects. 2. Foster vs. London, Chatham and Dover company (1895) 1 QB 711. A company acquired a piece of land for the purpose of its railway. The railway was erected on arches. The company left the arches as workshops e.t.c. The neighbours objected on an account of noise and claimed that the act was ultra vires to the company it was held that letting of the arches was valid. 3. Forrest vs. Manchester etc Rly company (1861) 4 Ltd 666. A railway company had the authority to keep boats to be supplied for a ferry. It employed the boats for excursion trips to the sea when they were not wanted for the ferry. It was held that the use of the boats was incidental to the main purpose and was within the powers of the company. The following activities have also been held incidental to carrying of business: a) Appointing agents and hiring servants. b) Borrowing money and giving security for loans. c) Paying gratuities to employees. d) Paying pensions to former officers and employees or their dependents. In the following cases companies were found to engage in activities beyond their powers. 1. London county council vs. Attorney General (1902) AC 165. The council had the power to run tramways. It ran omnibuses to feed the tramways. It was held that this was outside its powers as the omnibuses business was in no way incidental to the business of working tramways.

2. Stephenes vs. Mysore reefs (Kangudry Minin Company Ltd (1902) 1 ch 745. The company object authorized to it acquire gold mines in Mysore and elsewhere and it had other clauses. The company wanted to work in Ghana. It was held that elsewhere could not be taken to mean any other place outside India . Clause IV: Liability clause Promoters must indicate a) Whether the liability of the company is limited or unlimited. b) If limited, is it by shares or guarantee. c) If the company is public promoters have to indicate the liability of directors whether limited or unlimited. Liability clause is entirely omitted from the memorandum in an unlimited company. Clause V : The capital clause States that the registered share capital is divided into shares of a fixed amount. Registered capital is also called nominal or authorized capital. The clause is omitted in the companies with unlimited liability and the companies limited by guarantee having not shown capital. Clause VI: Association or subscription clause. This is a declaration by subscribers that they desire to form a company and agree to take shares stated against their names. The signature of each subscriber may be any of the subscribers. Each subscriber must indicate his address, description and occupation. General form of clause. If the several persons whose names and address are subscribed are desirous of being formed into a company in pursuance of the memorandum of association and we respectively agree to take the members of shares in the company set opposite of our respective names. After registration no subscriber to the memorandum can withdraw his description on any ground. Alteration of the memorandum Section 7 provides that a company cannot alter the conditions contained in the memorandum except in the cases; in the mode and to the extent for which express provision has been made in the companies Act. Section 8 gives seven instances where a company may alter its objects after a special resolution. i) To enable the company carry its business more economically and efficiently. ii) To attain its main purpose by new or more improved means. iii) To enlarge or change the local area of its operation. iv) To carry on some business which may be conveniently combined with its own. v) To restrict or abandon any of its objects. vi) To sell or dispose part of or whole of its business.

vii) To amalgamate with another company. The proposed alteration become effective unless within thirty days of the resolution, objection is made to the courts in which case the alteration will be effective if the court affirms it. Section 8 (2) provides not such application may be made a) By holders of that less than 15% of the companys members if the company is not limited by shares. b) By holders of not less than 15% of the companys debentures entitling the holders to object to the alteration of its objects. Section 8 (7) after a resolution altering the objects, a printed copy of the memorandum must be delivered to the Registrar within fourteen days after the expiry of the period allowed for objection. Section 8 (2) the fact that an alteration does not come within one of the seven clauses specified in section 8, does not render the alteration invalid unless objection is submitted within thirty days. No alteration can be made requiring a member to take up further shares or increasing his liability unless he agrees in writing (section 24). The courts cannot allow an alteration, which is incompatible with the original of the objects of the company. DOCTRINE OF ULTRA VIRES Ultra vires is a term given to refer to a situation a company does anything beyond powers given in the memorandum. A company must not engage in activities which are not expressly or impliedly authorized by the memorandum, otherwise any act which exceeds the powers of the company will be ultra vires and void and thus cannot be ratified even by the assent of the whole body of directors. An Act of Intra vires the company if it is within the companys powers, this is the case when; (i) The act is within the companys objects as stated in the memorandum of association of the company. (ii) The act is reasonably incidental to the companys objects, which are expressly stated in the memorandum of association and is done in order to effectuate or achieve the stated objectives. The doctrine of ultra vires is illustrated in Ashbury Railway Carriage and Iron Company vs. Riche In this case the memorandum gave the company powers to make and sell railway carriages. The directors entered in to a contract to lay a railway in Belgium and the company in a general meeting subsequently purported to ratify the act of the directors by passing a special resolution to that effect. The company later dishonored (repudiated) the contract and the other party sued for breach of contract. House of Lords held that there could be no ratification of a contract made by a company ultra vires even though every single member consented there to. The contract to make a railway in a foreign country was a nature not included in the memorandum. The company was therefore held not liable for the breach of contract. The doctrine of ultra vires approved but qualified in Attorney General vs. Great Eastern Railway Company (1880) 5 AC by adding that the doctrine ought to be reasonably understood and applied and whatever may fairly be regarded as incidental to or as consequential upon those things which the legislature has authorized ought not to be held ultra vires to the company.

The main issue in the doctrine of ultra vires is that a company not being a natural person should not be held responsible for its own acts or agents acts that are beyond its powers and privileges. But there is nothing to prevent a company from protecting its property. A case on this point is National Telephone co. vs. St. Peter Port Constables (1900) AC 317. A telephone company put wires where it didnt have powers to put. The defendant cut them down. It was held the company could sue for damages for the wires. If transaction is beyond powers of directors but within powers of the company, the shareholders can ratify it by a resolution in a general meeting provided they have all facts relating to the transaction to be ratified. Effects of ultra vires transactions 1. Any member may obtain an injunction of the court to restrain the company from committing an ultra vires act. 2. Directors may be held personally liable for ultra vires payments. But the directors having refunded the money could get indemnity as against the person who received the payment with the knowledge that the payment to him was ultra vires. 3. Directors entering into ultra vires contracts may be liable to the third party for breach of warranty of authority. Directors will be liable to the losses incurred to third parties provided the third party does not know that they have no authority to enter in a particular contract.

4. In Weeks vs. Property a company invited applications for a loan on debentures but the company had
already issued a maximum limit of debentures. Directors were held personally liable to a plaintiff who offered a loan of $.500. In order to make directors personally liable it must be established that their act amounts to an implied misrepresentation of facts and not of law. 5. If funds have been spent ultra vires in purchasing some property, its right over the property will be protected. 6. Ultra vires contracts have no legal effect and are void. A company cannot sue or be sued on those contracts because they are void. Every person dealing with the company is expected to know its powers and if he enters into a contract that is inconsistent with them he does so at his own risk. Exceptions where a party can sue on an ultra vires contract. a. If the company takes an ultra-loan and uses it to pay off the lawful debts of the company then the second creditor (render) steps to the position of the paid off creditor and to that extent will have the right to recover his loan from the company. But he cannot claim any right to securities held by the original creditor. b. If the property handed over to the company exists in specie or if it can be traced, the party handing it over can reclaim it. c. If money is lent by a company that does not have the power to lend it, it can be recovered because the debtor will be stopped from taking the plea that the company had no power to lend. d. A company will be liable for any tort of its employees if: i. The tort is committed in pursuance of its stated objects.

ii. It is committed by employees within the course of their employment. A company will not be liable for ultra vires torts.

