B.

com (General) – 2nd year

Company Law (246C3B)
Unit -1 – Introduction to Company Law

• Definition of company under companies act 2013 (section 2) :

• “A Company is an artificial person created by law Having separate legal entity with a
perpectual succession
and a common seal”

• Section 2(20) of the Companies Act, 2013 provided that "Company means a company
incorporated under this Act or under any previous Company Law”

• Characteristic of a Joint Stock Company:

1. Artificial Person: A company is created under law and exists independent of its
members. Like a person, a company can own property, own bank accounts, undertake
agreements with outsiders, raise capital, borrow money, sue others. Therefore, a
company is called an artificial person.

2. Formation: A company is formed under Companies Act, 2013, There are a number of
formalities, which need to be completed before a company is formed. A number of
documents are prepared which are submitted at the time of registration. The formation
of a company is complicated and time-consuming process.

3. Independent Legal Entity: The company is created under law. It has a separate legal
entity apart from its members. The company is not bound by the act of its members, and
members do not act as agents of the company. The life of the company is independent of
the lives of its members. The company can sue and be sued in its own name.

4. Limited Liability: The liability of its shareholders is limited to the value of shares they
have purchased. In case the company incurs huge liabilities, the shareholders can only be
called upon to pay the unpaid balance of their shares.

5. Common Seal: A company being an artificial person cannot put its signatures. The law
requires every company to have a seal and get its name engraved on it. The seal of the
company is affixed on all important documents and contracts as a token of signature.

6. Transferability of Shares. The shares of a company can be transferred by its members.

Whenever the members want to dispose off the shares, they can do by following the
procedure devised for this purpose. Under Articles of Association, the company can put
certain restrictions on the transfer of shares.

7. Separation of Ownership and Management. A shareholder may like to invest money

but may not be interested in its management. The shareholders do not get any right to
 participate in company management. The right to manage company affairs is vested in
the directors who are elected representatives of the shareholders.

Corporate veil :

The corporate veil refers to the legal distinction between a company and it’s shareholders.
It protects shareholders from being personally liable for the companies debt and obligations.

Circumstances for lifting the corporate veil:

1. Fraud and Misrepresentation

2. Improper conduct
3. Inadequate capitalization
4. Avoidance of legal Obligation
5. Combining of assets
6. Failure to follow corporate formalities
7. Alter ego theory

Difference between Joint Stock Company and Partnership Firm :

S.no Joint- stock Company Partnership Firm

1. Company is a artificial person. Partnership is not a legal person.
2. Company has perpectual Partnership firm does not have perpectual
succession succession
3. Company is created by registration For a partnership firm registration is not
under companies act 2013. compulsory. It is guided by Indian contract
act and Indian partnership act1 932,
4. Private limited company shall have Partnership firm should have atleast 2
atleast two members and maximum members and maximum 20 members for
200 members. In case of public banking and 10 in case of other business.
limited minimum 7 members and
maximum unlimited.
5. In a Private limited company liability Liability of members is unlimited in a
of members can be limited by shares partnership firm.
or guarantee.
6. A member is not a agent of Partner is an agent of the firm and other
company. partner.
7. A member cannot bind company by A partner can bind firm by his act.
his act.
8. Ordinary members cannot take part Partners can take part in management of
in management of a company. Only firm.
director can take part in
management.
 9. Maximum paid up capital Rs.1 Lakhs There is no minimum paid up capital for a
in a private limited and public partnership firm.
limited company of Rs.5 Lakhs.
10. Shares of a private limited can be A partner can transfer his share but the
transferred easily. assignee does not become a partner.
11. A company is different from it’s The property of a firm owned by partner.
members. It may own properly make The firm can sue and sued in it’s name and
contract sue and sued in it’s own partners name also
name
12. A single member cannot wind up a A partnership may be dissolved by any
company. partner at any time.

Classification of company:

Classification of company:
On the basis of Incorporation:

a. Chartered Companies
Chartered companies are established by the King or Queen of a country. Power to cancel the
charter is vested with King/Queen.
Examples: East Indian Company, Bank of England, Hudson’s Bay Company
b. Statutory Companies
Companies are established by a Special Act made in Parliament/State Assembly. Examples:
Food Corporation of India, LIC, GIC, RBI, SBI, IDBI, Railways, Electricity, ONGC. It need not
use the word ‘Limited’ next to its name.

c. Association Not for Profit or Licenced Company:

The license will be granted only in the case of ‘association not for profit’. In other words, the
Central Government will grant the license only if it is satisfied that:
(i) The association about to be formed as a limited company aims at the promotion of Sports,
Commerce, Art, Science, Religion, Charity or any other useful object.
(ii) It prohibits the payment of dividend to its members.
.

2. Classification of Companies on the Basis of Membership

a. Private Company
Private limited company is a type of company which is formed with minimum two
shareholders and two directors, The minimum requirement with respect to authorised or
paid up capital of Rs. 1,00,000 . Maximum of 200 persons can become shareholders in a
private company. The name of private company should be suffixed with pvt.Ltd or (p) Ltd. Ex.
Scientific publishing services private Limited, Chennai.

b. Public Company
Public Company means a company which is not a private company. A public company may be
said to be an association which
i. consists of at least 7 members.
ii. Has a minimum paid-up capital of Rs. 5,00,000 or such higher paid up capital as may be
prescribed.
iii. Does not restrict the right to transfer its shares.
v.Must have the word LTD.
3. Classification of Companies on the Basis of Liability
a. Company Limited by Shares (Limited Liability)
A company limited by shares is a company in which the liability of its members is limited by
its Memorandum to the amount (if any) unpaid on the shares respectively held by them..

b. Company Limited by Guarantee

A company limited by guarantee is a company in which the liability of its members is limited
by its Memorandum to such an amount as the members may respectively undertake to
contribute to the assets of the company in the event of its being wound up.

c. Unlimited Company (Unlimited liability)

In other words, the liability of members is unlimited i.e., there is no limit on the liability of
members. The members of such companies may be required to pay company’s losses from
their personal property.
4. Classification of Companies on the Basis of control
a. Government Companies
These companies are owned and managed by the central or the state government.
“Government Companies” are company in which not less than 51% of the [paid-up share
capital] is held by.
1. The Central Government
2. Any State Government or Governments
3. Partly by the Central Government and partly by one or more State Governments.
A subsidiary of a Government company shall also be treated as a Government company.
Examples: Steel Authority of India, Indian Oil Corporation, Oil and Natural Gas Corporation,
Bharath Heavy Electricals.

Classification Based on Control

• Holding Company: A company that controls another company, usually by owning more
than 50% of its shares.
• Subsidiary Company: A company controlled by a holding company.

5. Classification of Companies on the Basis of Nationality

a. Domestic Companies
A company which cannot be termed as foreign company under the provision of the
Companies Act should be regarded as a domestic company and registered under the act of
that country

b. Foreign Companies
A foreign company means a company which is incorporated in a country outside India under
the law of that country. After the establishment of business in India, the documents like
address of the company ,the list of directors and authorized resident in the country must be
filed with the Registrar of Companies within 30 days from the date of establishment.

c. Multi National Companies

A Multi National Company (MNC) is a huge industrial organisation which,
i. Operates in more than one country
ii. Carries out production, marketing and research activities on international Scale in those
countries.
A domestic company or a foreign company can be a MNC.
Examples: Microsoft Corporation, Nokia Corporation, Nestle, Coca-Cola, Pepsico.
 B.com(General)-2nd Year
Company law (246C3B)
Unit-2 Formation of Joint-Stock Company

FORMATION OF A JOINT STOCK COMPANY

The promotion of every business requires a process to be followed. The promotion of a company involves the
conceiving of a business opportunity and taking the initiative to give it a practical shape.

