company law
DESCRIPTION
COMPANY LAW STUDENTS STUDY MATERIALTRANSCRIPT
SEMESTER - IV
DIPLOMA IN BUSINESS LAW
COMPANY LAW II Bcom(CA) VANITHA.J
Unit – I
Company – Definition – Characteristics – Kinds – Privileges of Private Company –
Formation of a Company.
Unit – II
Memorandum of Association – Meaning – Purpose – Alteration of Memorandum – Doctrine
of Ultravires – Articles of Association – Meaning – Forms – Contents – Alteration of Articles
–Doctrine of Indoor management
Unit – III
Prospectus – Definition – Contents – Deemed Prospectus – Misstatement in Prospectus ––
Kinds of Shares and Debentures.
Unit – IV
Director and Secretary – Qualification and Disqualification – Appointment – Removal –
Remuneration – Powers, Duties and Liabilities.
Unit – V
Meetings – Requisites of Valid Meeting – Types of Meeting – Winding up – Meaning -
Modes of Winding Up.
COMPANYLAW
UNIT-I
Meaning of company:
“Company” in the common usage refers to a voluntary association of individuals formed for
the purpose of attaining a common social or economic end.
Definition of Company:
According to Section 3(1) (i) of the Companies Act, 1956 a Company means, “A Company
formed and Registered under this Act or an existing Company “An existing Company means a
company formed and Registered under any of the previous Companies Laws.
According to Lord Justice Lindley a Company is, “An association of many persons who
contribute money or moneys worth to a common stock and employed for a common purpose.
Characteristics of a Company:
1. Separate Legal Entity:
A Company formed and registered under the companies Act is a distinct legal entity. It is a
creation of Law and is sometimes called artificial person being invisible and intangible. It is a fiction
of law with legal, but no natural or physical existence. The principle that a company is a legal entity
separate from the individual who compose it is very clearly illustrated in the leading case of Saloman
vs. Salomon & co. ltd (1897). Saloman had a boot business. He sold the business to a company
named Saloman & Company ltd which he formed. There were seven members – his wife, daughter
and four sons who took 1 share each and Saloman himself who took 20,000 shares. The price paid by
the company to Saloman was 30,000; but instead of paying him cash, the Company gave him 20,000
fully paid shares 1 each and 10,000 in debentures owing to strike in the boot, trade the company
was wound up. The assets of the company amounted to 6,000 only. Debts amounted to 10,000 due
to Saloman and secured by debentures and a further 7000 due to unsecured creditors. The
unsecured creditors claimed that as saloman and company ltd was really the same person as
Saloman he could not own money to himself and that they should be paid their 7000 first. It was held
by the House of Lords that Saloman was entitled to 6000, as the Company was entirely separate
person from Saloman. The unsecured creditors got nothing.
Thus Saloman’s case established beyond doubt that in law, a registered company is an entity
distinct from its members, even if one person holds all the shares in the company. There is no
difference in principle between a company consisting of only two shareholders and a company
consisting of two hundred members. In each case the company is a separate legal entity.
2. Perpetual Succession:
Unlike a natural person a company never dies. It is an entity with perpetual succession. Its
existence is not affected by the death, lunacy and insolvency of its members.
3. Limited Liability:
Limited liability of members is another most important characteristic of a company. Their
liability is limited to the face value of shares subscribed to by them. If the shares are fully paid up,
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their liability is nil. Where the assets of the company are insufficient to meet the claims of the
creditors of the company, the members cannot be asked to pay anything more than what is due on
the shares of the company held by them.
4. Common Seal:
As a company is an artificial person it cannot sign its name on a contract. Common seal is
used as a substitute for its signature. Every company must have a seal with its name engraved on it.
Anything done under an agreement between the company and the third party requires recognition of
the company in the form of an official seal.
5. Transferability of Shares:
The shares of a company are freely transferable and can be sold or purchased in the share
market. Section 82 of the Companies Act recognizes the right of transferability of shares and
provides that “ the shares or other interest of any member shall be movable property transferable in
the manner provided for in the articles of the company.
6. Capacity to sue and be sued:
On incorporation, a company acquires a separate and independent legal personality as a legal
person, it consul and be sued in its own name.
7. Company’s actions limited:
A company cannot go beyond the power of its charter- the memorandum of association. But
once the powers have been laid down it cannot go beyond unless the memorandum of association is
itself altered prior to doing so.
8. Separate Property:
As a legal person, a company can own, enjoy and dispose of any property in its won name. No
member can claim himself to be the owner of the company’s property. The property of the company
is not the property of the shareholder: it is the property of the company.
KINDS OF COMPANIES:
I Classification on the Basis of Incorporation:
1. Chartered Companies:
Companies which are incorporated under a special charter granted by the king queen (in
England) eg., the East India Company, the Bank of England. A chartered company is governed by its
charter which defines the nature of the company and at the same time incorporates it. These
companies find no place in India after the country attained independence in 1947.
2. Statutory Company:
These are the companies which are created by a special Act of the legislature eg., the
Reserve Bank of India, the State Bank of India, the Life Insurance Corporation, the Industrial Finance
Corporation, the Unit trust of India (UTI) These are mostly concerned with public utilities eg.,
railways, tramways, gas & electricity companies & enterprises of national importance. The provisions
of the company Act 1956 apply to them, if they are not inconsistent with the provisions of the special
Acts under which they are formed.
3. Registered Companies:
These are the companies which are formed and registered under the companies Act 1956 or
were registered under any of the earlier companies Act. These are by for the most commonly found
companies.
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II Classification on the Basis of liability:
1) Companies Limited by shares:
Where the liability of the members of a company is limited to the amount unpaid on the
shares, the company is known as a company limited by shares (Sec 12 (2)(a)). The liability can be
enforced during the existence of the company as also during the winding up of the company. If the
shares are fully paid, the liability of the share holders holding such shares is nil. There is one
exception to this rule as given in Sec 45. A company limited by shares may be a public company or a
private company.
2) Companies limited by guarantee:
Where the liability of the members of a company is limited to a fixed amount which the
members undertake to contribute to the assets of the company in case of its winding up, the
company is called a company limited by guarantee. The liability of its limited. The Articles of such a
company must state the number of members with which the company is to be registered.
3) Unlimited Companies:
Sec 12 specifically provides that any 7 or more persons (2 or more in case of a private
company) may form an incorporated company with or with or without limited liability. A company
without limited liability is known as on unlimited company. In case of such a company every member
is liable for the debts of the company, as in an ordinary partnership, in proportion to his interest in
the company.
An unlimited company may or may not have a share capital. If it has a share capital, it may be
a public company or a private company.
III. Classification on the basis of number of Members:
1) Private Companies:
A private company is normally what the Americans call a “Close corporation”. According t sect
3(1) (iii), a private company means which by its Articles:
a) Restricts the right to transfer its shares, if any
b) Limits the number of its members to 50 (not including its employees members) and
c) Prohibits any invitation to the public to subscribe for any shares debentures of the company.
2) Public Company:
A company which is not a private company is a public company. In other words, a public
company means a company which by its share, if any;
i) Does not restrict the right to transfer its shares, if any;
ii) Does not limit the number of its members;&
iii) Does not prohibit any invitation to the public to subscribe for any shares or debentures of
the company.
DISTIGUISH BETWEEN A PUBLIC COMPANY & A PRIVATE COMPANY
1. Minimum Number
The minimum number of persons required to form a public company is 7. it is 2 in case of a
private company.
2. Maximum Number
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There is no restriction of maximum number of members in a public company; where as the
maximum number cannot exceed 5 in a private company.
3. Number of directors
A public company must have at least 3 directors whereas a private company must have at
least 2 directors.
4. Restriction on appointment of directors
In the case of a public company the directors must file with the registrar a consent to act as
director or sign an undertaking to take up qualification shares [Sec 266 (1)]. The directors of private
company need not be so [Sec 266 (5) (b)]
5. Restriction on invitation to subscribe for shares
A public company invites the general public to subscribe for the shares or the debentures of
the company. A private company by its articles prohibits any such invitation to the public [Sec 3 (1)
(iii) (c)]
6. Transferability of share
in a public company, the shares use freely transferable. In a private company the right to
transfer shares is restricted by the Articles.
7. Special Privileges
A private company enjoys some special privileges.
8. Quorum
If the Articles of a company do not provide for a larger quorum, 5 members personally present
in the case of a public company are quorum for a meeting of the company. It is 2 in the case of a
private company.
9. Managerial Remuneration
Total managerial remuneration in a public company cannot exceed 11 per cent of the net
profits. no such restriction applies to a private company.
Special Privileges of a Private Company
1. Number of Member
A Private company may have only 2 members. [Sec12 (1)]
2. Allotment before minimum subscription
It can commence allotment of shares before the minimum subscription is subscribed for or
paid.[sec.69].
3. Prospectus or a statement in lieu of prospectus
It may allot share without issuing a prospectus or delivering to the Registrar a statement in
lieu of prospectus [Sec 70 m (3)]
4. Issue of New shares
when a public company offers new shares at any time after the expiry of 2 years from the
formation of a company or at any time after the expiry of 1 year from the date of first allotment
whichever is earlier, it has first to offer these shares to the existing equity share holders on pro-rate
basis however the members in a general meeting may decide otherwise. There is no such
requirement in case of a private company [Sec 81 (3)].
5. Kinds of shares
A private co. may issue share capital of such kinds, in such forms & with such voting rights, as
it may think fit. [Sec 85 to 89].
6. Commencement of Business
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it can commence business immediately on incorporation [sec 149(7)]
7. Index of members
It need not keep an index of members.[Sec 15 (1)]
Statutory meeting & statutory Reports;
It need not hold statutory meeting or file with the registrar the statutory report [Sec 165 (10)]
8. Managerial Remuneration
The rule of coverall maximum managerial remuneration does not apply to a private company
which is not a subsidiary of a public co.,
9. Number of director
It need not have more than 2 directors [Sec 252 (2)]
10. Rules regarding directors
In case of a private co., the rules regarding directors are loss stringent. For eg., a private co.,
need not file with the registrar the consent of a director to act as such. Its director can vote on a
contract in which be is interested.
Conversion of a private company into a public company:
1. Conversion by default: [Sec 43]
Where a default is made by a private company in complying with the essential requirement of
a private co., ( viz., restriction on transfer of shares, limitations on the number of members to 50 &
prohibition of invitation to the public to buy shares or debentures), the company cases to enjoy some
of the privileges of a private co., and the provisions of the companies Act apply to it as if it were not
a private co., the company law Board may relieve the company from the consequence as aforesaid, if
it is of opinion that the non-compliance was accidental or due to in-advertences or other sufficient
cause. It may also grant relief if on some other grounds it is just and equitable.
2. Conversion by operation of law. [Sec 43A]
Under Sec 43-A, a private co., becomes a public company
1) Where at least 25% of its paid up share capital is held by one or more bodies corporate. In
competing this percentage, no account is taken of the shares of the company held by a
banking company on trust or as executors [Sec 43-A (1)]. An executor is a person who is
appointed by a testator (one who makes a will) to execute his will.
2) Where the private company holds at least 25% share capital of a public company, having a
share capital [Sec 43 – A (1-B)]
In the above cases, the private company becomes a public company on & from the date on
which the aforesaid percentage is first held.
3) Conversion By Choice (Sec 44)
If a private co., so alters its Articles that they do not contain the provision which make it a
private co., it ceases to be a private company as on the date of the alteration. It must then
file with the Registrar, within 30 days, either a prospectus or a statement in lieu of prospectus
[Sec 44 (1)]. When this is done the private company becomes a public company.
A private company which so becomes a public company must also
1) File a copy of the resolution altering the articles, within 30 days of passing there of, with the
Registration
2) Take steps to raise its membership to at least 7 if it is below that number on the date of
conversion, and also increase the number of directors to 3 if it is below that number;
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3) Alter the regulations contained in the Articles which are inconsistent with those of a public
company.
IV. Classification on the basis of control
Holding companies
A company is known as the holding company of another company if it has control over that
other company. According to sec 4(4), of a company is “deemed to be the holding company of
another if, but only if, that other is its subsidiary”.
Subsidiary Company
A company is known as a subsidiary of another company when control is exercised by the
latter (called holding company) over the former, called a subsidiary company. According to Sec 4(1),
a company (say company S) is deemed to be a subsidiary of another company (say, company H) in
the following 3 cases.
1. Company controlling composition of Board of Directors [Sec 4(1) (a)]
Where a company H controls the composition of Board of Directors of another company (is
company S), the later company S becomes the subsidiary company of the former company H for this
purpose the composition of a company’s Board of directors is deemed to be controlled by another
company if that other company can appoint or remove of all or a majority of the directors [sec 4 (2)]
2. Holding of majority of share [Sec 4(1) (b)]
Where a company S is subsidiary of another company {say company H] which is itself
subsidiary of the controlling company [i.e., company H) the former (ie, company S) becomes the
subsidiary of the controlling company (ie company H)
V. Classification on the Basis of ownership
1. Government company or
2. Non-government company
GOVERNMENT COMPANY
A government company means any company in which at least 51% of the paid up share
capital is held by the central government or by any State Government or governments or partly by
the Central Government and partly by one or more State Government.
For Example:
State Trading Corporation of India & Minerals and Metals trading corporation of India are
Government companies. The subsidiary of a Government company is also a Government Company
(Sec 617)
FOREIGN COMPANY
It means any company incorporated outside Indian which has a place of business in India
For eg: Where representatives of a foreign country frequently comes & stay in a hotel in India for
purchasing machinery, cotton etc., the foreign company has a place of business in India.
Where a minimum of 50% of the paid up share capital (whether equity or preferential or
partly equity & partly preference) of a foreign company is held by one or more citizens of India or /
and by one or more Indian companies, singly or jointly, such company shall comply with such
provisions as may be prescribed as if it were an Indian company [Sec 591 (2)]
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ONE – MAN COMPANY
This is a company (usually private) in which one man holds practically the whole of the share capital
of the company, and in order to meet the statutory requirement of minimum number of members,
some dummy members who are mostly his relations of or friends hold one or two shares each. The
dummy members are usually nominees of the principal share holders who is the virtual owner of the
business and who carries it on with limited liability.
Example: A private co., is registered with a share capital of Rs. 5, 00,000 divided into 5000 shares of
Rs. 100 each. Of these shares 4999 are held by A & one share is held by A’s wife, B. this is one-man
company.
A one man company, like any other c., is a legal entity distinct from is members.
FORMATION OF COMPANY
The application for registration of a company should be presented to the Registered of the
State in which the business office of the company is to be situated. The application shall be
accompanied with the following document.
1. The Memorandum of Association
2. The Articles of Association, if any, duly signed by the subscribers of the Memorandum
3. A statement of the nominal or authorized capital
4. A notice of address of the registered office of the company. This may be done within 30 days
of registration if it cannot be filed at the time of registration.
5. A list of directors and their consent to act as such, singed by each.
6. An undertaking in writing signed by each such director to take & pay for their qualification
shares.
7. A declaration that all the requirements [provisions] of the companies Act have been complied
with such a declaration may be signed by an advocate of the supreme court or High court, an
attorney or pleader entitled to appear before a High Court, or a chartered accountant
practicing in India, who is engaged in the formation of the company, or by a person named in
the articles as director, manager or secretary of company.
Items number 5 and 6 listed above are not required to be filed in the case of private company
If the registrar is satisfied that all the requisite documents delivered to him are in order, he
shall register the Memorandum & the Articles, if any, provided he is satisfied on the following points:
a. The relevant provisions of the act have been complied with
b. The objects of the company are lawful
c. The requisite number of persons required under the Act have subscribed & duly signed.
d. The Memorandum and the articles comply in all respects with the provisions of the act
acceptable; and
e. The name selected by the company is acceptable: and
f. The statutory declaration has been properly made.
If the registrar of companies is satisfied that all the aforesaid requirements have been complied
with, he will register the company and place its name on the register of companies. It is clear that
once the statutory requirements have been complied with, the registrar has no option but to
register it.
Certificate of incorporation
On registration, the registrar will issue a certificate of incorporation whereby he certifies that
the company is incorporated. From the date of incorporation mentioned in the certificate, the
company becomes a legal person separate from its share holders. Hence it is the birth certificate of
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the company. The certificate of incorporation prevents the reopening of matter prior to the
registration and places the existence of the company as a legal person beyond doubt. Consequently,
even if the seven signatures to a memorandum were written by one person or were all forged, the
certificate would be conclusive that the company was duly registered. Similarly, if the signatories
were all infants, the certificate would still be conclusive.
Certificate of commencement of Business
A private company may commence its business immediately on incorporation but public
company cannot commence business immediately after incorporation, unless it has obtained a
certificate of commencement of business [also known as trading certificate] from the registrar. If the
company has a share capital & has issued a prospectus inviting the public to subscribe for its shares
or debentures it cannot commence business until.
a) Shares payable in cash have been allotted to the extent of the maximum subscription.
b) Every director has paid in cash the application & allotment money on shares taken by him
c) No money is liable to be repaid to the application for failure to apply or obtain permission for
the shares or debentures to be dealt in on any recognized stock exchange.
d). a statutory declaration duly verified by one of the directors or the secretary in the prescribed
form that above condition have been complied with has been filed with the registrar [section 149
(1)]
On the above requirements being duly fulfilled, the registrar shall certify that the company is
entitled to commence business. This certificate is conclusive evidence that the company is so
entitled. [Section 149 (3)] contracts made by the company before it has obtained the certificate of
commencement are provisional only & do not become binding on the company until it has become
entitled to commence business. [Section 149(4)]. Where a company is wound up before entitled to
commence business, anybody who has supplied goods cannot have any claim against the company.
A company is bound to commence business within a year of its incorporation or else it is liable to be
wound up by the court.[Section 433(c)]
Promoter
A promoter is one” who undertakes to form a company with reference to a given object and to
set it going and who takes the necessary steps to accomplish that purpose”. The promoters of a
company decide the scope of its business activities. They negotiate, if necessary, for the purchase of
an existing business. They provide the registration fees & carry out other duties involved in the
formation of a company. They also make arrangements for advertising & circulating the prospectus,
& placing the capital
A promoter is no t an agent for the company which he is forming because a company cannot
have an agent before it come sin to existence. For the same reason, he cannot be the trustee of the
company however, from the moment he acts with the company in mind, a promotes stands in a
fiduciary position towards the company.