ARTICLES OF ASSOCIATION Articles of Association are the rules and regulations of a company formed for the purpose of internal management. According to the Lord Justice Bowen the Memorandum contains the fundamental conditions upon which alone the company is allowed to be incorporated. They are conditions introduced for the benefits of creditors and the outside public. The Articles of Association are the internal regulations of the company and are for the benefit of shareholders. Lord Cairns said the Articles play a part subsidiary to the Memorandum of association. They accept the Memorandum as a charter of incorporation of the company and so accepting the Articles proceed to define duties, rights and powers of the governing body as between themselves and the company at large and the mode and form in which business of the company is to be carried on and the mode and form in which changes in the internal regulations of the company may from time to time be made. Section 2 (1) Articles include the regulations contained in Table A Schedule 1 of the Act in so far as they apply to the company. Articles were to be framed carefully so that they do not go beyond the powers of the company. They should not violate any provision of the Companies Act as these will make them null and void. In Perneril Gold mines Ltd (1898) 1 ch. 122 the Articles of a company provided that no petition for a winding up could be presented unless: a) Two directors consented in writing, b) The petitioner held is of the issue of the share capital of these conditions were fulfilled. It was held that the restrictions were invalid and a petition could be presented. Functions of the Articles of Association 1. Define duties, rights and powers of the governing body. 2. Determine the mode and the form in which the business of the company may from time to time be made. Section 9 stipulates that the Articles must be registered before incorporation. Section 11 states a company limited by shares may adopt all or any part of the regulations of Table A are not excluded or modified, these regulations shall be the regulations of the company so far as they are applicable. Section 12 provides that if special Articles are registered they must be: a) Printed in English b) Divided into paragraphs c) Dated d) Signed by each subscriber and witnessed. Contents of Articles of Association. As an internal constitution promoters and later the members can indicate any rules they may wish to have so long as such rules are permissible. The following are expected to be included in the Articles of Association.

a) Share capital, rights of shareholders, and variation, of the rights payments of commissions share certificates. b) Lien on shares c) Calls on shares. d) Transfer of shares e) Transmission of shares f) Forfeiture of shares g) Conversion of shares into stock h) Share warrants i) Alteration of capital j) General meetings and proceedings there at k) Voting rights of members, voting and poll proxies. l) Directors their appointments remuneration, qualifications, powers and proceedings of board of directors. m) Manager. n) Secretary. o) Dividends and reserves p) Accounts, audit and borrowing powers q) Capitalization of profits r) Winding up. Alteration of Articles of Association Section 13of Companies Act chap 486, provides that a company can alter or add to its Articles by passing a special resolution. Any alteration made in the Articles shall; subject to the provisions of the act; be as valid as if originally contained therein. Limitations to alterations. The following limitations should be observed regarding alteration of articles: a) Such alteration should not be inconsistent to the act. i) Restrict the members right to petition for winding up under section 221. ii) Authorize the company to purchase its own shares. iii) Authorize payment of dividends out of capital. b) It must not contradict the Memorandum of association. However Articles may be referred to where there is an ambiguity in the Memorandum or where the Memorandum is silent on an issue. c) Alteration should not sanction anything illegal. d) Alteration must be made bona fide and for the benefit of the company as a whole. e) An alteration to increase the members liability will only bind those who consent to it.

Section 24 provides that no member is bound by an alteration of the Memorandum or Articles which requires him to increase his holding of shares or increase his liability to pay money to the companies unless: i) Alteration is made before he became a member. ii) He agrees in writing to be bound by such alteration. An alteration of Articles subject to restrictions in section 24 may be retrospective in effect, but this will not enable the company to achieve a lien over shares after they have been transferred for value by a debtor. The relationship between the Articles and Memorandum of Association. 1. The Articles are subordinate to the Memorandum. The Memorandum states the objectives of the company while the Articles provide the manner in which the internal management of the company is to be carried out. 2. The Memorandum must be read in conjunction with Articles where it is necessary to; a) Explain any ambiguity in terms of the Memorandum. b) Supplement the Memorandum on matters where it is silent but cannot extend the scope of the Memorandum. 3. The terms of the Memorandum cannot be modified or controlled by the articles. Legal effects of Memorandum and articles: 1. Section 22 provides that after the Articles and Memorandum of association have been signed by, bind the members as if they have been signed by each individual member of the company. The legal implications of the Articles and Memorandum may be dissolved in four categories. a) Members to the company. Each member is bound to the company as if each member has actually signed the Memorandum and the articles b) Company to the member. A company is bound to the members and the company can exercise its rights as against any member only in accordance with the provisions in the Memorandum and articles. A member can obtain an injunction restraining the company from doing ultra vires act. In wood vs. Odesa Water Works Company Ltd (1889) 42 ch. D630 the Articles of company provided that the directors may with the sanction of the company at general meeting declare a dividend to be paid to the members. A resolution was passed to give the shareholders debenture bonds instead of paying the dividend in cash. It was held that the words to pay meant paid in cash; and a shareholder could restrain the company from acting on the resolution on the ground that it contravened the articles. A member can also obtain an injunction restraining the company from committing a breach of the Memorandum and the articles, which would affect his rights as a member.

c) Members to members. The Memorandum and Articles constitute a contract between the members and each member and is bound to as against the other or others. Lord Herschell in Welton vs. Saffery (1897) AC 299 observed it is quite true that the Articles constitute a contract between each member and the company and there is no contract in terms of between the individual members of the company but the Articles do not any the less, regulate their rights inter se such rights can only be enforced by or against a member through the company or through the liquidators; representing the company but no member has between himself and other members any right beyond that which the contract of the company gives. d) Company to outsiders. The Articles do not constitute any binding contract as between a company and an outsider. In general law, a stranger to a contract cannot acquire any rights under such a contract. Cases on these points are: i) Brown vs. La Trinidad (1887) 37 ch. D1. The Articles of a company contained a clause whereby B was to be a director irremovable for a period of time. He was removed from office before the period; it was held that it could not restrain the company from removing him as there was no contract between him and the company. ii) Elay vs. Positive Government Security Life Ass.Co. 1876 1 Ex D 88. The Articles of a company provided that it should be the solicitor of the company for life and could be removed from office only for misconduct. P took office and became a shareholder, after some time the company dismissed him without alleging misconduct. E sued the company for damages for breach of contact. It was held that the Articles did not constitute any contract between the company and outsiders and as such no action could lie. The case in Elay has brought in some problems. The courts have therefore in some cases acted on the footing that a clause in the Articles not dealing with the rights of a member as such but apparently intended to operate as a contract with him is to be regarded as the basis of a contract. In Swabey vs. ports Danwin Gold mining company (1889) 1 Meg 385, the Articles provided that a director should receive a specified sum per annum by way of remuneration. In July, the company passed a special resolution reducing the sum as from the end of the proceeding year. The plaintiff, who was a director, resigned and sued for the services, it was held that he was entitled to sue for remuneration up for the date of his resignation. Constructive notice of Memorandum and articles Each person dealing with the company is assumed to know the contents of the Memorandum and Articles of Association. It is presumed the individuals dealing with the company have read and understood the documents. This is called the doctrine of constructive notice. Memorandum and Articles are open and accessible to all special resolution. They become public documents once registered and an outsider is in notice of their contents in the same way as he is of the Articles and Memorandum. Lord Hartheley in Mahoney vs East Hollyford mining company (1875) LR7 HL 869 observed. But, whether he actually reads them or not it will be presumed that he has read them. Every joint stock company has its Memorandum and Articles of Association open to all who are minded to have any dealings whatever with the