Stages for Promotion of a Company

A. Promotion Stage
B. Incorporation/Registration Stage
C. Floatation or Raising of Capital Stage
D. Commencement of Business Stage

A. Promotion Stage
Promoter:
A promoter is a person who initiates the setting up of a company and controls its
working. A promoter may be an individual, a firm or body corporate.
Following are the steps in promotion :
1. Identification of Business Opportunity.
2. Detailed Investigation
3. Signatories to Memorandum
4. Appointment of professionals
5. Preparing necessary documents

B. Incorporation/Registration Stage
Before getting a company registered, a number of steps have to be taken up:

1. Application for approval of name.

• The applicant should give a maximum of six names in order to avoid delay.
• The Registrar is expected to approve the name within 7 days of the receipt of application.
• The proposed name must be registered within 3 months from the date of intimation by the Registrar
2. Preparation of Memorandum of Association.
• It is the constitution of the company which describes its objects and scope and the relation with
outside world.
• The memorandum is to be signed by at least seven persons if it is a public limited company and atleast
two persons in case of a private limited company.
• The memorandum should be printed and properly stamped.
3. Preparation of Articles of Association.
• It is a document which contains rules and regulations relating to the internal management of the
company.
• A public limited company may not file its own Articles of Association but a private limited company is
must required to submit its Articles duly signed by the signatories.
4. Preparation of other documents.
The promoters are also expected to prepare the following documents at the time of
incorporating the company:
i. Power of Attorney
ii. Consent of Directors
iii. Particulars of Directors
iv. Affidavit by Subscribers and First Directors
v. Address for Communication and Notice of Registered Address
vi. Statutory Declaration.
vii. Payment of fee
C. Floatation or Raising of Capital Stage
After going through the incorporation formalities, the next stage will be to raise funds.

A company not having share capital may commence business after obtaining certificate of incorporation.
Following steps are required to raise funds from the public:
i. SEBI approval
ii. Filing of prospectus
iii. Appointment of bankers, brokers, underwriters.
iv. Minimum subscription
v. Application to Stock exchange
vi. Allotment of shares
D. Commencement of Business
The Companies Act, 2013 provides that companies having share capital shall not commence any business or
exercise any borrowing power without complying with the following requirements after issuing incorporation
certificate:
i. Declaration by a Director
ii. Filling of Verification of Registered Office
Relevance of Certificate of Commencement
This certificate is a legal document and proof that formation of the company is complete.
This certificate is a concluding evidence that the company is entitled to commence its business.
MEMORANDUM OF ASSOCIATION (MOA)
The Memorandum of Association is the constitution of the company and provides the foundation on which its
structure is built. . It defines the scope of the company's activities as well as its relation with the outside world.
The company law defines it as per Section 2 (56) of the Companies Act, 2013, “The memorandum of
Clauses of memorandum
1. The Name Clause.
• A company may select any name which does not resemble the name of any other company
• The name should not be objectionable in the opinion of the government. The word 'Limited' must be
used at the end of the name of a Public and 'Private Limited' is used by a Private Company.
• This name can be changed by passing an ordinary resolution.
2.Registered Office Clause.
• Every company should have a registered office, the address of which should be communicated to the
Registrar of Companies.
• The place of registered office can be intimated to the Registrar within 30 days of incorporation or
commencement of business
3.Object Cause.
• It determines the rights and power of the company and also defines its sphere of activities
• No activity can be taken up by the company which is not mentioned in the object clause.
• Moreover, the investors, i.e. shareholders will know the sphere of activities which the company can
undertake.

4.Liability Clause.
• This clause states that the liability of the members is limited to the value of shares held by them.
• It means that the members will be liable to pay only the unpaid balance of their shares.
• The liability of the members may be limited by guarantee.
5. Capital Clause.
• This clause states the total capital of the proposed company.
• The division of capital into equity shares capital and preference share capital should also be
mentioned.
• The number of shares in each category and their value should be given.
• The capital clause can be altered by passing a special resolution
6. Name of Nominee in case of One Person Company:
• In case of one person company, memorandum must state the name of the person who, in the event of
death of the subscriber or his inability to act shall become the member of the company.
7. Association Clause.
• This clause contains the names of signatories to the memorandum of association.
• The memorandum must be signed by atleast seven persons in the case of a public limited company
and by at least two persons in case of private limited company.
• The full addresses and occupations of subscribers and the witnesses are also given.
ARTICLES OF ASSOCIATION (AOA)
The rules and regulations which are framed for the internal management of the company are set out in a
document named Articles of Association. It is a supplementary document to the memorandum.
Nature of Articles of Association
• Articles help in achieving the objectives laid down in the memorandum.
• Articles are only internal regulations over which members exercise control.
• Articles lay down the regulations for governance of the company.
Contents of Articles of Association
• Share capital shares their value and their division into equity and preference shares, if any.
• Rights of each class of shareholders and procedure for variation of the rights.
• Procedure relating to the allotment of shares, making of calls and forfeiture of shares.
• Increase, alteration and reduction of share capital.
• Rules relating to transfer or transmission of shares and the procedure to be followed for the same.
• Lien of the company on shares allotted to the members for the amount unpaid in respect of such shares
and the procedure in respect thereof.
• Appointment, remuneration, powers, duties etc. of the directors and officers of the company..
• Procedure for conversion of shares into stock and vice versa.
• Notice of the meetings, voting rights of members, proxy, quorum, poll, etc.
• Audit of accounts, transfer of amount of reserves, declaration of dividend, etc.
• Borrowing powers of the company and the mode of exercise of those powers.
• Issue of share certificates including procedure for issue of duplicate shares.
• Winding up of the company
PROSPECTUS
Section 2(70) of Companies Act, 2013 defines a prospectus as :
“Any document described or issued as a prospectus or any notice,circular, advertisement or other
document inviting deposits from the public or inviting offers from the public for the subscription or purchase of
any shares in, or debentures of a body corporate.”
• In simple words, a prospectus is a document, notice, circular, advertisement issued for inviting public to
subscribe to the shares or debentures of a company.
Contents of Prospectus:
• Company name , address, company secretary, chief financial officer , auditors , legal advisors,
bankers and trustees
• Date of opening and closing of issue and declaration about issue of allotment.
• Bank details
• Consent of directors, Auditors, Solicitors, Manger to issue , Registrar to issue.
• Expert opinion if any.
• The authority for the issue and defaults of resolutions passed.
• Procedure and time schedule for allotment.
Kinds of Prospectus
Preliminary prospectus: filed by a company with the Registrar of Companies (RoC) before the initial
issue of shares. It contains most of the information pertaining to the company's operations and
financials but does not include the details of the price or the number of shares being offered.
Final Prospectus: Includes detailed information about the number of shares being offered, the price
at which they are being offered, the terms of the issue, the use of proceeds, the company's financial
condition, risks involved, and other pertinent information.

