COMPANY LAW

Q No 1: Define Company. Discuss the characteristics of company.

Distinguish it from partnership.

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Introduction:

The word 'company' is derived from the Latin word Com Panis (Com means 'With or
together' and Panis means 'Bread'), and it originally referred to an association of persons who took their
meals together. In popular parlance, a company denotes an association of like minded persons formed
for the purpose of carrying on some business or undertaking. A company is an association of both
natural and artificial persons and is incorporated under the existing law of a country.

Company Definition:

According to Section 2 (20) of the Company Act 2013 "Company means a company
incorporated under this Act or any previous Company Law."

In general, a company is an artificial person, created by law that has a separate legal entity,
perpetual succession, and common seal and has limited liability. It is a voluntary association of person
who together contributes in the capital of the company to do business.

Characteristics of Company:

The various characteristics of a company are as follows-

i. Voluntary association: A company is a voluntary association formed by an individual or

group of individuals. Most companies are formed with the motive of profit-making except the
Section 8 companies (NGO). Profit earned is divided among the shareholders or saved for the
future expansion of the company.
ii. Artificial Person: A company is created with the sanction of law and is not itself a human
being; it is, therefore, called artificially; and since it is clothed with certain rights and obligations,
it is called a person. A company is, accordingly, an artificial person.
iii. Separate Legal Entity: A separate legal entity means that only the company is responsible
to repay creditors and to get sued for its deeds. A company has a separate legal entity, which is
not affected by changes in the ownership. Therefore being a separate entity, a company can
contract, sue and be sued in its corporate name and capacity.
iv. Perpetual Existence: The existence of company is not affected by the death, retirement,
and insolvency of its members. That is, the life of a company remains unaffected by the life and
the tenure of its members in the company. The life of a company is infinite until it is properly
wound up as per the Companies Act.
v. Limited Liability: Every shareholder of a company has limited liability. His liability is limited
to the extent of the unpaid value of the shares held by him. If such shares are fully paid up, he is
subject to no further liability.

vi. Common Seal: The company is not a natural person and has no physical existence. Hence, it
cannot put its signature. Thus, the common seal acts as an official signature of a company that
validates the official documents.
vii. Separate Property: A company being a legal person and entirely distinct from its members,
is capable of owning, enjoying and disposing of property in its own name. The company is the

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 real person in which all its property is vested, and by which it is controlled, managed and
disposed off.

viii. Transferability of shares: There are three types of companies under the Companies Act -
public company, private company and one Person company. A public company is free to transfer
its share from one person to another, whereas in a private company, the right to transfer shares
is restricted. And in One Person Company (OPC), transferability of shares is not allowed.
ix. Capacity to sue and be sued: A company can sue and be sued in its name and may even
sue its members. It also has a right to seek damages where a defamatory matter is published
about the company, which affects its business.
x. Management and Ownership: A company is not managed by all members but by their
elected representatives called Directors. Thus, management and ownership are different.

Difference Between Partnership And Company:

i. The members of the partnership firm are called partners whereas the members of company
are called shareholders.
ii. The partnership business is to be governed by the Indian Partnership Act, 1932 whereas the
business of the company is determined by Indian Companies act, 2013
iii. Partnership firm is created by contract between two or more persons whereas company is
created by law i.e registration.
iv. The rules of a partnership are to be registered by the state government whereas in the case
of the company it is to be regulated by the central government.
v. In case of partnership, management is to be done by active partners, whereas in case of
company management is done by the board of directors.
vi. Seal ( Stamp ) is not required for partnership whereas in case of company stamp is required.
vii. Partners have unlimited liability whereas shareholders have limited liability.

Conclusion:

From the above discussion we have seen that a company is a voluntary organization of
many persons who contribute money or money’s worth to common stock and employs it in
some trade or business and who share the profit or loss arising, therefore and it is different
from partnership. But both the company and partnership serve an important role towards
the growth of a nation.

Q no 2: Discuss the salient features of the Companies Act, 2013.

Introduction:

The Indian Companies Act 2013 replaced the Indian Companies Act, 1956. The Companies Act
2013 regulates the formation and functioning of corporations or companies in India. The Companies
Act 2013 makes comprehensive provisions to govern all listed and unlisted companies in the country.

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The Companies Act 2013 implemented many new sections and repealed the relevant corresponding
sections of the Companies Act 1956. This is a landmark legislation with far-reaching consequences on all
companies incorporated in India.

Salient features of the Companies Act, 2013:

The various Salient features of the Companies Act, 2013 are as follows-

i. Class action suits for Shareholders: The Companies Act 2013 has introduced new
concept of class action suits with a view of making shareholders and other stakeholders, more
informed and knowledgeable about their rights.
ii. More power for Shareholders: The Companies Act 2013 provides for approvals from
shareholders on various significant transactions.
iii. Women empowerment in the corporate sector: The Companies Act 2013 stipulates
appointment of at least one woman Director on the Board (for certain class of companies).
iv. Corporate Social Responsibility: The Companies Act 2013 stipulates certain class of
Companies to spend a certain amount of money every year on activities/initiatives reflecting
Corporate Social Responsibility.
v. National Company Law Tribunal: The Companies Act 2013 introduced National
Company Law Tribunal and the National Company Law Appellate Tribunal to replace the
Company Law Board and Board for Industrial and Financial Reconstruction.
vi. Fast Track Mergers: The Companies Act 2013 proposes a fast track and simplified
procedure for mergers and amalgamations of certain class of companies such as holding and
subsidiary, and small companies after obtaining approval of the Indian government.
vii. Cross Border Mergers: The Companies Act 2013 permits cross border mergers, both ways;
a foreign company merging with an India Company and vice versa but with prior permission
of RBI.
viii. Increase in number of Shareholders: The Companies Act 2013 increased the number of
maximum shareholders in a private company from 50 to 200.
ix. Limit on Maximum Partners: . Under the Companies Act 1956, there was a limit of
maximum 20 persons/partners and there was no exemption granted to the professionals. But
this act the maximum number of persons/partners in any association/partnership may be upto
such number as may be prescribed but not exceeding one hundred
x. One Person Company: The Companies Act 2013 provides new form of private company,
i.e., one person company. It may have only one director and one shareholder. The Companies
Act 1956 requires minimum two shareholders and two directors in case of a private company.
xi. Electronic Mode: The Companies Act 2013 proposed E-Governance for various company
processes like maintenance and inspection of documents in electronic form, option of keeping
of books of accounts in electronic form, financial statements to be placed on company’s
website, etc.
xii. Indian Resident as Director: Every company shall have at least one director who has
stayed in India for a total period of not less than 182 days in the previous calendar year.