company and those who sue deal with them must be affected with notice of all that is contained in these two documents. Anyone dealing with a company is presumed not only to have read the Memorandum and Articles but have understood them properly (Oak Bank Oil Co. vs. Crum (1882) 8 A. 65). The doctrine also prevents one from alleging that he did not know that the Memorandum and Articles rendered a particular act ultra vires to the company. Doctrine of indoor management. This doctrine imposes a limitation on the doctrine of constructive notice. Persons dealing with the company once they are satisfied that the company has powers to enter the proposed transaction, they are not required enquire into the regularity of any internal proceedings they are entitled to assume that provisions of Articles have been complied with by the company in its internal working. If the proposed contract is within the powers of the company the company will be bound to the outsider and claims of the outsider will not be affected in any way by the internal irregularity of the company. This is the doctrine of indoor management or the rule in royal British Bank v. Turquand. In Royal British Bank vs. Turquand the Articles empowered the directors to borrow money provided they were authorized by a resolution passed at a general meeting of the company. The directors borrowed money from T and issued a bond to him without the authority of resolution passed at the general meeting. It was held that the company was liable for the money to T because once the Articles authorized directors to borrow subject to a resolution of the general meeting of the company T, was entitled to assume that the directors were borrowing on the authority of the resolution passed at a general meeting of the company, T was not required to enquire into the regularity of the companys internal proceedings. In Premier industrial Bank Ltd Vs. Calton Manufacturing company, it was stated that if the directors have power and authority to bind the company, but certain preliminaries are required to be gone through on the part of the company before that power can be duly exercised, then the person contracting with the directors is not bound to the section, that all these preliminaries have been observed he is entitled to presume that the directors are acting lawfully in what they do. The rule is also held in Fuontain vs. Carmarthen Rly co. (1868) LR5 ESQ 316. The general rule here is that persons dealing with limited liability are not bound to inquire into the regularity of the internal proceedings and will not be affected by irregularities of which they had no notice. Exceptions to the Doctrine of indoor management. The doctrine of indoor management will not apply in the following instances: i) Where the outsider has notice (actual or constructive) that the prescribed procedure has not been complied with by the company. In Howard Patent Ivory Company, the directors were empowered to borrow up to $1000 and such further sums as the company in the general meeting might authorize without such consent they issued to themselves debentures for sums in excess of $1000. It was held they had knowledge of irregularity in the internal proceedings of the company, the company would be liable for $1000 only. Sums borrowed in excess of this were held invalid.

ii) A company cannot be held liable for forgeries committed by its officers. In Ruben vs. Great Fingall Ltd, the company secretary issued a share certificate by forging the signatures of the two directors under the seal of the company. The plaintiff contended that it was not his duty to verify the signatures. Whether signatures were genuine or not was part of internal management. It was held that the certificate was not binding on the company as the rule in Turquands case does not protect forgery. Lord Loreburn observed in the case it is quite true that persons dealing with limited liability companies are not bound to inquire into their indoor management and will not be affected by irregularities of which they have no notice. But this doctrine applies only to irregularities that otherwise might affect a genuine transaction, it can apply to forgery. iii) When the outsider is negligent: Any person entering into a contract with the company ought to make proper inquires, and in the absence of this he cannot claim benefit under the Turquard case. In Arand Bihari Lal vs. Dinshaw and company, the plaintiff accepted transfer on the companys property from its accountant. The transfer was held to be void because such a transaction is apparently beyond the scope of the accountants powers. It puts the person dealing with the company into inquiry, the plaintiff should have insisted on seeing the power of Attorney executed in favour of the accountant by the company. Even delegation clause is not enough to make the transaction valid unless the accountant is in fact authorized. iv) When an outsider does not have any knowledge of the Articles. A person, who did not consult the companys Memorandum and Articles and consequently did not act in reliance on those documents, cannot be protected under the rule in Turquands case. v) Where an act is ordinarily beyond the apparent authority. An outsider will not be protected by the rule in Turquards case if the act of the agent is one which would not ordinarily be within his powers simply because under the Articles the power of making such a contract might have been entrusted to him. The outsider can only hold the company liable if only the power had in fact been delegated. The facts of Anard bihari Lal vs. Dinshaw and company illustrate this point. Book building refers to the process of generating, capturing, and recording investor demand for shares during an IPO (or other securities during their issuance process) in order to support efficient price discovery. Usually, the issuer appoints a major investment bank to act as a major securities underwriter or book runner. The book is the off-market collation of investor demand by the book runner and is confidential to the book runner, issuer, and underwriter. Where shares are acquired, or transferred via a book build, the transfer occurs off-market, and the transfer is not guaranteed by an exchanges clearing house. Where an underwriter has been appointed, the underwriter bears the risk of non-payment by an acquirer or non-delivery by the seller. Book building is a common practice in developed countries and has recently been making inroads into emerging markets as well. Bids may be submitted on-line, but the book is maintained off-market by the book runner and bids are confidential to the book runner. The price at which new shares are issued is determined after the book is closed at the discretion of the book runner in consultation with the issuer. Generally, bidding is by invitation only to clients of the book runner and, if any, lead manager, or co-manager. Generally, securities laws require additional disclosure requirements to be met if the issue is to be offered to all investors. Consequently, participation in a book build may be limited to certain classes of investors. If retail clients are invited to bid, retail bidders are generally required to bid at the final price, which is unknown at the time of the bid, due to the impracticability of collecting multiple price point bids from each retail client. Although bidding is by invitation, the issuer and book runner retain discretion to give some bidders a greater allocation of their bids than other investors. Typically, large institutional bidders receive preference over smaller retail bidders, by receiving a greater allocation as a proportion of their initial bid. All book building is conducted off-market and most stock exchanges have rules that require that on-market trading be halted during the book building process.

The key differences between acquiring shares via a book build (conducted off-market) and trading (conducted onmarket) are: 1) bids into the book are confidential vs transparent bid and ask prices on a stock exchange; 2) bidding is by invitation only (only clients of the book runner and any co-managers may bid); 3) the book runner and the issuer determine the price of the shares to be issued and the allocations of shares between bidders in their absolute discretion; 4) all shares are issued or transferred at the same price whereas on-market acquisitions provide for a multiple trading prices. It is one of the merger process the book runner collects bids from investors at various prices, between the floor price and the cap price. Bids can be revised by the bidder before the book closes. The process aims at tapping both wholesale and retail investors. The final issue price is not determined until the end of the process when the book has closed. After the close of the book building period, the book runner evaluates the collected bids on the basis of certain evaluation criteria and sets the final issue price. If demand is high enough, the book can be oversubscribed. In this case the green shoe option is triggered. Book building is essentially a process used by companies raising capital through public offeringsboth Initial Public Offers (IPOs) or follow-on public offers (FPOs) to aid price and demand discovery. It is a mechanism where, during the period for which the book for the offer is open, the bids are collected from investors at various prices, which are within the price band specified by the issuer. The process is directed towards both the institutional as well as the retail investors. The issue price is determined after the bid closure based on the demand generated in the process. An initial public offering (IPO) or stock market launch is the first sale of stock by a company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises. Many companies that undertake an IPO also request the assistance of an investment banking firm acting in the capacity of an underwriter to help them correctly assess the value of their shares, that is, the share price (IPO Initial Public Offerings, 2011). In 1602, the Dutch East India Company was the first company in the world to issue stocks and bonds in an initial public offering (Chambers, 2006). Reasons for Listing When a company lists its securities on a public exchange, the money paid by investors for the newly issued shares goes directly to the company (in contrast to a later trade of shares on the exchange, where the money passes between investors). An IPO, therefore, allows a company to tap a wide pool of investors to provide itself with capital for future growth, repayment of debt or working capital. A company selling common shares is never required to repay the capital to investors. Once a company is listed, it is able to issue additional common shares via a secondary offering, thereby again providing itself with capital for expansion without incurring any debt. This ability to quickly raise large amounts of capital from the market is a key reason many companies seek to go public. There are several benefits to being a public company, namely: 1. 2. 3. 4. 5. 6. Bolstering and diversifying equity base Enabling cheaper access to capital Exposure, prestige and public image Attracting and retaining better management and employees through liquid equity participation Facilitating acquisitions Creating multiple financing opportunities: equity, convertible debt, cheaper bank loans, etc.

