company law (module 1 paper 1)
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STUDY MATERIAL
EXECUTIVE PROGRAMME
COMP NY L W
PAPER 1
ICSI House, 22, Institutional Area, Lodi Road, New Delhi 110 003tel011-4534 1000, 4150 4444 fax+91-11-2462 6727emailinfo@icsi.edu websitewww.icsi.edu
http://www.icsi.edu/http://www.icsi.edu/http://www.icsi.edu/http://www.icsi.edu/ -
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THE INSTITUTE OF COMPANY SECRETARIES OF INDIA
TIMING OF HEADQUARTERS
Monday to Friday
Office Timings 9.00 A.M. to 5.00 P.M.
Public Dealing Timings
Without financial transactions 9.30 A.M. to 5.00 P.M.
With f inancial transactions 9.30 A.M. to 4.00 P.M.
Phones
4150444,45341000
Fax
011-24626727
Website
www.icsi.edu
E-mail
info@icsi.edu
Laser Typesetting by Delhi Computer Services, Dwarka, New DelhiPrinted at M.P. Printers/February, 2013/10,000
http://www.icsi.edu/http://www.icsi.edu/ -
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EXECUTIVE PROGRAMME
COMPANY LAW
In view of increasing emphasis on adherence to norms of good corporate governance,
Company Law assumes an added importance in the corporate legislative milieu, as it deals with
structure, management, administration and conduct of affairs of Companies. A thorough study
of various provisions of the Companies Act is a must for becoming a competent and efficient
Company Secretary. In the light of this, the study material has been published to impart
thorough knowledge to the students preparing for the Company Law paper of the CS Executive
Programme. The purpose of this study material is to develop an understanding of the regulation
of registered companies and to provide thorough understanding of the various provisions of the
Company Law as well as Schedules and Rules made thereunder including their interpretation
through case laws, departmental clarifications etc. Additionally this study material also provides
conceptual understanding of the principles of Cooperatives Law.
Company Secretaryship being a professional course, the examination standards are setvery high, with emphasis on knowledge of concepts, applications, procedures and case laws,
for which sole reliance on the contents of the study material may not be enough. Besides
Company Secretaries Regulations, 1982 requires the students to be conversant with the
amendments to the laws made upto six months preceding the date of examination. This study
material may therefore be regarded as basic material and must be read along with the Bare Act,
Rules, Regulations, Case Law, as well as suggested readings.
The amendments made upto December, 2012 have been incorporated in this study
material. However, it may happen that some developments might have taken place during the
printing of the study material and its supply to the students. The students are therefore advised
to refer to the 'Student Company Secretary', Chartered Secretary and other publications for
updation of study material. In the event of any doubt, students may contact the Directorate ofAcademics and Professional Development in the Institute for clarification.
Although due care has been taken in publishing this study material yet the possibility of
errors, omissions and/or discrepancies cannot be ruled out. This publication is released with an
understanding that the Institute shall not be responsible for any errors, omissions and/or
discrepancies or any action taken in that behalf.
Should there be any discrepancy, error or omission noted in the study material, the Institute
shall be obliged if the same are brought to its notice for issue of corrigendum in the 'Student
Company Secretary'.
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EXECUTIVE PROGRAMME
SYLLABUS
FOR
MODULE 1 - PAPER 1: COMPANY LAW (100 MARKS)
Level of Knowledge: Expert Knowledge
Objective: To acquire knowledge and develop understanding of the regulatory framework of companies
with reference to various provisions of Companies Act and its schedules, rules, notifications, circulars,
clarifications there under including case laws and Secretarial standards.
Detailed Contents:
1. Introduction
Historical Development of Concept of Corporate Law in India
Company Definition, Meaning, Nature and its Characteristics
Nature and Forms of Business
Company vis--vis other Forms of Business
Concept of Corporate Personality, Corporate Veil, Limited Liability and Citizenship
2. Incorpo ration and its Consequences
Types of Companies and their incorporation
Promoters Meaning, Position, Duties, Rights, Responsibilities and Liabilities
Formation of Companies Procedural Aspects
Memorandum of Association & Articles of Association and their Alteration
Contracts and Conversion of Companies
Commencement of Business
Doctrine of Ultra-Vires, Constructive Notice, Indoor Management, Alter Ego
3. Financial Structure
Concept of Capital and Financing of Companies Sources of Capital; Classes and Types of
Shares; Equity Shares with Differential Rights; Issue of Shares at Par, Premium and Discount;
Forfeiture and Surrender of Shares; Bonus Issues; Rights Issues; Issue of Sweat Equity Shares;
Employees Stock Option Scheme; Private Placement; preference shares and other forms of
securities
Alteration of Share Capital Reduction of Capital; BuyBack of Shares
Prospectus Definition; Abridged Prospectus; RedHerring Prospectus; Shelf Prospectus;
Information Memorandum; Contents, Registration; Misrepresentations and Penalties
Debt Capital Debentures, Debenture Stock, Bonds; Recent Trends and Dynamics of Corporate
Debt Financing; Debenture Trust Deed and Trustees; Conversion of and Redemption of
Debentures
Securing of Debts:Charges ; Creation, Modification and Satisfaction of Charges
Allotment and Certificates General Principles and Statutory Provisions related to Allotment;
Minimum Subscription; Irregular Allotment; Procedure of Issue of Share Certificates and Warrants
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4. Membership in a Company
Modes of Acquiring Membership
Rights and Privileges of Members, Register of Members
Dematerialisation and Rematerialisation of Securities
Transfer and Transmission of Securities in Physical and Dematerialized forms
Nomination
5. Management and Control of Companies
Directors Types, Directors Identification Number (DIN), Appointment/Reappointment,
Qualifications, Disqualifications, Vacation of Office, Retirement, Resignation and Removal of
Managing and WholeTime Directors and Manager
Role and Responsibilities of Directors
Powers and Duties
Loans to Directors
Remuneration of Directors
Office or Place of Profit Contracts in which Directors are Interested
Board of Directors and its Committees
Company Secretary Appointment, Role and Responsibilities
Company Secretary as a Key Managerial Personnel
Meetings:
Meetings of Board and Committees Frequency, Convening, Proceedings, Video Conferencing of
Board/Committee(s); Resolution by Circulation; Minutes and Evidence
General Meetings Kinds of Meetings; Law, Practice and Procedure Relating to Convening and
Proceedings at General and Other Meetings; Notice, Quorum, Chairman, Proxy, Voting including
Voting through Electronic Means; Resolutions, Circulation of Members Resolution, etc.; PostalBallot; Recording, Signing and Inspection of Minutes;
Distribution of Powers of a Company Division of Powers between Board and General Meetings;
Acts by Directors in Excess of Authority; Monitoring and Management
Sole Selling and Buying Agents Meaning, Appointment and Reappointment, Removal; Powers
of Central Government and Rules Framed for the Purpose
6. Investments, Loans and Deposits
Law relating to making investments in and granting loans to other bodies corporate and giving
guarantees and providing security
Acceptance of Deposits, Renewal, Repayment, Default and Remedies
7. Accounts and Audit
Books of Accounts
Financial Statements
Auditors Appointment, Resignation and Removal; Qualification and Disqualification; Rights,
Dutiesand Liabilities
Audit and Auditors Report
Cost Audit and Special Audit
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8. Dividends
Profit and Ascertainment of Divisible Profits
Declaration and Payment of Dividend
Treatment of Unpaid and Unclaimed Dividend
Transfer of Unpaid and Unclaimed Dividend to Investor Education and Protection Fund
Boards Report and Disclosures Contents and Annexure to Boards Report
Directors Responsibility Statement Preparation and Disclosures
Compliance Certificate Need and Objective; Issue and Signing by Practising Company
Secretary
Corporate Governance Report
9. Registers, Forms and Returns
Statutory Books and Registers prescribed under various provisions of the Company Law
Maintenance, Authentication Place of Keeping and Inspection
Filing of various Forms and Returns with the Authorities
Procedure and Penalties for Delayed Filing
Annual Return Nature and Significance; Contents; and Certification by Practising Company
Secretary
10. Inspection and Investigation
Inspection of Documents
Powers of the Inspector
Seizure of Books And Documents
Inspectors Report
Power of the Registrar of Companies
Investigation into Affairs of the Company
11. Majority Rule and Minority Rights
Law relating to Majority Powers and Minority Rights
Shareholder Remedies Actions by Shareholders; Statutory Remedies; Personal Actions
Prevention of Oppression and Mis-Management
12. Merger, De-merger, Amalgamation, Compromises and Arrangements An Overview
13. Producer Companies
Concept, Formation, Functioning and Dissolution
14. Limited L iability Partnerships
Concept, Formation, Membership, Functioning and Dissolution
15. Application of Company Law to Different Sectors
Banking
Insurance
Others
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16. Offences and Penalties
Introduction
Officer in Default
Penalties
17. Compounding of Offences
18. Winding up o f Companies An Overview
Concept and Modes
19. Striking Off Name of Companies
20. An Introduction to E-Governance and XBRL
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LIST OF RECOMMENDED BOOKS
MODULE I
PAPER 1 : COMPANY LAW
Readings:
1. Dr. Avtar Singh : Company Law; Eastern Book Company, 34, Lalbagh, Lucknow
226 001
2. C.R. Datta : Datta on the Company Law; Lexis Nexis, Butterworths Wadhwa,
Nagpur
3. A. Ramaiya : Guide to the Companies Act; Lexis Nexis, Butterworths Wadhwa,
Nagpur
4. K.C. Garg, R.C.
Chawla, Vijay Gupta
: Company Law; Kalyani Publishers, 1/1, Rajinder Nagar, Civil
Lines, Ludhiana 141 001.