Shelf Prospectus: Issued by financial institutions, banks, and companies to raise funds multiple
times within a specific period without having to issue a new prospectus each time. This type of
prospectus allows companies to issue securities in stages.

Abridged Prospectus: A shorter version of the full prospectus that contains all the salient features of
a prospectus. This is provided to the investors along with the application form for the purchase of
securities.

Deemed Prospectus: If a company allots or agrees to allot securities with a view to their being
offered for sale to the public, any document by which the offer for sale to the public is made is
deemed to be a prospectus. It includes disclosures similar to that of a regular prospectus.

Liability for mis-statement in prospectus:

Liability for misstatements in a prospectus primarily relates to providing inaccurate or misleading
information to investors.
1. Civil Liability:
o Investors who suffer losses due to reliance on a misstatement in the prospectus can
bring claims against those responsible for preparing the prospectus .
o The parties liable include the issuing company, directors, promoters, underwriters, and
experts (such as auditors) involved in preparing or approving the prospectus.
2. Criminal Liability:
o In cases of intentional misrepresentation, fraud, or deliberate omissions, criminal
liability may arise under securities laws or fraud statutes. This can result in penalties
such as fines or imprisonment.

Share Capital:
Share capital is the amount of money a company raises by issuing shares to shareholders in exchange
for ownership interest in the company.
Types of Share Capital under the Indian Companies Act, 2013
Authorized Share Capital:
• The maximum amount of capital that a company is authorized to issue to shareholders as stated
in its Memorandum of Association (MoA).
Issued Share Capital:
• The portion of the authorized share capital that the company has actually offered for subscription
to shareholders.
• Represents the shares that have been issued and can be held by shareholders.
Subscribed Share Capital:
• The portion of the issued share capital that has been subscribed (or agreed to be purchased) by
shareholders. Reflects the shares that shareholders have committed to buy.
Paid-up Share Capital:
• The portion of the subscribed share capital that shareholders have paid for.
• Represents the actual amount of money received by the company from shareholders for their
shares.

Called-up Share Capital:

• The portion of the subscribed share capital that the company has called for payment from
shareholders.
• Indicates the amount that shareholders are required to pay on the shares they hold.
Uncalled Share Capital:
• The portion of the subscribed share capital that has not yet been called up for payment by the
company.
• Represents potential future capital that the company can call upon if needed.
Reserve Share Capital:
• A portion of the uncalled share capital that the company, by special resolution, reserves to be
called only in the event of winding up of the company.
• Acts as a safeguard for creditors in the event of liquidation.

Shares:
Shares are units of ownership in a company, representing a proportional share in the company's
assets and profits. They are issued by companies to raise capital from investors. In general, there are
two main kinds of shares:

1. Equity Shares (Ordinary Shares):

• Equity shares represent the basic form of ownership in a company.
• Equity shareholders typically have voting rights in proportion to their shareholding
• Dividends on equity shares are distributed among shareholders after all other obligations of the
company are met.
• In case of liquidation, equity shareholders have a claim on the residual assets of the company
after creditors and preference shareholders are paid.
2. Preference Shares:
• Preference shares are a type of share that gives its holders certain preferential rights over ordinary
equity shares
• Preference shareholders are entitled to receive a fixed dividend before any dividend is paid to
equity shareholders.
• In the event of liquidation, preference shareholders have a priority claim on the company's assets
over equity shareholders.
• Generally, preference shareholders do not have voting rights.

3.Bonus Shares:
• Definition: These are additional shares issued to existing shareholders for free, typically as a
way of distributing profits instead of cash dividends.
• Features: Bonus shares do not require additional investment by the shareholder and are
issued in proportion to the shares already held.
4. Right Shares:
• Definition: These are shares issued to existing shareholders at a discounted price, giving them
the right to purchase more shares before the general public.
• Features: Issued to raise additional capital while giving existing shareholders an opportunity to
maintain their proportional ownership in the company.
5. Sweat Equity Shares:
 • Definition: These are shares issued to directors or employees of the company as a reward for
their hard work or expertise.
• Features: Usually issued at a discount or for consideration other than cash (e.g., intellectual
property or technical know-how).

6.Partly Paid-Up Shares:

• These are shares that have been issued by a company but have not yet been fully paid for by
the shareholder. The remaining amount to be paid at a later date when called upon by the
company.
Issue of Shares – Methods
The three common ways of issuing shares are at par, at a premium, and at a discount.
1. Issue of Shares at Par
• Shares are issued at their face value (also known as nominal value or par value).
• If the face value of a share is ₹10, and the company issues the share at ₹10, it is said to be
issued at par.
2. Issue of Shares at a Premium
• Shares are issued at a price higher than their face value. The excess over the face value is
referred to as the share premium.
• If the face value of a share is ₹10 but the company issues it at ₹15, then the share is said to be
issued at a premium of ₹5.
• The extra money received over the face value goes into a Securities Premium Account, which
can only be used for specific purposes (as per regulatory requirements), such as:
o Issuing fully paid bonus shares.
o Writing off preliminary expenses.
o Writing off discount on issue of shares or debentures.
o Providing for premium payable on the redemption of preference shares or debentures.
3. Issue of Shares at a Discount
• Shares are issued at a price lower than their face value. The difference between the face value
and the issue price is the discount.
• If the face value of a share is ₹10 but the company issues it at ₹8, then the share is issued at a
discount of ₹2.
• In India, the Companies Act, 2013 prohibits the issue of shares at a discount, except in cases
like issuing sweat equity shares.
Alteration of share capital:
. Alteration of share capital refers to changes that a company makes to its authorized or issued share capital,
subject to the approval of its shareholders and in accordance with the provisions of the applicable law (such as
the Companies Act).
1. Increase of Share Capital
• This occurs when a company increases its authorized capital (the maximum amount of share
capital the company is allowed to issue) or issues new shares.
• Methods:
o Issuance of New Shares: New shares can be issued to existing shareholders (via a
rights issue or bonus shares) or to the public or private investors.
o Conversion: Existing convertible securities (e.g., bonds, debentures) may be converted
into shares.
2. Reduction of Share Capital
• This is when a company reduces its issued or paid-up share capital, typically to eliminate
accumulated losses or return excess capital to shareholders.
• Methods:
 o Cancellation of Paid-Up Capital: The company cancels shares that have been issued
but are not fully paid up.
o Buy-Back of Shares: The company buys back its shares from the shareholders,
reducing the overall capital.
o .
3. Sub-Division (Stock Split)
• The company divides its shares into smaller denominations. For example, a share with a face
value of ₹10 may be split into two shares of ₹5 each.
4. Consolidation of Share Capital
• The reverse of sub-division, where the company consolidates its shares into larger
denominations. For example, two shares with a face value of ₹5 may be consolidated into one
share of ₹10.
5. Cancellation of Unissued Shares
• This involves canceling shares that the company has authorized but has not yet issued.
• To reduce authorized share capital if the company no longer requires the unissued shares.
6. Reclassification of Shares
• : Reclassification involves changing the class of existing shares. For example, converting
preference shares into equity shares, or vice versa, or changing shares with certain rights into
shares with different rights.
7. Capitalization of Profits (Bonus Shares)
• The company uses its reserves or profits to issue bonus shares to existing shareholders instead
of paying out cash dividends.
Types of Dividends
Dividends can be categorized based on the form in which they are distributed or the nature of the
payment. Below are the main types of dividends:
1. Cash Dividend
• This is the most common form of dividend where shareholders receive a payment in cash.
2. Stock Dividend (Bonus Shares)
• The company issues additional shares to existing shareholders instead of paying cash.
3. Property Dividend
• Instead of cash or stock, the company distributes physical assets or other property as
dividends.
4. Scrip Dividend
• The company issues promissory notes or scrip certificates to shareholders in place of a cash
dividend, promising to pay the dividend at a future date.
5. Liquidating Dividend
• A type of dividend paid when a company is partially or fully liquidating its business. It is
essentially a return of capital rather than profits.
6.Preferred dividend
• Refers to the dividend paid to holders of preferred shares (also known as preference shares).
Preferred shares are a special class of shares that typically have a fixed dividend .