Disadvantages on an IPO There are several disadvantages to completing an initial public offering, namely: 1. Significant legal, accounting and marketing costs 2. Ongoing requirement to disclose financial and business information 3. Meaningful time, effort and attention required of senior management

4. Risk that required funding will not be raised 5. Public dissemination of information which may be useful to competitors, suppliers and customers Procedure IPOs generally involve one or more investment banks known as "underwriters". The company offering its shares, called the "issuer", enters a contract with a lead underwriter to sell its shares to the public. The underwriter then approaches investors with offers to sell these shares. The sale (allocation and pricing) of shares in an IPO may take several forms. Common methods include: 1. 2. 3. 4. 5. Best efforts contract Firm commitment contract All-or-none contract Bought deal Dutch auction

A large IPO is usually underwritten by a "syndicate" of investment banks led by one or more major investment banks (lead underwriter). Upon selling the shares, the underwriters keep a commission based on a percentage of the value of the shares sold (called the gross spread). Usually, the lead underwriters, i.e. the underwriters selling the largest proportions of the IPO, take the highest commissionsup to 8% in some cases. Multinational IPOs may have many syndicates to deal with differing legal requirements in both the issuer's domestic market and other regions. For example, an issuer based in the E.U. may be represented by the main selling syndicate in its domestic market, Europe, in addition to separate syndicates or selling groups for US/Canada and for Asia. Usually, the lead underwriter in the main selling group is also the lead bank in the other selling groups. Because of the wide array of legal requirements and because it is an expensive process, IPOs typically involve one or more law firms with major practices in securities law, such as the Magic Circle firms of London and the white shoe firms of New York City. Public offerings are sold to both institutional investors and retail clients of underwriters. A licensed security salesperson (Registered Representative in the USA and Canada) selling shares of a public offering to his clients is paid a commission from their dealer rather than their client. In cases where the salesperson is the client's advisor it is notable that the financial incentives of the advisor and client are not aligned. In the US sales can only be made through a final prospectus cleared by the Securities and Exchange Commission. Investment dealers will often initiate research coverage on companies so their Corporate Finance departments and retail divisions can attract and market new issues. The issuer usually allows the underwriters an option to increase the size of the offering by up to 15% under certain circumstance known as the green shoe or overallotment option. A venture capitalist named Bill Hambrecht has attempted to devise a method that can reduce the inefficient process. He devised a way to issue shares through a Dutch auction as an attempt to minimize the extreme under pricing that underwriters were nurturing. Underwriters, however, have not taken to this strategy very well which is understandable given that auctions are threatening large fees otherwise payable. Though not the first company to use Dutch auction, Google is one established company that went public through the use of auction. Google's share price rose 17% in its first day of trading despite the auction method. Brokers close to the IPO report that the underwriters actively discouraged institutional investors from buying to reduce demand and send the initial price down. The resulting low share price was then used to "illustrate" that auctions generally don't work. Perception of IPOs can be controversial. For those who view a successful IPO to be one that raises as much money as possible, the IPO was a total failure. For those who view a successful IPO from the kind of investors that eventually gained from the under pricing, the IPO was a complete success. It's important to note that different sets of investors bid in auctions versus the open marketmore institutions bid, fewer private individuals bid. Google may be a special case; however, as many individual investors bought the stock based on long-term valuation shortly after it launched its IPO, driving it beyond institutional valuation.

Pricing of IPO The under pricing of initial public offerings (IPO) has been well documented in different markets (Ibbotson, 1975; Ritter 1984; Levis, 1990; Mc Guinness, 1992; Drucker and Puri, 2007). While issuers always try to maximize their issue proceeds, the under pricing of IPOs has constituted a serious anomaly in the literature of financial economics. Many financial economists have developed different models to explain the under pricing of IPOs. Some of the models explained it as a consequence of deliberate under pricing by issuers or their agents. In general, smaller issues are observed to be underpriced more than large issue (Ritter, 1984; Ritter, 1991; Levis, 1990). Historically, some of IPOs both globally and in the United States have been underpriced. The effect of "initial under pricing" an IPO is to generate additional interest in the stock when it first becomes publicly traded. Through flipping, this can lead to significant gains for investors who have been allocated shares of the IPO at the offering price. However, under pricing an IPO results in "money left on the table"lost capital that could have been raised for the company had the stock been offered at a higher price. One great example of all these factors at play was seen with theglobe.com IPO which helped fuel the IPO mania of the late 90's internet era. Underwritten by Bear Stearns on November 13, 1998, the stock had been priced at $9 per share, and famously jumped 1000% at the opening of trading all the way up to $97, before deflating and closing at $63 after large sell offs from institutions flipping the stock. Although the company did rise about $30 million from the offering it is estimated that with the level of demand for the offering and the volume of trading that took place the company might have left upwards of $200 million on the table. The danger of overpricing is also an important consideration. If a stock is offered to the public at a higher price than the market will pay, the underwriters may have trouble meeting their commitments to sell shares. Even if they sell all of the issued shares, if the stock falls in value on the first day of trading, it may lose its marketability and hence even more of its value. Underwriters, therefore, take many factors into consideration when pricing an IPO, and attempt to reach an offering price that is low enough to stimulate interest in the stock, but high enough to raise an adequate amount of capital for the company. The process of determining an optimal price usually involves the underwriters ("syndicate") arranging share purchase commitments from leading institutional investors. On the other hand, some researchers (e.g. Geoffrey C., and C. Swift, 2009) believe that IPOs are not being underpriced deliberately by issuers and/or underwriters, but the price-rocketing phenomena on issuance days are due to investors' over-reaction (Friesen & Swift, 2009). Some algorithms to determine under pricing: IPO Under pricing Algorithms sue price. A company that is planning an IPO appoints lead managers to help it decide on an appropriate price at which the shares should be issued. There are two ways in which the price of an IPO can be determined: either the company, with the help of its lead managers, fixes a price (fixed price method) or the price is arrived at through the process of book building. Note: Not all IPOs are eligible for delivery settlement through the DTC system, which would then either require the physical delivery of the stock certificates to the clearing agent bank's custodian, or a delivery versus payment (DVP) arrangement with the selling group brokerage firm. Quiet period There are two time windows commonly referred to as "quiet periods" during an IPO's history. The first and the one linked above is the period of time following the filing of the company's S-1 but before SEC staff declare the registration statement effective. During this time, issuers, company insiders, analysts, and other parties are legally restricted in their ability to discuss or promote the upcoming IPO (U.S. Securities and Exchange Commission, 2005). The other "quiet period" refers to a period of 40 calendar days following an IPO's first day of public trading. During this time, insiders and any underwriters involved in the IPO are restricted from issuing any earnings forecasts or research reports for the company. Regulatory changes enacted by the SEC as part of the Global Settlement enlarged the "quiet period" from 25 days to 40 days on July 9, 2002. When the quiet period is over, generally the underwriters will initiate research coverage on the firm. Additionally, the NASDAQ and NYSE have approved a