5. A.K. Mujumdar, Dr.
G.K. Kapoor
: Company Law and Practice; Taxmann, 59/32, New Rohtak Road, New
Delhi-110 005.
6. V.S. Datey : Guide to Tax and Corporate Laws; Taxmann, 59/32, New Rohtak
Road, New Delhi-110 005.
7. M.C. Kuchhal : Modern Indian Company Law; Shri Mahavir Book Depot, 2603,
Nai Sarak, Delhi-110 006.
8. H.K. Saharay : Company Law; Universal Law Publishing Co., C-FF-1A, Dilkhush
Industrial Estate, G.T. Karnal Road, Delhi. -110033.
References:
1. D.K. Jain : Company Law Ready Reckoner; Bharat Law House Pvt. Ltd.; T-
1/95, Mangolpuri Industrial Area, Delhi-110083.
2. R. Suryanarayanan : Company Law Ready Reckoner; Commercial Law Publishers,
151, Rajinder Market, Opp. Tis Hazari Court, Delhi-110054.
3. Palmer : Company Law (Vol. 1); Stevens & Sons Ltd., London.
4. L.C.B. Gower : Principles of Modern Company Law; Stevens & Sons Ltd.,
London.
5. Taxmanns : Circulars & Clarifications on Company Law; Taxmann, 59/32, NewRohtak Road, New Delhi-110 005.
6. Bare Act : Corporate Laws; Taxmann, 59/32, New Rohtak Road, New Delhi-
110 005.
The Companies Act, 1956; Universal Law Publishing Co., C-FF-
1A, Dilkhush Industrial Estate, G.T. Karnal Road, Delhi. -110 003.
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Journals:
1. Chartered Secretary : ICSI, New Delhi
2. Student Company
Secretary
: ICSI, New Delhi
3. Corporate Law Adviser : Corporate Law Advisers, 613, Metro View Apt., Sector 13, Pocket
B, Dwarka, New Delhi-110075.
4. Company Law Journal : Company Law Journal (India) Pvt. Ltd., 53/15, Old Rajinder
Nagar, Post Box No. 2844, New Delhi-110060.
Note:The latest edition of all the books referred to above should be read.
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ARRANGEMENT OF STUDY LESSONS
PAPER 1: COMPANY LAW (100 Marks)
Lesson No. Subject
1 INTRODUCTION
2 TYPES OF COMPANIES3 PROMOTION AND INCORPORATION OF COMPANIES
4 MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION
5 CONTRACTS AND CONVERSIONS
6 CONCEPT OF CAPITAL AND FINANCING OF COMPANIES
7 ALTERATION OF SHARE CAPITAL
8 PROSPECTUS
9 DEBT CAPITAL
10 CREATION AND REGISTRATION OF CHARGES
11 ALLOTMENT AND ISSUE OF CERTIFICATES
12 MEMBERSHIP IN A COMPANY
13 TRANSFER AND TRANSMISSION OF SECURITIES
14 INSTITUTION OF DIRECTORS
15 POWERS AND DUTIES OF DIRECTORS
16 MANAGING DIRECTOR, WHOLE-TIME DIRECTOR AND MANAGER
17 COMPANY SECRETARY
18 MEETINGS
19 INTERCORPORATE LOANS AND INVESTMENTS
20 DEPOSITS
21 ACCOUNTS AND AUDIT
22 DIVISIBLE PROFITS AND DIVIDENDS
23 SOLE SELLING AND SOLE BUYING AGENTS24 BOARDS REPORT AND DISCLOSURES
25 REGISTERS, FORMS AND RETURNS
26 INSPECTION AND INVESTIGATION
27 MAJORITY RULE AND MINORITY RIGHTS
28 MERGER, DE-MERGER, AMALGAMATION, COMPROMISE ANDARRANGEMENTS AN OVERVIEW
29 PRODUCER COMPANIES
30 LIMITED LIABILITY PARTNERSHIPS
31 APPLICATION OF COMPANY LAW TO DIFFERENT SECTORS
32 OFFENCES, PENALTIES AND THEIR COMPOUNDING
33 WINDING UP OF COMPANIES
34 STRIKING OFF NAME OF COMPANIES
35 AN INTRODUCTION TO E-GOVERNANCE AND XBRL
36 SECRETARIAL STANDARDS
TEST PAPERS
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EXECUTIVE PROGRAMME
COMPANY LAW
CONTENTS
LESSON 1
INTRODUCTION
Page
Learning Objectives/Lesson Outline 1
Meaning of a Company ... 2
CompanyIts Nature and Characteristics ... 3
Development of Company Law in India and England 10
Brief History of Company Law in England ... 11
Development of Indian Company Law ... 13Amendments made to the Companies Act by the Depositories Act, 1996 ... 15
The Companies (Amendment) Act, 1999Salient Features ... 16
The Companies (Amendment) Act, 2000Salient Features ... 16
The Companies (Amendment) Act, 2002 and Companies (SecondAmendment) Act, 2002Salient Features ... 17
The Companies (Amendment) Act, 2006 18
Highlights of Companies Bill, 2012 20
Distinction between Company and Partnership ... 20
Distinction between Company and Hindu Joint Family Business ... 21
Distinction between Company and Corporation ... 21
Distinction between Company and Limited Liability Partnership 22Lifting or Piercing the Corporate Veil ... 23
Lifting of Corporate Veil under Judicial Interpretation ... 23
Use of Corporate Veil for Hiding Criminal Activities ... 26
Citizenship 26
Personal Liability of Directors or Members ... 28
Illegal Association ... 29
Lesson Round-Up 31
Glossary 32
SELF-TEST QUESTIONS ... 32
LESSON 2
TYPES OF COMPANIES
Learning Objectives/Lesson Outline 35
Classification of Companies ... 36
Private Company ... 37
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Page
Privileges and Exemptions of Private Company ... 38
Special Obligations of a Private Company ... 40
Consequences of Infringement of the Articles of Private Companies ... 41Public Company ... 41
Limited Company ... 42
Companies Limited by Shares ... 42
Companies Limited by Guarantee ... 42
Unlimited Company ... 43
Association not for Profit ... 44
Government Companies ... 45
Exemption to Government Companies from applicability ofnotified provisions of Companies Act, 1956 46
Audit in Government Companies ... 47
Foreign Companies ... 47Holding and Subsidiary Companies ... 49
Determination of Holding-subsidiary relationship and shareholding ... 50
Investment Companies ... 51
Producer Companies 51
Finance Companies ... 52
Public Financial Institutions ... 53
A Brief Study of Statutory Corporations ... 54
Which Corporations are State ... 56
Lesson Round-Up 56
Glossary 57
SELF-TEST QUESTIONS ... 58
LESSON 3
PROMOTION AND INCORPORATION OF COMPANIES
Learning Objectives/Lesson Outline 59
Definition of the term Promoter ... 60
Promoters contract - Ratification thereof 61
Legal Position of a Promoter ... 61
Duties of a Promoter ... 62Termination of Promoters Duties ... 63
Remedies available to the Company against the Promoter ... 63
Liabilities of Promoters ... 64
Rights of Promoters ... 66
Formation of Companies 67
Application for Availability of Name of Company ... 67
Preparation of Memorandum and Articles of Association ... 68
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Vetting of Memorandum and Articles, Printing, Stamping and Signing of the same ... 68
Page
Power of Attorney ... 69
Additional Documents Required ... 69Payment of Registration Fees ... 70
Certificate of Incorporation ... 70
Conclusive Evidence ... 70
Online Incorporation of Companies within 24 Hours 71
Lesson Round-Up 71
Glossary 72
SELF-TEST QUESTIONS ... 72
LESSON 4
MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION
Learning Objectives/Lesson Outline 73
Memorandum of Association ... 74
Purpose of Memorandum ... 75
Form of Memorandum of Association ... 75
Contents of Memorandum ... 75
Name Clause ... 76
Situation Clause ... 78
Objects Clause ... 78
Doctrine of Ultra Vires ... 80
Shareholders right in respect of ultra viresacts 83
Effects of ultra viresTransactions ... 83
Liability Clause ... 84
Capital Clause ... 84
Association Clause and Subscription ... 85
Printing and Signing of Memorandum 85
Alteration of Memorandum of Association ... 85
Alteration of Name Clause ... 86
Effect of Change ... 87
Alteration of Registered Office Clause ... 87
Alteration of Objects Clause of the Company ... 90Registration of Alteration ... 92
Alteration of Liability Clause ... 94
Alteration of Capital Clause ... 94
Articles of Association ... 95
Registration of Articles ... 96
Statutory Requirements ... 97
Contents of Articles ... 97
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Provision in articles as regards expulsion of a member 98
Alteration of Articles of Association ... 98
Page
Effect of altered Articles 100Distinction between Memorandum and Articles ... 100
Legal Effect of Memorandum and Articles ... 101
Constructive Notice of Memorandum and Articles ... 102
Money Payable by Members is a Debt ... 103
Interpretation of Memorandum and Articles ... 103
Doctrine of Indoor Management ... 104
Exceptions to the Doctrine of Indoor Management ... 105
Doctrine of Alter Ego 107
Lesson Round-Up 107
Glossary 108
SELF-TEST QUESTIONS ... 108
LESSON 5
CONTRACTS AND CONVERSIONS
Learning Objectives/Lesson Outline 111
Preliminary Contracts ... 112
Pre-incorporation contracts ... 112
Provisional Contracts ... 113
Contracts made after issue of Certificate of Commencement of Business in the case of
Public Company, and after Incorporation in the case of Private Company ... 114Common Seal ... 114
Conversion of a Private Company into a Public Company ... 115
Private Company (which is a subsidiary of public company) deemed to be a Public Company ... 116
Conversion of a Public Company into a Private Company ... 116
Commencement of Business ... 116
Commencement of New Business by an Existing Company ... 118
Lesson Round-Up 118
Glossary 119
SELF-TEST QUESTIONS ... 119
LESSON 6
CONCEPT OF CAPITAL AND FINANCING OF COMPANIES
Learning Objectives/Lesson Outline 121
Meaning of the term Capital ... 122
Use of the word Capital indifferent senses ... 122
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Meaning and Nature of a Share ... 124
Kinds of Shares ... 125
Preference Shares or Preference Share Capital ... 126
Types of Preference Shares ... 127
Page
Preference Shares Compared with Equity Shares ... 128
Issue of Sweat Equity Shares ... 129
Sources of Capital ... 130
Public Issue of Shares ... 131
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 ... 131
Preferential Issue by Existing Listed Companies ... 134
Issue of Shares at a Premium ... 136
Issue of Shares at a Discount ... 137
Further issue of shares ... 139
Judicial Pronouncement relating to further issue of shares 140Bonus Shares ... 141