Liabilities of promoters
A promoter can be compelled by the company to hand over any secret profit which he has
made without full disclosures to the company. The company can also sue for the recession of the
contract of sale by the promoter where the promoter has not disclosed his interest therein.
A promoter is liable for any untrue statement in the prospectus to a person who has
subscribed for any shares or debentures on the faith of the prospectus. Such a person many sue the
promoter for compensation for any loss or damage sustained by him.
Remuneration of promoters
The nature of the promoters work in the formation of a company calls for considerable skill for
which he should be adequately remunerated. A promoter has no right against the company for his
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remuneration unless there is a contract, he cannot even recover from the company payments he has
made in connection with the formation of the company.
Preliminary or Pre-incorporation contracts
Preliminary contracts are purposed to be made on behalf of a company before its
incorporation. Prior to this, a company has no capacity to contract a contract entered in to by
promoters on behalf of a proposed company is void so far as the company is concerned. The
promoters cannot be the agents for a principal of which has not yet come into company existence. In
such a case the company cannot sue or be sued on it. The company has no legal existence until it is
incorporated. The preliminary contracts made by promoters generally provide that it the company
adopts the agreement within a certain time either party may rescind the contract. In such a case the
promoters, liability would cease after the lapse of the fixed time.
Provisional Contracts:
Pre –incorporation contracts must be distinguished from contracts entered into by a company
after incorporation, but before it becomes entitled to commence business. Contracts entered into by
a company after its incorporation & before it is entitled to commence business are provisional only &
are not binding on the company: until the trading certificates is issued consequently, should the
company go in to liquidation, without commencing business, such contracts cannot be enforced at
all.
UNIT-II
MEMORANDUM OF ASSOCIATION
MEANING
Memorandum of Association is one of the documents which have to be filed with the Registrar
of Companies at the time of incorporation of a company. It is a document which sets out the
constitution of the company and is really the foundation on which the structure of the company is
based. It contains the fundamental conditions upon which alone the company is allowed to be
incorporated. A company may pursue only such objects and exercise only such powers as are
conferred expressly in the memorandum or by implication there from i.e., such powers as are
incidental to the attainment of the objects. A company cannot depart from the provisions constrained
in its memorandum, however, great the necessity may be if it does, it would be ultra vires the
company and therefore wholly void. It defines its relation with the outside world and the relation with
the outside world and the scope of its activities. The purpose of the memorandum is to enable
shareholders, creditors and those who deal with the company to know what is the permitted range of
the activities of the enterprise.
PURPOSE OF THE MEMORANDUM
1. Firstly, the shareholders are in a position to know how their savings are to be used and the field in
which or the purpose for which their funds are to be utilized and risk involved in making the
investment.
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2. Secondly, any one who is dealing with the company can understand the permitted range of the
company, its powers and object. Therefore, he can know that the contract he has proposed to make
with the company is within its scope.
CONTENTS OF MEMORANDUM
According to section 13, the memorandum of association of every company must contain the
following clauses.
1. The name of the company with ‘limited ‘ as the last word of the name in the case of a public
limited company and with ‘private limited ‘ as the last word in the case of a private limited
company.
2. The state in which the registered office of the company is to be situated.
3. the objects of the company to be classified as
(i) The main objects of the company to be pursued by the company on its
incorporation and objects incidental to the attainments of the main objects, &
(ii) Other objects not included above, limited if the company is limited by; shares or by
guarantee.
4. The liability of members is limited if the company is limited by shares or by guarantee.
5. In the case of a company having a share capital, the amount of share capital with which the
company proposes to be registered and its division in to shares of a fixed amount. An
unlimited company need not include items 4 and 5 in its memorandum a brief discussion of
the various clauses is a follows:
NAME CLAUSE:
A company may be registered with any name it likes. But no company shall be registered by a
name which in the opinion of the central government is undesirable and in particular which is
identical or which too nearly resembles the name of an existing company. Every public company
must write the word ‘limited’ after its name and every private limited’ after its name. A company
cannot adopt a name which violates the provisions of the Emblems and Names [Prevention of
Improper Use] Act 1950. every company is required to publish its name outside its registered office,
and outside every place where it caries on business, to have its name engraved on a seal and to
have its name on all business letters, bill heads, notices and other official publications of the
company [Section 147].
REGISTERED OFFICE CLAUSE:
This clause states the name of the State where the registered office of the company is to
Situated. The registered office clause is important for two reasons. Firstly, it ascertains the domicile
and nationality of a company. This domicile clings to it throughout its existence. Secondly, it is the
place where various registers relating to the company must be kept and to which all communications
and notice must be sent.
OBJECTS CLAUSE
The object clause is the most important clause in the memorandum of association of a
company. It is not merely a record of what is contemplated by the subscribers, but it serves a two-
fold purpose.
a. It gives an idea to the prospective shareholders the purposes for which their money will be
utilized.
b. It enables the persons dealing with the company to ascertain its powers in case of companies
which were in existence immediately before the commencement of the companies
[Amendment Act 1965, the objects clause has simply to state the objects of the company to
be registered after the amendment, the objects clause must state the objects of the
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company. But in the case of a company to be registered after the amendment, the objects
clause must state separately.
i) Main objects
This sub-clause has to state the main objects to be pursued by the company on its
incorporation and objects incidental or ancillary to the attainment of the main objects.
ii) Other objects
This sub-clause shall state other objects which are not included in the above clause.
LIABILITY CLAUSE:
This clause states that the liability of the members of the company is limited. In the case of a
company limited by share, the member is liable only to the amount unpaid on the shares taken by
him. In the case of a company limited by guarantee, the members are liable to the amount
undertaken to be contributed by them to the assets of the company in the event of its being would
up. However, this clause is omitted from the memorandum of association of the unlimited
companies.
CAPITAL CLAUSE:
The memorandum of a company limited by shares must state the authorized or nominal share
capital, the different kinds of shares, the nominal value of each Share . the chief point to consider in
regard to this clause is what funds are necessary to set the business going or, if it is proposed to by
an existing concern, what sum is needed to pay its price and what, in addition, is wanted to keep the
business going. It is generally advisable to have a reasonable amount of more capital and have some
shares in reserve as un issued so that further capital may be raised as and when required.
ASSOCIATION OR SUBSCRIPTION CLAUSE:
This clause provides that those who have agreed to subscribe to the memorandum must
signify their willingness to associate and form a company. According to sec. 12 of the Act, at least
seven persons are required to sign the memorandum in the case of a public company, and at least to
persons in the case of a private company. The memorandum has to be signed by each subscriber in
the presence of at least one witness who must attest the signatures. Each subscriber must write
opposite his name the number of shares he shall take. No subscriber of the memorandum shall take
less than one share. This clause need not be numbered.
ALTERATION OF MEMORANDUM
The memorandum of association of a company being its charter, the right of the company to
alter its contents is rigidly limited by the provisions of the Act. Section 16 of the Act provides that a
company shall not alter the conditions contained in its memorandum except in the cases, in the
manner and to the extent provided in the Act.
CHANGE OF NAME
A company can change its name for this purpose it must first pas a special resolution and
then obtain approval of the central. Government in writing. However, no such approval is necessary
for merely including or deleting the word ‘private’ consequent on the conversion of the public
company in to private company and vice versa.
The registrar shall enter the new name the register in place of former name and shall issue a
fresh certificate of incorporation. Necessary alteration shall also be made in the memorandum by the
registrar. The change of name shall be completer & effective only on the issue of such a certificate.
The rights & obligations of a company will not be aggressed on the change of its name [Section 23]
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CHANGE OF REGISTERED OFFICE
A company can shift its registered office from one place to another within the same city, town
or village, provided a notice of change is given to the registrar within 30 days of such change. But,
where the registered office is to be changed outside the local limits of any city, town or village in the
same state, special resolution to that effect must be passed. A notice of such change shall also be
given to the registrar within 30 days of change. These two changes in the registered office do not
involve alteration of memorandum.
CHANGE OF THE OBJECTS CLAUSE:
Selection 17 of the set only gives a limited right to the company to alter its objects clause.
This section provides specific purpose that the objects clause can be altered only if the change
enables the company.
a. To carry on its business more economically or more efficiently
b. To attain its main object by new or improved means;
c. To enlarge or change the local area of its operation;
d. To carry on some business, which under existing circumstances may be conveniently or
advantageously combined with the business of the company;
e. To restrict or abandon any of the objects specified in the memorandum;
f. To sell or dispose of the whole or any part of the undertaking of the company;
g. To amalgamate with any other company or body of persons.
The company can alter its objects clause only to the above named purposes. The company
Law Board has no jurisdiction to confirm any alteration which is not covered by section 17(i). The
alteration must leave the business of the company substantially the same what it was before with
only such changes in the mode of conducting it as will enable it to be carried on more economically
or more efficiency. The additions or alterations should be a step in aid t improve efficiency and
generate more resources.
CHANGE OF THE LIABILITY CLAUSE:
The liability clause cannot be altered to make the liability of the members unlimited. But if all
the members agree, and if the Articles permit, the liability of all the directors or any of the directors
can be altered. A special resolution must be passed for this purpose.
CHANGE OF THE CAPITAL CLAUSE:
The capital clause of a company can be altered for anyone of the following purposes:
1. Alteration Proper
2. Reduction of Capital
3. Increase in share capital
4. Variation of Shareholders Rights
DOCTRINE OF ULTRA VIRES
A company has power to carry out the objects set out in the memorandum and also
everything which is reasonably necessary to enable it to carry out those objects. Any activities not
expressly or impliedly authorized by the memorandum are ultra –vires to the company. An act is said
to be ultra – vires when it is performed which, though legal in itself, is not authorized by the objects
clause in the memorandum of association or the statute. Such an act is void and cannot be ratified
even by a
unaniminous reduction of all the share holders.
Effects of Ultra – vires Act
An act which is ultra – vires the company is absolutely void. A company is not bound by and
cannot enforce an ultra – vires act are as follows.
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1. As such a company may be restrained by an injunction to do an act if it is ultra-vires of its
objects.
2. If the money borrowed has been used to pay-off debts which could have been enforced
against the company, the lender may sue the company being subrogated to the rights of the
creditors who were paid-off.
3. If the leader can identify his money, or other property purchased with it, he is entitled to what
is known as a tracing order and can recover.
4. The lender may hold the director’s personality liable for contracting an ultra-vires loan of the
company. The directors are liable for danger to the lender for the breach of the implied
warranty of authority.
5. If any money is unlawfully disbursed, the directors shall be personality liable to make goods
the amount.
6. Where the officers of a company persuade a third party to enter into a transaction which is
ultra-vires the company, an action may le against them in breach of warranty of authority.
7. An ultra – vires contract cannot become intra-vires by reason of estoppels-lapse of time,
ratification or delay.
8. A company can protect its property acquired by ultra-vires expenditure.
9. A company will be liable for torts or crimes committed in the pursuit of its stated objects.
Types of Ultra Vires Acts
1. Ultra Vires the Memorandum or the company
2. Ultra Vires the Articles but Intra Vires the Company
3. Ultra Vires the Director but intra vires the company.
ARTICLES OF ASSOCIATION
Meaning:
‘Articles’ means the Articles of association of a company as originally framed or as altered
from time to time in pursuance of any previous companies law or of this Act. The articles of
association are the rules and regulations of a company framed for the purpose of internal
management of its affairs it deals with the rights of the members of the company inter-sec. The
articles are framed for carrying out the aims and objects of the Memorandum of Association.
It is not obligatory to register Articles in the case of a public company limited by shares. In
such a case, model articles contained in ‘table A’ of Schedule I of the Act will apply. However, a
private company, a company limited by guarantee and an unlimited company must register their
articles along with the Memorandum [section 27 (1]. In the case of an unlimited by guarantee, the
Articles shall state the number of members, with which the company is to be registered [Section 27
(2)]
In the case of a private company, the Articles must contain provisions which
a. restrict the right to transfer its shares;
b. limit the number of its members to fifty excluding past and the present employees of the
company;
c. prohibit any invitation to public to subscribe for any shares in or debentures of the company
The Articles must be printed and divided in to paragraph, numbered consecutively. The articles
must be signed by each subscriber of the memorandum in the presence of at least one witness who
will attest the signature and likewise add his address, description & occupation, if any,
CONTENTS OF ARTICLES
1. Exclusion wholly or in part of table A
2. Adoption of preliminary contracts.
3. Number and value of shares
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4. Allotment of shares
5. Calls on shares
6. Lien on shares
7. Transfer and transmission of shares
8. Forfeiture of Shares
9. Alteration of capital
10. share certificates
11. conversion of shares into stock
12. Voting rights and proxies.
13. Meetings
14. Directors, their appointment etc.,
15. borrowing powers
16. account and audit
17. dividend and reserves
18. Winding up.
ALTERATION OF ARTICLES
Companies have wide power to alter their Articles. Any restriction on the exercise of their
power will be invalid articles of association may be altered by a company by passing a special
resolution to that effect. The altered Articles will bind the members in the same way as did the
original Articles. The company must file with the Registrar a copy of the special resolution within one
month from the date of its passing.
Memorandum and Articles Distinguished
1. Contents and Scope
Memorandum of Association is the charter of the company and defines the scope of its
activities. An article of Association of the company is a document which regulates the internal
management of the company. These are the rules made by the company for carrying out the objects
of the company as set out in the memorandum.
2. Relationship between company members and outsiders
Memorandum of Association defines the relation of the company with the outside world,
whereas Articles of Association deals with rights of the members of the company inter-se and also
establishes the relationship of the company with the members.
3. Alteration
Memorandum of Association cannot be altered except in the manner and the Articles being
only the byelaws of the company, can be altered by a special resolution.
4. Supremacy
Memorandum is a supreme document of the company, whereas Articles are subordinate to
the Memorandum. They cannot alter or control the memorandum.
5. Adoption
Every company must have its non memorandum but a company limited by shares need not
register its Articles. In such a case Table A applier.
6. Ultra – vires Acts
a company cannot depart from the provisions contained in its Memorandum, and if it does, it
would be ultra-vires the company. Anything done against the provisions of Articles, but which is
intra-vires the Memorandum, can be ratified.
Doctrine of Indoor Management [ Rule in Turguand Case]
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The Doctrine of Indoor Management is an exception to the rule of constructive notice. A
person dealing with a company is deemed to have knowledge of the Memorandum and the Articles
of the Association of the company. So, if he enters in to a transaction with the company which is
ultra-vires of the Memorandum or Articles, he cannot treat the transaction as binding on the
company. On the other hand, if the transaction appears to be proper one, when compared with the
memorandum and Articles, it would be grossly unfair if the company could escape liability under it
by showing that there was some irregularity in the conduct of the company’s affairs leading up to
the transaction, when the other party did not know of the irregularity and had no means of
discovering it.
The doctrine of indoor management is eminently practical and is based on business
convenience, for business could not be carried on smoothly if a person dealing with the company
was compelled to call for evidence that all internal regulations have been duly observed. The
doctrine is not only convenient, it is also just. The lot of creditors of a company is not a particularly
happy one; it would be unhappier still if the company could escape liability by denying the authority
of the official to act on its behalf. The memorandum and the Articles of a company are public
documents and accessible to all who are to consult them; but the details of the internal procedures
are not registered and not accessible to all.
EXCEPTIONS
The doctrine is however, subject to the following exception
1. Knowledge of irregularity:
A person, who deals with the company in its internal management in connection with the
subject matter of his dealing, cannot claim the benefit of the rule in Turquand’s case.
2. Negligence
A person cannot claim the benefit of the rule in Turquand’s case in circumstances under
which he would have discovered the irregularity if he had made proper inquiries.
3. Forgery:
The rule in Turquand’s case will not apply where a document on which the person seeks to
rely is a forgery.
4. Acts outside the apparent authority
The rule in Turquard’s case does not apply where a person acting on behalf of the company
exceeds any actual or ostensible authority given to him.
5. No knowledge of the contents of the articles
A person who has not actually read the memorandum and articles of a company and who was
not at the time, he entered in to the contract, time, he entered in to the contract, aware of their
contents, cannot seek to rely in statement contained therein. The doctrine of indoor management is
based on the principle of estopper, and therefore, it cannot be invoked in favour of a person who has
not consulted the company’s memorandum and articles of Association.
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UNIT-III
PROSPECTUS
Definition
Section 2(36) defines a prospectus as “any document described or issued as a prospectus and
includes any notice, Circular, advertisement or other document inviting deposits from the public or
inviting offer from the public for the subscription or purchase of any shares in, or debentures of, a
body corporate”.
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A prospectus is usually a circular or newspaper advertisement published by the promoters
after the formation of the company to induce the public to take up shares in the company. The
invitation must be sent to the public if the document is to be a prospectus.
Formalities in issuing a Prospectus
1. Every prospectus issued by or on behalf of a company must be dated and that date shall
unless the contrary is proved, by regarded as the date of its publication.
2. A copy of the prospectus signed by every director or proposed director or by his agent must
be delivered to the Registrar on or before the date of publication. The prospectus issued to
the public should mention that a copy of the prospectus along with the specified documents
have been filed with the Registrar.
3. Consent or authorization i.e. acknowledgement from securities Exchange Board of India
[SEBI].
4. Every form of application for subscribing the shares or debentures of a company shall not be
issued, unless it is accompanied by a copy of the prospectus.
5. A prospectus must contain the necessary information to enable the public to decide whether
or not to subscribe for its shares or debentures. Every prospectus shall state the particulars
specified in part I and II of Schedule II.
Part I of Schedule II- Matters to be specified
General information, capital structure of the company, term of the present issue, company
management and project, particular in regard to the company and other listed companies under the
same management, outstanding litigation pertaining to management perception of risk factors, etc
are to be given in this part.
1. The main objectives of the company with particulars of the signatories to the memorandum
and the number of shares subscribed by them.
2. The number and classes of shares and the nature and extent of the holders in the property
and profits of the company.
3. The number of redeemable preference shares to be issued and the details of such shares.
4. The number of shares fixed by the articles as the qualification of a director.
5. Names and addresses of directors, or proposed directors of managing directors or the
managers.