rule mandating a 10-day quiet period after a Secondary Offering and a 15-day quiet period both before and after expiration of a "lock-up agreement" for a securities offering. Stag profit Stag profit is a stock market term used to describe a situation before and immediately after a company's Initial public offering (or any new issue of shares). A stag is a party or individual who subscribes to the new issue expecting the price of the stock to rise immediately upon the start of trading. Thus, stag profit is the financial gain accumulated by the party or individual resulting from the value of the shares rising. For example, one might expect a certain I.T. company to do particularly well and purchase a large volume of their stock or shares before flotation on the stock market. Once the price of the shares has risen to a satisfactory level the person will choose to sell their shares and make a stag profit. Largest IPOs 1. Agricultural Bank of China $22.1 billion (2010)[1] 2. Industrial and Commercial Bank of China $21.9 billion (2006)[2] 3. American International Assurance $20.5 billion (2010)[3] 4. Visa Inc. $19.7 billion (2008)[4] 5. General Motors $18.1 billion (2010)[5] Value of IPOs The US last topped the IPO league tables in 2008; then east overtook west with China (Shanghai, Shenzhen and Hong Kong) raising $73 billion (almost double the amount of money raised on the New York Stock Exchange and Nasdaq combined) up to the end of November 2011. The Hong Kong Stock Exchange raised 30.9 billion in 2011 as the top course for the third year in a row, while New York raised 30.7 billion.

MEETINGS A meeting is an assembly of people for lawful purpose or the coming together of at least two persons for the same reason. A company meeting is a coming together of at least a quorum of members in order to transact either the ordinary or special business of the company. In Sharp vs. Dawes (1876) a meeting was defined as an assembly of people for a lawful purpose or the coming together of at least two persons for any lawful purpose. Meetings are divided into two types: a) Public meetings These are meetings open to all members of the public and which consider matters of public concern. b) Private These are meetings attended by people who have a specific right or special capacity to attend. Importance of company meetings It is in meetings that important matters relating to the business of the company are decided. Shareholders meetings are also important as they help them look after their interests by exercising powers conferred on them by statute. There are also certain matters that can only be decided only by shareholders. Classification of company meeting

Company meetings are classified as below: 1. Meetings of shareholders. i. ii. Statutory meetings Annual general meetings Extra ordinary general meetings

iii.

iv. Class meetings 2. Meetings of directors i. ii. Meetings of the board of directors Meeting of committees of directors

3. Meetings of debenture holders 4. Meetings of creditors. 5. Meetings of creditors and contributories on winding up of the company. Statutory meeting This is the first meeting of a public company. Every company limited by shares and every company limited by guarantee and having a share capital shall within a period of not less than three months from the date on which the company is entitled to commence business; hold a general meeting of members of the company which shall be called the statutory meeting. The purpose is to accord members an opportunity to discuss matters relating to the formation of the company or matters arising out of the statutory report, whether previous notice has been given or not. Statutory report This is a report sent to all members at least fourteen days before the statutory meeting. If all the members entitled to attend and vote agree the report can be forwarded in less than fourteen days to the meeting. Contents of the statutory report: i. ii. iii. iv. v. vi. Total shares allotted distinguishing shares allotted as fully or partly paid up. Cash received in respect of shares allotted. An abstract of receipts and payments of the company made up to date without the seven days of the reports. Names, address and occupation of the directors, auditors and managers and secretary and changes, which have occurred in such names, address, and occupations. The particulars of any contract the modification of which is to be submitted to the meeting for approval, together with the particulars of the modification or proposed modification. Section 130 (8) provides that the meeting may adjourn from time to time and at any adjourned meeting a resolution can be passed after due notice in accordance with articles. Default If default is made as regards to holding of the statutory meeting and delivering the statutory report a ground for petition for winding up order against the company is created. In usual practice courts order such meetings to be held and reports delivered at the cost of persons in default. The person in default is also liable to a fine of up to one thousand rupees.

Annual general meetings These are meetings held annually and the interval between one meeting and the next one shall be not more than fifteen months. A company however may hold its first annual general meeting within a period of eighteen months from the date of corporation. The Registrar may for any special reason, extend the time for holding any annual general meeting by a given period of time. No extension of time is granted for holding the first annual general meeting. In case of default a member may apply to the Registrar of companies to call or direct the calling of such meeting. If default is made in holding the annual general meeting in year one, the annual general meeting held in year two is treated as an annual general meeting for the year one. Default to holding the annual general meeting, renders the company and its officers in default to a fine up to two thousand rupees. Requirement of notice Section 133 provides the minimum notice required for company meetings as follows: a) In the case of a meeting, twenty-one days notice in writing. b) In the case of a meeting then an annual general meeting for passing a special resolution, fourteen days in writing and seven days notice for an unlimited company. Ordinary business of the Annual General Meeting. The objects depend on the articles, but Article 52 of table A provides that the ordinary business of an annual general meeting shall be: a) In Consideration of dividend. b) In Consideration of accounts. c) Election of directors to replace the retiring. d) Appointment of and fixing the remuneration of auditors. e) Although appointment of auditors must be made by the company in the general meeting they are made by the company in the general meeting they are automatically re-elected, provided they are qualified, without any resolution to that effect, unless; a) They have resigned. b) They are unwilling c) A resolution has been passed expressly providing that they shall not be re-appointed. Extra ordinary general meeting These are called for transacting some special business, which may not be postponed till the next annual general meeting. All meetings other than the annual general meeting and statutory meeting are called extra ordinary general meeting. The extra ordinary general meeting may be convened; a) By the board of directors on its own or on the requisition of the members.

b) By the requisitions on failure of the board of directors. Extra ordinary meeting convened the board of directors. (i) On its own Board of directors may call an extraordinary general meeting to allow members decide on matters that cannot be postponed to the next annual general meeting. (ii) On requisition of the members The required number of members of a company may also as for an extraordinary general. The requisition for such a meeting by the members shall be signed. a) In the case of a company having share capital holders if not less than one tenth of the paid up capital of the company. b) In the case of a company not having a share capital, by members representing not less than one tenth of the total voting power in regard to the matter in requisition. The directors are required by section 132 to convene such a meeting within twenty-one days from the date of the requisition and if they fail to do so, the requisitionists may convene the meeting. The company must compensate the requisitionists for any reasonable expenses incurred. Class meetings These are called when the companys share capital is divided into different classes of shares. These meetings are required when it is proposed to alter, vary or affect the rights of a particular class of shares. A class meeting should be attended only by members of the class. A class meeting can include strangers if there is no objection to their presence by a member of the class. The rights of a particular class of shares may be varied with the consent in writing of the holders of three fourths of the issued shares of that class. Rights of minority Section 74 stipulates that the holders of not less than 15% of the issued shares of that class being persons, who did not consent to the resolution, abstained or did not vote all, may object within thirty days to the alteration approved by the majority of the class. The court must disallow the variation if it is satisfied that it would unfairly prejudice the shareholders of the class, but if not satisfied, it will confirm the variation. Meetings of the board of directors These are the most frequent meetings of the company. These meetings discuss matters of the company and decide on policy issues concerning the company. Meetings of committees of directors Committees are common in large companies where it is convenient to delegate certain matters. Delegation to committees can only be allowed if the articles so provided. Committees may be standing or ad hoc committees.