Employee Stock Option Scheme ... 142
Lesson Round-Up 143
Glossary 144
SELF-TEST QUESTIONS ... 144
LESSON 7
ALTERATION OF SHARE CAPITAL
Learning Objectives/Lesson Outline 145
Alteration of Share Capital ... 146
Judicial Pronouncement ... 147
Nature of Stock ... 148
Difference between Share and Stock ... 148
Reduction of Share Capital ... 149
Judicial Pronouncement on reduction of share capital 150
Reduction of share capital without sanction of the Court ... 151
Difference in Alteration in Share Capital and reduction of share capital 152
Creditors Right to Object to Reduction ... 152
Confirmation and Registration ... 153Conclusiveness of certificate for reduction of capital ... 153
Diminution of share capital is not a reduction of capital ... 153
Liability of Members in respect of Reduced Share Capital ... 154
Company Prohibited to Buy its Own Shares or to Finance their Purchase ... 154
Power of Company to Purchase its Own Securities ... 155
Conditions for Buy-back ... 156
Prohibition for Buy-Back in Certain Circumstances ... 158
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Lesson Round-Up 158
Glossary 159
SELF-TEST QUESTIONS ... 159
Page
LESSON 8
PROSPECTUS
Learning Objectives/Lesson Outline 161
Meaning and Definition of Prospectus ... 162
Invitation to Public ... 162
When Prospectus is not required to be issued ... 163
Statement in lieu of Prospectus ... 164Dating and Registration of Prospectus ... 164
When Registrar Must Refuse Registration ... 165
Shelf Prospectus ... 166
Information Memorandum ... 167
Red-Herring Prospectus 167
Manner of Disclosures in the Offer Documents 168
Application with Prospectus ... 168
Abridged Prospectus ... 168
Voluntary Statement in Prospectus ... 169
The Golden Rule or Golden Legacy ... 169
Liability for Untrue Statement ... 170
Remedies for Misrepresentation in Prospectus ... 170
Remedies Against Directors or Promoters ... 171
Criminal Liability for Mis-statement in Prospectus ... 174
Who is Entitled to Remedies ... 174
Penalty for Fraudulently Inducing to Invest Money ... 175
Prohibition of Allotment of Shares in Fictitious Name ... 175
Lesson Round-Up 176
Glossary 176
SELF-TEST QUESTIONS ... 177
LESSON 9
DEBT CAPITAL
Learning Objectives/Lesson Outline 179
Borrowing ... 180
Power of Company to Borrow ... 180
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Unauthorised or Ultra Vires Borrowing ... 180
Intra viresBorrowing but Outside the Scope of Agents Authority ... 181
Judicial pronouncement relating to borrowing powers of company 181
Types of borrowing 183
Borrowing on Security of Property ... 184Charge on Uncalled Capital ... 185
Debentures 185
Page
Judicial pronouncement about debentures 186
Pari passu clause in case of debentures 187
Kinds of Debentures ... 187
Regulatory framework for debt securities 189
Debentures Trust Deed ... 191
Appointment of Debenture Trustees and Duties of Debenture Trustees ... 192
Liability of Company to Create Security and Debenture Redemption Reserve ... 193Debenture Redemption Reserve (DRR) 193
Register of Debentureholders ... 194
Remedies Open to Debentureholders ... 194
Debenture-holders claim ... 197
Distinction Between Debentures and Shares ... 197
Redemption of Debenture ... 198
Re-issue of Redeemed Debentures ... 198
Public Sector Bonds ... 198
Foreign Bonds ... 199
Recent Trends in Corporate Debt Financing ... 199New Instruments in Money Market ... 201
Lesson Round-Up 201
Glossary 201
SELF-TEST QUESTIONS ... 202
LESSON 10
CREATION AND REGISTRATION OF CHARGES
Learning Objectives/Lesson Outline 203
Definition of a Charge ... 204Kinds of Charges ... 204
Judicial pronouncements ... 205
Crystallisation of Floating Charge ... 206
Postponement of a Floating Charge ... 207
Registration of Charges ... 208
Particulars to be filed with the Registrar in case of series of Debentures ... 210
Effect of Registration ... 211
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Conclusive Nature of the Certificate of Registration ... 212
Consequences of non-registration ... 213
Register of Charges ... 214
Extension of Time and Rectification of Register of Charges ... 215
Modification of Charges ... 216Satisfaction of Charges ... 216
Purchase or Acquisition of a Property Subject to Charge ... 217
Properties Situated Abroad and Subject to Charge ... 217
Page
Difference between Mortgage and Charge ... 218
Lesson Round-Up 218
Glossary 219
SELF-TEST QUESTIONS ... 219
LESSON 11
ALLOTMENT AND ISSUE OF CERTIFICATES
Learning Objectives/Lesson Outline 221
Allotment of Shares ... 222
Notice of Allotment ... 222
General Principles Regarding Allotment ... 222
Statutory Provisions regarding Allotment ... 223
Effect of Irregular Allotment ... 226
Revocation by applicant/allottee ... 228
Ultra vires allotment ... 228
Allotment Procedure ... 228
Return of Allotment ... 229
Judicial pronouncement 230
Share Certificate ... 231
Share Warrant ... 236
Share Certificate and Share Warrant Distinguished ... 237
Personation of Shareholder ... 238
Calls and Forfeiture ... 238
Forfeiture of Shares ... 241
Re-issue of Forfeited Shares ... 243Surrender of Shares 243
Lesson Round-Up 244
Glossary 244
SELF-TEST QUESTIONS ... 245
LESSON 12
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MEMBERSHIP IN A COMPANY
Learning Objectives/Lesson Outline 247
Who are Members ... 248
Modes of Acquiring Membership ... 249Who may become a Member ... 250
Joint Members ... 252
Registration of Shares in the name of Public Office ... 253
Minimum Number of Members ... 254
Cessation of Membership ... 254
Page
Expulsion of a Member ... 255
Personation and Penalty ... 255
Register of Members ... 256
Judicial pronouncement 256Place of Keeping and Inspection of the Registers ... 257
Remedy if inspection is refused ... 258
Registerprima facieevidence ... 258
Rectification of a register of Members ... 258
Closing of Register of Members ... 260
Foreign Register ... 261
Preservation of Registers, etc. ... 261
Power of the Central Government to Investigate into the Ownership of Shares ... 262
Declaration by Persons not holding Beneficial Interest in any Share ... 262
Rights of Members ... 263
Individual Rights ... 263
Collective Membership Rights ... 264
Voting Rights of Members ... 265
Shareholders Pre-emptive Rights ... 265
Variation of Members Rights ... 266
Rights of Dissentient Members ... 266
Liability of Members ... 266
Lesson Round-Up 267
Glossary 267
SELF-TEST QUESTIONS ... 268
LESSON 13
TRANSFER AND TRANSMISSION OF SECURITIES
Learning Objectives/Lesson Outline 269
Introduction ... 270
Provisions under Companies Act regulating transfer of securities 270
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Nomination of shares/debentures 270
Power to refuse registration and appeal against refusal 272
Statutory Remedy against refusal under Section 111 ... 272
Transfer of Securities of a Public Company (Section 111A) ... 272
Stamp Duty Payable and Affixation/Cancellation of Stamps ... 273Lost Transfer Deeds ... 274
Delegation of Powers for Transfer ... 274
Transfer of Debentures ... 274
Transfer of Shares to a Minor ... 274
Transmission of shares ... 275
Distinction between Transfer and Transmission ... 276
Page
Compliance with Section 108 A mandatory provision 283
Certification of Transfer ... 285
Blank Transfer ... 285Transfer of Shares during winding up ... 286
Forged transfer 287
Transposition of Name ... 288
Death of transferor or transferee before registration of transfer ... 289
Rights of Transferor ... 289
Effects of Transfer ... 291
Companys lien on shares ... 292
Transfer and Transmission of Debentures ... 293
Transfer of Shares registered with Depository Mode ... 294
Legal Framework for Depository System 294The Depositories Act, 1996 : An Analysis ... 295
Safeguards on transfer of securities in demat form 301
Lesson Round-Up 304
Glossary 305
SELF-TEST QUESTIONS ... 305
LESSON 14
INSTITUTION OF DIRECTORS
Learning Objectives/Lesson Outline 307Concept of Director ... 308
Definition of Director ... 308
Types of Directors ... 309
Legal Position of Directors ... 311
Qualifications of Directors ... 313
Companies [Disqualification of Directors under Section 274(1)(g) ofthe Companies Act, 1956] Rules, 2003 315
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Qualification Shares ... 316
Number of Directors ... 318
Appointment of Directors ... 319
Restriction on Appointment or Re-appointment of Directors ... 320
Director Identification Number 320Appointment of First Directors ... 321
Appointment of Directors by Members in General Meeting ... 322
Appointment of Person other than Retiring Director ... 324
Appointment of Directors to be voted individually ... 325
Principle of Proportional Representation ... 326
Appointment of Directors by the Board ... 326
Appointment of Directors by Central Government ... 330
Page
Application to the Company Law Board to Prevent Oppression and Mismanagement ... 331Appointment of Directors by Third Parties (Nominee Directors) ... 332
Appointment of a Director by Small Shareholders ... 333
Removal of Directors ... 334
Retirement of Directors ... 338
Resignation of Directors ... 338
Penalty for Wrongful Withholding of Companys Property ... 340
Vacation of Office of Directors ... 343
Remuneration of Directors ... 345
Remuneration of non-executive directors 348
Office or Place of Profit ... 356
Important Clarifications ... 359
Lesson Round-Up 362
Glossary 363
SELF-TEST QUESITONS ... 364
LESSON 15
POWERS AND DUTIES OF DIRECTORS
Learning Objectives/Lesson Outline 365