6. Where shares are offered to the public, the particulars as to (a) the minimum amount which in
the opinion of the directors must be raised by the issue of shares, and (b) the amount to be
provided from other sources.
7. The time of the opening of the subscription list.
8. The amount payable on application and allotment.
9. Particulars of any option to subscribe for shares and the persons entitled to the option.
10. Particulars of shares or debentures issued within the two preceding years as fully or partly
paid up or payable on shares issued within two years preceding the issue of the prospectus.
11. Particulars of the premium paid or payable in shares issued within two years preceding the
issue of the prospectus.
12. If any such issue has under written the names of the under writers and the opinion of the
directors as to the financial position of the under writers.
13. The amount or rate of the brokerage or underwriting commission paid within the preceding
two year as are payable.
14. The names and address of the vendors of any property acquired or to be acquired by the
company which is to be paid for out of the proceeds of the issue.
15. Preliminary expenses and the person by whom it is paid or payable.
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16. Any benefit given to any promoter or officer in the two preceding years and the consideration
for giving the benefit.
17. The date of and parties to any material contract and the general nature of all such contracts.
18. The names and address of the auditors of the company.
19. Full particulars of the nature and extent of interest of the directors or promoters in the
promotion of the company or in the property acquired by the company.
20. Voting rights of different classes of shareholders.
21. Particulars of restrictions, if any, on the right of the members.
22. Where the company carries on business, the length of time during which it has been carried
on.
23. If any reserves or profits of the company have been capitalized the particulars of the same.
24. A reasonable time and place at which copies of all Balance sheets, Profit and Loss Accounts, if
any may be inspected.
Part II of Schedule II – Reports to setout
1. Report of the auditors of the company with respect to
a. Profits and losses and assets and liabilities of the company;
b. The dividend paid by the company in each of the 5 years preceding the prospects
c. The profits and losses of the subsidiary company, if any,
2. Report by named Accountants of the profits and losses and assets and liabilities for each of
the five financial years preceding the issue of the prospectus of any business intended to be
purchased with the proceeds of this issue.
3. If the proceeds of the issue are to be applied in acquisition of shares in another company, a
report of the named accountant about such company.
Statements in Lieu of Prospectus [Sec 70]
In some cases, companies are able to raise the original capital without inviting the public to
subscribe. In such cases, the company need not issue a prospectus. Where a public company, which
has a share capital, does not issue a prospectus on its formation, it cannot alloy any shares without
first filing with the Registrar a document called “Statement in lieu of Prospectus”. This document
must be in the form set out is schedule III and must contain practically the same information as is
required in the prospectus.
The document shall be delivered to the Registrar at least three days before the first allotment
of shares. The statement must be signed by every director or proposed director or his agent. If a
company fails to deliver a statement in lieu of prospectus, it cannot allot any shares or debentures.
An allotment, if made, is voidable if the allottee notifies the company within 2 months after the
statutory meeting or in case where there is no such meeting within two months after allotment.
If a company fails to fulfill the above conditions, the company and every director who has
been knowingly a party to this contravention shall be liable for fine up to Rs.1000/-. If a statement in
lieu of prospectus delivered to the Registered contains an untrue i.e. ., misleading statement, every
person who authorized the delivery of the statement shall be liable to imprisonment for two years
and fine of Rs.5000/-.
Liability for Mis-statement or omission, in a prospectus
Where an untrue statement occurs in a prospectus there may be (a) civil liability, and (b)
Criminal liability. The liability for misstatement in lie of prospectus is the same as in the case of
prospectus.
a) Civil Liability:
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A person who has been induced to subscribe for shares in a company on the strength of
misstatement or omission in the prospectus may have a remedy either against the company or
against the promoters (or) directors (or) exports.
Remedies against the company:
A person who has been induced to subscribe for shares may a) rescind the contract to take
the shares; b) claim damages
i) Rescission of contract:
Where a person has purchased the shares of a company on the faith of a prospectus which
contained an untrue or misleading, but not necessarily fraudulent statement, he can seek rescission
of the contract i.e., return the shares allotted to him get back his purchase money with interest and
get his name removed the register of members. This remedy is available only to those persons who
subscribed for any shares on the faith of the prospectus.
ii) Damages:
Any person induced by fraud to take up shares in entitled to sue the company for damages
provided he has rescinded his contract in fine. He cannot both retain the shares and get damages
against the company. The company is liable in damages where the misrepresentation is an innocent
one, unless it proves that it had reasonable grounds to believe.
Remedies against the directors, promoters and experts:
Any person who has purchased shares or debentures on the faith of the prospectus containing
the untrue statement may sue. A) every director, (b) every person whose name appeared in the
prospectus as a proposed director, (c) every promoter: and (d) every person who authorized the
issue of the prospectus; The aggrieved person may claim (1) compensation under Sec 62; (2)
damages for non-compliance with the requirements of sec 56; (3) damages under the general law.
Defense available to a director:
A director may escape liability if he proves.(i) that the prospectus was issued without the
knowledge or consent and that on becoming aware of its issue, he gave reasonable public notice to
that effect; (ii) that after the issue of prospectus and before allotment, he on becoming aware of the
untrue statement in its withdrew his consent and gave reasonable public notice of the withdrawal
and the reasons for it; (iii)that he had reasonable grounds to believe and did believe up to the time of
allotment of shares or debentures that the statement was true; (iv) that he made the statement upon
the authority of an expert whom he had reasonable ground to believe: (v) that the statement was a
correct and true company of an official document.
b) Criminal Liability of director
Every person who authorized the issue of a prospectus containing an untrue statement shall
be punishable with imprisonment which may extend to two years or with fine which may extend to
Rs.5, 000/- or with both: (a) that the statement was immaterial, or (b) he had reasonable ground to
believe and did believe up to the time of the issue of the prospectus that the statement was true
[Sec 68]. The punishment for issuing an application for shares or debentures which is not
accompanied by a prospectus is a fine up to 5,000.
SHARES AND DEBENTURES
Members and Shareholders:
The words members and shareholders are interchangeable in the case of company having a
share capital. The word ‘shareholder’ is used in relation to a company having a share capital and
there can be no membership except through the medium of shareholding. But the term ‘member’ is
wider in scope and may be used in relation to all types of company. A person may become a member
of company without holding any shares. Companies limited by guarantee or unlimited companies
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which may not have share capital and can therefore have no shareholders but they do have
members.
Acquiring Membership:
A person may become a member of the company in any of the following ways: 1. By
subscribing to the memorandum of association 2. By agreeing to take qualification shares. 3. By
application and allotment 4. By transfer of shares 5. By transmission of shares 6. By stopple or
holding out as a member.
Termination of Membership:
A person will cease to be a member of the company when his name is removed from the
register of members. It may take place in any of the following ways: 1. When a person transfer
his shares. In such a case, the transfer or ceases to be a member as soon as the transfer is
registered but not before. 2. When his shares are validity forfeited by the company. 3. When a
person makes a valid surrender of his shares to the company. 4. When a company sells the shares in
exercise of its right of lien over them. 5. When he dies. 6. When he is declared insolvent and the
official Assignee either disclaims or transfers the shares. 7. When he repudiates the contract on the
ground of false or misleading statement in the prospectus of the company. 8. When he is holding
redeemable preference shares and such shares are redeemed. 9. When share warrants are issued in
exchange of fully paid up shares and the articles do not recognize holders of share warrants as
members. 10. When the company is round up, but he remains liable as a contributory.
Rights of a Member:
(i) To have the certificate of shares held (or) the certificate of stock issued to him within the
prescribed time [Sec 113].
(ii) To have his name borne on the register of members as well as to have the register
rectified, and in the case of refusal by the company, to apply to the court for necessary
relief [Sec 155].
(iii) To transfer shares subject to any restrictions imposed by the articles [Sec 82].
(iv) To attend meetings of shareholders, receive proper notice and to vote at the meetings.
(v) To associate in the declaration of dividends and to apply to the court for an injection
restraining the directors from paying dividends on an ultra vires declaration or out of
capital.
(vi) To inspect the registers, indexes, returns and copies of certificates, etc., kept by the
company and to obtain extracts or copy thereof [Sec.16].
(vii) To obtain copies of Memorandum and Articles on request and payment of the prescribed
fees [Sec 39].
(viii) To have the first option in case of issue of new shares or a further issue of shares [i.e., the
right of preemption] by the company [Sec 81].
(ix) To receive a copy of the statutory report [Sec 165(1) & (2)].
Share Capital:
The word ‘capital’ used in connection with a company has different meanings. It may mean
the nominal, issued, called-up, paid-up or reserve share capital of the company. Section 86 provides
that the share-capital of a company limited by shares shall be of two kinds only; namely (a)
Preference Share Capital; (b) Equity Share Capital. It is that part of paid-up share capital which
carries preferential rights as to payment of dividend at a fixed rate and also a preferential right to
the repayment of the paid up capital. It means all share capital which is not preference share capital.
Alteration of Capital:
Under Sec 94, a company limited by shares may in general meeting, if so authorized by its
articles, alter the conditions of its memorandum relating to share capital in order to: (a) increase its
share capital by issuing new shares; (b) consolidate and divide all or any of its share capital into
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shares of larger amount than its existing shares; (c) convert all or any of its fully paid up shares into
stock or reconvert that stock into fully paid up shares of any denomination; (d) sub-divide its shares
into shares of smaller amount then is fixed by the memorandum, provided the paid-up amount will
remain at the same proportion of its share capital.
Reduction of Capital:
A company may wish to reduce its capital for a number of reasons; namely: 1. The capital of
the company may be more than enough for its needs, and so, it may return the surplus capital to the
shareholders. 2. The paid up capital of the company is sufficient and it may refrain from calling up
the unpaid portion of share money. 3. Some of the capital may in fact have been lost or diminished.
E.g., Rs.100 shares may represent assets worth Rs.50. The company may wish to write off the lost
capital. Reduction under item (1) or (2) above will reduce the funds available to the creditors.
Reduction under item (3) affects the right of different classes of share holders as well as the interest
of the members of the public who may be induced to take shares in the company.
The question of reducing the capital is a domestic affair to be decided by the majority, but
this power must be exercised in a fair and equitable manner. Reduction is capital may be effected in
several ways which may be classified under two heads:
1. Reduction without the consent of the court:
There are a number of cases where a company may reduce its capital without the sanction of
the court: (a) Where redeemable preference shares are redeemed in accordance with the provisions
of Sec 80 (b) Where any shares are forfeited for non-payment of calls. (c) Where there is a surrender
of shares or a gift is made to the company of its own shares. (d) Where unissued shares are
cancelled. In all these cases, the procedure laid down under Sec 100 of the Companies Act is not
required to be followed.
2. Reduction with the consent of the Court:
Sec 100 gives a company limited by shares or a company limited by guarantee and having a
share capital the power to reduce its share capital in any way. The Act has not prescribed the
manner in which the reduction is to be carried out, nor has it prohibited any method of affecting that
object. A company, if so authorized by its articles, may, by special resolution, reduce its share capital
subject to the confirmation of the court in any one of the following ways (a) Extinguish or reduce the
liability on any of its shares in respect of share capital not paid-up. (b) Cancel any paid-up share
capital which is lost or is unrepresented by the available assets (c) Pay-off any paid-up share capital
which is in excess of the requirements of the company.
Shares:
A share is the interest of a share holder in a definite portion of the capital. It expresses a
proprietary relationship between the company and the share holder. A share is a personal estate
capable of being transferred in the manner laid down in the articles of association. A certificate of
shares issued by a company under its common seal specifies the shares held by any member. The
share certificate is the prima facie evidence of the title of the member to such shares [Sec 84(i)]. The
share certificate is not a negotiable instrument. According to Sec 86 of the Companies Act, a
company can issue only two types of shares – (a) Preference Shares and (b) Equity Shares.
Preference Shares:
A preference share must satisfy the following two conditions: (i) It shall carry a preferential
right as to payment of dividend at fixed rate; (ii) In the event of winding up, there must be a
preferential right to the repayment of paid-up capital. These are two dominant characteristics of
preference shares. A preference shares may or may not carry such other rights as- (a) A preferential
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right to any arrears of dividend; (b) A right to share in surplus profits by way of additional dividend;
(c) A right to be paid in fixed premium specified in the memorandum; and (d) A right to share in
surplus assets in the event of a winding up, after all kinds of capital have been repaid.
Equity Shares:
All shares which are not preference shares are equity shares. Equity share holders have the
residual rights of the company. They may get higher dividend than preference shareholders if the
company is prosperous or get nothing if the business of the company flops. In the winding up, the
equity shares are entitled to the entire surplus assets remaining after the payment of the liabilities
and the capital of the company; unless the articles confer right on the preference shares a right to
participate in the distribution of surplus assets.
Stock:
Stock is the aggregate of fully paid up shares legally consolidated. The aggregate can be split
up into fractions of any amount without regard to the original nominal amount of shares. When
shares are fully paid up they may be converted into stock. The issue of partly paid up stock is invalid.
The use of the term ‘stock’ merely denotes that a company has recognized the fact of the complete
payment of the shares and that the time has come when these shares may be assigned in
fragments, which, for obvious reasons, could not be permitted before.
Application and Allotment of Shares:
A prospectus issued by a company inviting the public to subscribe to the shares of a company
is a mere invitation. An application for shares is an offer by a prospective share holder to take
shares. When an application is accepted it is an ‘allotment’. Allotment creates a binding contract
between the parties.
Irregular Allotment:
An allotment made by a company before the minimum subscription is received or the filing of
the statement in lieu of the prospectus is voidable at the option of the applicant. Such an option
must be exercised within two months of the statutory meeting and where the company is not
required to hold a statutory meeting within two months after the date of allotment and not later. The
allotment may be avoided although the company is being wound up. A member entitled to avoid an
irregular allotment of shares will lose his right if, after becoming aware of the irregularity he
exercises any rights of a member. Such an allotment though irregular, is nonetheless an allotment
and the applicant may retain the shares notwithstanding the irregularities to allotment. Where the
directors knowingly contravene the provisions as to allotment, they are liable to compensate the
company and the allotee for any loss or damage suffered thereby. Proceedings against the directors
must be commenced within two years of allotment.
Calls on Shares:
When shares are issued, the full amount of each share is not generally payable at once. A part
is payable on applications a part on allotment and the remainder by installments when called for. A
call may be defined as a demand by the company on its shareholders to pay whole or part of the
balance remaining unpaid on each share. It is, thus, and intimation to the shareholder to discharge
his obligation by paying the whole or part of the amount which remains unpaid on the shares.
Share Certificate:
Every person whose name is entered as a member in the register of members shall be
entitled to receive one certificate for all his shares without payment. The share certificate must be
under the common seal of the company and specify the shares to which it relates and the amount
paid thereon. A share certificate under the common seal of the company, specifying any shares held
by any member shall be prima facie evidence of the title of the member to such shares.
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Share Warrant:
A share warrant is a document issued under the common seal of the company stating that the
bearer is entitled to the shares specified therein. A share warrant is a bearer document and is
transferable by mere delivery. Such share warrants are negotiable instruments. A public company
limited by shares may issue share warrants. When shares are fully paid, the company may, if
authorized by its articles and subject to the consent of the Central Government, issue share
warrants. Share warrants should contain the number of shares in respect of which they have been
issued. Such a warrant must state the bearer of it is entitled to the shares specified therein. The
company may provide by coupons or otherwise, for the payment of future dividends on the shares
specified in the warrant [Sec 114].
Transfer of Shares:
The shares in a company are movable property and they can be transferred in the manner
provided by the articles of the company [Sec 82]. Shares are the personal property of the share
holder and he has power to transfer his shares. It is an absolute right which cannot be taken away by
any provisions in the articles. In the absence of any restrictions in the articles of association, the
share holder can transfer his shares to any person even to a paper or even if the transfer is
made to escape liability provided it is an out and out disposal of the property without retaining any
interest in the shares.
Transmission of Shares:
The transmission of shares means transfer of title in shares by ‘operation of law’. In other
words, the transmission of shares signifies involuntary assignment of shares because in this case the
property in shares passes ‘not by the act of the parties’, but by ‘operation of law’. For instance: (i) On
the insolvency of a shareholder property in shares passes to his official receiver who shall become
entitled to the shares owned by the insolvent; (ii) On the death of a shareholder, the property in
shares passes to the legal representatives who shall become entitled to shares owned by the
deceased; (iii) On the lunacy of a shareholder, the property in shares passes to the administrator
appointed by the court.
Lien or Shares:
A lien is the right to retain possession of a thing until a claim is satisfied. In the case of a
company, lien on a share means that a member would not be permitted to transfer his shares unless
he pays his debt to the company. The articles generally provide that the company shall have a first
lien of the shares of each member for the debts and liabilities to the company. The right of lien is not
inherent but must be clearly provided for in the articles. The articles may give the right of lien over
shares either for unpaid calls or for any other debt due by the member to the company. The
company may have lien on fully paid-up shares. The lien also extends to the dividends payable on
the shares.
Surrender of Shares:
The Companies Act does not provide for surrender of shares. Shares are said to be
surrendered when they are voluntarily given up. The articles of a company may authorize the
directors to accept surrender of shares. Surrender of shares is valid where it is done to relieve the
company from going through the formality of forfeiture of shares and the shareholder is willing to
surrender the shares. Surrender and forfeiture have practically the same effect, the only difference
being that the former is done with the assent of the shareholder while the latter is done at the
instance of the company.
Forfeiture of Shares:
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A company has no inherent power to forfeit shares. The power to forfeit shares must be
contained in the articles, where as the shareholder fails to pay the amount due on any call, the
directors may, if so authorized by the articles, forfeit his shares. Shares can only be forfeited for non-
payment of calls. An attempt to forfeit shares for other reasons is illegal. Thus, where the shares are
declared forfeited for the purpose of relieving a friend from liability, the forfeiture may be set aside.
Issue of Shares at a Premium [Sec 78]:
A company is free to sell its shares at a premium i.e., at a price higher than their nominal
value. The power to issue shares at a premium need not be taken in the articles. The premium
received on issue of shares, whether in cash or kind must be transferred to a separate account called
Share Premium Account. The provisions of the Act relating to the reduction of the share capital will
apply as if the share premium account were paid-up share capital of the company.