Debentures
Debentures are long-term debt instruments issued by a company to borrow funds from the public or
institutions. They are similar to bonds and represent a loan made to the company, with the debenture
holder acting as a creditor.
Types of Debentures
On The Basis of Security:
• Secured Debentures:
o These debentures are backed by the company’s assets as collateral.
o In case of default, debenture holders have a claim on the secured assets to recover
their investment.
• Unsecured Debentures:
o These debentures are not secured by any company assets and are issued solely based
on the company’s creditworthiness.
o Debenture holders do not have any claim on the company’s assets in case of default.
On The Basis Of Convertability
• Convertible Debentures:
o These debentures can be converted into equity shares of the company after a certain
period or under specific conditions.
o Convertible debenture holders have the option to become shareholders in the
company.
• Non-Convertible Debentures (NCDs):
o These debentures cannot be converted into equity shares and remain as debt
instruments until maturity.
o They carry a fixed interest rate and must be redeemed by the company at maturity.
On the basis of Redemption:
• Redeemable Debentures:
o These debentures are repayable by the company on a specified date or after a specific
period.
o The company repays the principal amount to the debenture holders upon maturity or
earlier if the terms allow.
• Irredeemable (Perpetual) Debentures:
o These debentures do not have a fixed maturity date and may not be repaid by the
company. Interest is paid perpetually until the company decides to repay the principal.
On the basis of Priority:
1. First Mortgage Debentures:
o These debentures are secured by a first charge on the company’s assets.
o In case of default or liquidation, holders of first mortgage debentures have the first
claim on the assets secured as collateral.
2. Second Mortgage Debentures:
o These debentures are secured by a second charge on the company’s assets.
o In case of liquidation, holders of second mortgage debentures have a claim on the
assets only after the claims of first mortgage debenture holders have been satisfied.
On the basis of Reward:
3. Registered Debentures:
o These debentures are registered in the company’s books with the name and details of
the holder.
o Transfer of registered debentures requires proper documentation and registration with
the company.
4. Bearer Debentures:
o These debentures are not registered in the company's books and are transferable by
mere delivery.
 o Interest and principal are paid to whoever holds the debenture certificate at the time of
payment, similar to cash.
On the basis of Coupon:
• Fixed Debentures:
o These debentures are secured by a fixed charge on specific assets of the company.
o The charge is on specific assets such as property or machinery, which cannot be sold by
the company without the permission of the debenture holders or paying off the
debenture.
• Floating Debentures:
o These debentures are secured by a floating charge on the general assets of the
company, which may change from time to time.
On the basis of Status:
• Junior Debentures:
o These debentures have a lower priority in the hierarchy of claims in the event of
liquidation, behind senior debentures and other higher-priority debt.
• Senior Debentures:
o These debentures have a higher priority in the hierarchy of claims, taking precedence
over junior debentures in the event of liquidation or bankruptcy.
Share and Stock Difference:

Share Stock
• A share has a nominal value. • A stock has no nominal value.
• A share has a distinctive number which • A stock bears no such number.
distinguishes it from other shares.
• Shares can be originally to the public. • A company cannot make an original issue
of stock,it can be issues by company by
converting it surely paid-up.
• A shares may either be fully paid up or • A stock can be only fully paid-up.
partially paid-up.
• A share cannot be transferred in fractions • A stock may be transferred in any
.It is transferred as whole. fraction.
• All the shares are of equal denomination. • Stock may be different denomination.
 Company Law (246C3B)
Unit – 3
Meeting
Meaning :
Any gathering ,assembly(or) Coming together of two or more persons for the
Transaction of Some lawful business of common concern is called meeting.

Characteristic of company meeting:

1. Two or more Persons . Who are the members of the company must be present at the
meeting
2. The assembly of person must be for discussion and transaction of some lawful
business.
3. A Previous Notice Would be Given for Convening a meeting
4. The meeting must be held at a particular place date and time.
5. The meeting must be held as per provisions of Companies act.

Some Important terms in meeting.

1. Agenda
2. Minutes
3. Action item
4. Quorum
5. Consensus
6. Stake Holders
7. Proxy

Kinds of meeting:
1. Statutory Meeting:
Purpose: Statutory meetings are required for public companies (limited by shares or by
guarantee) and must be held within a specific period after incorporation. The main purpose
is to inform shareholders about the company’s formation, share allotments, and other key
facts.
Report: The board of directors must present a "statutory report" during the meeting.
Under the old Companies Act, 1956, the following provisions were relevant to a statutory
meeting:
Applicability: Only public limited companies were required to hold a statutory meeting.
Private companies were exempt.
Timing: The statutory meeting had to be held within six months but not earlier than one
month from the date on which the company was entitled to commence business .
Statutory Report:
The company was required to prepare and send a statutory report to every shareholder at
least 21 days before the meeting.
The statutory report included:
• Details of shares allotted.
• Total amount of cash received for shares.
• Names, addresses, and occupations of directors, auditors, and key officials.
• Contracts entered into by the company.
• Preliminary expenses.
• Any commissions or brokerage on shares issued.
Purpose: The meeting provided shareholders with an update on the company’s formation,
share allotments, and financial status in its initial phase of operations.
Filing with Registrar: A certified copy of the statutory report had to be filed with the Registrar
of Companies.
Points to Be Discussed in Statutory meeting
• Share allotment Details
• Share Capital
• List of Directors
• Audit Reports
• Company Progress
• Capital Structure
• Details of the Directors and the Shareholders
2. Annual General Meeting (AGM):
• The AGM is a mandatory yearly meeting where shareholders gather to discuss the
company's performance, financial statements, dividend declarations, appointment or
re-appointment of directors, and auditors..
• The first AGM must be held within nine months of the end of the first financial year.
• Subsequent AGMs should be held within six months of the financial year-end, with no
more than 15 months between two AGMs.
Points to be Discussed in AGM:
• Shareholders , Auditors,Directors
• Approval of Previous AGM
• Presentation of Financial Report.
• Declaration of Dividend
• Appointment or Reappointment of Directors
• Special Resolution.
3.Extraordinary General Meeting (EGM):
• EGMs are held to discuss urgent or special matters that cannot wait until the next AGM,
such as major financial decisions, changes to the company's structure, or amendments
to the Articles of Association..
4. Board Meeting:
• This is a meeting of the company's board of directors. It is held to make key
management decisions, oversee the company’s affairs, and ensure that it operates in
compliance with relevant laws and regulations.
• Board meetings are required at least four times a year, with no more than 120 days
between two meetings.
5. Class Meeting:
• A class meeting is held when a decision affects only a particular class of shareholders
(e.g., preference shareholders).
• Matters such as altering the rights attached to a specific class of shares are discussed
here.
6. Committee Meeting:
• Companies often delegate specific functions to committees (such as audit committees,
remuneration committees, etc.). These committees hold meetings to discuss and
decide on matters within their scope, such as financial audits or compensation policies.