Distribution of Powers of a Company ... 366
Exercise of Powers ... 366
Powers to be Exercised only at Board Meetings ... 368
Other Powers to be Exercised at Board Meetings ... 369
Powers Which Must be Exercised by Unanimous Vote ... 370
Powers of the Board Exercisable with the Approval of the Company in General Meeting ... 370
Borrowings ... 373
Prohibitions and restrictions regarding political contributions ... 374
Loans to Directors ... 375
Application for ApprovalInformation to be Stated therein ... 377
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Boards sanction for contracts in which Directors are Interested ... 378
Disclosure of Interest by Directors ... 382
Position of Interested Director ... 383
Duties of Directors ... 383
Liabilities of Directors ... 387
Directors Liability for Acts of Co-directors ... 392
Criminal Liability ... 392
Liability as an Officer in Default ... 394
Courts Power to grant Relief in Certain Cases ... 396
Compounding of certain OffencesSection 621A ... 398
Monitoring and Management ... 399
Lesson Round-Up 400
Glossary 401
SELF-TEST QUESTIONS ... 401
Page
LESSON 16
MANAGING DIRECTOR, WHOLE-TIME DIRECTOR AND MANAGER
Learning Objectives/Lesson Outline 403
MANAGING DIRECTOR 404
Appointment of Managing Director ... 405
Qualifications of Managing Director ... 410
Powers of Managing Director ... 411
Duties of a Managing Director ... 413
Liabilities ... 413
EXECUTIVE DIRECTOR/WHOLE-TIME DIRECTOR 413Appointment ... 414
Role and Powers of Executive/Whole-time Director ... 414
Duties of a Whole-time Director ... 415
Liabilities ... 415
MANAGER 416
Number of Managers in a Company ... 416
Director as Manager ... 416
Appointment ... 417
Disqualification ... 417
Term of Office ... 417
Restriction on the Number of Companies of Which a Person may be Appointed Manager ... 417Restriction on Appointment of Manager ... 417
Distinction between Manager and Managing Director ... 417
Remuneration ... 418
Powers ... 418
Duties ... 418
Liabilities ... 419
Relationship with the Board of Directors ... 419
Compensation for loss of office ... 423
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CHAIRMAN 424
Election of Chairman ... 424
Appointment of Chairman ... 424
Removal of Chairman ... 425
Role of Chairman ... 425
Whole-time and part time Chairman ... 426
Duties and Responsibilities ... 426
Chairmans Power under Common Law ... 428
Amendments to Resolution ... 428
Adjournment of Meetings ... 428
Chairmans Declaration as to result to voting ... 429
Liabilities ... 429
Lesson Round-Up 429
Glossary 430
SELF-TEST QUESTIONS ... 430
Page
LESSON 17
COMPANY SECRETARY
Learning Objectives/Lesson Outline 431
Who is a Secretary ... 432
Who is a Company Secretary ... 432
Statutory Requirement ... 433
Importance of Secretary ... 434
Position of the Secretary ... 434
Companies (Appointment and Qualifications of Secretary) Rules, 1988 ... 436
Appointment of a Secretary ... 438
Dismissal of a Secretary ... 439
Powers of a Secretary ... 440
Duties of a Secretary ... 440
Statutory Duties ... 441
General Duties ... 442
Liabilities of Secretary ... 443
Rights of Secretary ... 445
Role of Company Secretary ... 446
COMPANY SECRETARY IN PRACTICE 454Who can Practice as a Company Secretary ... 454
Areas of Practice ... 455
Professional Duties and Code of Conduct ... 461
Rules Applicable to a Company Secretary in Practice ... 461
Professional Misconduct ... 462
Quality Review Board 463
Peer Review 463
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Lesson Round-Up 464
Glossary 464
SELF-TEST QUESTIONS ... 464
LESSON 18
MEETINGS
Learning Objectives/Lesson Outline 467
Introduction ... 468
Meaning of a Meeting ... 468
Kinds of Company Meetings ... 469
Statutory Meeting ... 469
Statutory Report ... 470
Annual General Meeting ... 471
Extension of Validity Period of AGM 472
Page
Time and Place for holding an Annual General Meeting ... 473
Participation by shareholders or directors in meetings through electronic mode 474
Default in holding Annual General Meeting ... 475
Consideration of Accounts of more than One Year at AGM 477
Canceling/Postponing of Convened General Meeting ... 477
Object of holding an Annual General Meeting ... 477
Business transacted at an Annual General Meeting ... 478
Applicability of Provisions of Sections 171 to 186 ... 478
Extraordinary General Meetings ... 478
Types of Business Transacted at Extraordinary General Meeting ... 478
Who May Convene Extraordinary General Meetings ... 478
Calling of Extraordinary General Meeting on Requisition ... 479
Calling of Extraordinary General Meeting by Company Law Board ... 480
Class Meetings ... 482
Meetings of Debentureholders ... 482
Meeting of Creditors ... 482
Meeting of Board of Directors ... 482
Notice of Board Meetings ... 484
Time and Place of Board Meetings ... 485Agenda ... 486
Resolution Passed by Circulation by Directors ... 487
Minutes of Board Meetings ... 488
Quorum of Directors ... 490
Disclosure of Interest ... 491
Chairman of Board Meeting ... 492
Meetings of Committee of Directors ... 492
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Provisions of relating General Meetings 493
Requisites of Valid Meeting ... 493
General Meetings to be Convened by Directors ... 494
Notice of Meeting ... 494
Venue of the Meeting ... 497Notice of Adjourned Meeting ... 498
Agenda ... 498
Quorum ... 498
Proxy ... 500
Voting at General Meeting ... 504
Voting and Demand for Poll ... 504
Chairman ... 507
Duties and Role of Chairman ... 508
Motion ... 509
Amendment ... 509
General Rules Regarding Amendments ... 510
Methods of Exercising Shareholders Rights with regard to Voting ... 510
Page
Resolutions ... 511
Resolution Requiring Special Notice ... 512
Resolutions Passed at Adjourned Meeting ... 512
Circulation of Members Resolution ... 512
Registration of Resolutions and Agreements ... 513
Passing of Resolutions by Postal Ballot ... 514
Companies (Passing of the Resolution by Postal Ballot) Rules, 2011 515Adjournment ... 516
Postponement ... 517
Dissolution ... 518
Minutes of Proceedings of Meetings ... 518
Lesson Round-Up 520
Glossary 521
SELF-TEST QUESTIONS ... 522
LESSON 19
INTERCORPORATE LOANS AND INVESTMENTS
Learning Objectives/Lesson Outline 523
Introduction ... 524
Inter-corporate Loans and Investments ... 524
No blanket permission from shareholders ... 526
Circular 526
Register of loans made, guarantees given, securities provided and investments made ... 527
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Inspection of Register ... 527
Penalties ... 527
Exemptions ... 528
Investments to be held in Companys own name ... 528
Register of Investments not held in company own name ... 530Penalty 531
Lesson Round-Up 531
Glossary 532
SELF-TEST QUESTIONS ... 532
LESSON 20
DEPOSITS
Learning Objectives/Lesson Outline 533
Invitation and Acceptance of Deposits ... 534Application of Provisions of Section 58A to Guarantee Companies and Section 25 Companies ... 535
Non-Banking Non-Financial Companies ... 535
Exemptions from applicability of Section 58A ... 536
Page
Nomination by Depositors ... 537
Companys Right to Reject Application ... 538
Deposit from NRIs ... 538
Provisions Relating to Prospectus Apply to Issue of Advertisement ... 540
Companies (Acceptance of Deposits) Rules, 1975 ... 540
Deposits and Loan ... 543
Deposit and Debenture ... 544
Depositor ... 544
Ceiling Limits for Acceptance of Deposits ... 544
Ceiling on Rate of Interest ... 546
Rate of Brokerage ... 546
Maintenance of Liquid Assets ... 546
Constitutional Validity of Section 58A of the Act and Rule 3A of Deposit Rules ... 547
Form and Particulars of Advertisement ... 549
Delivery of the Text of Advertisement to the Registrar ... 550
Statement in Lieu of Advertisement ... 551Signing of Advertisement ... 551
Form of Application for Deposits ... 551
Furnishing of receipts to Depositors ... 552
Register of Deposits ... 552
General Provisions regarding Premature Repayment of Deposits ... 552
Exemption ... 553
Power of the Central Government ... 553
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Return of Deposits ... 553
Renewal of Deposits ... 554
Repayment of Deposits 554
Penalties ... 556
Defaults in Repayment of Deposits to Small Deposit holders ... 557Remedy if the Company Fails to Repay on Due Date ... 558
Powers to Grant Extension of Time and Exemption ... 559
Guidelines for filing Statutory Application under Section 58A(8) of Companies Act, 1956 559
Lesson Round-Up 560
Glossary 560
SELF-TEST QUESTIONS ... 560
LESSON 21
ACCOUNTS AND AUDIT
Learning Objectives/Lesson Outline 563
ACCOUNTS 564
Requirement of Keeping Books of Account ... 564
Place of Keeping Books of Account ... 565
Page
Books of Accounts in Respect of Branch Office ... 565
True and Fair View ... 565
Preservation of Books of Accounts ... 565
Inspection of Books of Accounts ... 565
Maintenance of Costing Records and Stock Records ... 567
Persons Responsible for Keeping Books of Accounts ... 567
Statutory Books ... 568
Statistical Books ... 569
Annual Accounts: Balance Sheet and Profit and Loss Account 570
Meaning of Balance Sheet 570
Preparation of Balance Sheet and Profit and Loss Account 571
Form of Balance Sheet 571
Meaning of Profit and Loss Account 573
Form of Profit and Loss Account 574
Annual Accounts to Comply with Accounting Standards ... 575IND AS 575
National Advisory Committee on Accounting Standards ... 575
Laying of Accounts ... 577
Default in Laying of Accounts ... 577
Approval and Signing of Balance Sheet and Profit and Loss Account ... 578