The premium can, however, be used for the following purposes:
(a) For issuing to the members as fully paid bonus shares, the un issued shares of the company; (b)
for writing-off preliminary expenses of the company; (c) for writing-off expenses, commission or
discount on the issue of shares or debentures of the company; (d) for providing for the payment of
premium payable on redemption of redeemable preference shares or debentures. Dividend cannot
be paid out of share premium account as it will amount to reduction of capital without the
confirmation of the court, and hence ultravires the company.
Issue of Shares at a Discount:
A company issues shares at a discount when shares are issued at a price less than their face
value. Shares at a discount can be issued by the company if the following conditions are fulfilled: (i)
Shares to be issued must be of a class already issued. (ii) Such issue is authorized by a resolution of
share holders. (iii) Issue must be sanctioned by the company Law Board. (iv) The resolution must
specify the rate of discount which must not exceed 10 percent, unless the company Law Board is of
the opinion that a higher percentage of discount may be allowed in the special circumstances of the
case (v) Not less than one year has elapsed since the date on which the company was entitled to
sanction by the company Law Board or within such extended time as the company Law Board may
permit.
Dividend:
Dividend is the portion of the profits of company which is allocated to the shareholders in
proportion to their shares and in accordance with their rights as share holders. A dividend can be
declared by the shareholders at the annual general meeting, but no dividend shall exceed the
amount general meeting, but no dividend shall exceed the amount recommended by the Board of
Directors. If the directors feel that a dividend should not be declared, the shareholders in general
meeting cannot themselves declare it. Apart from these, the articles may empower the directors to
declare interim dividend.
Interim Dividend:
The Articles of a company may empower the directors to declare interim dividend, i.e.,
dividend in between its two annual general meetings. The Board may from time to time pay to the
members such interim dividend as appears to it to be justified by the profits of the company [Articles
86 of Table A]. But before declaring an interim dividend, the directors must satisfy themselves that
the financial position of the company warrants the payment of such dividend out of profits available
for distribution.
Dividend Warrant:
It is an instrument containing an order on a company’s banker directing it to pay the stated
amount to or to the order of the shareholder named therein who is entitled to claim dividend. It is in
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two parts – one part is a notice of the dividend to the shareholder as well as the certificate of
deduction of income-tax, and the other part is the dividend warrant.
Payment of Interest out of Capital [Sec 208]:
When any shares are issued for the purpose of raising money to defray the expenses of the
construction of any work or building or the provision of any plant, which cannot be made profitable
for a lengthy period, the company may pay interest on paid-up share capital under certain conditions
provided such payment is bonafide and in the interests of the company. The conditions are: (i) Such
payment is authorized by the articles or a special resolution (ii) Previous approval of the Central
Government is obtained. (iii) Before sanctioning any such payment, the Central Government may, at
the expense of the company, hold an inquiry and require the company to give security for the cost of
the inquiry. (iv) The interest shall be payable only for such period as may be determined by the
Central Government and such period will, in no case, extend beyond the close of the half year
following the half year during which the work or building has been actually completed, or the plant
provided. (v) The rate of interest shall not exceed four percent or such other rates as may be
sanctioned by the Central Government.
Debentures:
The charge on the assets of a company, given by a debenture or a trust deed, may be either
(i) Specific or fixed charge (ii) Floating charge.
(i) Specific or Fixed Charge:
It is created in respect of a definite and ascertained property and this prevents the company
from dealing with that property without the consent of the debenture holders. In case of winding up
of a company a debenture – holder secured by a specific charge is in the highest ranking class of
creditors. Where there are a number of specific charges on the same property, their priority is
determined by the general rules relating to priority of charges.
(ii) Floating Charges:
Act A ‘floating charge’ is an equitable charge which does not fasten on any ascertained or
definite property and as such the company can deal with any of its assets in the ordinary course of
business. The consent of the debenture holders is not necessary for the company to deal with its
assets. Whether a particular charge is a floating charge or not depends upon the construction of the
words used in the document creating the charge. The nature of charge cannot be altered to become
a floating charge merely because in spite of the charge, the business of the company continues to be
carried on.
Registration of shares:
Where a company creates a charge over its property Sec 128 requires that charge to be
registered with the Registrar of companies. The particulars of every charge and mortgage created on
a movable or immovable property must be filed by the company with the Registrar within 30 days of
their creation. The Registrar may extend the time for filing of the particulars and instruments
creating the charge by seven days provided the company had sufficient cause for not filing the
particulars within the specified. The charges which are required to be compulsorily registered are
given below.
1. A charge to secure any issue of debentures.
2. A charge on uncalled share capital.
3. A charge on any immovable property wherever situated or any interest therein.
4. A charge on any book debts of the company.
5. A charge not being a pledge or any movable property of the company.
6. A floating charge on the undertaking or any property of the company including stock in trade.
7. A charge on calls made but not paid.
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8. A charge on slip or any share in a slip.
9. A charge on goodwill, or a patent or license under a patent, on a trade mark or copy right.
**********************************************************************
UNIT-IV
DIRECTORS OF A COMPANY:
According to Section 2 (13) of the Companies Act 1956, “director” includes any person
occupying the position of director by whatever name called. Only an individual can be appointed as
a director (Section 253).
Number of directors:
Every public company must have at least 3 directors and every private company must have at
least 2 directors. Subject to the minimum number of directors a company should have, the articles
of a company may prescribe the maximum and the minimum number of directors for its Board of
directors. A company in a general meeting may be ordinary resolution increase or reduce the
number of its directors within the limits fixed in that behalf by its articles (Section 258). A public
company or a private company which is a subsidiary of a public company cannot increase the
number of directors beyond the permissible maximum under its articles without the approval of the
Central Government. However, no approval of the Central Government is required if such
permissible maximum is 12 or less than 12, and the increase in the number of its directors does not
exceed 12. (Section 259).
Appointment of directors:
Directors may be appointed in the following ways:
1. By the articles as regards first directors. (Section 254)
The first Directors are appointed by promoters. The first directors are usually named in
company’s articles of association. In case the articles of association are silent about the first
directors, the subscribers of the memorandum of association, who are individuals, shall be
considered as the directors of the company. They shall hold the office until the directors are duly
appointed at the first annual general meeting.
2. By the company in general meeting. (Section 255 to 257, 263,264).
The total number of directors of a public company or its subsidiary private company must be
appointed by the company in its general meeting of shareholders. The remaining directors of
such company, and the directors generally of a private company, may be appointed in
accordance with the provisions of articles of association. In his absence of such articles, or in
case of default in such appointment, these directors shall also be appointed by the company
in general meeting.
(a) One-third of the total number of directors can be given permanent appointment.
(b) Two-third of the total number of directors is liable to retire by rotation.
3. By the directors. (Section 260,266 to 313).
Additional directors:
The Board of Directors may appoint additional directors if it is authorized by the
articles of association. The total number of directors must not exceed the maximum number
fixed by the articles of association. Such additional directors shall hold office only up to the
date of the next annual general meeting.
Casual vacancies:
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A Casual vacancy occurs when the office of a director is vacated before the expiry of
his term of office. It may be caused by death, resignation, insanity, insolvency etc. of the
director. Such vacancy is filled by the Board of director’s general meeting that is according to
the regulations and procedures laid down in the articles.
Alternate director:
An alternate director is appointed to act in place of a director who is absent for a
period of more than three months from the State in which the Board meetings are ordinarily
held. These directors are appointed by the Board of directors.
4. By third parties. (Section 255).
The term third parties here mean the debenture-holders, financial corporations, or
banking companies who have advanced loan to the company. The articles of association of
the company may give power to such third parties to appoint their nominee on companies
Board of Directors. The number of so nominated directors must not exceed one-third of the
total number of directors. This is so because two-third of the total number of directors must
be appointed by the company at its general meeting of the shareholders.
5. By the principle of proportional representation. (Section 265).
In this case the directors of the company are appointed by an ordinary resolution (i.e.,
simple majority) of the shareholders. The articles of association of a company may provide
for the appointment of not less than two-third of the total number of directors of a company
according to the principle of proportional representation, whether by single transferable vote,
or by a system of cumulative voting, or otherwise.
6. By the Central Government. (Section 408).
The Central Government may appoint the directors of a company where the Company
Law Board decides that it is necessary to effectively safeguard the interest of the Company,
or its shareholders, or the public, if company law board satisfied, the central Government may
appoint the directors for the purpose of prevention of oppression and mismanagement of the
company’s affairs. Such appointment should not exceed three years on any one occasion.
Legal position of directors:
The directors are not servants of the company or members of its staff. They cannot be
treated as the employees of the company. For certain matters under the Companies Act, the
directors are treated as officers of the company. As such, they are liable to certain penalties if the
provisions of the Act are not strictly complied with. Directors are trustees of (a) the company’s
money and property; and (b) the powers entrusted to them.
They are trustees of the company’s money and property in the sense that they must account
for all the company’s money over which they exercise control and must refund to the company any
of its money which they have improperly paid away. Directors are trustees of their powers and they
must exercise their powers honestly and in good faith and in the interest of the company. Company
being an artificial person, is governed by the human agency. Directors control the affairs of the
company as its agents. Acts of the directors for and on behalf of the company exclude directors from
personal liability, provided they are within the scope of their authority.
The liabilities of directors follow mostly from their duties; they are also accountable to the
company for damage suffered as a result of negligence in performance of their duties. They are also
liable to the company when they commit a breach of trust reposed in them by the shareholders, and
misuse or avail of mis appropriate profits or assets of the company. If the directors fail in the
performance of their statutory functions of accounts, etc., they render themselves liable to
prosecution and penalties prescribed by the Statute.
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The directors of a company are usually protected by an Indemnity Clause contained in the
Articles of Association in order to provide recommendation and protection for bonafide acts of the
directors in discharge of their function as directors. Such indemnity, however, is not available where
a director has not acted in good faith and where he is charged with gross negligence, bad faith and
disregard of his duties in the conduct of his office as a director.
Penalties imposable on directors for the contravention or defaults are of two types:
(a) Those imposable on them directly as “directors” and
(b) Those imposable on them directly as “officers who are in default”.
Under each category, there is a long list of offences dealt with in different sections of the Companies
Act with specific penalties prescribed there under.
Share Qualification:
The Act does not make it obligatory on any director to hold shares in the company. The
articles of association generally require that the qualification of a director shall be the holding of a
specified number of shares known as qualification shares. The nominal value of these shares must
not exceed Rs. 5,000 or the nominal value of one share where it exceeds Rs. 5,000.
Disqualifications of directors:
The circumstances in which a person cannot be appointed as a director of a company are as
follows:
1. He has been found to be of unsound mind by a competent court and the finding is in force;
2. He has an un discharged insolvent;
3. He has applied to be adjudicated as an insolvent and his application in pending.
4. He has been convicted of an offence involving moral turpitude and sentenced to
imprisonment for not less than 6 months and a period of 5 years had not elapsed since the
expiry of his sentences;
5. He has not paid any call in respect of shares of the company held by him for a period of
six months from the last day fixed for the payment;
6. He has been disqualified by an order of the Court under Section 203, of an offence in
relation to promotion, formation or management of the company or fraud or misfeasance
in relation to the company.
Restriction on number of directorships:
No person can be a director in more than twenty companies. The following companies shall
be excluded in calculating the number of companies of which a person may be a director.
1. A private company which is neither a subsidiary nor a holding company of a public
company;
2. An unlimited company;
3. An association not carrying on business for profit or which prohibits the payments of a
dividend;
4. A company in which such person is only an alternate director.
Vacation of office by directors:
The office of a director shall become vacant if
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1. He fails to obtain or ceases to hold the share qualification required of him by the articles
of the company;
2. He is found to be of unsound mind by a competent court;
3. He applies to be adjudicated an insolvent;
4. He is adjudged an insolvent;
5. He is convicted by a court of an offence involving moral turpitude and sentenced to
imprisonment for not less than 6 months;
6. He fails to pay any calls on the shares held by him within six months from the date fixed
for payment; unless the Central Government has by notification in the Official Gazette
removed his disqualification;
7. He absents himself from three consecutive meetings of the Board of directors or from all
the meetings of Board for a continuous period of 3 months whichever is longer without
obtaining leave of absence from the Board.
Removal of directors:
A director of a company can be removed by,
Removal by the company:
The company (shareholders) may remove a director before the expiry of his period of office. The
company may do so by passing an ordinary resolution at the general meeting of the
shareholders. The special notice of any resolution to remove a director is required i.e., the notice
of the intention to move such resolution should be given to the company not less than 14 days
before the meeting.
Removal by the Central Government:
The Central Government may remove the director on the recommendation of the Company
Law Board. The Central Government may refer a case against the managerial personnel of a
company to the Company Law board and request that the Company Law Board may enquire into
the case and record a decision as to whether or not such person is a fit and proper person to hold
the office of director or of any other managerial personnel.
Removal by the Company Law Board:
The Company Law Board for the prevention of oppression and mismanagement. On
such appointment, if the Company Law Board is satisfied that the relief should be granted, it may
terminate any agreement of the company with a director.
Remuneration of directors:
The directors’ payable to directors is usually determined by the Articles of Association or a
resolution passed by the company in its general meeting. Total managerial remuneration payable to
directors, managing director, or manager and whole-time director, in respect of any financial year
should not exceed 11 % of the net profits of the company for the financial year. In years of
inadequate profits, as sum not exceeding Rs. 50,000 per annum may be paid to all managerial
personnel with the prior approval of the Central Government.
Registration. The register of director, managing director, manager, and secretary is done in the
registered office.
Register should contain the following particulars:
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Name, surname and address of director etc. father’s name, nationality and business
occupation if any, date of birth and particulars regarding office held by him in any other
company.
Any director is nominated by another company and the name and particulars of that should
also be noted.
The company should send duplicate particulars to the registered regarding register.
It should inform to the register within 30 days of such appointment.
“Register of Directors” should be kept open for inspection on payment of one rupee for each
inspection.
Note: The company should maintain another register called register of director,
shareholders, showing that number regarding description and amount of shareholders (or)
debentures held by each director.
Retirement:
According to the directors retirement one-third of the permanent directors and two-third of
the retire by rotate directors, appointed in the general meeting and annual general meeting
respectively.
o Appointments of directors are by the agreement or by lot system.
o Eligible for re-appointment.
o Vacate the office on the last day of the AGM.
o It does not apply to the private company.
o A person liable to retire cannot hold office of the managing director.
o The office of the managing director cannot be ceased, it continue to be the director.
Powers of Directors:
As the company is an artificial person, it acts through its directors. The directors enjoy such
powers as are given to them by the Act, Memorandum of Articles.
General Powers:
The Board exercises all such powers and does all such acts and things, as the company is
authorized to exercise and do. But the Board cannot do any act which is to be done by the company
in general meeting. In exercising any power, the Board will be subject to the provisions of this or any
other Act, the Memorandum or the Articles.
Power to be exercised by board only at meeting:
The Board can exercise the powers, only by resolutions passed at the Board Meeting:
The power to make calls.
The power to issue debentures.
The power to borrow money otherwise than on debentures.
The power to invest the funds of the company.
The power to make loans.
Duties of Directors:
In discharging the duties of his position, a director must exercise some degree of skill and
diligence.
A director must act honestly in the performance of his duties.
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A director is not bound to give continuous attention to the affairs of his company.
Though all books of account and other books and papers of the company are open to
inspection by the director, he is not bound to examine individual entries in the books.
The directors must perform their duties personally. Unless permitted by the articles
specifically, the directors must not delegate any of their powers to some other person.
A director or his relative or any firm in which he or his relative has any interest or any private
company of which he is a member or a director shall not enter into any contract with the
company for the sale, purchase or supply of goods, materials or services or for underwriting
the subscription of any shares or debentures.
Liabilities of Directors:
The liabilities of directors may be discussed under three heads:
Liability to outsiders.
Liability to company and
Criminal liability.
Liability to outsiders:
The directors are not personally liable to outsiders if they act within the scope of
powers vested in them. The directors are personally liable to third parties of contract in the following
cases:
- They contract with outsiders in their personal capacity.
- They contract as agents of an undisclosed principal.
- They enter into a contract on behalf of a prospective company.
- When the contract is ultra-vires the company.
In default of statutory duties, the directors shall be personally liable to third parties in the following
cases:
- Misstatement in prospectus.
- Irregular allotment.
- Failure to repay application money if allotment of shares and debentures is not
dealt in on the stock exchange as provided in the prospectus.
Liabilities to company:
The directors shall be liable to the company for the following:
- Where they have acted ultra vires the company.
- When they have acted negligently.
- Where there is a breach of trust.
- Directors are liable to the company for misfeasance.
Criminal liabilities of directors:
For acts of fraud, default in discharging their duties and the act provides penalties by way of
fine or imprisonment.
MANAGING DIRECTOR
Managing Director means a director who is entrusted with substantial powers of management
which would not otherwise be exercisable by him. It includes a director occupying the position of a
managing director by whatever name called. The substantial powers of the management may be
conferred up to him by virtue of an agreement with the company, or of a resolution passed by the
company in its general meeting or by its Board of Directors, or by virtue of its memorandum or
articles of association.
Appointment of managing director:
- By an agreement with the company; or
- By a resolution passed by the company in its general meeting; or
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- By a resolution of the Board of Directors; or
- By a clause in the Memorandum of Association or Articles of Association of the
company.
If the Articles is silent, then the company generally authorize the directors to appoint one of them as
managing director. A private company or a private company being subsidiary of a public company
must get the approval of the Central Government before appointing the managing director for the
first time or within 3 months of doing so.
It is to be noted that the Government shall not grant approval unless it is satisfied that:
- it is in the interest of the company to have a managing director or whole-time
director;
- the proposed person is a fit and proper person and the appointment is not
against public interest; and
- the terms and conditions of appointment are fair and reasonable.
Disqualifications of managing director:
The following persons cannot be appointed as a managing director:
- A person who is an un discharged insolvent or who has at any time been
adjudged an insolvent;
- A person who suspends or has at any time suspended payment to his creditors
or who makes or has at any time made a composition with them.
- A person who is or has at any time been convicted by a Court of an offence
involving moral turpitude.