7. Creditors’ Meeting:
• In cases of insolvency, restructuring, or liquidation, a creditors' meeting is held to
discuss the repayment and settlement of debts. Creditors may vote on the approval of
repayment plans or reorganization proposals.
8. Debenture Holders' Meeting:
• If the company has issued debentures, this meeting is called to discuss matters
concerning debenture holders, such as changes to terms, repayment plans, or
conversion rights.
Resolution:
A Resolution in Law refers to a Formal Decision or Expression of Opinion made by a
Legislative body.
Types of meeting:
1. Ordinary Resolution:
• An ordinary resolution is passed by a simple majority of the shareholders or directors
present at a meeting.
• It requires a majority of more than 50% of the votes cast in favor of the resolution to
be passed.
Ordinary resolutions are used for routine business matters such as:
• Approval of financial statements.
• Election or re-election of directors.
• Appointment of auditors.
• Declaration of dividends.
2. Special Resolution:
 • A special resolution is passed when a higher level of approval is needed for significant
decisions.
• It requires at least 75% of the votes cast by shareholders or members to be in favor of
the resolution.
Special resolutions are used for more important or non-routine decisions, including:
• Alteration of the company’s Articles of Association or Memorandum of Association.
• Changing the company's name.
• Winding up (liquidation) of the company.
• Reducing share capital.
• Approving mergers or amalgamations.
• Issuing new shares or debentures.
Written Resolution:
• A written resolution is a formal decision made by the shareholders or directors of a
company without holding a physical or virtual meeting.
• Instead, the resolution is circulated in writing, and the required parties give their
approval by signing the document.
• This method is often used for efficiency, particularly in private companies or small
businesses where convening meetings may not be necessary or practical.
Requisites of a valid meeting:
1. Properly Convened:
• The meeting must be convened by an authorized person or body, such as the board of
directors, company secretary, or shareholders (if allowed under the company’s rules).
• Meetings must be called in accordance with the company’s Articles of Association and
applicable legal provisions.
2. Proper Notice:
• Adequate notice of the meeting must be given to all eligible participants (shareholders
or directors).
• The notice must include essential details like the date, time, venue, and the agenda or
matters to be discussed.
• For AGMs and EGMs, the Companies Act usually prescribes a minimum notice period
(e.g., 21 days for an AGM, 14 days for an EGM).

3. Quorum:
• A quorum is the minimum number of participants required to make the meeting legally
valid.
• The quorum is specified in the company’s Articles of Association or in the Companies
Act. For example, in shareholder meetings, it may be 2 or more shareholders for a
private company and 5 for a public company.
• If a quorum is not present, the meeting is either adjourned or declared invalid.
4. Chairman:
 • A valid meeting must have a chairperson who presides over the meeting to maintain
order and ensure the agenda is followed.
• The chairperson may be the company’s appointed chairperson, or in their absence,
another person may be elected by those present.
5. Agenda:
• The meeting must have a specific agenda, which outlines the matters to be discussed
and resolved during the meeting.
• The agenda is typically included in the notice and helps ensure that participants are
prepared and aware of the topics under consideration.
6. Minutes of the Meeting:
• A record of the proceedings, known as minutes, must be properly maintained. Minutes
include key points of discussion, decisions made, and the results of voting.
• The minutes should be approved by the participants in the subsequent meeting and
must be signed by the chairperson.
• These serve as an official record and provide legal proof of the actions taken during the
meeting.
7. Authority to Conduct Business:
• The meeting must be held with proper authority and must have the power to conduct
the business listed on the agenda.
• For example, shareholders in a general meeting can pass resolutions related to the
company’s management and structure, while board meetings are limited to
management and operational decisions.
Audit:
Audit refers to the process of examining and verifying an organization’s financial records
to ensure accuracy, compliance, and fairness in the representation of its financial position.

Auditors:
Auditors are professionals responsible for performing audits and verifying the accuracy and
reliability of an organization’s financial records. They can be either internal or external
Auditors must be qualified, ethical, and skilled in auditing standards and practices.

Qualification for an Auditors:

1) Educational Background.
2) Professional Certification
i)CPA -Certified Public Accounant
ii)CA – Charted Accountant
iii)CIA – Certified Internal Auditor
iv)CISA- Certified Information System Auditor
3) Experience
4) Knowledge of Regulation
5) Technical Skills
6) Continuous Professional Education
7) Soft Skills
Appointment of an Auditors:
Sole Properitor:
In the case of a sole proprietorship, the appointment of an auditor follows a simpler process
compared to companies, as sole proprietorships are not legally separate entities from their
owners.
1. Voluntary Appointment:
• sole proprietors may choose to appoint an auditor voluntarily, especially if their
business is large or if external verification is needed for tax purposes, financing, or
stakeholder assurance.
2. Appointment Process:
• The appointment is based on a personal decision by the sole proprietor, who can
choose any Chartered Accountant or auditing firm based on preference and
requirements.
3. Types of Audits:
• Tax Audit: For sole proprietorships, if the business turnover exceeds a specified limit a
tax audit is mandatory.
• Financial Audit: Although not mandatory, a sole proprietor may also appoint an auditor
to conduct a general financial audit to review the accuracy of financial statements.
4. Engagement and Fees:
• The sole proprietor and the auditor agree upon the scope of the audit and the audit
fees directly, based on the nature and volume of the business.
5. Reporting:
• If the audit is conducted for compliance (e.g., tax audit), the auditor submits the audit
report to the relevant authority, such as the Income Tax Department.
• For general audits, the auditor typically issues a report to the sole proprietor outlining
findings and any financial discrepancies.
Partnership Firm:

In the case of a partnership firm, the appointment of an auditor is generally guided by the
terms of the Partnership Deed and mutual agreement among the partners.
1. Voluntary Appointment:
• If the partnership is large or has complex financial transactions, the partners may agree
to appoint an auditor.
2. Mandatory Appointment (Tax Audit):
• Under the Income Tax Act, 1961, a tax audit is mandatory for partnership firms if their
turnover exceeds the specified limits:
o For businesses, if turnover exceeds ₹1 crore (or ₹10 crore if cash transactions are
below 5% of total transactions).
o For professional firms, if gross receipts exceed ₹50 lakh in a financial year.
3. Appointment Process:
• The Partnership Deed or a written agreement among partners typically governs the
process of appointing an auditor.
• Any changes in the auditor or their scope may require partner approval.
4. Types of Audits:
• Tax Audit: As mentioned, required if turnover or receipts exceed prescribed limits.
• Internal Audit: Some partnership firms may engage in internal audits to evaluate
internal controls and operational efficiency, though not required by law.
• Financial Audit: Partners may voluntarily initiate a financial audit to verify financial
records, assess profits and losses, or ensure transparency among partners.
5. Engagement and Fees:
• The partners agree upon the audit fee and terms of engagement with the auditor.
6. Auditor’s Report:
• For a tax audit, the auditor issues a tax audit report as per the Income Tax Act
requirements.
• For other audits, the auditor typically issues a general audit report to the partners,
highlighting financial status, compliance issues, or any identified discrepancies.