Penalty 579
Authentication of Annual Accounts by Secretary 579
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Authentication of Annual Accounts when only one Director is available 580
Time Gap between authentication of accounts and signing by auditor 580
Approval of Annual Accounts by Delegation 581
Circulation of Balance Sheet and Auditors Report ... 581
Adoption of Accounts at Annual General Meeting ... 584Filing of Annual Accounts with the Registrar ... 585
Clarifications issued by MCA with respect of filing of Annual Accounts 586
Investor Education and Protection Fund 588
Inspection of Annual Accounts in case of Private Companies ... 588
Duty of officer to make Disclosure of Payments ... 588
Accounts of Holding and Subsidiary Company 589
AUDIT 592
Appointment of Auditor ... 593
Qualifications and Disqualifications of Auditors ... 593
Method of Appointment of Auditors ... 594
Appointment of First Auditors ... 594
Subsequent Appointment of Auditors ... 595
Ceiling on Appointment as Auditor ... 595
Reappointment of Auditors ... 596
Appointment of Auditor Other Than a Retiring Auditor ... 596
Rights of Retiring Auditors ... 597
Page
Filling of Casual Vacancy ... 597
Power of Central Government to Appoint Auditors ... 597
Appointment of Auditors by Special Resolution ... 597Remuneration of Auditors ... 599
Term of Office ... 599
Resignation by an Auditor ... 600
Removal of Auditors ... 600
Status of the Auditors ... 601
Auditors of Government Companies ... 601
Rights and Powers of Auditors ... 603
Duties of Auditors ... 604
Judicial pronouncements on the duties of auditors 605
Liabilities of an Auditor ... 608
Audit of Branch Accounts ... 609Special Audit ... 610
Cost Audit ... 611
Cost Audit Report 612
Social Audit 613
Proper Books of Accounts ... 614
True and Fair View ... 615
Notes on Accounts ... 615
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Guidelines for Filing Statutory Applications 616
Annexure: Companies (Auditors Report) Order, 2003 618
Lesson Round-Up 621
Glossary 622
SELF-TEST QUESTIONS ... 623
LESSON 22
DIVISIBLE PROFITS AND DIVIDENDS
Learning Objectives/Lesson Outline 625
Definition and Meaning of Dividend ... 626
Difference between Dividend and Interest ... 626
Types of Dividend ... 626
Final Dividend ... 626
Interim Dividend ... 626Dividend on Preference Shares ... 627
Dividend on Equity Shares ... 627
Restrictions on Declaration of Dividend and Purpose Behind it ... 627
Ascertainment of Divisible Profits and Dividends ... 628
Depreciation ... 628
Loss of Previous Year(s) to be Set off against Profits of Current Year or Previous Years ... 630
Page
Transfer of Profits to Reserves ... 630
Dividend in case of Absence or Inadequacy of Profits ... 631
Declaration of Dividend ... 632
Revocation of Declared Dividend ... 632
Payment of Dividend in Cash or in Kind ... 633
Liability of Directors, Shareholders and Auditors for improper Dividend ... 633
Shareholders Right to Dividend ... 633
Who is eligible to receive dividend ... 633
When dividend is Payable ... 634
Establishment of Investor Education and Protection Fund ... 636
Dividend Warrants ... 636
Dividend Mandate ... 637
Use of Information Technology in Cash Transaction of Listed Companiesfor Payment of Dividends ... 637
Can Dividends be Paid out of Capital ... 637
Payment of Interest out of Capital ... 638
Payment of Dividend out of Capital Profits ... 639
Remittance of Dividend or Interest or Sale Proceeds to NRIs,Foreigners and Foreign Companies ... 639
Rate of Dividend on Preference Shares ... 639
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Lesson Round-Up 640
Glossary 640
SELF-TEST QUESTIONS ... 641
LESSON 23
SOLE SELLING AND SOLE BUYING AGENTS
Learning Objectives/Lesson Outline 643
Sole Selling Agents-Meaning ... 644
Appointment of Sole-selling Agents ... 644
Powers of the Central Government to Investigate Terms of Appointment ... 645
Companys Duty in Investigation ... 647
Penalty ... 647
Power of the Central Government to Prohibit the Appointment of Sole Selling Agent
in Certain Cases ... 647Re-appointment of Sole Selling Agents ... 650
Duties of a Secretary ... 650
Condition to form part of Agreement 651
Remuneration of Sole Selling Agents ... 651
Sole Buying or Purchasing Agents ... 651
No Compensation to Sole Selling Agent for Loss of Office ... 652
Meaning of Relative ... 652
The Companies (Appointment of Sole Agents) Rules, 1975 ... 653
Page
Guidelines for filing statutory applications under Section 294AA of the Companies Act, 1956 655Lesson Round-Up 655
Glossary 656
SELF-TEST QUESTIONS ... 656
LESSON 24
BOARDS REPORT AND DISCLOSURES
Learning Objectives/Lesson Outline 659
Introduction 660
Disclosures under Companies Act 660
Disclosure under Section 217(1) 660
Disclosure under Section 217(2) 662
Particulars in respect of certain employees [Section 217(2A)] 662
Directors Responsibility Statement [Section 217(2AA)] 663
Comment on Auditors Report [Section 217(3)] 665
Other Disclosures 664
Disclosures pursuant to the Listing agreement of Stock Exchanges 664
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Disclosures pursuant to employee stock option and employees stock purchase schemes 667
Disclosures pursuant to Directions of RBI 667
Approval of the Boards Report 668
Signing and dating of the Boards Report 668
Filing of the Boards Report 669Right of Members to copies of Balance Sheet, Boards Report, etc. 670
Liability for Mis-statement 670
Chairmans Speech 671
Compliance Certificate under Section 383A 671
Need for Compliance Certificate 672
Scope of Compliance Certificate 673
Penalty for Non-Compliance 673
Mode and period of Appointment of PCS 673
Certification with Qualification 674
Penalty for false compliance certificate 674
Professional Responsibility 675
Lesson Round-Up 675
Glossary 676
SELF-TEST QUESTIONS ... 676
LESSON 25
REGISTERS, FORMS AND RETURNS
Learning Objectives/Lesson Outline 677
Statutory Books/Registers ... 678
Secretarial Standards ... 679
Page
Statutory Books ... 679
Register of Investments not held in Companys name 679
Register of deposits 679
Register of Securities bought back 681
Register of Charges 681
Register of Members 682
Index of Members 684
Register of debenture holder 684
Index of debenture holders 684Register and Index of beneficial owners 685
Foreign register of members and debentureholders 685
Annual Return 686
Minutes Book 689
Register of Postal Ballot 691
Books of Account 691
Cost Records 692
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Register of Particulars of Contracts in which directors are interested 692
Register of Directors 693
Register of Directors Shareholding 694
Register of Investment, Loan made, guarantee given or security provided
to other body corporate 694Register of renewed and duplicate certificate 695
Register of records and documents destroyed 695
Register of Sweat Equity Shares 696
Procedure for Keeping Registers and Returns at a Place other than the Registered Office ... 696
Other Registers ... 697
Electronic Forms 709
Filing of Various Forms/Returns with Registrar of Companies ... 710
Preparation and Filing of Returns with the Registrar of Companies ... 713
Returns on Occurrence of Certain Events ... 716
Filing Fee for Companies Registered in India ... 719
Filing Fee by Foreign Companies ... 719Payment of fees ... 720
Company Secretarys Role in Filing and Filing Returns and Forms ... 720
Guidelines for Preparing/Filing Forms, Documents, Returns etc. ... 721
Defective Forms/Documents ... 722
Condonation of Delay 722
Procedure for Condonation of Delay by Central Government inRelation to Filing of Documents with Registrar of Companies ... 723
Penalty for Filing False Documents/Statements with Registrar ... 723
Lesson Round-Up 723
Glossary 724
SELF-TEST QUESTIONS ... 724
Page
LESSON 26
INSPECTION AND INVESTIGATION
Learning Objectives/Lesson Outline 727
INSPECTION 728
Introduction 728
Nature of Inspection 728
Inspection by whom 728
Directors right to make inspection 729
Right of Members to make inspection 729
Time and Place of Inspection 730
Inspection of Books of Account and other books and papers 730
Notice for Inspection 730
Duties of Directors, other Officers and Employees 730
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Powers of Inspector 730
Inspection Report 730
Follow-up Action on the Report of Inspecting Officer 732
Penalty for Default 732
Note on Strategy on Inspection 732Preparation by Company Secretary to face Inspection 735
Powers of Registrar to call for Information or Explanation 736
Reports of Registrar 738
Seizure of documents by Registrar 738
INVESTIGATION 738
Meaning and Object 738
Kinds of Investigation 739
Investigation of the Affairs of a Company by the Central Government 739
Only Individual to be appointed as Inspector 743
Powers of Inspectors 743
Penalty for Default 745
Inspectors Report 746
Follow-up Action on the Report 746
Expenses of Investigation 748
Preparation by a Company Secretary to face Investigation 748
Investigation of the Ownership of Company 750
Restrictions on Shares and Debentures 751
Saving for disclosure by Legal Advisor or Banker 752
Protection of the Employees of Company during Investigation 752
Lesson Round-Up 753
Glossary 754SELF-TEST QUESTIONS ... 754
Page
LESSON 27
MAJORITY RULE AND MINORITY RIGHTS
Learning Objectives/Lesson Outline 757
SHAREHOLDER'S DEMOCRACY 758
MAJORITY POWERS AND MINORITY RIGHTS 759Powers of Majority ... 759
The Principle of Non-interference (Rule in Foss v. Harbottle) ... 760