Removal of managing director:
1. As prescribed in the Articles of Association.
2. Such removal does not contain any Approval.
3. In case of pre-maturely terminated he is entitle to receive compensation.
Term of office and Re-appointment of managing director:
The re-appointment of a person as managing director shall also be approved by Central
Government. A company cannot appoint a managing director for more than 5 years at a time. The
Re-appointment is not forbidden and such re-appointment cannot be sanctioned earlier than 2 years
from the date on which it is to come into force. Such provision does not apply to a private company
unless it is a subsidiary of a public company.
A person cannot be a managing director of more than 2 companies where at least one of the
two companies is a public company. But the Central Government may allow a person to be
managing director of more than two companies provided it is of the view that the companies should
have for their proper working functions as a single unit and have a common managing director.
Managerial Remuneration:
The Remuneration of the managing director is received either by way of a monthly payment,
or by way of a specific percentage of the net profits of the company of partly by one way partly by
the other. Except with the approval of the Central Government, such remuneration shall not exceed
in the aggregate 5 % of the net profits. (Sec.387).
Whole-time Director:
A “Whole-time Director” includes ‘a director in the whole-time employment of the company’.
The provisions applicable to the appointment of a Managing Director are also applicable to the
appointment of a whole-time director.
Company secretary:
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Meaning
The word ‘secretary’ has its orgin in the latin word “secretarious” which means a notary,
scribe or confidential officer. No doubt, modern secretary is a lot more than a mere confidential
officer. The latin orgin of the word is given only to prove that the need for a secretary was felt even
in the ancient past. in fact even in those days no organization worth its name could do without a
secretary.
Definition:
According to the companies act “a company secretary means company secretary as
defined under the company secretaries act and includes any other individual possessing the
prescribed qualifications and appointed to perform the duties by a secretary under this act or any
other ministerial or administrative duties”
Appointment:
Usually companies’ articles empower that board of directors to appoint the secretary of the
company for such term, at such remuneration and on such conditions as the board thinks fit however
the first secretary of a company is appointed by the promoters at the pre-incorporation stage.
After the company registered this appointment should be confirmed at the first meeting of the
board of directors by a resolution which shall also fix the remuneration and allowances payable to
the secretary.
Under section 303 of the act, every appointment of a secretary must be recorded in the
register of directors etc. and a notice of his appointment must also be sent to the registrar of
companies.
Part time secretary:
A part time secretary is one who accepts appointment of more than one
company. A person may be the secretary of more than one company only if none of the companies
has a paid up share capital of rupees two crore or more .Thus a person may be a part time
secretary in companies of small sizes only .if a person is secretary of more than one companies , his
knowledge as secretary of the other company unless it is his duty to the first company to
communication his knowledge to the second company [Re fenwick stobart & co(1902)]
Director as secretary:
A direct of the company may be appointed as its secretary provided consent
of the company has been obtained by passing a special resolution to this effect. This condition is laid
down by section 314 which inter alia provides that no director of a company shall hold any office or
place of profit under the company unless so consented by the company by a special. Thus legally a
director may be appointed as the company secretary.
Rights of company secretary:
(a) To superintend direct and control office work at the registered office of the company.
(b) To do all such acts as authorized by directors.
(c) To issue testimonials to employees on be half of the company
(d)To sign the proceedings of company meeting and other such documents on behalf of the
company, which do not require common seal (sec.54)
(e) To get his remuneration. in winding up of the company a whole time secretary has a right
to claim four months salary not exceeding rupees twenty thousand as a preferential creditor
(sec.530).
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Duties of company secretary:
(1) Duties towards the company.
(a) To make the ‘statutory declaration’ for obtaining the certificate of commencement of
business [sec.149(1)(d)].
(b) To sign annual report [sec.161(1)];
(c) To sign every balance sheet and every profit and loss account in the case of non banking
companies [sec.215(1)]
Duties to the directors:
(a) To deal with all correspondence in which the directors are interested.
(b) To work according to the instructions of the directors.
(c) To maintain all important correspondence, files and records for the perusal of directors.
(d) To draft directors’ report.
Duties to the whole time authority:
(a) To organize and control the head office of the company efficiently.
(b) To draft contracts with the vendors, if any and also with the underwriters and share brokers.
(c) To act as the liaison officer between the managing director and the directors, staff, creditors.
(d) To keep the title deeds of the company’s properties and investments under safe custody.
(e) To submit all ‘statutory returns’ in time.
Duties to the shareholders and the public:
(a) To deal with all correspondence between the company and the shareholders, creditors, public and
look into their grievances and complaints.
(b) To issue notices and agendas of the statutory meeting, annual general meeting and all other
meetings of shareholders, creditors and debenture holders.
(c) To keep the proceedings of all meetings, incorporate them in the minutes book, be present in the
meetings and help the chairman in conducting the affairs of a meeting.
Duties towards the office and the staff:
The company secretary is a executive head at the registered office of the company and is
solely responsible to the managing director or manager for the smooth running of office work. In fact
the company secretary is the pivot around which the whole corporate machinery revolves. All the
heads of various departments into which office is organized viz, the share department, filing and
records department, accounts department are directly responsible to the secretary. So he must act
as a friend, philosopher and guide of the staff.
Other duties:
(a) To represent the company on social functions.
(b) To act in an emergency very cautiously in the best interests of the company.
(c) To act with authority and maintain secrecy of confidential matters.
(d) To perform his duties honestly and diligently.
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Liabilities of company secretary:
The liabilities of company secretary may be studied under two heads;
1. Statutory liabilities 2. Contractual liabilities
Statutory liabilities: A few statutory liabilities of the company secretary under different sections of
the companies act are listed below:
(a) Sec 39- for failure to send copies of memorandum and articles etc, to members within seven days
of the requirement-fine up to Rs 500 for each offence.
(b) Sec 75- for failure to file with the registrar a return of the allotment of shares within 30 days after
the allotment-fine up to Rs 5000 for every day during which the default continues.
(c) Sec 150- for failure to maintain register of members with prescribed particulars-fine up to Rs 500
for every day during which the default continues.
(d) Sec 165-for default in holding the statutory meeting and filing the statutory report-fine up to Rs
5000
(e) Sec 303-for failure to maintain register of directors etc, with prescribed particulars-fine upto Rs
500 for every day during which the default continues.
Contractual liabilities;
A company secretary has also certain liabilities arising out of his contract of service with
company. So long as he acts within the scope of his authority, in good faith, bona fide and take
reasonable care in the discharge of his duties, he incurs no personal liability. but he will be held
personally liable to make good the loss to the company for willful negligence or misconduct 0r fraud
committed within the course of employment.
Qualifications for appointment as secretary:
The qualifications which a person must possess in order to be eligible for appointment as
whole time company secretary shall be as follows:
(1) In the case of a company having a paid share capital of rupees two crore or more, the
membership of the institute of company secretaries of India, New Delhi.
(2) In the case of accompany having paid up share capital of less than rupees two crore, one
or more of the following qualifications namely.
(a) The qualifications as specified above;
(b) Pass in the intermediate examination conducted by the Institute of company secretaries of
India.
(c) Post graduate degree in commerce
(d) Degree in law granted by any university;
(e) Membership of the institute of chartered Accountants of India;
(f) Membership of of the institute of cost and works accountants of India;
(g) Post graduate degree or diploma in management sciences granted by any university;
(i) Post diploma in company secretary ship granted by the institute of commercial practice,
Delhi;
(j) Post graduate diploma in company law and secretarial practice granted by the university of
Udaipur.
Personal qualities:
A company secretary must also possess certain personal qualities in order to enable to him
to discharge his multifarious obligations efficiently. Beside having a good personality, he must be a
man of integrity, pleasing temperament, charming manners, strong commonsense, tact and ready
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wit, he must be a man of decision and energy, have self control, sympathy for others and a strong
true sense of justice.
Dismissal of the secretary:
It has been observed that a secretary is a mere servant of the company. His
suspension and dismissal are therefore governed by the normal law applicable to master and
servant. If the secretary is appointed for affixed term, he can not properly be dismissed before the
expiration of the term unless he is guilty of misconduct, incompetence. Even if he is not appointed
for affixed term, however, he can not properly be dismissed without the agreed notice, except incase
of misconduct etc. In the absence of any agreement as to length of notice a secretary is entitled to
reasonable notice. It is also to be observed that the winding up of the company will operate as the
dismissal of the secretary along with all other employees of the company, but if he has been
appointed for a fixed term and the term has not expired on the date of winding up, he is entitled to
claim damages for the breach of contract.
Role of company secretary:
As a co-coordinator:
The secretary of a company being the chief officer of the company by virtue of his
office is also as an agent of the company in an restricted sense. He has ostensible authority to enter
into contracts on behalf of the company as regards matters connected with office administration. As
agent he must conduct the business with reasonable care and diligence and shall be made liable to
account for any secret profits made by him in the course of his employment. It may be noted that a
secretary is not an agent of the company like the directors. He is an agent in the capacity of a
servant and can not act for the company without authority from the directors except as regards
matters covered within his coordinative functions.
As an administrative officer:
The secretary is also an officer of the company within the meaning of section 2(30) As
officer of the company he may incur liability to statutory penalties by reason of non compliance with
requirements of the act for instance he may be held liable for default in holding the statutory
meeting and filing the statutory report under section 165, for default in registering certain
resolutions. The secretary like any other officer of the company will be punishable with
imprisonment, if he falsifies the books of the company, certain returns, reports, certificates or other
documents of the company which is being wound up.
A secretary is the chief administrative officer under whose supervision all the
ministerial and administrative work at the registered office of the company is carried on. He is solely
responsible to the managing director or manager and the directors for smooth running of office work.
In actual practice what usually happens is that any paper or problem which cannot be dealt with by a
particular department in the company is referred to the company secretary for disposal. To
substantiate it may be stated that under the civil procedure code no evidence of competency is
required for a secretary to sign pleadings on behalf of the company in connection with civil suits.
Position of a company secretary:
As a servant of the company:
The secretary of a company is a servant of the company, whose duty is to act in
accordance with instructions given to him by the directors. A secretary is a mere servant his position
is that he is to do what he is told, and no person can assume that he has any authority to represent
at all. The secretary cannot for instance summon a general meeting on his own authority or a
transfer of shares unless instructed to do so by the directors or borrow the money for the purposes of
the company without the like authority. Further, he has no implied authority to bind the company by
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making any representation, except the representation implied by section 112 upon a certification of
transfer made in accordance with that section.
Types of secretaries:
On the basis of the nature and functions of secretaries we can classify them as follows.
(a) Private secretary:
A private secretary is usually employed by an important person in any walk of life to look after
personal private work correspondence, keeping of records and making appointments on his behalf.
The employer may be a business executive, a doctor, a lawyer etc.
The functions of private secretary:
Routine office duties, such as handling mail, taking shorthand dictation, typing,
maintaining accounts and records.
Receptionist’s duties, such as handling telephone calls and visitors.
(b) Secretary of an association or club:
An association is a group of persons joined together for some common purpose like promotion
of art, sports, music, and religion. Usually, it pulls on with an honorary secretary, with its managing
committee looking after the decision making aspects of its working.
The functions of the secretary of an association;
Functions as to administration.
Functions as a public relation officer.
Functions as to meetings.
Advisory functions.
Functions as to trustee.
Functions as to social get together.
(c) Secretary of a co-operative society:
A co-operative society is a group of persons with a corporate status. It is registered in its own
name and has a common seal. The liability of its members is limited. A co-operative society is
managed by a managing committee. Its secretary may be paid secretary chosen through normal
channels of selection.
The functions of a co-operative secretary;
Functions as an administrator.
Legal functions.
Functions as a liaison officer.
Maintenance of accounts.
Functions as to meetings.
Miscellaneous functions.
(d) Secretary of a government department:
A Government secretary is an executive and administrative head of the ministry. On the face
of it a government ministry or department is headed by a minister. But that is only so far as decision
making is concerned. The responsibility for executing and implementing these decisions lies with the
secretary. He has relatively speaking a long association with the working of the department.
The functions of the Government secretary are as follows;
Administrative functions.
Advisory functions.
Functions as to formulation of policies.
(e) Secretary of a diplomatic mission or embassy:
The secretary is second in command of his mission. Next only to the ambassador or envoy, he
represents the ambassador or envoy during periods of his absence. He also performs administrative
and executive functions. But basically, he is his country’s representative in the country to which he is
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posted and acts as a link between his embassy and the government of the country in which it is
located.
(f) Secretary of a local body:
Sometime necessary under the laws governing local bodies to have to whole time secretary to
look after the administrative functions of the local body. Basically the secretary here is an
administrative and executive head. Office management, maintaining records and assisting in the
conduct of meetings are some of his important functions. He has ensured that all legal formalities as
provided in the law governing the local body are fully complied with. These include:
Submitting budget estimates and annual reports to the Government.
Undertaking inquiries and preparing project reports.
Issuing notices of meetings, preparing agenda and drafting minutes
Undertaking special duties which may be entrusted to him.
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UNIT-V
COMPANY MEETINGS
Meeting may be defined as assembly of people for a lawful purpose or the coming together of
at least two persons for the same reason. A company meting may be defined as a concurrence or
coming together of at least a quorum of members in order to transact either the ordinary or special
business of the company.
KINDS OF MEETINGS
GENERAL MEETINGS CLASS MEETINGS
Statutory Annual Extra-ordinary Preference Equity
Meeting general general shareholder’s shareholder’s
Meeting meeting meeting meeting
It is at the meeting of the directors, members, creditors, etc of a company express their will
be passing resolutions. Such meetings are (1) Board of Directors (2) Statutory (3) Annual (4) Extra-
ordinary (5) class of shareholders and (6) Creditors
STATUTORY MEETING:
Every company limited by shares and every company limited by guarantee and
having a share capital shall within a period of not less than one month and not more than six months
from the date at which the company is entitled to commence business, hold a general meeting of the
members of the company. Such a meeting can be called as the statutory meeting [sec 165(1)]. This
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meeting is held once during the life time of the company. A private company, an unlimited company
or a company limited by guarantee and not having a share capital is not required to hold a statutory
meeting. The notice for calling the meeting must be given at least 21 days before the meeting. The
notice convening the statutory meeting must specifically state that the meeting is the statutory
meeting. The object of such a meeting is to ensure that at an early date, the members may have an
opportunity of ascertaining the precise position and prospect of the company. According to Palmer,
“The object of statutory meeting is to put the shareholders of the company at as early a date as
possible in possession of all the important facts relating to the new company.
STATUTORY REPORT:
In order to achieve this object, the Directors are required to send a report called the “statutory
report” to every member of the company at least 21 days before the date of the meeting. Even if
the report is sent later than is required, it shall deemed to have been duly forwarded if it is so agreed
to by all the members entitled to attend and vote at the meeting. The statutory report shall contain
the following particulars:
(a) The total number of shares allotted distinguishing those allotted as fully or partly paid up
otherwise than in cash and stating in the case of shares partly paid up the extent to which they are
So paid up and in either case the consideration for which they have been allotted.
(b) The total amount of cash received by the company in respect of all the shares allotted.
(c) Abstract of receipts and payments made there at up to a date within seven days of the
date of the report and an account or estimate of the preliminary expenses.
(d) Names, addresses and occupations of its directors and auditors and also of its manager and
secretary if any and the changes which have occurred since the date of the incorporation.
(e) The particulars of any contract and the modification or the proposed modification of any
contract which is to be submitted for the approval of the members at the meeting.
(f) The extent to which the underwriting contracts have not been carried out and the reasons
therefore.
(g) The arrears, if any, due on calls from any director and the manager.
(h) The particulars of any commission or brokerage paid or to be paid to any director or to the
manager in connection with the issue or sale of shares or debentures of the company.
The statutory report must be certified as correct by not less than two
directors; one of whom shall be the managing director if any, the auditors of the company then
shall certify it as correct regarding the shares allotted, cash received in respect of such shares
and the receipts and payments of the company. A certified copy of the statutory report shall be
delivered to the Registrar for registration immediately after the same have been sent to the
members of the company.
Secretary Duties:
Before the Meeting:
Preparation of the statutory report.
Certification of the report.
Printing and forwarding of the statutory report and notices.
Filing of the copy of the statutory report with the Registrar.
Drawing up the agenda of the meeting.
Preparation of the list of the meeting.
Necessary arrangement for holding the meeting.
At the meeting:
Secure attendance of the members.
Receive the directors and make them comfortable.
Ascertain the requisite quorum.
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Take the notes of the proceedings.
Before the meeting:
Prepare the minutes of the proceedings.
Record the minutes and get approved by the chairman and signed by him within 30 days of
the meeting.
Carry out the instructions of the Board.
ANNUAL GENERAL MEETING:
Every company must in each year hold in addition to any other meeting, an
annual general meeting. The notice convening the meeting must specify that it is a notice of the
annual general meeting.
The first annual general meeting must be held within 18 months from the date of
incorporation. In that case, the company is not required to hold an annual general meeting in the
year of incorporation or in the following year. Thereafter it must be held in each year and there
shall not be a gap of more than 15 months between two annual general meetings. However the
Registrar has the power to extend the time for holding the annual general meeting (except the
first annual general meeting) by a period not exceeding three months.
Every annual general meeting must be held on a working day and during business
hours. It should be either held at the registered office of the company or at some other place
within the city, town or the village in which the registered office of the company is situated.
However, the Central government may exempt any class of companies from these provisions
subject to such conditions as it may impose. Public companies and private companies which are
subsidiaries of public companies may fix the time of their annual general meeting. A private
company may also in a like manner and by a resolution agreed to by all the members fix the time
as well as the place for its annual general meeting.
Default in holding the annual general meeting:
If any company fails to hold an annual general meeting within the
prescribed period, the central government on the application of any member, may either call or
direct the calling of a general meeting of the company. It may give such directions as it thinks fit
in regard to the calling, holding or conducting of such meetings. The central government may
direct that one member of the company present in person or by proxy shall be deemed to
constitute a meeting. A general meeting held at the directions of the central government shall be
regarded as an annual general meeting.
It must be noted that the company law board has not been given the powers to all;
hold and conduct the annual general meetings of the companies beyond the period specified in
section 166. Section 186(1) excludes these meetings from its purview. Under Section 186(1), the
company law board is empowered to call, hold and conduct extraordinary meetings of the
companies in certain circumstances.