Appointment of Company auditor (section 139, Indian companies act)

Section 139 of the Companies Act, 2013 in India outlines the provisions for the appointment
of auditors for companies. The section mandates how companies should appoint auditors,
the term limits.
1. First Auditor (Section 139(6) and 139(7)):
• For Non-Government Companies:
o The Board of Directors must appoint the first auditor within 30 days from the
date of incorporation.
o The first auditor holds office until the conclusion of the first Annual General
Meeting (AGM).
• For Government Companies:
o The Comptroller and Auditor General (CAG) of India appoints the first auditor
within 60 days from the date of incorporation.
o If the CAG does not appoint the auditor within this period, the Board of Directors
has the next 30 days to make the appointment.
o If the board also fails, the members of the company can appoint the auditor
within the following 60 days in an EGM.
2. Subsequent Appointment of Auditor (Section 139(1)):
• At the first AGM, the company must appoint an auditor to hold office from the
conclusion of the first AGM until the conclusion of the sixth AGM (a 5-year term).
3. Mandatory Rotation of Auditors (Section 139(2)):
 • For certain types of companies, such as listed companies and other companies
meeting certain financial criteria, auditor rotation is mandatory:
o An individual auditor can hold office for one term of 5 consecutive years.
o An audit firm can be appointed for two terms of 5 consecutive years each
(totaling 10 years).
4. Filing of Appointment with the Registrar of Companies (RoC):
• The company must notify the Registrar of Companies (RoC) of the auditor’s
appointment in Form ADT-1 within 15 days of the appointment.
Casual Vacancy (Section 139(8)):
• Casual Vacancy Arise in Case of retirement or death or Unsound mind of the Previous
Audit
• If a casual vacancy arises, such as the resignation of an auditor, it must be filled:
o By the Board of Directors within 30 days of the vacancy.
o If the vacancy is due to resignation, the appointment must be approved by the
company’s shareholders at a general meeting within three months of the
board's recommendation.
• In the case of a government company, any casual vacancy must be filled by the CAG
within 30 days; if the CAG fails, the Board of Directors may fill the vacancy within the
next 30 days.
1. Reappointment of Retiring Auditor (Section 139(9)):
• A retiring auditor may be reappointed at the AGM if:
o The auditor is qualified and willing to be reappointed.
o No other auditor has been appointed or expressly prevented from being
reappointed by the company’s Articles of Association or by a resolution.
2. Special Notice for Replacement:
• To appoint someone other than the retiring auditor or to expressly state that the
retiring auditor should not be reappointed, special notice is required under Section
140(4).
• The company must follow proper procedures to ensure shareholders are informed and
can vote on the proposed change.

Disqualifications of Auditors (Section 141(3)):

The disqualifications of auditors are outlined under Section 141 of the Companies Act, 2013
in India.
The following individuals and entities are disqualified from being appointed as an auditor of
a company:
1. Body Corporate:
o Any body corporate (other than a limited liability partnership) cannot be
appointed as an auditor. Only individual Chartered Accountants or firms of
Chartered Accountants are eligible for appointment.
2. Officer or Employee of the Company:
o Any officer or employee of the company is disqualified from becoming its
auditor. This ensures that individuals involved in managing or controlling the
company cannot also audit its accounts, as this would lead to a conflict of
interest.
3. Partner or Relative of a Director or Key Managerial Personnel (KMP):
o If an individual is a partner or relative of a director or key managerial personnel
(KMP) of the company, they are disqualified from being appointed as its auditor.
4. Indebtedness to the Company:
o A person who is indebted to the company or its subsidiary, holding, or associate
company for an amount exceeding ₹1,000 (or any other amount prescribed) is
disqualified.
5. Business Relationship with the Company:
o A person or firm having a direct business relationship with the company, its
subsidiaries, or associates cannot act as the auditor of the company.
6. Holding Security or Interest in the Company:
o A person who holds any security or interest in the company, its subsidiary,
holding, or associate company, or its subsidiaries, is disqualified.
7. Limit on Number of Audits:
o The Companies Act limits the number of audits that a Chartered Accountant or
an audit firm can undertake in any given financial year.
8. Conviction for an Offense Involving Fraud:
o If a person has been convicted of an offense involving fraud (within the last 10
years), they are disqualified from being appointed as an auditor.
9. Engagement in Other Services as Specified Under Section 144:
o An auditor cannot offer certain specified non-audit services to the company,
such as management services, accounting, or financial information systems
design and implementation.
o Engaging in these services while also serving as the auditor disqualifies them
from the role.
 Company Law (246C3B)
Unit – 4
Management & Administration
Director:
• In the context of a company, directors are individuals appointed to manage and
oversee the company's affairs, acting as agents, trustees, and Representative for
shareholders.
• Under the Companies Act, 2013 in India, directors play a critical role in corporate
governance, decision-making, and legal compliance.
Number of Directors :

Basis Public Company Private Company One Person Company

Minimum 3 2 1
Maximum 15 15 15
For More than 15 Special Resolution Special Resolution Special Resolution
Directors

Types of Directors (under the Companies Act, 2013)

1. Managing Director:
o A Managing Director (MD) is entrusted with substantial managerial powers and
often has executive authority to run the company's day-to-day operations.
o They must act in accordance with the Board's decisions and policies, and are
appointed by the Board of Directors or through shareholders' approval.
2. Whole-Time Director:
o A Whole-Time Director is a director who works full-time for the company and
takes part in day-to-day activities, often holding executive roles.
3. Independent Director:
o Independent Directors are non-executive directors who do not have material
relationships with the company, except for sitting fees or reimbursement.
o They are appointed to ensure transparency and accountability, providing
independent judgment on corporate decisions and protecting minority interests.
4. Nominee Director:
o A Nominee Director represents the interests of a third party, such as investors,
creditors, or the government, often appointed as part of financial agreements.
o They ensure the interests of the entity they represent are safeguarded.
5. Additional Director:
o The Board of Directors can appoint an Additional Director between AGMs if
allowed by the company's Articles of Association.
o They hold office until the next AGM, where they may be confirmed as a regular
director.
6. Alternate Director:
o An Alternate Director is appointed temporarily to fill in for an absent director
(who is outside India for more than three months).
o Their role is often interim, only for the period during which the original director
is absent.
7. Executive Director:
o An Executive Director is involved in the day-to-day operations of the company
and is a part of the management team.
o They typically work full-time, with significant responsibilities related to the
company’s operations.
8. Non-Executive Director:
o A Non-Executive Director does not partake in the day-to-day operations but
provides an outside perspective in policy-making, strategy, and governance.

9. . Ordinary Director
• An Ordinary Director is simply a director without any special roles such as managing
director, executive director, or independent director.
• They are general members of the Board who participate in decision-making and
governance but do not have assigned executive duties.
10.Professional Director
• A Professional Director is a director appointed based on their professional expertise
in a particular field, such as law, finance, marketing, or management.
11.Small Shareholder Director
• A Small Shareholder Director represents the interests of small shareholders in a
company. This position allows small shareholders (those holding shares of nominal
value) to have a voice on the Board.