Justification and Advantages of the Rule in Foss v. Harbottle ... 761
Exceptions to the Rule in Foss v. Harbottle Protection of Minority Rights andShareholders Remedies ... 762
Actions by Shareholders in Common Law ... 762
Statutory Remedies (under the Companies Act) ... 765
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PREVENTION OF OPPRESSION AND MISMANAGEMENT 766
Prevention of Oppression ... 767
Meaning of Oppression ... 767
Oppression must be of a continuous Nature ... 769
Prejudicial to Public Interest ... 770Winding up Order under Just and Equitable Clause ... 770
Winding up Would Unfairly Prejudice the Petitioners ... 770
Prevention of Mismanagement ... 771
Persons Entitled to Apply ... 772
Powers of the Company Law Board ... 774
Consequences of Termination or Modification of Agreements ... 775
Powers of the Central Government to Prevent Oppression or Mismanagement ... 775
Power to Prevent Changes in the Board ... 778
Lesson Round-Up 778
Glossary 779
SELF-TEST QUESTIONS ... 779
LESSON 28
MERGER, DE-MERGER, AMALGAMATION, COMPROMISE AND
ARRANGEMENTSAN OVERVIEW
Learning Objectives/Lesson Outline 781
Concept of Merger and Amalgamation 782
Demerger under the Companies Act, 1956 783
Section 390 provides the interpretation of section 391 and 393 783
Scope of Section 391 784
Sanctioned Arrangement binding on all Concerned Parties 785
Need for Reports from Registrar of Companies 785
When Courts do not sanction a Scheme 786
Page
Explanatory statement to the notice of meeting 787
Powers of the Court to Supervise the Implementation of the Scheme 788
Powers of the Court to Sanction Modification of the Terms of a Scheme 789
Powers of the Court to order a Winding up while considering a Scheme 789
Powers of the Court to make Consequential Orders 789Powers and Duty to acquire Shares of Shareholder dissenting from Scheme orContract Approved by Majority 790
Lesson Round-Up 793
Glossary 793
SELF-TEST QUESTIONS ... 794
LESSON 29
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PRODUCER COMPANIES
Learning Objectives/Lesson Outline 795
Genesis 796
Objects of Producer Company 796Formation of Producer Company and its Registration 797
Membership and voting rights of members of Producer Company 798
Benefits to Members 798
Memorandum of Association, Articles of Association 798
Contents of Memorandum of Producer Company 799
Contents of Articles of Association of Producer Company 799
Amendment to Memorandum and Articles 801
Option to Inter-State Co-operative Societies to become Producer Companies 801
Vesting of undertaking in Producer Company 802
Concession, etc. to be deemed to have been granted to Producer Company 802
Provisions in respect of Officers and other employees of Inter-State Co-operative Society 802
Number of Directors 802
Appointment of Director 803
Vacation of Officer by Directors 803
Powers and functions of Board 803
Matters to be transacted at the General Meeting 804
Liability of Directors 804
Committee of Directors 805
Meetings of the Board and Quorum 805
Chief Executive and his functions 805
Secretary of Producer Company 805Quorum of the General Meeting 806
Voting Rights 806
Annual General Meetings [Section 581ZA] 806
Share Capital 807
Transferability of shares and attendant rights 807
Surrender of shares 807
Page
Books of account 807
Internal Audit 808
Donation or Subscription by Producer Company 808General and other reserves 808
Issue of Bonus Shares 809
Loan, etc., to Members [Section 581ZK] 809
Investment in other companies, formation of subsidiaries etc. [Section 581ZL] 809
Amalgamation, merger or division, etc., to form new Producer Companies 809
Disputes 810
Striking off name of Producer Company 810
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Re-conversion of producer company to Inter-State Co-operative Society 810
Lesson Round-Up 810
Glossary 812
SELF-TEST QUESTIONS ... 812
LESSON 30
LIMITED LIABILITY PARTNERSHIPS
Learning Objectives/Lesson Outline 813
Introduction 814
Salient Features 814
Distinction between LLP and Partnership 815
Distinction between LLP and Company 816
Comparison of LLP with Private Limited Company 816
Incorporation of Limited Liability Partnership 817
LLP agreement 818Partners and Designated Partners 819
Responsibilities of Designated Partners 821
Partners obligation 821
Advantage and Disadvantages of LLP 822
LLP for the Professionals 822
Valuation of Capital Contribution 822
Maintenance of Books of Account 822
Audit of Limited Liability Partnership Accounts 823
Filing of Annual Returns 823
Electronic Filing of Documents 824
Investigation of the Affairs of LLP 824
Foreign LLP 825
Winding up of LLP 825
Foreign Direct Investment in LLP 826
Lesson Round-Up 827
Glossary 827
SELF-TEST QUESTIONS ... 827
Page
LESSON 31
APPLICATION OF COMPANY LAW TO DIFFERENT SECTORS
Learning Objectives/Lesson Outline 829
Application of Companies Act to different sectors 830
Banking Companies 830
Insurance Companies 831
Insurance Regulatory and Development Authority (IRDA) 832
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Exception of Public Financial Institution from Section 211 832
Lesson Round-Up 833
SELF-TEST QUESTIONS ... 833
LESSON 32
OFFENCES, PENALTIES AND THEIR COMPOUNDING
Learning Objectives/Lesson Outline 835
Introduction 836
Officer in default 836
Types of Penalty 837
Compounding of offences under Section 621A of Companies Act, 1956 837
Procedure for Compounding 838
List of Sections Imposing Penalty 839
Lesson Round-Up 853Glossary 853
SELF-TEST QUESTIONS ... 853
LESSON 33
WINDING UP OF COMPANIES
Learning Objectives/Lesson Outline 855
Introduction 856
Individual Insolvency vs. Corporate Insolvency 856
Winding up and Dissolution 857
Modes of winding up 857
Winding up by the Court 858
Grounds on which a company may be wound up by the Court 858
Who may file petition for winding up 860
Jurisdiction of Court for entertaining winding up petition 861
Voluntary winding up 861
Kinds of voluntary winding up 862
Members voluntary winding up 862
Page
Creditors voluntary winding up 863
Distinction between Members and Creditors voluntary winding up 863
Powers of the Court to Intervene in voluntary winding up 863
Commencement of winding up 864
Lesson Round-Up 865
SELF-TEST QUESTIONS ... 865
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LESSON 34
STRIKING OFF NAME OF COMPANIES
Learning Objectives/Lesson Outline 867
Meaning of Striking off 868
When a Company is still in operation 868
Procedure for Striking off a company 869
Fast Track Exit Mode by MCA 870
Restoration of the Companies Name 871
The rights of person aggrieved by the company having been struck off the register 872
Effect of Restoration Order 872
Mode of Sending Letter/Notice 873
Who can apply? 873
Lesson Round-Up 874
SELF-TEST QUESTIONS ... 874
LESSON 35
AN INTRODUCTION TO E-GOVERNANCE AND XBRL
Learning Objectives/Lesson Outline 875
Introduction 876
Organisation of ROC offices under MCA-21 876
Front office 876
Virtual front office 876
Physical Front office 877Back office 877
Important features of e-filing of Documents under MCA21 System 877
Director Identification Number 877
Corporate Identity Number 878
Digital Signature Certificate 878
Other Features of e-filing of documents under MCA21 System 879
Mode of payment 879
Service Request Number 880
Payment of stamp duty 880
Categories of e-forms 880
Page
Annual filing 883
Pre-certification of e-forms 884
Terms used while e-fling the e-forms 884
Online Inspection of Documents 885
Introduction of New e-form 68 886
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Key benefits of MCA21 Project 886
Clarifications issued by MCA 886
General structure of an e-form and e-filing process 887
Responsibility of Professionals Digitally Signing the e-forms 889
XBRL 889Benefits of XBRL 890
Lesson Round-Up 891
SELF-TEST QUESTIONS ... 891
LESSON 36
SECRETARIAL STANDARDS
Learning Objectives/Lesson Outline 893
Secretarial Standards - issued for the first time in any country- a unique and pioneering effort 894
Secretarial Standard on Meetings of the Board of Directors (SS-1) 894Secretarial Standard on General Meetings (SS-2) 895
Secretarial Standard on Dividend (SS-3) 895
Secretarial Standard on Registers and Records (SS-4) 895
Secretarial Standard on Minutes (SS-5) 895
Secretarial Standard on Transmission of Shares and Debentures (SS-6) 896
Secretarial Standard on Passing of Resolutions by Circulation (SS-7) 896
Secretarial Standard on Affixing of Common Seal (SS-8) 896
Secretarial Standard on Forfeiture of Shares (SS-9) 896
Secretarial Standard on Boards Report (SS-10) 897
Guidance notes 897
Refrencer on Secretarial Audit 897
Procedure for Issuing Secretarial Standards 898
Conclusion 898
TEST PAPERS 2013
Test Paper 1/2013 ... 901
Test Paper 2/2013 ... 903
Test Paper 3/2013 ... 906
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Lesson 1
INTRODUCTION
Company as a business medium
Meaning and definition of term company
Nature and characteristics of a company
Historical Development of Concept ofCorporate Law in India
Development of Company Law in India andEngland
Highlights of Companies Bill, 2012
Companies vis--vis other Forms of business
Concept of Corporate Personality
Lifting of Corporate Veil
Citizenship
Personal liability of directors or members
Illegal association
LEARNING OBJECTIVES
The concept of Company or Corporation in
business is not a new phenomenon, but was dealt
with, in 4th century BC itself during Arthashasthra
days. Its shape got revamped over a period of time
according to the tunes of business dynamics.