If default is made in holding the meeting of the company in accordance with
Section 166, or in complying with any directions of the Central Government, the company and
every other officer of the company who is in default shall be punishable with fine which may
extend to Rs.5, 000 and in the case of a continuing default with a further fine which may extend
to Rs.250 for every day after the first during which the default continues. [Section 168].
The company is liable for mere default but for the prosecution of a director or an
officer of the company, it must be shown that he was knowingly a party to the default. Further,
the company would not be liable for the default, if it is due to a cause beyond its control. In Bank
of Deacon Ltd. Air 1960. Kerala-5, the books of the company had been seized by the police and
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produced in the criminal court; the Kerala High Court held that the company would not be
punished because the default was beyond the control of the company.
Secretary Duties:
Before the Meeting:
Preparation, authentication and audit of accounts.
Printing and issue of notices and reports.
Preparation of certain documents.
Preliminary work of dividend distribution.
Receiving proxies.
Press report of the proceedings.
Seating arrangements.
At the Meeting:
Help the chairman.
Read the notice convening the meeting.
Read the auditors report.
Take notes of the proceedings.
After the Meeting:
Draft the minutes.
Execute instructions and resolutions.
Filing with the registrar.
Take action on other matters arising out of the decisions of the shareholders.
EXTRAORDINARY GENERAL MEETING:
Every general meeting of the company which is not statutory or the
annual general meeting is an ‘extraordinary general meeting’. This meeting is generally held for
the purpose of dealing with any extraordinary matter which cannot be postponed till the next
annual general meeting.
The extraordinary general meeting can be convened either by the directors
whenever they think fit or on the requisition of the members of the company. Where the
directors think fit to convene a meeting, they do so by resolution passed at a duly convened and
constituted meeting of the Board. If it any time sufficient member of directors to form a quorum
are not present in extraordinary general meeting.
The directors are bound to call an extraordinary general meeting of the company
if the requisition is made by members:
(i) holding 10% of the paid-up share capital of the company and having a right to vote at the
date of the deposit of the requisition; or
(ii) Company has no share capital, members having 10% of the voting powers of all the members
having a right to vote at the date of requisition.
The requisition shall set out the matters for consideration of which the meeting is
to be called. It must be signed by the requisitionists and must be deposited at the registered
office of the company.
On receipt of the requisition, the board shall proceed within 21 days to convene
a meeting which must be held within 45 days from the date of the deposit. If the Board does not,
within 21 days from the date of the deposit of a valid requisition, proceed duly to call a meeting
on a day not later than 45 days from the date of the deposit of the requisition, the meeting may
be called-
(a) By the requisitionists themselves
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(b) In the case of a company having a share capital, by such of them as represent either a
majority in value of the paid-up share capital held by all of them or not less than one-tenth of
the paid-up share capital of the company, whichever is less; or
(c) In the case of a company not having share capital, by such of the requisitionists as represent
not less than one-tenth of the voting power of the members of the company.
The extraordinary general meeting requisitioned by the members must be held
within three months of the deposit of the requisition. Where a meeting is called by the
requisitionists themselves and the registered office is not made available to them, for holding the
meeting, they may hold the meeting elsewhere. The company is bound to repay all reasonable
expenses incurred by the requisitionists in calling such a meeting and the company can recover
the said sum from the directors at default.
Power of the company law board to call meeting [Section 186]:
The company law board has been vested with the power to call a
meeting of the company other than the annual general meeting. This power which was earlier
vested in the court, has after the passing of the companies (amendment) Act 1974, been
transferred to the company law board. Where for some reason it is impracticable to call a
meeting of the company, other than the annual general meeting, the company law board may
either on its own motion or on the application of any director or member of the company order a
meeting to be called, held and conducted in such manner as it thinks fit. It can give such
directions in regard to the calling, holding and conducting of the meeting. It can also direct that
even one member of the company present in person or by proxy shall be deemed to constitute a
meeting. The word ‘impracticable’ means impracticable from a reasonable point of view. The
company law board should take a common sense view of the matter and act as a prudent person
of business.
Secretary Duties:
Before the Meeting:
To convene the board meeting in consultation with the chairman.
To submit the letter of requisition.
To scrutinize and registrar all proxies received.
To make arrangements.
At the Meeting:
To see the admission cards are duly signed.
To supply necessary references, explanation, information and documents.
To assist the chairman in the conduct of the meeting.
After the Meeting:
Prepare the minutes of the meetings.
Carry out the instructions.
Incorporate the necessary changes.
To take action on other matters.
CLASS MEETING:
Class meetings are generally held for obtaining the consent of a particular class of
shareholders for altering their rights and privileges or for the conversion of one class into another.
For instance, there may be a meeting of preference shareholders for paying their rate of dividend or
investing them into equity shares.
BOARD MEETING:
Company is managed by elected representatives of shareholders
Known as directors who constitute the board. The board of directors take all decisions in managing
the affairs of the company at a valid and properly-constituted meeting by adapting resolution, either
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ordinary or special as the case may be. On the board of directors nominees of other parties, such as
debenture holders, and the government may also be nominated. The board therefore consists of:
(a) Elected representatives, known as directors, of the shareholders.
(b) Elected or nominated representatives, also known as directors, of the debenture holders.
(c) Nominated representatives, known as directors, of the government or any other related
institution/organization.
The powers of directors are enshrined in the companies Act,
Memorandum of association and articles of association. Utilizing these powers according to their
best ability and in the interest of the company the directors, who constitute the board, take
decisions to manage the affairs of the company. The method of taking such a decision is
adoption of ordinary and/or special resolution at a valid and properly constituted meeting of the
board. According to the provisions of section 285 of the Act, the board must meet at least once in
three months and a minimum of four times a year.
Notice of board meeting:
The board’s meeting is held and conducted according to the provisions of articles
of association. The provisions regarding notice may be:
(1) a specific date may be fixed in the articles, e.g. every 1st working day of the month or alike.
In such a case no notice is required to be sent to the directors of the meeting since it is fixed.
However, in practice a notice is usually sent.
(2) If no specific date is fixed, then a notice regarding date, time and place of meeting must be
conveyed to every director well before the scheduled date of the meeting.
Along with the notice, agenda should also be sent.
Quorum of the board meeting:
The minimum number of directors, who constitute the quorum should be present at
the meeting in order to give the meeting validity and without the presence of the said number of
directors, forming quorum, no business can be transacted unless adjourned according to rules. If
article has made no provisions in this regard, then one third of the total number of directors or
two whichever is more, should be considered the quorum at any board’s meeting. It may,
however, not be lost sight of that during the meeting if as any time the quorum is not complete,
the meeting cannot transact any business.
Chairman of the board meeting:
If there is an elected chairman, then there is no problem. If there is none the meeting it self
may elect a chairman for the day’s meeting. Without a chairman no meeting can be held. The
chairman enjoys one extra vote known as casting vote. Other directors have only one vote. The
companies Act provides that in the following three cases, the directors must be unanimous:
1. While resolving on investment in shares and debentures of sister concerns, managed by the
name management.
2. While resolving on approval of prospectus.
3. While resolving on the appointment of a person the manager or managing director of an other
company in addition to the one where he is already functioning as manager or managing
director.
Secretarial practice in connection with board meeting:
1. To verify the provisions and stick to them.
2. To fix a date, time and place in consultation with the chairman/president/senior most
directors.
3. To issue notice along with agenda and other relevant documents.
4. To prepare resolutions, statement etc.
5. To prepare all the documents requiring signatures and common seal.
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6. To prepare transfer list.
7. To ensure, if required, presence of those whose advice and expertise are required.
8. To arrange for the smooth conduct of meeting.
9. To verify quorum.
10. To ensure the presence of directors.
11. To see that the minutes of last meeting is ready.
12. To prepare date, information’s, as required.
13. To record the minutes.
14. To implement the decisions.
According to the provisions of regulation 81 of table ‘A’ in the following cases
resolution by circulation the resolution may be adopted and passed, if, of course, the majority of
directors give their consent in favour of the resolution so circulated:
1. To make a call.
2. To issue debenture
3. To raise loan by any other method.
4. To make use of the right of investment and/or the right of advancing loan.
COMMITTEE MEETING:
The Articles usually empower the directors to delegate their powers to small committees of the
directors to investigate and report on various matters relating to the management and
administration of the company. In the case of routine matters, there may be standing or permanent
committees, e.g., share transfer committee, works committee, whereas come committees may be ad
hoc or temporary committees, e.g., share allotment committee, a committee for investigating staff
complaints, a committee for recommending the opening of new branches.
CREDITORS AND DEBENTRUE-HOLDERS MEETING:
The meetings of creditors or debenture-holders may be held for the purposes of securing their
support in effecting some scheme of compromise of arrangement or at the time of reorganization,
reconstruction or amalgamation or at the time of winding up. In these meetings creditors or
debenture-holders may be required to surrender some rights partially for saving the company from
some financial difficulty. In case of creditors’ voluntary winding up also, creditors’ meetings are held
from time to time.
REQUISITES OF A VALID MEETING:
1. PROPER AUTHOTITY:
A meeting to be valid must be called by a proper authority. It is the board who can
normally convene meeting. But under certain circumstances meetings can also be
Convened by the members, company law board or the central government.
2. NOTICE:
The second requirement of a valid meeting is that all those who are concerned with
the business of the meeting and are entitled to attend it, are communicated of the date, time,
place and business of the meeting. Such a communication is called “notice of the meeting, not
less than 21 days notice in writing should be given to the members to call a meeting of any kind.
‘Not less than 21 days’ means that both the date of the meeting and the date on which it is
served are to be excluded. i.e., 21 clear days notice. Where the notice is sent by post, it shall be
deemed to have been received at the expiration of forty-eight hours after the posting.
The requirement of 21 days notice of the meeting overrides any provision in the
articles for a shorter period. But the articles for a shorter period. But the articles can validly
provide for longer notice than the statutory minimum period.
The meeting can, however, be called by giving a shorter notice in the following cases:
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(a) In the case of any annual general meeting, by the consent of all the members entitled to
attend and vote.
(b) In the case of any other meeting, by the consent of the members holding not less than 95 per
cent paid-up share capital of the company, or holding not less than 95 per cent of the total
voting power of the company(when a company does not have a share capital).
Every notice of a meeting of a company must specify the place, day and hour of
the meeting and shall contain a statement of the business to be transacted thereat. Notice of
every meeting must be given to the following persons: (i)every members of the company
(ii)every person entitled to a share in consequence of the death or insolvency of a member (iii)
the auditor or auditors of the company.
Where notice of the meeting is given by advertisement in a newspaper
circulating in the neighborhood of the registered office of the company under section 53(3) of the
Act, explanatory statement need not one annexed to the notice under Section 173 of the Act, But
it is necessary to mention in the advertisement that the explanation statement has been
forwarded to the members of the company. The accidental omission to give notice to or non-
receipt of the notice by any members shall not invalidate the proceedings at the meeting.
Ordinary and special business:
Notice of meeting must contain a statement of nature of the business to be
transacted in the meeting. Section 173 classifies the business into ordinary business and special
business.
Ordinary business:
The following business which is transacted at every annual general meeting is
considered as ordinary business
(1) The consideration of accounts, balance sheet and the report of the board of directors and
auditors.
(2) The declaration of a dividend.
(3) The appointment of directors in place of those of retiring.
(4) The appointment of and fixing the remuneration of auditors.
Special business:
Any business other than ordinary business transacted at an annual general
meeting and all business transacted at the statutory meeting and at any extraordinary general
meeting is deemed as special business. In case of any items of special business to be transacted
in the general meeting, an explanatory statement shall be annexed to the notice of the meeting.
That statement must set out all material facts concerning each such item of the business
including in particular the nature of the concern or the interest if any, therein of any director and
the manager. Where any item of such business relates to or affects any other company, the
statement must set out the extent of share holding interest in such other company, of every
director and the manager if any, of the company, if such interest is not less than 20 per cent of
the paid-up share capital of such other company. Where that item of such business relates to the
according of approval to any document by the meeting, the statement annexed to the notice
must specify the time and the place where the document can be inspected. The purpose of the
statement is to enable the members to understand and appreciate the nature of the business or
items of business proposed to be considered at the meeting and make up their mind whether to
go to attend and vote at the meeting or abstain from voting.
3. QUORUM [SECTION 174]:
A quorum may be defined as the minimum number of members who must be
present at a meeting in order that the business of the meeting may be validly transacted. Unless
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the articles of the company provides for a larger member, five members personally present in the
case of public companies (other than a public company which has become such by virtue of
section 43-A) and two persons personally present in the case of private company will be the
quorum for a meeting of the company. It may be noted that the articles cannot provide for a
smaller quorum. No proxy is counted in forming the quorum.
If within half an hour from the time fixed for the meeting, the quorum is not
present, the meeting shall stand dissolved if it was called at the requisition of the members. In
any other case, the meeting shall stand adjourned to the same day next week, at the same time
and place. If at the adjourned meeting also, the quorum is not present within half an hour, the
members present shall be the quorum.
4. CHAIRMAN[SECTION 175]:
A meeting cannot proceed to transact any business without electing a
chairman. The articles of the company must provide who will be the chairman at a general
meeting. Where the articles are silent, the members present at the meeting may elect one of
themselves to be the chairman thereof. Election may be by show of hands shall immediately
take the poll. If some other person is elected as a result of the poll, he shall be the chairman for
the rest of the meeting.
The chairman presides over the meetings of the company. His main function is
to keep order and see that business is properly conducted. He must decide questions arising at
the meeting and must take care that the sense of the meeting is properly ascertained with regard
to any question before it. He must give a reasonable chance to the members present to discuss
any proposed resolutions.
Powers and Duties of a Chairman:
Powers:
(1) A chairman has prima facie authority to decide all the questions.
(2) He can adjourn the meeting when it is not possible, by reason of disorder etc., to conduct the
meeting and complete business.
(3) He has the right to decide priority amongst the speakers to demand poll, to exercise casting
vote, to expel unruly member and he can, with the support of a majority, apply closure to the
discussion after it has been reasonably debated.
Duties:
(1) He must act at all times bona fide in the interest of the company as a whole. A chairman who
presides over a meeting of a company is neither wholly a ministerial officer nor wholly a
judicial officer; his duties are of a mixed nature. He is not liable for damages, if acting bona
fide according to the best of his judgment and without malice.
(2) It is his duty to preserve order, and to see that the business is properly conducted.
(3) He must ensure that the sense of the meeting is properly ascertained in regard to any
question before it.
(4) He must ensure that the provisions of the Companies Act and the Articles of Association are
observed, and that the business is taken in the order set out in the agenda, and that business
is within the scope of the meeting.
(5) He must ensure that proper opportunity is given to the members to express their views that
the voting is fair.
(6) He must exercise his casting vote bona fide in the interests of the company.
(7) He must decide questions arising for decision during the meeting, and must see to it that the
majority do not refuse to bear the minority.
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(8) He must ensure that proceedings of the meeting are correctly and properly recorded in the
minutes book.
5. MINUTES OF THE MEETING:
The term ‘minutes’ mean the official record of the meetings of a company. These
are a summary of the business transacted; decisions and the resolutions arrived at the meeting.
It is incumbent on the company to maintain minutes of proceedings of general meetings and of
the board of directors and other meetings. Every company shall cause entries in the minutes of
proceedings of every meeting within 30 days of the conclusion of every such meeting concerned.
The minutes book shall be bound and its pages consecutively numbered. Each page of every
minutes of proceedings shall be initialed or signed and the last page of the record of proceedings
of each meeting in such book shall be dated and signed:
a. In the case of minutes of the proceedings of a meeting of the board or of a committee
thereof, by the chairman of the said meeting or the chairman of the next succeeding
meeting.
b. In the case of minutes of proceedings of a general meeting, by the chairman of the
same meeting or in the event of the death or in ability of the chairman by a director
duly authorized by the board for the purpose.
AGENDA:
Meaning and definition of agenda:
An agenda is a list of programmes of business to be transacted at the meeting.
This is necessary in order to conduct the business smoothly and in an order which consumes less
time and works faster.
The secretary prepares the list of business to be transacted at a meeting in consultation
with the president/chairman and/or board of directors. The list of business may either be
prepared on a piece of paper or in a bound register. This is prepared in a serial order serialized
according to specific priority decided either according to importance of the matter to be
discussed or according to the wishes expressed by the president/chairman and/or the board.
Importance is the better criteria of a decision in the matter:
An agenda is usually prepared:
(1) Either in brief or
(2) In detail.
An agenda in brief:
The following is an example of an agenda in brief:
(1) Confirmation of the minutes of the last meeting.
(2) Presentation and approval of cash position of the company.
(3) Approval of issued cheques.
(4) Acceptance of the registration admitted by Shri.A.Kumar as director.
(5) Election of a director in place of Shri.A.Kumar.
(6) Any other matter with permission of the chair.
An agenda in detail:
The following is the agenda in detail:
(1) Confirmation of the minutes of the meeting held on 20th September, 1985 and discussion of the
matters arising out of the same.
(2) Presentation of the cash position of the company, which stands at Rs.10, 23,755.75 on 30 th
September 1985. Discussion and approval of the same.
(3) Cheques issued between 1st September 1985 to 30th September 1985. These are 267 in number
from No.23458 to 23724 amounting to Rs.80,81,776. Seeking approval of the same.
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(4) Shri .A. Kumar submitted his resignation from directorship of the company on 16th September
1985. a proposal for its acceptance to be considered and decided upon.
(5) In place of Shri.A.Kumar, if resignation is accepted, election of Shri.A.K.Singh as Director, the
resolution for which is enclosed. The consideration and adoption of this resolution.
Any other matter with permission of the chair.
PROXIES:
Any member of a company entitled to attend and vote may do so either in person or by
proxy. A proxy may be defined as a person authorized to attend and vote for another at a
meeting. According to Lord Hanworth M.R. proxy is a personal representative of the shareholder
who may be described as his agent to carry out a course which the shareholder himself has
decided upon. It also refers to the instrument by which the appointment is made. A proxy need
not be a member of the company. The proxy has no right to speak at the meeting, but he can
demand a poll. A member of a private company cannot appoint more than one proxy to attend
on the same occasion and a member of a company without a share capital cannot appoint a
proxy.