Meetings of debenture holders These meetings are held in accordance with the rules and regulations that are either entered in the trust deed or endorsed on the debenture bond and are binding on the company and the debenture holders. These meetings are called wherever the interests of the debentures are involved as in reconstruction, reorganizations, amalgamation and winding up. The rules and regulations entered in the trust deed relate to notice of meeting, appointment of a chairman and the writing and signing of minutes. Meeting of creditors These are called when the company proposes to make a scheme or arrangement with its creditors. Meeting of creditors and contributions on winding up. These are held when the company has gone into liquidation. These are called to ascertain the indebtness of the company to its creditors and also to appoint either a liquidator or a committee of inspection. Requisites of a valid meeting The following are requirements for a valid meeting: a. The meeting must be duly commenced by a proper authority. b. A proper notice must be served in the prescribed manner. c. A quorum must be present. d. A chairman must preside. e. Minutes of proceedings must be kept. 2. Types of resolutions

3. Company decisions are made by passing resolutions. Resolutions are passed both by the
company's members and by its directors. In either case, resolutions may be passed at meetings or by written resolution. 4. Members Resolution 5. There are now just two types of resolution, ordinary resolutions (passed by a simple majority) and special resolutions (passed by a 75% majority). Two types of resolution (extraordinary and elective) required in certain circumstances by the 1985 Act have now been abolished, though a company's articles may still refer to these. 6. Sec.282- Ordinary Resolutions

7.
(1) An ordinary resolution of the members (or of a class of members) of a company means a resolution that is passed by a simple majority. 8. (2) A written resolution is passed by a simple majority if it is passed by members representing a simple majority of the total voting rights of eligible members. 9. (3) A resolution passed at a meeting on a show of hands is passed by a simple majority if it is passed by a simple majority of10. (a) the members who, being entitled to do so, vote in person on the resolution, 11. (b) the persons who vote on the resolution as duly appointed proxies of members entitled to vote on it.

12.

(4) A resolution passed on a poll taken at a meeting is passed by a simple majority if it is passed by members representing a simple majority of the total voting rights of members who (being entitled to do so) vote in person or by proxy on the resolution. 13. (5) Anything that may be done by ordinary resolution may also be done by special resolution. 14. 15. Sec-283 Special Resolutions

16.
(1) A special resolution of the members (or of a class of members) of a company means a resolution passed by a majority of not less than 75%. 17. (2) A written resolution is passed by a majority of not less than 75% if it is passed by members representing not less than 75% of the total voting rights of eligible members. 18. (3) Where a resolution of a private company is passed as a written resolution(a) the resolution is not a special resolution unless it stated that it was proposed as a special resolution, and (b) if the resolution so stated, it may only be passed as a special resolution. 19. (4) A resolution passed at a meeting on a show of hands is passed by a majority of not less than 75% if it is passed by not less than 75% of20. (a)the members who, being entitled to do so, vote in person on the resolution, and (b) the persons who vote on the resolution as duly appointed proxies of members entitled to vote on it. 21. (5) A resolution passed on a poll taken at a meeting is passed by a majority of not less than 75% if it is passed by members representing not less than 75% of the total voting rights of the members who (being entitled to do so) vote in person or by proxy on the resolution. 22. (6) Where a resolution is passed at a meeting(a) the resolution is not a special resolution unless the notice of the meeting included the text of the resolution and specified the intention to propose the resolution as a special resolution, and 23. (b) if the notice of the meeting so specified, the resolution may only be passed as a special resolution. 24. 25. Directors' Resolutions 26. At board meetings there are no different types of resolution (unless, very exceptionally, the company's articles specify to the contrary). All resolutions are passed by a simple majority. 27. There are no statutory provisions so any rules must be found in the company's articles. 28. DECISION-MAKING BY DIRECTORS 29. Directors to take decisions collectively (1) The general rule about decision-making by directors is that any decision of the directors must be either a majority decision at a meeting. 30. (2) If(a) the company only has one director, and (b) no provision of the articles requires it to have more than one director, the general rule does not apply, and the director may take decisions without regard to any of the provisions of the articles relating to directors' decision-making. 31. Unanimous decisions 32. (1)A decision of the directors is taken in accordance with this article when all eligible directors indicate to each other by any means that they share a common view on a matter. 33. (2) Such a decision may take the form of a resolution in writing, copies of which have been signed by each eligible director or to which each eligible director has otherwise indicated agreement in writing. 34. (3) References in this article to eligible directors are to directors who would have been entitled to vote on the matter had it been proposed as a resolution at a directors' meeting. 35. (4) A decision may not be taken in accordance with this article if the eligible directors would not have formed a quorum at such a meeting.

36. Incorporation Services Limited provides an expert service for all your company formation and company
law requirements, including all company secretarial matters such as the calling and conduct of company meetings. WINDING UP OR LIQUIDATION Winding up represent the proceeding by which a company is dissolved. The assets of the company are disposed of, the debts are paid from assets proceeds (or from contributories) and the surplus is distributed to the shareholders. Winding up or liquidation is the process by which the management of a companys affairs is taken out of its directors hands, its assets are realized by a liquidator and its debts are paid out of the proceed of realization. Professor Gower gave the following definition winding up of a company is a process whereby its life is ended and its property administered for the benefit of its creditors and members. An administrator called a liquidator, is appointed and he takes control of the company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights. Pennington gives the following definition of winding up. Winding up is a process by which the management of a companys affairs is taken out of its directors hands; its assets are realized by the liquidator and debts are paid out of the proceeds of realization and any balance remaining is returned to its members. At the end of the winding up, the company will have no assets or liabilities and will therefore be simply a formal step for it to be dissolved, that is its legal personality as a corporation to be brought to an end. Winding up and dissolution A company is said to be dissolved when it ceases to exist as a corporate entity. Winding up precedes dissolution; it is the process by which the dissolution of a company is brought about. Winding up and insolvency The following can be noted as regard to winding up and insolvency. a) Winding up order can be made even when the company is solvent. b) On winding up, the company continues to exist it is only its administration that is carried on through the medium of a liquidator. c) Even where a company is wound up because it is in insolvent circumstances, all the provisions of insolvency law do not apply to it. Modes of winding up There are three modes of winding up. 1. Winding up by court 2. Voluntary winding up. a. Members voluntary winding up b. Creditors voluntary winding up 3. Winding up subject to the supervision of the court Winding up by the court (sec.219) Winding by court is also called compulsory winding up. This may occur in the following circumstances: -

a) If the company has by special resolution resolved that it be wound up by court. b) Default is made in delivering the statutory report to the Registrar or in holding the statutory meeting. c) Only a shareholder may present a petition on this ground and where reason is failure to hold the statutory meeting, fourteen days must have elapsed from the date meeting was due to be held. The courts may instead of making the winding up order direct that the statutory report shall be delivered or the meeting be held and the costs to be paid by any persons who are responsible for the default. d) Where there is failure to commence business within a year or where the business is suspended for a whole year by the company. The court may order winding up if the company has no intention of carrying on its business or if is not possible to carry on its business. An example of a company that was wound up because of failure to continue business is in Orissa Trunks and Enamel Works Ltd (1973) where the company suspended business for ten years due to embezzlement. If a company has not begun to carry on business within a year from its incorporation or suspends its business for a whole year the court will not wind it up if: i. There are reasonable prospects of a company starting business within a reasonable time. There are good reasons for the delay. e) The number is reduced in case of private company below two or in the case of any other company below seven. If the company carries on business for more than six months while the number is so reduced, every member who is aware of the fact that the number is below the statutory minimum will be severally liable for the payment of the debts of the company contracted after six months. This is also one of the situations under the act where the veil of incorporation is f) Where the company is unable to pay its debts. i. A creditor to whom the company owns more than one thousand rupees has left at the companys registered office a demand under his hand for the payment of the sum due and the company has for three weeks or thereafter neglected to pay the sum, to secure or compound for it to the reasonable satisfaction of the creditor or; ii. iii. Execution or other process in favour of creditors of the company is returned unsatisfied in whole or part or; It is proved to the satisfaction of the court that the company is unable to pay its debts; taking into account the contingent and prospective liabilities of the company. g) When it is just and equitable. The petition should be allowed only as a last resort or for compelling reasons when other remedies are not efficacious enough to protect the general interests of the company. In Westbourne Galleries Ltd Re. (1973) AC 360 it was observed that a petitioner who relies on the just equitable clause must come to the court with a clean hand, and if the breakdown is confidence between him and other parties to the dispute appears to have been due to his misconduct, he cannot insist on the company being wound up if they wish to continue. lifted.