1. Basic Provisions for Appointment of Directors (Section 152)

• Minimum Number of Directors:
o Private Company: At least 2 directors.
o Public Company: At least 3 directors.
o One Person Company (OPC): At least 1 director.
• Maximum Number of Directors:
o A company can have a maximum of 15 directors. If a company wishes to appoint
more than 15 directors, a special resolution must be passed.
• Director Identification Number (DIN):
o Every director must obtain a Director Identification Number (DIN) prior to their
appointment. This DIN is mandatory for all individuals intending to act as
directors in any company.
 • Consent to Act:
o The individual must provide a written consent to act as a director (DIR-2 form),
confirming their willingness to serve in that capacity.
• Appointment Process:
o Directors are usually appointed by the shareholders at the Annual General
Meeting (AGM), based on an ordinary resolution.
2. Appointment of First Directors
• First Directors:
o The first directors of a company can be appointed by the subscribers to the
Memorandum of Association (MoA) at the time of incorporation.
o If the Articles of Association (AoA) do not specify otherwise, the subscribers can
appoint the first directors, who will hold office until the first Annual General
Meeting (AGM).
• Duration:
o The first directors serve until the company’s first AGM.
3. Rotational Directors(Only Applicable for Public company)
• Definition:
o Rotational Directors are directors who must retire at each AGM, as mandated
by Section 152(6) of the Companies Act, 2013.
• Requirement:
o In a public company, at least two-thirds of the directors (excluding independent
directors) are required to retire by rotation.
o Out of the retiring directors, one-third must step down at each AGM but can
offer themselves for reappointment.
• Procedure:
o The retirement is based on the longest-serving directors, ensuring that the Board
refreshes itself regularly.
o The company must inform shareholders about the directors who are due for
retirement and offer them the option to re-elect them.
4. Appointment of Directors by the Board of Directors (BoD)
• Additional Directors:
o The Board of Directors has the power to appoint additional directors in between
AGMs to fill any vacancies that arise or to expand the Board, as long as the
Articles of Association allow this.
o Additional directors hold office until the next AGM, where their appointment
may be confirmed.
• Alternate Directors:
o The Board can appoint alternate directors to replace a director who is absent for
an extended period (more than three months) from India.
o The appointment of alternate directors is also governed by the Articles of
Association.
 • Filling Casual Vacancies
• If a director resigns or is otherwise unable to continue, the Board may fill the casual
vacancy in the case of a vacancy caused by resignation , Death or Disqualification.
• The casual director appointed will hold office until the next AGM, where the position
can be regularized.
• Appointed by BOD
• Only for Public Company.

Removal of Director:

. Removal by Shareholders (Section 169)