The instrument appointing a proxy must be in writing in the form prescribed and signed
by the appointed or by his attorney duly authorized in writing. If the appointer is a corporate
body, it must be under its seal or signed by an officer or attorney duly authorized. Every notice
calling a meeting of the company having a share capital or the articles of which provide for voting
by proxy at the meeting, must mention with reasonable prominence a statement that a member
entitled to attend to appoint a proxy and a proxy need not be a member.
The instrument appointing a proxy must be deposited with the company 48 hours before
the meeting.
MINUTES:
‘Minutes’ are written record of the business conducted at a meeting. They are official
record of the proceedings and decisions of the meeting. Minutes may be defined as “clear, concise,
accurate and permanent record of the proceedings and decisions of a meeting.” Minutes are a
historical record. After they are written by the secretary they are approved either at the next
meeting or after the meeting by the chairman of the meeting. Once approved (of course the
chairman signs the minutes signifying that they have been approved either by himself, if he is
authorized to do so after the meeting or by the next meeting, again he signs but after seeking the
approval of the members present at the next meeting) they are accepted as evidence of the
proceeding in the court of law.
According to section 193, it is obligatory for every company to maintain the minutes of
all the meetings separately. Section 194 provides that the minutes, if maintained in accordance
with the provisions of the law, shall be accepted as evidence in the court of law. It is the duty of the
secretary to maintain the minutes. . However, heavy penalty may be levied on the directors and
other officers of the company as well for any negligence etc in this regard.
Kinds of minutes:
Minutes may be divided into two parts.
(1) Minutes of resolutions:
When this method is adopted for writing the minutes only the resolutions
adopted and decisions taken are recorded in the minute’s book. Explanations or narrations seldom
find a place in such a method of recording. The minutes of this kind always start with “Resolved
that………..,
(2)Minutes of narration:
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Here every detail of the proceedings are recorded right from the proposal to elect a
chairman of the meeting or from the moment the chairman takes his chair to the vote of thanks the
proceedings of the meeting are recorded step by step and usually word by word. The discussions,
the debate, the motions, formal motions, voting etc are fully recorded in the minutes of narration.
This may be written in tabular form as well, e.g. first details, of the meeting, secondly the
attendance and thirdly serial wise decisions taken and resolutions adopted, usually known as
subject matter of the minutes.
Provisions of the companies Act in regard to minutes:
As has been previously indicated Section 193 of the Companies Act, specifically has
made provisions for recording and maintenance of minutes of company meeting. The relevant
provisions are being summarized hereafter.
(a) Every company shall maintain the minutes of the proceedings of (1) board meeting
(2)committee of board meeting (3) annual general meeting (4) any other meeting convened and
conducted in accordance with the provisions of laws or of the articles.
(b) Minutes must be completely recorded within 30 days from the date of the meeting held.
© The pages of the minute’s book must be serially numbered and each page initialed. A certificate
to the effect must be taken by the chairman before the minutes book is made use of for the first
time.
(d) Attaching or pasting in the minutes book is strictly prohibited.
(e) The minutes must record a fair and correct summary or narration of the proceedings.
(f) All resolutions passed and decisions taken must be recorded in their original form.
(g) In case of board’s meeting, the attendance of directors, those dissenting or not concerning with
any of the resolutions or decisions must be clearly recorded. If required, their views may also be
recorded.
(h) The minutes may not record any defamatory, irrelevant, immaterial or detrimental speeches,
even if it is kept narration method. Of course, the ruling here shall be of the chairman, which shall
be binding and final.
(i)The last page of the minute book must be dated and signed by the chairman of the same
meeting(if it is a general meeting) and of the same or next meeting(if it is a board meeting)
(j) The default attracts a penalty of rupees fifty on the company as well as on those officers who
have been in default.
(k) Evidence:
Section 194 and 195 of the companies Act provide that “minutes of meeting kept in
accordance with provisions of section 193 shall be evidence of the proceedings recorded therein.
(l) Inspection:
Section 6 Provides that the minutes of the proceedings of every general meeting of the
company must be :
Kept at the registered office of the company.
Kept open for inspection by any of the member
Allowed the inspection free of charge(time allowed for inspection may not exceed two
hours each day)
Given a copy of the minutes, if asked for, within 7 days on payment of 37 paisa per 100
words or part thereof.
If any inspection or copy is refused the company or its officers in default or both may be
liable to pay a penalty extending rupees five hundred. The court by issue of an order
may compel an immediate inspection or direct that the copy be sent to the person
requiring it.
49
Ordinarily, members of a company enjoy no right to inspect the minutes of the board of
directors meeting. However, section 235 to 246 of the companies act provide that the
minutes book may be inspected and reported upon by inspectors appointed by the
government of India.
Secretarial duties regarding minutes:
Among other things the following are the duties of a company secretary relating to minutes of a
meeting.
(1) to see that separate minutes books are being maintained for recording the meetings of the
board, annual general meeting, extra-ordinary general meeting and others.
(2) To see that each page of the minutes book is numbered and initialed.
(3) To see that certificate at the beginning of the minutes book is written and signed by the
chairman before the recording starts.
(4) To see that the minutes are recorded within 30 days and are approved and signed by the
chairman.
(5) To see that a fair and correct summary of proceedings are recorded.
(6) To see that nothing defamatory, irrelevant, immaterial or detrimental to the interest of the
company is recorded and the chairman has ruled out to this effect.
(7) To see that minutes are read and verified, if required at the next meeting.
(8) To see that the last page of the book is dated and signed by the chairman.
(9) To see that minutes books are kept in the registered office of the company and is open to
inspection.
(10) To see that on request a copy is being supplied timely and on payment if required.
(11) To see that minutes books are kept pin safe custody and any tampering with or alternation is
fully prevented.
VOTING:
Every person, whose name appears on the register of members, has a right to vote. A
shareholder’s right to vote is a right of property which he may use in any matter he likes. In
other words, he can exercise his right to vote for his own interest and even against the interest of
the company. In the case of a company which has no share capital, each member is entitled to
one vote only. But where a company has a share capital, if the articles are silent every
shareholder has one vote in respect of each share.
A company is authorized to make provisions in its articles restricting the voting rights of a
member on the ground that (i) calls on his shares or any other sum presently payable have not
been paid or (ii) the company has exercised right of lien in respect of those shares. Where the
articles of a company do not contain such provisions, a member cannot be prevented from voting
even though calls payable by him have not been paid. [Section 181].
Methods of voting:
In order to ascertain the sense of a meeting, voting may be by (a) show of hands or (b)
by poll.
Voting by a show of hands:
Questions arising at a general meeting are to be decided in the first instance by a
show of hands. But, where a poll is demanded it is not necessary that the resolutions should be
put to vote by show of hands. On a show of hands each member has one vote and a proxy cannot
vote unless the articles otherwise provide. The declaration by the chairman that a resolution on a
show of hands has or has not been carried and an entry to that effect in the minutes book shall
be conclusive evidence of this fact. [Section 178].
Voting by poll:
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A vote by a show of hands is only a rough and ready method of taking the sense of a
meeting. It is not an accurate method of ascertaining the wishes of the members of a company
because the votes of those voting by proxy are not counted. Again it does not pay due regard to
the wishes of a member holding a large number of shares since he has only one vote on a show
of hands. A poll is more proper and effective means of arriving are the wishes of all the
members. A poll may be demanded before or on the declaration of the result of the voting on
any resolution on a show of hands. Such a poll cannot be demanded after the declaration of
result and after the chairman has taken up any other item from the agenda for consideration of
the meeting.
RESOLUTIONS:
Decisions of the company are made by resolutions of its members, passed at meetings
of members. A proposal when passed and accepted by the members become resolution. Three
kinds of resolutions are recognized by companies act.
1. Ordinary resolution.
2. Special resolution.
3. Resolutions requiring a special notice.
Ordinary resolution:
An ordinary resolution is one which is passed at a general meeting by a simple
majority of members entitled to vote therein. Simple majority means that the votes cast either
by show of hands or on a poll in favour of a particular proposal including the casting vote of the
chairman exceeds the votes cast against it. The votes may be cast by the members either in
person or by proxy, if allowed. An ordinary resolution in sufficient to affect any transaction which
is within the powers of the company and is not required either by the articles or the Companies
Act to be effected in some other manners. All resolutions which are not special or which do not
require special notices are ordinary resolutions.
Special resolution:
A resolution shall be a special resolution when – (a) the intention to propose the
resolution as a special resolution has been duly specified in the notice;(b) the notice required
under the Act (21 days) has been duly given; and (c) the votes casted in favour of the resolution
by members entitled to vote either in person or by proxy are not less than three times the
number of votes, if any, cast against the resolution. The votes may be cast either on a show of
hand or by poll. There is no question of a casting vote in case of a special resolution. A special
resolution is required for the following purposes:
(1) To alter the provisions of the memorandum for changing the place of registered office from
one state to another or objects of the company [Section 17].
(2) To change the name of the company. [Section 21].
(3) To change the articles of the company. [Section 31].
(4) To offer further issue of subscribed capital when shares are offered to outsiders. [Section 81].
(5) To create reserve capital. [Section 99].
(6) To reduce the share capital of the company. [Section 100].
(7) To authorize payment of interest out of capital. [Section 208].
(8) To request the central government to appoint inspectors for investigation of the affairs of the
company. [Section 237].
(9) To authorize payment of remuneration to directors who are not in the whole time employment
of the company. [Section 309].
(10) To make the liability of directors unlimited. [Section 323].
(11) To have the company wound up by the court. [Section 433].
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(12) To wind up the company voluntarily. [Section 484].
Resolutions requiring special notice:
In addition to the above two types of resolutions, there is another class of
resolutions provided under the companies act which require a special notice to be given in
respect of them.
Special notice is required in the following cases:
1. For the appointment of an auditor other than the retiring auditor. [Section 225].
2. For express resolution that the retiring auditor shall not be reappointed. [Section 225].
3. For removing a director before the expiry of his term. [Section 284].
4. For appointing another person as director in place of the director removed. [Section
284].
In the above cases, the notice of intention to move the resolution shall be given to
the company not less than 14 days before the meeting. In computing 14 days the day on
which the notice is served and the day of the meeting is excluded. The company must,
immediately after receiving the notice, give its members notice of the proposed resolution
in the same manner as it gives notice of any meeting. If that is not practicable, the
company must give notice either by advertisement in a local newspaper or in any other
mode allowed by the articles at least 7 days before the meeting. [Section 190].
WINDING UP
Winding up of a company is a process of putting an end to the life of a company. It is a
proceeding by means of which a company is dissolved and in the course of such a dissolution it s
assets are collected, its debts are paid off out of the assets of the company or from contributions by
its members, if necessary. If any surplus is left, is is distributed among the members in accordance
with their rights.
There are three modes of winding up of a company. These are: (a) Compulsory winding up
by the court. (b) Voluntary winding up, which is itself of two kinds: (i) Members’ voluntary
winding up, (ii) Creditors’ voluntary winding up, (c) Winding up under the supervision of the
court.
COMPULSORY WINDING UP BY COURT
A company may be wound up by an order of the court. This is called Compulsory Winding up.
Section 433 lays down the following grounds for the winding up of a company by the court:
1. If the company has by a special resolution resolved that it may be wound up by the court.
2. If a company makes a default in delivering the statutory report to the Registrar or in
holding the statutory meeting, the court may order winding up of the company either on
the petition of the Registrar or on the petition of the Contributory.
3. Where a company does not commence its business within a year from its incorporation, or
suspends its business for a whole year, the court may order for its winding up.
4. Where the number of members is reduced below 7 in the case of a public company and
below 2 in case of a private company, the court may order the winding up of the company.
5. The court may order for the winding up of a company if it is unable to pay its debts. The
basis of an order for winding up under this clause is that the company has ceased to be
commercially solvent.
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6. The last ground on which the court can order the winding up of a company is when the
Court is of the opinion that is just and equitable that the company should be winding up.
The following are the instances where the courts have exercised their discretion under this
clause: (i) Where there is a deadlock in the management, (ii) Where it is impossible to
carry on the business of the company except at a loss, (iii) Where the company has ceased
to carry on its authorized business and is engaged in an illegal business, (iv) Where the object for
which the company is formed is impossible of further pursuit, (v) Where the minority is
being disregarded or oppressed,(vi) Where there is lack of confidence in directors,(vii) Where a
company has been conceived and brought forth in fraud.
Petition for winding up:
The following persons can file a petition:
1. The company:
A company may itself present a petition to the court for winding up provided it has passed a
special resolution to that effect.
2. Any creditor or creditors including any contingent prospective creditor or creditors:
A creditor for the purpose of a petition includes:
(a) A contingent or prospective creditor.
(b) A secured creditor.
(c) A debenture-holder.
(d) Any person who has a pecuniary (monetary) claim against the company.
(e) An assignee of a debt.
(f) Central or a State Government or a local authority to whom any tax or other public
charge is due.
(g) The legal representation of a deceased creditor.
3. Any contributory or contributories:
The term ‘contributory’ means every person liable to contribute to the assets of the
company in the event of its being wound up. It includes the holder of fully paid-up shares also. A
contributory is entitled to present a winding up petition if—
(a) The membership is reduced below the statutory minimum; or
(b) He is an original allottee of shares; or
(c) He has held his shares for at least 6 months during the 18 months immediately before the
commencement of the winding up; or
(d) The shares have devolved (transferred or passed).
4. The Registrar:
The Registrar can present a petition for winding up a company only on the following grounds, viz.,
(a) If a default is made by the company in delivering the statutory report tot eh Registrar
or in holding the statutory meeting.
(b) If the company does not commence its business within a year from its incorporation,
or suspends its business for a whole year.
(c) If the number of members is reduced in the case of a public company below 7 and in
the case of a private company below 2.
(d) If the company is unable to pay its debts.
(e) If the court is of opinion that it is just and equitable that the company should be
wound up.
5. Any person authorized by the Central Government under Section 243:
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Under Sec. 243 the Central Government may cause to be presented to the court (by
any person authorized by it in this behalf) a petition for the winding up of a company
where it appears from the report of inspectors appointed to investigate the affairs of
the company under Sec. 235 that –
(i) The business of the company is being conducted with intent to –
(a) defraud its creditors, members, or any other person, or
(b) otherwise for a fraudulent or unlawful purpose, or
(c) in a manner oppressive of any of its members, or
(d) that the company was formed for any fraudulent or un law purpose; or
(ii) The persons concerned in the formation of the company or the management of its affairs
has in connection therewith been guilty of fraud, misfeasance or other misconduct towards
the company or towards any of its members.
Contents of the petition:
The petition made to the court for the winding up of a company must contain the following
particulars:
(a) Name of the company with the date of its incorporation.
(b) Address of the registered office.
(c) Amount of paid-up capital.
(d) Statement of facts to justify a winding up order.
(e) A prayer to the court to issue an order or winding up.
(f) Statements in the form of an affidavit that the facts stated in the petition are correct and
true.
Commencement of Winding up:
The winding up of a company by the court is deemed to commence at the time of the
presentation of the petition for winding up. But where, before the presentation of the petition, a
resolution has been passed by the company, for voluntary winding up, the winding up shall be
deemed to have commenced at the time of the passing of the resolution (Section 441).
PROCEDURE FOR WINDING UP:
The winding up proceedings begin with the making of the petition by any of the parties
entitled to make a petition. The petition may be made to the High Court or any District court
having jurisdiction in the manner.
Advertisement of petition:
Every petition for winding up a company shall be advertised 14 days before the hearing,
stating the date on which the petition was presented and the names and addresses of petitioners.
Power of court to stay or restrain proceedings against company: (Sec. 442)
At any time after the presentation of a winding up petition and before a winding up order has
been made, the company or any creditor or contributory may apply to the court for a stay of, or
restraint of further, proceedings in the court.
Powers of the court on hearing petition: (Sec. 443)
On hearing a winding up petition, the court may –
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(a) Dismiss it, with or without costs; or
(b) Adjourn the hearing; or
(c) Make any interim order that it thinks fit; or
(d) Make an order for winding up the company with or without costs or any other order as it
thinks fit.
The words ‘on hearing a winding up petition’ cover the entire period from the date of
entertainment of the petition and issuing of notice till an actual order of winding up is dismissed.
Intimation to Liquidator and Registrar: (Sec. 444)
Where the court makes an order for the winding up of a company, it shall cause intimation
thereof to be sent to the Official Liquidator and the Registrar of the order of winding up.
Copy of winding up order to be filed with the Registrar: (Sec. 445)
On the making of the winding up order it is the duty of the petitioner in the winding up
proceedings and of the company to file with the Registrar a certified copy of the order within 30
days from the date of the making of the order. On the filling of a certified copy of the winding up
order, the Registrar shall make a minute thereof in his books relating to the company. He shall
also notify in the Official Gazette that such an order has been made.
CONSEQUENCES OF WINDING UP ORDER
Once the court makes an order for the winding up of a company, its consequences date back
to the commencement of winding up. These consequences are as follows:
1. Order for winding up deemed to be notice of discharge:
The order for winding up is deemed to be notice of discharge to the officers and employees of
the company, except when the business of the company is continued. Sec. 445(3).
2. Suits stayed:
When a winding up order has been made, no suit or other legal proceeding can be commenced
against the company without leave of the court. Similarly pending suits cannot be proceeded
with except with leave of the court. Sec. 446(1).
3.Powers of the court:
The court, which is winding up the company, has jurisdiction to entertain or dispose of –
(a) Any suit or proceeding by or against the company;
(b) Any claim made by or against the company;
(c) Any application made under Sec. 391 for compromise with creditors and/or members;
(d) Any question of proprieties or any other question whatsoever, whether of law or fact, which
may relate to or arise in course of the winding up of the company.
4. Effect of winding up order:
An order for winding up a company operates in favour of all creditors and of all the
contributories of the company as if it had been made on the joint petition of a creditor and of a
contributory.
5. Official Liquidator to be liquidator:
On a winding up order being made in respect of a company, the Official Liquidator, by
virtue of his office, becomes the liquidator of the company. (Sec. 449).