Company form of business has certain distinctadvantages over other forms of businesses like Sole
Proprietorship/Partnership etc. It includes features
such as Limited Liability, Perceptual Succession etc.
After reading this lesson, you would be able to
understand the historical development in evolution of
corporate law in India and England, emerging
regulatory aspects including Companies Bill, 2012,
besides dealing with basic characteristics of
company and how it differs from other forms of
businesses.
The great problem of having corporate citizens is that they aren't like the rest of us. As Baron Thurlow in England is
supposed to have said, "They have no soul to save, and they have no body to incarcerate." Robert Monks
LESSON OUTLINE
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1. COMPANY AS A BUSINESS MEDIUM
Meaning of a Company
The word company is derived from the Latin word (Com=with or together; panis =bread), and it originally
referred to an association of persons who took their meals together. In the leisurely past, merchants tookadvantage of festive gatherings, to discuss business matters. Now a days, the business matters have
become more complicated and cannot be discussed at length at festive gatherings. Therefore, the word
company has assumed greater importance. It denotes a joint stock enterprise in which the capital is
contributed by a large number of people. Thus, in popular parlance, a company denotes an association of
like minded persons formed for the purpose of carrying on some business or undertaking. A company is a
corporate body and a legal person having status and personality distinct and separate from that of the
members constituting it.
It is called a body corporate because the persons composing it are made into one body by incorporating it
according to the law and clothing it with legal personality. The word corporation is derived from the Latin
term corpus which means body.Accordingly, corporation is a legal person created by the process other
than natural birth. It is, for this reason, sometimes called artificial legal person. As a legal person, a corporateis capable of enjoying many of the rights and incurring many of the liabilities of a natural person.
The incorporated company owes its existence either to a special Act of Parliament or to company legislation.
The public corporations like Life Insurance Corporation of India, SBI etc., have been brought into existence
through special Acts of Parliament, whereas companies like Tata Steels Ltd., Reliance Industries Limited
have been formed under the Companys Legislation i.e. Companies Act, 1956. The trading partnership which
is governed by Partnership Act is the most apt example of an unincorporated association.
Definition of Company
In the legal sense, a company is an association of both natural and artificial persons incorporated under the
existing law of a country. In terms of the Companies Act, 1956 (Act No. 1 of 1956) [hereinafter referred to as
the Act] a company means a company formed and registered under the Companies Act, 1956 or under theprevious laws relating to companies" [Section 3(1)(ii)]. In common law, a company is a legal person or
legal entity separate from, and capable of surviving beyond the lives of its members. However, an
association formed not for profit also acquires a corporate life and falls within the meaning of a company by
reason of a licence under Section 25(1) of the Act.
But a company is not merely a legal institution. It is rather a legal device for the attainment of any social or
economic end. It is, therefore, a combined political, social, economic and legal institution. Thus, the term
company has been described in many ways. Itis a means of cooperation and organisation in the conduct of
an enterprise. It is an intricate, centralised, economic and administrative structure run by professional
managers who hire capital from the investor(s).
Lord Justice James has defined a company as an association of many persons who contribute money ormoneys worth to a common stock and employ it in some trade or business and who share the profit and loss
arising therefrom. The common stock so contributed is denoted in money and is the capital of the company.
The persons who form it, or to whom it belongs, are members. The proportion of capital to which each
member is entitled is his share.
From the foregoing discussion it is clear that a company has its own corporate and legal personality distinct
and separate from that of its members. A brief description of the various attributes is given here to explain
the nature and characteristics of the company as a corporate body.
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Lesson 1 Introduction 3
NATURE AND CHARACTERISTICS OF A COMPANY
Since a corporate body (i.e. a company) is the creation of law, it is not a human being, it is an artificial person
(i.e. created by law); it is clothed with many rights, obligations, powers and duties prescribed by law; it is
called a person. Being the creation of law, it possesses only the properties conferred upon it by its
Memorandum of Association which is the charter of the company. Within the limits of powers conferred by
the charter, it can do all acts as a natural person may do.
The most striking characteristics of a company are:
(i) Corporate personality
The company incorporated under the Act is vested with a corporate personality quite distinct from individuals
who are its members. Being a separate legal entity it bears its own name and acts under a corporate name.
It has a seal of its own. Its assets are separate and distinct from those of its members. It is also a different
person from the members who compose it. As such it is capable of owning property, incurring debts,
borrowing money, having a bank account, employing people, entering into contracts and suing or being sued
in the same manner as an individual. Its members are its owners but they can be its creditors simultaneously
as it has a separate legal entity. A shareholder cannot be held liable for the acts of the company even if he
holds virtually the entire share capital. The shareholders are not the agents of the company and so they
cannot bind it by their acts. The company does not hold its property as an agent or trustee for its members
and they cannot sue to enforce its rights, nor can they be sued in respect of its liabilities. Thus,
incorporation is the act of forming a legal corporation as a juristic person. A juristic person is in law also
conferred with rights and obligations and is dealt with in accordance with law. In other words, the entity acts
like a natural person but only through a designated person, whose acts are processed within the ambit of law
[Shiromani Gurdwara Prabandhak Committeev. Shri Sam Nath DassAIR 2000 SCW 139].
CASE EXAMPLE
The case of Salomon v.Salomon and Co. Ltd., (1897) A.C. 22
The above case has clearly established the principle that once a company has been validly constituted underCompanies Act, it becomes a legal person distinct from its members and for this purpose it is immaterial
whether any member has a large or small proportion of the shares, and whether he holds those shares
beneficially or as a mere trustee.
In the case, Salomon had, for some years, carried on a prosperous business as a leather merchant and boot
manufacturer. He formed a limited company consisting of himself, his wife, his daughter and his four sons as
the shareholders, all of whom subscribed for 1 share each so that the actual cash paid as capital was 7.
Salomon sold his business (which was perfectly solvent at that time), to the Company formed by him for the
sum of 38,782. The companys nominal capital was 40,000 in 1 shares. In part payment of the purchase
money for the business sold to the company, debentures of the amount of 10,000 secured by a floating
charge on the companys assets were issued to Salomon, who also applied for and received an allotment of
20,000 1 fully paid shares. The remaining amount of 8,782 was paid to Salomon in cash. Salomon wasthe managing director and two of his sons were other directors.
The company soon ran into difficulties and the debentureholders appointed a receiver and the company went
into liquidation. The total assets of the company amounted to 6050, its liabilities were 10,000 secured by
debentures, 8,000 owning to unsecured trade creditors, who claimed the whole of the companys assets,
viz., 6,050, on the ground that, as the company was a mere alias or agent for Salomon, they were entitled
to payment of their debts in priority to debentures. They further pleaded that Salomon, as principal
beneficiary, was ultimately responsible for the debts incurred by his agent or trustee on his behalf.