What is a just and equitable clause? The courts may order winding up under the just and equitable clause in the following 1. When the substratum is said to have disappeared. This occurs when the object for which the company was formed has substantially failed or when it is impossible to carry business except at loss or the existing and possible assets are insufficient to meet the existing liabilities. In making the winding up order the courts should consider the interests of the shareholders and creditors. The substratum of a company disappears: i. When the subject matter of the company is gone. ii. When the main object of the company has substantially failed or become impractical. iii. When a companys main object fails its substratum is gone and it may be wound up even though it is carrying on its business in pursuit of a subsidiary object. iv. When the company is carrying on its business at a loss and there is no reasonable hope that the object of trading can be attained. v. Where the majority shareholders are against winding up, the court will not order a company to be wound up merely because it is making a loss. vi. Where the existing and probable assets of the company are insufficient to meet its existing liabilities. 2. When the management is carried in such a way that the minority are disregarded or oppressed. The court will not make an order for winding up unless it is proved that wrong has been done to the company by abuse of majority voting power, and it is impossible for the business of the company as a whole, owing to the way in which voting is held and used. In Re Harnets Mining co. Ltd WC (winding case no 12 of 1977) the petitioner Mrs. Beth Wambui Mugo wanted the company to be wound up on the just and equitable ground, the reasons were as follows: i. The affairs of the company were conducted in manner oppressive to her. Though she had 50% of shareholding she did not participate in decision-making but was expected to sign resolutions by other directors. ii. The substratum of the company had gone and that the company had no alternative business to engage in. iii. The directors had lost confidence and probity in each other to the extent that the company could no longer be managed at all. It was held that the company could be wound up. 3. Where there is a deadlock in the management of a company. This is usually real when the shareholding between the two competing sides is equal and thus there is a complete deadlock in the company on account of lack of probity in the management of the company and there is no possibility of efficient continuance of the company as a commercial concern. 4. When the company was formed to carry out fraud or the illegal business or the business of the company becomes illegal. Petition for compulsory winding up. An application to the courts for winding up by petition may be presented.

a) By the company
A company in general meeting may resolve that the company be wound up by the court.

b) By a creditor or creditors (including any contingent or prospective creditors).

Persons included in the category of creditors 1. A contingent or prospective creditor 2. A secured creditor 3. A debenture holder 4. Any person who has a pecuniary claim against the company. 5. The legal representations of a deceased creditor. 6. The government or local authority to which any tax or public charge is due.

Disputed debt A creditor whose debt is disputed cannot get a winding up order.

c) By petition of any contributory

A contributory is any person liable to contribute to the assets of the company in the event its being wound up. The definition does not include debtors. A holder of fully paid shares is regarded as a contributory although no further calls can normally be imposed upon him in liquidation of the company. d) By official receiver. e) By the attorney general after receiving a report of inspectors on the companys affairs. f) Section 221 (2) provides that when a company is already in the course of being wound up voluntarily or subject to supervision, the courts if satisfied that voluntary winding up or winding up subject to supervision cannot be continued with due regard to the interest of the creditors and contributories. Right of assignee of a debt The assignee of a debt has the same right which his assignor had to present a petition for winding up order, unless the assignment was made after a petition had already been presented. Commencement of winding up The commencement of winding up by the court is deemed to have started from the date a petition is presented. When the order is made for winding up, it relates back to the date of the presentation of petition. Powers of court (section 218,221&222) Courts have jurisdiction to receive winding up petition, hear it and make determination. The interest of the applicant alone is not of predominant consideration. The interests of the shareholders of the company as a whole apart from those other interests have to be kept in mind at the time of consideration as to whether the application should be admitted on the allegations mentioned in the petition. The court may delay the order to enable the company to: a) Settle a list of contributories. b) Order any person in possession of any property of the company to surrender it to the liquidator immediately.

c) Make the last calls on the shares and debentures the members hold. d) Where the companys business is running, the company has power to appoint a special manager to take care of the business until it determines. e) Prevent any creditor from participating in the distribution of the companys assets when the company is paying off its liabilities. f) The courts have also power to prepare a priority list detailing the order in which payment shall be made (sec.262). g) If at the time of winding it appears that promoters might have committed fraud to the company, the court may order that they be examined. Procedure for winding up by the courts A petition for winding up order against a company may be presented to the high court such a petition must be supported by an affidavit of the petitioner (sec.218). When determining the case (petition) the court may (sec.222): a) Dismiss it with or without costs. b) Adjourn the hearing conditionally or unconditionally. c) Make an interim order. d) Make any other order (for compulsory winding up or winding up under supervision of the court). Consequences of winding up order The consequences date back to the commencement of winding up. A winding up order operates in favour of all creditors and contributories as if made on the joint petition of a creditor and a contributory. In the case of compulsory winding up by courts, the winding up dates from the presentation of the petition unless before that date a resolution was passed to winding up voluntarily, in which case the commencement is the time of resolution. Any subsequent disposition of the property and any transfer of shares or alteration in the status of members is void unless the court otherwise orders. When winding up order has been granted or an interim liquidator has been appointed, no action may be preceded with or commenced against the company except with the leave of the courts and subject to such terms as the courts may impose. The official receiver (of the court) becomes the principal liquidator to the company until he or another person becomes liquidator (sec.236). Special manager Upon an application by the official receivers a special manager may be appointed, acting as a liquidator, whether provisional or not by the courts. Such an application may be made if the official receiver is satisfied that the nature of the companys business or interests of the creditors or contributories generally require the appointment of a special manager other than himself. The remuneration of the special manager may be fixed by the courts.

Official receiver as liquidator. The courts are empowered by section 235 to appoint a provisional liquidator at any time after presentation of a petition and before winding up order is made. Once the winding up order has been made the official receiver becomes a provisional liquidator until a liquidator is appointed. Duties of an official receiver An official receiver as a provisional liquidator can call on the directors to furnish him with a statement of the companys affairs that has to be made out in accordance to a statutory form and verified by an affidavit. This statement must show: a) Particulars of assets, debts, and liability of the company. b) Names, residence and occupation of its creditors. c) The security held by creditors and the dates when they were given and such other information as may be required. d) The above statement must be submitted and verified by affidavit if: (i) (ii) By one or more directors and secretary or, By persons who are or have been officers or were engaged in the formation of the company within the past years in its employment during such a time. Report by official receiver After receiving a statement of affairs the official receiver has to submit a preliminary report to the courts as soon as practical. The report should contain the following: a) Amount of capital issued, subscribed and paid and the estimated amount of assets and liabilities. b) The cause of failure of the company (if the company failed). c) Whether in his opinion there is need for further inquiry to any matter relating to the promotion formation or failure of the company or the conduct of its business. First meeting of creditors and contributories The official receiver is under obligation to convene separate meetings of the creditors and contributories to find out whether they would like to appoint a liquidator in place of the official receiver. The above meeting should be held within sixty days from the date when the order was given unless the courts provide otherwise. A notice of seven days is required to hold both meetings. Rule 114 requires that the official receiver must send to the creditors and contributories a summary of the companys statement of affairs including causes of failure of the company and any observation he may think fit to make. Where such meetings are called the official receiver or (or liquidator) or his nominee is the chairman at the meeting. The object of the meetings is to find out; a) b) Whether creditors or contributories desire a liquidator of their choice. Whether there shall be a committee of inspection and whom shall it consist.