o Shareholders have the right to remove a director before the expiration of their
term by passing a special resolution at a general meeting.
o This applies to both executive and non-executive directors, including
independent directors.
o A notice of at least 14 days must be given to the director regarding the intention
to remove them.
o :The removal is decided in a general meeting, where a special resolution must
be passed, requiring approval from at least three-fourths of the votes cast.
o The director has the right to make a representation against their removal and be
heard at the meetin
o After the resolution is passed, the company must file Form DIR-12 with the
Registrar of Companies (RoC) within 30 days to notify the removal.
2. Removal by the Central Government (Section 241)
• The Central Government has the authority to remove a director if it is determined that:
▪ The director has acted against the interests of the company or its
shareholders.
▪ The director has been guilty of fraud or misconduct.
▪ The director has engaged in activities detrimental to the company’s
operations.
▪ The removal can be initiated through a petition to the NCLT.
▪ The Central Government can pass an order for the removal of the director
based on the findings of an inquiry or investigation.
▪ The concerned director is given an opportunity to present their case
before any removal order is issued.
3. Removal by the National Company Law Tribunal (NCLT) (Section 242)
The NCLT can remove a director upon the application of:
▪ The company itself.
▪ Any member of the company.
▪ The Central Government.
 o Grounds for approaching the NCLT may include:
▪ Oppression and mismanagement.
▪ Acts that are prejudicial to the interests of the company or its
shareholders.
o An application can be made to the NCLT, which will hold hearings and consider
evidence.
o If the NCLT finds justifiable grounds, it may order the removal of the director.
o The director must be given a chance to be heard during the proceedings.
• The NCLT’s order for removal is binding and must be complied with by the company.
Resignation of Director:
The resignation of a director is a significant event in corporate governance, and it is governed
by provisions in the Companies Act, 2013.
• The resignation of directors is primarily governed by Section 168 of the Companies Act,
2013.
• A director has the right to resign from their position at any time before the expiration
of their term.
• The resignation can be voluntary, usually due to personal reasons, conflicts of interest,
or other business commitments.
• The director must submit a written resignation to the company.
• The resignation letter should specify the effective date of resignation.
• The resignation should be addressed to the Board of Directors and must be
communicated in writing.
• The company must ensure that it acknowledges receipt of the resignation.
• Upon the resignation of a director, the company must inform the Registrar of
Companies (RoC):
o This is done by filing Form DIR-12 within 30 days of the resignation.
o The form must include details such as the name of the resigning director, their
Director Identification Number (DIN), and the date of resignation.
• The resignation takes effect from the date specified in the resignation letter or, if no
date is specified, from the date the resignation is received by the company.
• Once the resignation is effective, the director ceases to be a member of the Board of
Directors.
• Unlike removal, a resignation does not require the approval of the shareholders. The
decision rests solely with the director.
o A resigning director may still be liable for acts committed during their tenure,
depending on the nature of those acts and the provisions of the Companies Act.
Powers of Directors
Directors possess various powers to manage the company's operations effectively, which
include:
a. General Powers
• Management Authority: Directors have the authority to manage the company's day-
to-day affairs, make decisions regarding its business operations, and implement
strategies.
• Power to Delegate: Directors can delegate their powers to committees or executive
officers, but they remain accountable for the actions of those to whom they delegate
authority.
b. Financial Powers
• Authority to Borrow: Directors can borrow money on behalf of the company, subject
to the limits specified in the Articles of Association or as approved by the shareholders.
• Issuance of Shares: They have the power to issue shares, debentures, and other
securities as permitted by the Articles of Association and the provisions of the
Companies Act.
• Dividend Declaration
c. Contractual Powers
• Entering into Contracts: Directors can enter into contracts on behalf of the company
and bind it legally, subject to the company’s Articles and statutory provisions.
d. Appointment Powers
• Appointment of Key Personnel: Directors can appoint and remove key managerial
personnel (KMP) and other employees, ensuring that the company is staffed
appropriately for its operations.
2. Duties of Directors
Directors are also subject to specific duties that they must uphold while performing their
roles, including:
A. Fiduciary(Representative) Duty
• Act in Good Faith: Directors must act honestly and in the best interests of the company,
avoiding conflicts of interest and prioritizing the company’s welfare over personal gain.
• Duty to Avoid Conflicts: They should not place themselves in situations where their
interests conflict with those of the company.
B. Duty of Care
• Act with Due Diligence: Directors must exercise reasonable care, skill, and diligence in
the performance of their duties. This involves being informed about the company’s
affairs and making decisions based on adequate information.
• Informed Decision-Making: Directors should seek advice and information necessary to
make informed decisions and ensure that they fulfill their responsibilities competently.
C. Compliance with Laws
• Ensure Legal Compliance: Directors must ensure that the company complies with all
applicable laws and regulations, including the Companies Act, labor laws,
environmental regulations, and tax obligations.
D. Duty to Act Within Powers
• Act According to Articles: Directors must act within the powers conferred upon them
by the company’s Articles of Association and ensure that their actions align with the
objectives of the company as stated in its Memorandum of Association.
E. Duty to Promote the Company’s Success
• Focus on Long-term Benefits: Directors should act to promote the success of the
company for the benefit of its members as a whole, taking into account the interests
of employees, suppliers, and the community.
F. Transparency and Accountability
• Maintain Records: Directors must ensure that accurate records of the company’s
proceedings, financials, and decisions are maintained.
• Report to Shareholders: They have a duty to provide clear and truthful information to
shareholders and ensure transparency in their dealings.
G. Consequences of Breach of Duties
• Liability: Directors may be held liable for breaches of their fiduciary duties, duty of
care, or statutory obligations. This could result in civil penalties, disqualification, or
even criminal liability in cases of fraud or misconduct.
• Indemnity and Insurance: Companies can provide indemnity to directors for actions
taken in good faith, and they may also take directors’ insurance to protect them against
certain liabilities.
 Company Law (246C3B)
Unit – 5
Winding Up
Methods of Winding Up
The Companies Act, 2013 provides for the following methods of winding up:
a. Voluntary Winding Up
Voluntary winding up occurs when the shareholders decide to wind up the company
voluntarily. This can be further categorized into two types:
1. Winding Up by Members (Section 304)
o Circumstances: This occurs when the company has passed a special resolution
for winding up, usually because it is no longer viable to continue operations
(e.g., the company is solvent).
o Procedure:
▪ A special resolution must be passed by the shareholders in a general
meeting.
▪ A declaration of solvency must be made by the Board of Directors,
stating that the company can pay its debts in full within a specified
period.
▪ A liquidator is appointed to oversee the winding-up process.
2. Winding Up by Creditors (Section 305)
o Circumstances: This occurs when the company is unable to pay its debts and a
resolution is passed by creditors.
o Procedure:
▪ A meeting of creditors is convened to pass a resolution for winding up.
▪ A liquidator is appointed to manage the winding-up process.
b. Compulsory Winding Up
Compulsory winding up occurs when a company is ordered to be wound up by the National
Company Law Tribunal (NCLT). The circumstances include:
1. Insolvency:
o The company is unable to pay its debts, and the NCLT is satisfied that it is just
and equitable to wind up the company.
2. Insolvency Resolution Process:
o If the company fails to complete the Corporate Insolvency Resolution Process
(CIRP) within the stipulated time, the NCLT may order winding up.
3. Statutory Grounds:
o Other statutory grounds include the company’s activities being illegal, not
commencing business within one year of incorporation, or if the company has
acted against the interests of the sovereignty and integrity of India.
c. Winding Up under Specific Circumstances
1. Winding Up under Special Resolution:
o A company may be wound up voluntarily if a special resolution is passed by its
members.
2. Winding Up due to Company’s Activities:
o If the company has acted in a manner detrimental to public interest or has
engaged in illegal activities.
Winding Up Process (or) Liquidation Process :
The winding-up process generally includes the following steps:
1. Appointment of Liquidator:
o A liquidator is appointed to manage the winding-up process, including selling
assets, settling liabilities, and distributing remaining assets.
2. Realization of Assets:
o The liquidator collects all company assets and realizes them through sale or
other means.
3. Settlement of Debts:
o The liquidator pays off the company’s creditors in the order of priority
established by law.
4. Distribution of Surplus:
o Any remaining assets after settling debts are distributed among the
shareholders based on their respective shareholdings.
5. Final Accounts and Dissolution:
o The liquidator prepares final accounts, and upon approval, files with the NCLT
for dissolution of the company.
Consequences of Liquidation
Liquidation leads to various consequences for the company and its stakeholders, including:
a. Ceasing of Business Operations
• The company is required to stop its business activities immediately upon the
appointment of a liquidator, which marks the end of its commercial existence.
b. Settlement of Liabilities
• The liquidator is responsible for settling the company’s debts and liabilities from the
assets of the company. Creditors will be paid in the order of their priority as per the
law (e.g., secured creditors first, followed by unsecured creditors).
c. Distribution of Remaining Assets
• After settling debts, any remaining assets are distributed among the shareholders
based on their rights and interests in the company.
d. Loss of Legal Status
• The company loses its status as a legal entity. This means it can no longer enter into
contracts, own property, or be involved in legal proceedings in its own name.
e. Impact on Directors and Officers
• Directors may lose their positions, and their powers are transferred to the liquidator.
They can also face scrutiny for their actions leading up to the winding-up process.
• Directors may be held liable for misconduct or mismanagement if they have acted
improperly before liquidation.
f. Impact on Employees
• Employment contracts may be terminated as the company ceases operations.
Employees may be entitled to certain payments, such as salaries, severance pay, and
other benefits before the settlement of creditors.
g. Public Record
• The winding-up order is recorded with the Registrar of Companies (RoC), making it
publicly accessible and impacting the company’s reputation.
Powers of the Tribunal (NCLT)
The National Company Law Tribunal (NCLT) holds significant powers in the winding-up
process, including:
a. Initiation of Winding Up
• The NCLT can initiate the winding-up process based on petitions filed by
shareholders, creditors, or the Central Government.
b. Passing Winding Up Orders
• The NCLT has the authority to pass orders for the winding up of a company under
various circumstances, including insolvency, oppression, or mismanagement.
c. Appointment of Liquidators
• The Tribunal can appoint liquidators and define their powers and responsibilities
during the winding-up process.
d. Supervision of Liquidation Process
• The NCLT has the power to supervise the liquidation process, ensuring compliance
with legal requirements and protecting the interests of creditors and shareholders.
e. Resolving Disputes
• The Tribunal can adjudicate any disputes arising during the liquidation process,
including claims by creditors and objections from shareholders or directors.
f. Restoration of Companies
• In certain cases, the NCLT has the authority to restore a company to the register if it
determines that the winding-up order should be set aside.
Petition for Winding Up
The process for filing a petition for winding up a company involves several steps:
a. Filing a Petition
• A petition for winding up can be filed with the NCLT by:
o The company itself.
o Any creditor or creditors.
o A member or members of the company.
o The Central Government.
b. Grounds for Petition
• The petition may be based on several grounds, such as:
o The company is unable to pay its debts.
o The company has acted against the interests of its shareholders or the public.
o The company has been incorporated for an unlawful purpose.
o It is just and equitable to wind up the company.
c. Contents of the Petition
• The petition must include:
o Details of the company (name, registration number, registered office).
o The grounds for winding up.
o Any relevant documents, including a statement of the company’s financial
position.
o An affidavit verifying the contents of the petition.
d. Notice to the Company
• Upon filing the petition, a notice is served to the company, informing it of the petition
and the hearing date.
e. Hearing of the Petition
• The NCLT conducts a hearing where both the petitioner and the company can present
their arguments.
• If satisfied with the grounds for winding up, the NCLT will pass an order for winding
up.