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Their Lordships of the House of Lords observed:
the company is a different person altogether from the subscribers of the memorandum; and though it may
be that after incorporation the business is precisely the same as before, the same persons are managers,
and the same hands receive the profits, the company is not in law their agent or trustee. The statute enacts
nothing as to the extent or degree of interest which may be held by each of the seven or as to the proportion
of interest, or influence possessed by one or majority of the shareholders over others. There is nothing in theAct requiring that the subscribers to the memorandum should be independent or unconnected, or that they or
any of them should take a substantial interest in the undertakings, or that they should have a mind or will of
their own, or that there should be anything like a balance of power in the constitution of company.
CASE EXAMPLE
The case of Lee v. Lees Air Farming Ltd. (1961) A.C. 12 (P.C.),
The above case illustrates the application of the principles established in Salomons case (supra). In this
case, a company was formed for the purpose of aerial top-dressing. Lee, a qualified pilot, held all but one ofthe shares in the company. He voted himself the managing director and got himself appointed by the articles
as chief pilot at a salary. He was killed in an air crash while working for the company. His widow claimed
compensation for the death of her husband in the course of his employment. The company opposed the
claim on the ground that Lee was not a worker as the same person could not be the employer and the
employee. The Privy Council held that Lee and his company were distinct legal persons which had entered
into contractual relationships under which he became, the chief pilot, a servant of the company. In his
capacity of managing director he could, on behalf of the company, give himself orders in his other capacity of
pilot, and the relationship between himself, as pilot and the company, was that of servant and master. Lee
was a separate person from the company he formed and his widow was held entitled to get the
compensation. In effect the magic of corporate personality enabled him (Lee) to be the master and servant at
the same time and enjoy the advantages of both.
The decision of the Calcutta High Court in Re. Kondoli Tea Co. Ltd., (1886) ILR 13 Cal. 43, recognised the
principle of separate legal entity even much earlier than the decision in Salomon v. Salomon & Co. Ltd. case.
Certain persons transferred a Tea Estate to a company and claimed exemptions from ad valorem duty on the
ground that since they themselves were also the shareholders in the company and, therefore, it was nothing
but a transfer from them in one name to themselves under another name. While rejecting this Calcutta High
Court observed: Thecompany was a separate person, a separate body altogether from the shareholders
and the transfer was as much a conveyance, a transfer of the property, as if the shareholders had been
totally different persons.
CASE EXAMPLENew Horizons Ltd. v. Union of India, (AIR 1994, Delhi 126)
The experience of a shareholder of a company can be regarded as experience of a company. The tender of
the company, New Horizons Ltd., for publication of telephone directory was not accepted by the Tender
Evaluation Committee on the ground that the company had nothing on record to show that it had the
technical experience required to be possessed to qualify for tender. On appeal the rejection of tender was
upheld by the Delhi High Court.
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The judgement of the Delhi High Court was reversed by the Supreme Court which observed as under:
Onceit is held that NHL (New Horizons Ltd.) is a joint venture, as claimed by it in the tender, the experience
of its various constituents namely, TPI (Thomson Press India Ltd.), LMI (Living Media India Ltd.) and WML
(World Media Ltd.) as well as IIPL (Integrated Information Pvt. Ltd.) had to be taken into consideration, if the
Tender Evaluation Committee had adopted the approach of a prudent business man.
Seeing through the veil covering the face of NHL, it will be found that as a result of re-organisation in 1992
the company is functioning as a joint venture wherein the Indian group (TPI, LMI and WML) and Mr. Aroon
Purie hold 60% shares and the Singapore based company (IIPL) hold 40% shares. Both the groups have
contributed towards the resources of the joint venture in the form of machines, equipment and expertise in
the field. The company is in the nature of partnership between the Indian group of companies and Singapore
based company who have jointly undertaken this commercial enterprise wherein they will contribute to the
assets and share the risk. In respect of such a joint venture company, the experience of the company can
only mean the experience of the constituents of the joint venture i.e. the Indian group of companies (TPI, LMI
and WML) and the Singapore based company (IIPL) (New Horizons Ltd. and another v. Union of India (1995)
1 Comp. LJ 100 SC).
Company as a personCompany is an artificial person created by law. It is not a human being but it acts only through human
beings. It is considered as a legal person which can enter into contracts, possess properties in its own name,
sue and can be sued by others etc. It is called an artificial person since it is invisible, intangible, existing only
in the contemplation of law. It is capable of enjoying rights and being subject to duties.
CASE EXAMPLE
Union Bank of Indiav. Khader International Construction and Other [(2001) 42 CLA 296 SC]
In this case, the question which arose before the Court was whether a company is entitled to sue as an
indigent (poor) person under Order 33, Rule 1 of the Civil Procedure Code, 1908. The aforesaid Order
permits persons to file suits under the Code as pauper/indigent persons if they are unable to bear the cost of
litigation. The appellant in this case had objected to the contention of the company which had soughtpermission to sue as an indigent person. The point of contention was that, the appellant being a public
limited company, it was not a person within the purview of Order 33, Rule 1 of the Code and the person
referred to only a natural person and not to other juristic persons. The Supreme Court held that the word
person mentioned in Order 33, Rule 1 of the Civil Procedure Code, 1908, included any company as
association or body of individuals, whether incorporated or not. The Court observed that the word person
had to be given its meaning in the context in which it was used and being a benevolent provision, it was to be
given an extended meaning. Thus a company may also file suit as an indigent person.
REVIEW QUESTIONS
State whether the following statement is Trueor FalseA shareholder cannot be personally held liable for the acts of the company
even if he holds virtually the entire share capital.
True
False
Correct Answer: True
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(ii) Limited Liability
Theprivilege of limited liability for business debts is one of the principal advantages of doing business under
the corporate form of organisation. The company, being a separate person, is the owner of its assets and
bound by its liabilities. The liability of a member as shareholder, extends to contribution to the assets of the
company up to the nominal value of the shares held and not paid by him. Members, even as a whole, are
neither the owners of the companys undertakings, nor liable for its debts. In other words, a shareholder isliable to pay the balance, if any, due on the shares held by him, when called upon to pay and nothing more,
even if the liabilities of the company far exceed its assets. This means that the liability of a member is limited.
For example, if A holds shares of the total nominal value of`1,000 and has already paid`500/- (or 50% of
the value) as part payment at the time of allotment, he cannot be called upon to pay more than `500/-, the
amount remaining unpaid on his shares. If he holds fully-paid shares, he has no further liability to pay even if
the company is declared insolvent. In the case of a company limited by guarantee, the liability of members is
limited to a specified amount mentioned in the memorandum.
Buckley, J. in Re. London and Globe Finance Corporation, (1903) 1 Ch.D. 728 at 731, has observed: The
statutes relating to limited liability have probably done more than any legislation of the last fifty years to further the
commercial prosperity of the country. They have, to the advantage of the investor as well as of the public, allowed
and encouraged aggregation of small sums into large capitals which have been employed in undertakings of
great public utility largely increasing the wealth of the country.
Exceptions to the principle of limited liability
As provided by Section 45 of the Companies Act, 1956, the members become personally liable if themembership falls below prescribed minimum and the business is carried on for more than six monthsthereafter.
It is also provided in the Act vide Section 323 that a limited company may, if so authorised by itsarticles, alter its memorandum by special resolution so as to render the liability of its directors or ofany of its director or manager as unlimited.
Further, where in the course of winding up it appears that any business of the company has beencarried on with intent to defraud creditors, the Court may declare the persons who were knowinglyparties to the transaction as personally liable without limitation of liability for all or any of thedebts/liabilities of the company.
When the company is incorporated as an Unlimited Company under Section 12(2)(c) of the Act.
(iii) Perpetual Succession
An incorporated company never dies except when it is wound up as per law. A company, being a separate
legal person is unaffected by death or departure of any member and remains the same entity, despite total
change in the membership. A companys life is determined by the terms of its Memorandum of Association. It
may be perpetual or it may continue for a specified time to carry on a task or object as laid down in the
Memorandum of Association. Perpetual succession, therefore, means that the membership of a company
may keep changing from time to time, but that does not affect its continuity.
The membership of an incorporated company may change either because one shareholder has transferred
his shares to another or his shares devolve on his legal representatives on his death or he ceases to be a
member under some other provisions of the Companies Act. Thus, perpetual succession denotes the ability
of a company to maintain its existence by the constant succession of new individuals who step into the shoes
of those who cease to be members of the company. Professor L.C.B. Gower rightly mentions, Members
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Lesson 1 Introduction 7
may come and go, but the company can go on forever. During the war all the members of one private
company, while in general meeting, were killed by a bomb, but the company survived not even a
hydrogen bomb could have destroyed it.
(iv) Separate Property
A company being a legal person and entirely distinct from its members, is capable of owning, enjoying anddisposing of property in its own name. The company is the real person in which all its property is vested, and
by which it is controlled, managed and disposed off. Their Lordships of the Madras High Court in R.F.
Perumal v. H. John Deavin,A.I.R. 1960 Mad. 43 held that no member can claim himself to be the owner of
the companys property during its existence or in its winding-up. A member does not even have an insurable
interest in the property of the company.
CASE EXAMPLE
Mrs. Bacha F. Guzdar v. The Commissioner of Income Tax, Bombay,A.I.R. 1955 S.C. 74
The Supreme Court in this case
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