LIQUIDATOR
Official Liquidator (Sec. 448):
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For the purpose of winding up of companies by the court –
(a) there is attached to each High Court an Official Liquidator appointed by the Central Government,
who is a whole-time officer. If the Central Government considers that there will not be sufficient
work for a whole-time officer, it may appoint a part-time officer to act as District Official Liquidator;
(b) The Official Receiver attached to the District Court, if there is no Official Receiver attached to a
District Court for insolvency purposes, or there is no such Official Receiver, then, such person as the
Central Government may by notification in the Official Gazette, appoint for the purposes, is the
Official Liquidator attached to the Court.
Liquidator (Sec. 449):
On a winding up order being made in respect of a company, the Official Liquidator, by virtue of his
office, becomes the liquidator of the company.
Provisional liquidator (Sec. 450):
At any time after the presentation of a winding up petition and before the making of a winding up
order, the court may appoint the Official Liquidator to be the liquidator provisionally.
Before appointing a provisional liquidator, the court must give notice to the company and give
a reasonable opportunity to it to make its representations, if any.
Statement of affairs (Sec. 454):
Within 21 days of the date of the winding up order or the appointment of the Official
Liquidator as provisional liquidator, the company has to submit a statement to the Official Liquidator
as to the affairs of the company. The statement must be in the prescribed form, verified by affidavit
and contain the particulars:
Contents:
1. The assets of the company, showing separately cash in hand and bank and
negotiable securities.
2. Its debts and liabilities.
3. Names, residence and occupations of its creditors, stating separately the
amount of secured and unsecured debts.
4. In the case of secured debts, particulars of the securities held by the creditors,
their value and dates on which they were given.
5. The debts due to the company and names and addresses of persons from
whom they are due and the amount likely to be realized.
6. Such further information as may be required by the Official Liquidator.
The court may extend the period of 21 days for the submission of the statement to a
maximum period of 3 months.
Duties of liquidator:
Proceedings in winding up. (Sec. 451).
Report. (Sec. 455).
Custody of company’s property. (Sec. 456).
Control of powers.
Meetings of creditors and contributories.
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Directions from the court. (Sec. 460).
Proper books. (Sec. 461).
Audit of accounts. (Sec. 462).
Appointment of committee of inspection. (Sec. 464,465).
Pending liquidation. (Sec. 551).
Powers of liquidator: (Sec. 457):
The liquidator in a winding up by the court has powers with the sanction of the court:
1. To institute or defend suits and other legal proceedings, civil or criminal, in the
name and on behalf of the company.
2. To carry on the business of the company so far as may be necessary for the
beneficial winding up of the company.
3. To sell the immovable and movable property and its actionable claims with
power to transfer the whole or sell the same in parcels.
4. To raise money on the security of the company’s assets.
5. To do all such other things as may be necessary for winding up the affairs of
the company and distributing its assets.
The liquidator may exercise the following powers without the sanction of the court, viz.,
powers -
1. To do all acts and to execute documents and deeds on behalf of the company under its
seal;
2. To inspect the records and returns of the company or the files of the Registrar without
payment of any fee;
3. To prove, rank and claim in the insolvency of any contributory for any balance against the
estate and to receive dividends;
4. To draw, accept, make and indorse any bill of exchange, hundi or promissory note on
behalf of the company in the course of its business;
5. To take out, in his official name, letters of administration to any deceased contributory,
and to do any other act necessary for obtaining payment of any money due from a
contributory or his estate;
6. To appoint an agent to do any business which he is unable to do himself
Duties of secretary in respect of compulsory winding up:
To help the directors in drawing up the petition where the company itself is the
petitioner.
To see that a copy of the winding up order passed by the court is filed with the
Registrar within 30 days of the making of the order.
To arrange the preparation of the statement of affairs of the company in the
prescribed form, to be submitted to the Official Liquidator, after it is properly verified
by an affidavit.
To give all necessary information relating to the affairs of the company when called
upon by the court during the course of the winding up.
To see that every invoice, order or business letter issued by the company during the
period of winding up contains a statement that the company is being wound up
VOLUNTARY WINDING UP
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Voluntary winding up means winding up by the members of creditors of a company within
interference by the court. The object of a voluntary winding up is that the company, i.e., the
members as well as the creditors, are lift free to settle their affairs without going to the court of Law.
They may however apply to the court for any directions, if and when it is necessary.
A company may be wound up voluntary –
1. By passing an ordinary resolution:
The company in the general meeting may pass an ordinary resolution for its voluntary
winding up.
2. By passing a special resolution:
Within 14 days of passing such, it shall give notice of resolution by advertisement in
the Official Gazette, and also in some newspapers circulating in the district where the registered
office of the company is situated.
TYPES OF VOLUNTARY WINDING UP
1. A members voluntary winding up, or
2. A creditor’s voluntary winding up.
MEMBERS VOLUNTARY WINDING UP
Declaration of solvency: (Sec.488):
In voluntary winding up if a declaration of solvency is made in accordance with the
provisions of Sec. 488, it is a members voluntary winding up. The declaration shall be made by a
majority of the directors at a meeting of the Board that the company had no debts or that it will be
able to pay its debts in full within 3 years from the commencement of he winding up. The
declaration shall be verified by an affidavit.
The declaration shall be –
(a) Made within the 5 weeks (i.e., 35 days) immediately before the date of the passing of the
resolution for winding up the company and delivered to the Registrar for registration before
that date; and
(b) Accompanied by a copy of the report of the auditors of the company on the profit and loss
account of the company from the date of the last profit and loss account to the latest
practicable date immediately before the declaration of solvency, the balance sheet of the
company, and a statement of the company’s assets and liabilities as on the last-mentioned
date.
Penalty:
Imprisonment up to a period of 6 months or with fine up to Rs. 5000 or with both.
Provisions applicable to a members voluntary winding up:
1. Appointment of liquidators (Sec. 490):
The company in general meeting shall appoint one or more liquidators for the purpose of winding up
the affairs and distributing the assets of the company. It shall also fix the remuneration to be paid to
the liquidators.
2. Board’s powers to cease on appointment of a liquidator (Sec. 491):
On the appointment of a liquidator, all the powers of the Board of directors and of the
managing or whole-time directors, and manager, it there be any of these, shall cease, except when
the company in general meeting or the liquidator may sanction them to continue.
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3. Power to fill vacancy in office of liquidator (Sec. 492):
If a vacancy occurs by death, resignation or otherwise in the office of any liquidator appointed by the
company, the company in general meeting may fill the vacancy.
4. Notice of appointment of liquidator to be given to Registrar (Sec. 493):
The company shall give notice to the Registrar of the appointment of a liquidator or liquidators. The
notice shall be given by the company within 10 days of the event to which it relates.
5. Power of liquidator to accept shares, etc., as consideration for sale of property
(Sec. 494): Where a company is being wound up voluntarily and it is proposed to transfer
or sell the whole or any part of the business or property to another company, the liquidator of the
company may accept shares, policies or like interests in the transferee company or enter into any
other arrangement with that company by way of compensation for such transfer or sale, provided it
is sanctioned by the company by a special resolution.
6. Duty of liquidator to call creditors meeting in case of insolvency (Sec. 495):
If the liquidator is at any time of opinion that the company will not be able to pay its debts in full
within the period stated in the declaration, he shall forthwith summon a meeting of the creditors.
7. Duty to call general meeting at the end of the year (Sec. 496):
In the event of the winding up continuing for more than 1 year, the liquidator shall call a general
meeting of the company at the end of the first year from the commencement of the winding up.
Penalty: Fine this may extend to Rs. 100.
8. Final meeting and dissolution (Sec. 497):
As soon as the affairs of the company are fully wound up, the liquidator shall make up an
account of the winding up, showing how the winding up has been conducted and how the property of
the company has been disposed of. He shall then call a general meeting of the company and lay
before it the accounts showing how the winding up has been conducted. This meeting is the final
meeting of the company.
The meeting shall be called by advertisement –
(a) Specifying the name, place and object of the meeting; and
(b) Published not less than 1 month before the meeting in the Official Gazette, and also in some
newspaper circulating in the district of the registered office of the company.
Within 1 week after the meeting, the liquidator shall send to the Registrar and the Official Liquidator
a copy each of the account and make a return to each of them of the holding of the meeting and of
the date thereof. If the copy is not sent or the return is not so made, the liquidator shall be
punishable with fine which may extend to Rs. 50 for every day during which the default continues.
9. Provisions as to annual and final meeting in case of insolvency (Sec. 498):
If in the case of a members voluntary winding up, the liquidator finds that the company is
insolvent shall apply as if the winding up were a Creditors voluntary winding and not a members
voluntary winding up.
Duties of secretary in respect of members voluntary winding up:
To arrange to hold a Board meeting, within 5 weeks immediately preceding the date of the
passing of the resolution for voluntary winding up, to approve the draft of the declaration of
solvency as well as the draft of the resolution for winding up.
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To arrange for the preparation and audit of the balance sheet and profit and loss account for
the period commencing after the date of the last balance sheet and ending with the latest
practicable date before the date of declaration, as well as a statement of the company’s
assets and liabilities as at that date.
To prepare the declaration of solvency get income tax verified by an affidavit before a
Magistrate and file income tax with the Registrar, along with the audited balance sheet and
profit and loss account and statement of assets and liabilities, before the meeting is held for
passing the resolution of winding up.
To prepare and issue notice of the general meeting where the resolution for voluntary winding
up is to be passed, and to see that the special resolution for members voluntary winding up is
duly passed at the meeting. To see that the liquidator is also appointed and his remuneration
fixed up at the same meeting.
To see that the notice of the resolution for winding up passed at the meeting is published in
the Official Gazette and newspapers within 14 days of the passing of the resolution.
To see that the notice of the appointment of the liquidator is filed with the Registrar within 10
days of passing the resolution.
To see that the special resolution for winding up is filed with the Registrar, along with the
explanatory statement, within 30 days of the passing of the resolution.
To see that a statement of affairs of the company is duly verified by affidavit and submitted in
duplicate to the liquidator within 21 days of the commencement of the winding up. The
winding up commences from the date of the passing of the resolution.
To see that every invoice, order and business letter issued by the company during the period
of the winding up contains a statement that the company is being wound up.
While he winding up proceedings are going on, to see that all books, papers and documents
as well as movable and immovable property of the company are delivered to the liquidator
when directed to do so, and to appear before the Court, if called upon to do so, for public
examination and give evidence as required.
CREDITORS VOLUNTARY WINDING UP
A voluntary winding up in which a solvency declaration is not made is referred to as creditors
voluntary winding up.
Provisions applicable to creditors voluntary winding up:
1. Meeting of creditors (Sec. 500):
The company shall call a meeting of the creditors of the company on the day, or the day next
following the day, on which the resolution for voluntary winding up is to be proposed. The notice of
the meeting of creditors to be advertised once at least in the Official Gazette and once at least in 2
newspapers circulating in the district of the registered office of the company.
2. Notice of resolution to be given to Registrar (Sec. 501):
Notice of any resolution passed at a creditors meeting shall be given by the company to the
Registrar within 10 days of the passing thereof. If there is any default occurs in complying with the
above said provision, the company and every office of the company, who is in default, shall be
punishable with fine which may extend to Rs. 50 for every day during which the default continues.
3. Appointment of liquidator (Sec. 502):
The creditors and the members at their respective meetings may nominate a liquidator for
the purpose of winding up the affairs and distributing the assets of the company. If the creditors and
the members nominate different persons, the creditors nominee shall be the liquidator. But any
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director, member or creditor of the company may, within 7 days after the date on which the
nomination was made by the creditors, apply to the court for an order that the person nominated as
liquidator by the members or other person shall be liquidator.
4. Appointment of committee of inspection (Sec. 503):
The creditors at their meeting may, if they think fit, appoint a committee of inspection
consisting of not more than 5 persons. If such a committee is appointed, the company may also at
any general meeting appoint not more than 5 members to the committee.
5. Liquidator’s remuneration (Sec. 504):
The committee of inspection, or if there is no such committee, the creditors may fix the
remuneration to be paid to the liquidator or liquidators. Where the remuneration is not so fixed, it
shall be determined by the court. Any remuneration fixed shall not be increased in any
circumstances whatever, with or without the sanction of the court.
6. Board’s powers to cease an appointment of liquidator (Sec. 505):
On the appointment of a liquidator, all the powers of the Board of directors shall cease. But
the committee of inspection, or if there is no such committee, the creditors in general meeting may
sanction the continuance of the Board.
7. Power to fill vacancy in office of liquidator (Sec. 506):
If a vacancy occurs by death, resignation or otherwise, in the office of a liquidator, the
creditors in general meeting may fill the vacancy.
8. Duty of liquidator to call meetings of company and of creditors at the end of each
year (Sec. 508):
The liquidator shall call a general meeting of the creditors every year, within 3 months from
the close of the liquidation year, if the winding up continues for more than 1 year. He shall lay
before the meeting an account of his acts and dealings and of the conduct of winding up during the
preceding year and position of the winding up. If the liquidator fails to comply with this, he shall be
punishable, in respect of each failure, with fine which may extend to Rs. 100.
9. Final meeting and dissolution (Sec. 509):
As soon as the affairs of the company are fully wound up the liquidator shall make up
an account of the winding up showing how the winding up has been conducted and how the property
of the company has been disposed of.
Duties of secretary in respect of creditors voluntary winding up:
To arrange for the calling of a Board meeting to fix the date, time, place and agenda of the
general meeting of members, where the resolution of winding up is to be passed and the
creditors meeting to be held immediately thereafter.
To see that the Board meeting approves the draft resolution to be placed at the general
meeting, as well as nominates a director to preside over the creditors meeting.
To prepare the statement of affairs of the company and the list of creditors to be placed at
the creditors meeting.
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To issue notices of the general meeting of members and the creditors meeting by post
simultaneously. Also to see that the notices are published in the Official Gazette as well as 2
newspapers circulating in the district in which registered office of the company is situated.
To see that the general meeting of members is duly held and a special resolution for winding
up the company and appointing a liquidator is duly passed thereat.
To see that the creditors meeting is duly held, the statement of affairs and creditors list is
duly placed before the meeting and a resolution, approving the winding up, appointing a
liquidator and fixing his remuneration, is duly passed thereat.
To see that notice of the resolution passed at the creditors meeting is filed with the Registrar
within 10 days of passing of the resolution.
To see that a statement of affairs of the company is duly verified by affidavit and submitted in
duplicate to the liquidator within 21 days of the commencement of the winding up.
To see that the special resolution for winding up is filed with the Registrar within 30 days of
the passing of it.
To see that the notice of the resolution is published in the Official Gazette and newspapers
within 14 days of its passing.
To see that every invoice, order and business letter issued by the company during the period
of the winding up contains a statement that the company is being wound up.
To see that all books, papers and documents, as well as movable and immovable properties of
the company, are delivered to the liquidator as and when directed and to appear before the
Court, if directed, and give evidence regarding the affairs of the company.
MEMBERS AND CREDITORS VOLUNTARY WINDING UP COMPARED:
1. In case of a member’s voluntary winding up, there is declaration of solvency. In case of a
creditor’s voluntary winding up, there is no such declaration.
2. In a member’s voluntary winding up, the member’s control the winding up of the company
and the creditors do not participate directly as the company makes a declaration of
solvency. In a creditor’s voluntary winding up, the creditors control the winding up of the
company as the company is deemed to be insolvent.
3. In a member’s voluntary winding up, there is no meeting of creditors. In a creditor’s
voluntary winding up, whenever there is a meeting of members, there is a corresponding
meeting of creditors.
4. In a member’s voluntary winding up, the liquidator is appointed by the company and his
remuneration is fixed by the company. In a creditor’s voluntary winding up, he is, in
effect, appointed by the creditors and his remuneration is fixed by the committee of
inspection or, if there is no such committee, by the creditors.
5. There is no committee of inspection in members voluntary winding up; in creditors
voluntary winding up the creditors may appoint a committee of inspection.
6. In a member’s voluntary winding up, the liquidator can exercise certain powers with the
sanction of a special resolution of the company; in a creditors voluntary winding up, he
can do so with the sanction of the Court or the committee of inspection of the creditors.
Winding up of a company subject to the supervision of the court presupposes a voluntary
winding up of the company. At any time after a company has passed a resolution for voluntary
winding up, the court may make an order that the voluntary winding up shall continue, but subject to
the supervision of the court. The court may give such liberty to creditors, contributories or others to
apply to it as it thinks just (Sec. 522). A petition for the continuance of a voluntary winding up
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subject to the supervision of the court is deemed to be a petition for winding up by the court (Sec.
523).
Petition: Where a company is being wound up voluntary or subject to the supervision of the court, a
petition for its winding up by the court may be presented by –
(a) Any person authorized to do so under Sec. 439 or
(b) The Official Liquidator.
Power of court to appoint or remove liquidators (Sec. 524):
Where an order is made for a winding up subject to supervision of the court, the court may,
by that or any subsequent order, appoint an additional liquidator or liquidators. The Court may
remove any such liquidator and fill any vacancy occasioned by the removal, or by death or
resignation.
The Court may appoint the Official Liquidator as a liquidator. It may also appoint the Official
Liquidator on an application made by the Registrar in this behalf.
Powers and obligations of liquidator (Sec. 525): ]
A liquidator appointed by the court has the same powers, is subject to the same obligations,
and in all respects stands in the same position, as if he had been duly appointed in accordance with
the provisions of the Companies Act with respect to the appointment of liquidators in the voluntary
winding up.
Effect of supervision order (Sec. 526):
The liquidator may exercise all his powers, without the sanction or intervention of the court, in
the same manner as if the company were being wound up altogether voluntarily.
1. Any order made by the Court for a winding up subject to the supervision of the court shall,
for all purposes, including the staying of suits and other proceedings, be deemed to be an
order of the court for winding up the company by the court.
2. The order shall empower the court to make calls or to enforce calls made by the
liquidators and to exercise all other powers, which it might have exercised if an order had
been made for winding up the company altogether by the Court.
Advantages of supervision:
The advantages of an order for winding up subject to the supervision of the court as follows:
1. After the order is made, suits and other actions against the company are automatically
stayed as in a compulsory winding up. The attachments and executions against the
company also become void and inoperative.
2. The Court controls the appointment and removal of liquidators.
3. The Court can make calls or enforce calls made by the liquidators.
4. The Court can exercise all other powers which it might have exercised if an order had
been made for winding up the company by the Court.
5. The Court may lay down such terms and conditions as will safeguard the interests of the
creditors and the contributories.
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