Powers of the liquidator After winding order is granted or after a provisional liquidator is appointed he will take into his custody or under his control all the property of the company and other right of the company. The liquidator has power with leave of the court or committee. a) To institute or defend suits and other legal proceedings, civil, criminal in the name of the company. b) To carry on the business of the company so far as necessary for the beneficial winding up of the company. c) To appoint an advocate and to assist him in performing his duties. d) Pay any class of creditors in full. e) Make any compromise with creditors or persons claiming to be creditors. f) Compromise calls debts and other claims between the company and any contributory or debtor and, A liquidator may, without sanction of the courts, a) Sell companys movable and immovable property. b) Do all acts and execute all documents in the companys seal. c) Prove and receive dividends in the bankruptcy of any contributory. d) Draw, accept and endorse bills and notes in the name of the company. e) Borrow money on the security of the company assets. f) Take out his official name letters of administration to a deceased contributory. g) Appoint an agent to do any business which the liquidator is unable to do himself.

Additional powers These are powers of the courts delegated to the liquidator. a) To call and hold meeting of creditors and contributories. b) Settling the list of contributories and rectifying the register of members. c) Paying, delivery, conveyance, surrender or transfer of money, property and documents to the liquidator. d) Making calls on the contributories. e) Fixing time within which debts and claims must be proved. The above powers are exercised by the liquidator as an officer of the court. Disclaimer by a liquidator Section 315 empowers a liquidator with leave of the courts to disclaim any onerous property of the company. The liquidator has to disclaim the property within one year from the date of commencement winding up or from the date he became aware of the onerous property. The disclaimer extinguishes the rights, interests and liabilities of the company in the property disclaimed. If any person suffers a loss (or damages by a disclaimer of the property, he may prove for the amount as a creditor).

Termination of liquidators powers A liquidator will cease to function if: a) b) c) He resigns He is removed He is released.

Committee of inspection Creditors and contributories may apply to the courts to appoint a committee of inspection. There is no given limit of members of the committee of inspection. There is no given limit of members of the committee. The function of the committee is to assist and supervise the acts of the liquidator. The committee must meet once in a month but, the liquidator may call for meetings of inspection as often as he thinks. Power of the court to stay winding up The courts at any time after an order of winding up have a discretion on the application of the liquidator, official receiver or creditor or contributor, so stay proceedings in relation to winding up. The courts may stay the proceedings altogether or for a limited time. Dissolution of the company When the affairs of the company have been wound up, the court will, if the liquidator makes an application, make an order dissolving the company and the company is dissolved from the date of such order. The liquidator must within fourteen days deliver a copy of the order to the Registrar for registration. Voluntary winding up This is winding up by members or creditors without interference by the court. The members, creditors may however apply to the court for any direction, if and when necessary. A company may be wound up voluntarily on the following circumstances (sec.271). a) When the period for the duration of the company have come to an end or the event which the company is to be wound up has happened and the company has in a general meeting passed a resolution which may be an ordinary resolution unless articles provide otherwise. b) If the company passes a resolution to wind up voluntarily. Types of winding up a) b) Members voluntary winding up Creditors voluntary winding up.

a) Members voluntary winding up

This is allowed if a declaration of solvency of the company is made. The declaration shall be made by a majority of the directors at a meeting to of the board that they have made a full inquiry into the affairs of the company and that having done so they are of the opinion that a) That the company has no debts b) That the debts can be paid in full within twelve months from the commencement of the winding up. Such declaration is infective unless: a. it is made within thirty days immediately preceding the dates of passing of the resolution and delivered to the registrar. b. It embodies a statement of the companys assets and liabilities at the latest practicable date before the making of the declaration. DECLARATION OF SOLVENCY This is declaration by a director that a company is able to pay all its debts within one year. If late it is proved that a director has made the declaration of solvency without reasonable grounds he may be liable to imprisonment up to a year or a fine or both. Notice of declaration The notice of the resolution to voluntarily wind up a company must be advertised in the Gazette within fourteen days. Summoning a general meeting If the winding continues for more than a year the liquidator must summon a general meeting at the end of the first and subsequent years. The liquidator must lay before the meeting an account of his acts and dealing of winding up during the preceding year. Final meeting When the affairs of company are wound up the liquidator must make up a final account and call a general meeting of the company, which must be advertised in the Gazette. The liquidator must send a copy of the accounts to the Registrar and make a return of the holding of the meeting within fourteen days. Creditors voluntary winding up This arises when the company is insolvent in which case the company must call a meeting of the creditors on the same day of the general meeting of member on a day after. The meeting must be advertised in the gazette and directors must lay before the meeting, a statement of the position of the company with a list of its creditors. The directors can appoint one of their numbers to preside at the meeting

Appointment of liquidator The creditors and the company in their separate meetings may nominate a liquidator for the purpose of winding up the affairs of the company. If the creditors and the company nominate different persons the nomination of creditors will prevail. The liquidator must within fourteen days of his appointment, publish in the Gazette and deliver to the Registrar of companies notice of his appointment in the form prescribed by the register (sec.299). Committee of inspection Creditors at their meeting may appoint a committee of inspection, and the committee may appoint not more than five persons to the members of the committee subject to the power of the creditors to disapprove persons so appointed (sec 288). A liquidator is to call a meeting of members and creditors after each year-end and has to lay before the meeting an account of his acts and dealings of the winding up of the preceding year. Final meeting and dissolution When the company is fully wound up, the liquidator has to hold a general meeting of the company and a meeting of creditors and has to produce an account of the winding up showing how it has been conducted and property of the company disposed of. These meetings are to be advertised in the gazette, published thirty days before the meeting. Within fourteen days after the meeting the liquidator must send to the Registrar a copy of the accounts and a return of the meetings. WINDING UP SUBJECT TO SUPERVISION OF COURT. Section 304 provides that when a company has passed a resolution to wind up voluntarily, the courts may order the continuation of voluntary winding up subject to their supervision on any terms or conditions. The liquidator will continue to exercise all powers subject to any restrictions laid by the courts. A petition for winding subject to court supervision may be presented by any person entitled to petition for the compulsory winding up. Effects of supervision order. Powers for the exercise of which such liquidation would require sanction may be exercised only with the sanction of the courts or the committee of inspections otherwise in all other instances ordinary voluntary liquidation procedures are followed. Preferential payment Section 302 provides that the companys assets must be used to pay all costs, charges and expenses properly incurred in the winding up including liquidation. Thus winding up charges and expenses rank in priority to all other claims.

The following preferential payments are required to be made in priority to all other debts and such debts rank Pari Passu i.e. they rank equally amongst themselves. a) All government and local rates payable with 12 months before the date of winding up. b) All government rents not more than one year in arrears. c) Wages and salary of any clerk or servant for services rendered during four months preceding the relevant date not exceeding four thousand rupees. d) All amounts done in respect of any compensation under the workmens compensation act, which have accrued before the relevant date. e) Proceeds left may be given to the shareholders and if any portion remains unclaimed, if goes to the public trustee as Bona vacantia i.e. owners property.