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xiii. Independent Directors: The Companies Act 2013 provides that all listed companies should
have at least one-third of the Board as independent directors. Such other class or classes of
public companies as may be prescribed by the Central Government shall also be required to
appoint independent directors.
xiv. Rotation of Auditors: The Companies Act 2013 provides for rotation of auditors and audit
firms in case of publicly traded companies.
xv. Prohibits Auditors from performing Non-Audit Services: The Companies Act
2013 prohibits Auditors from performing non-audit services to the company where they are
auditor to ensure independence and accountability of auditor.
xvi. Rehabilitation and Liquidation Process: The entire rehabilitation and liquidation
process of the companies in financial crisis has been made time bound under Companies Act
2013.

Conclusion:

From the above discussion we have seen that the Companies Act 2013 which was
replaced the Indian Companies Act, 1956 introduces various new provisions for the companies which
ensures the well running of a company and ensure the harmony of a company. Thus this legislation is
considered as an important act in the history of company law.

Q No 3: What do you mean by Incorporation of a company? Discuss

the advantages and disadvantages of Incorporation of a company.

Introduction:

The word 'company' is derived from the Latin word Com Panis (Com means 'With or
together' and Panis means 'Bread'), and it originally referred to an association of persons who took their
meals together. In popular parlance, a company denotes an association of like minded persons formed

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for the purpose of carrying on some business or undertaking. A company is an association of both
natural and artificial persons and is incorporated under the existing law of a country.

Incorporation of a Company:

Incorporation is the way that a business is formally organized and officially brought into
existence. The process of incorporation involves writing up a document known as the articles of
incorporation and enumerating the firm's shareholders.

Corporations can be created in nearly all countries in the world and are usually identified as
such by the use of terms such as "Inc." or "Limited (Ltd.)" in their names. It is the process of legally
declaring a corporate entity as separate from its owners.

Advantages of Incorporation of a Company:

The advantages mentioned below are only enjoyed by the companies which are incorporated
according to the provisions laid out in the Companies Act of 2013. Non incorporated companies do not
enjoy these benefits.

i. Separate Legal Identity: Once a business is incorporated, it becomes a separate legal

identity. An incorporated company, unlike a partnership firm which has no identity of its own,
has a separate legal identity of its own which is independent of its shareholders and its
members. The companies can thus own properties in their name, become signatories to
contracts etc.
ii. Perpetual Succession: The term perpetual succession means that the longevity of the
company does not depend on its members or their financial status. Even if all the members of
the company go bankrupt or all of them die, the company will not dissolve on its own unless it is
made to dissolve on grounds which are laid out in the act.
iii. Limited Liability: Every shareholder of a company has limited liability. His liability is limited
to the extent of the unpaid value of the shares held by him. If such shares are fully paid up, he is
subject to no further liability.
iv. Separate Property: A company being a legal person and entirely distinct from its members,
is capable of owning, enjoying and disposing of property in its own name. The company is the
real person in which all its property is vested, and by which it is controlled, managed and
disposed off.
v. Capacity to sue and be sued: A company can sue and be sued in its name and may even
sue its members. It also has a right to seek damages where a defamatory matter is published
about the company, which affects its business.
vi. Transferability of shares: There are three types of companies under the Companies Act -
public company, private company and one Person company. A public company is free to transfer
its share from one person to another, whereas in a private company, the right to transfer shares
is restricted. And in One Person Company (OPC), transferability of shares is not allowed.

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Disadvantages of Incorporation of a Company
The disadvantages mentioned below are not enjoyed by the companies which are incorporated
according to the provisions laid out in the Companies Act of 2013.

i. Lifting the Corporate Veil: Under this concept, the court disregards the status of a
company as a separate legal entity if the members of the company try to take advantage of
this status. The intentions of the persons behind the veil are completely exposed. They are
made personally liable for using the company as a vehicle for undesirable purposes. This can
be done where the only purpose of incorporation of a company was to evade taxes, where
the company was brought forth for fraudulent purposes etc.
ii. Paperwork and Expenses: Incorporation of a company is both, an expensive affair in
monetary terms and a cumbersome process because of the paperwork that it requires.
iii. Company is not Citizen: A company, though a legal person, is not a citizen. It can have
the benefit of only such fundamental rights as are guaranteed to every “person” whether a
citizen or not. A company, however, does have a nationality, domicile and residence.

Conclusion
Incorporation of a company thus has its own pros and cons. Incorporation greatly depends
on the needs of the business, if the members perceive the business as scalable then the high
incorporation costs are completely justified.

Q No 4: Define ‘Private Company’. Discuss the provisions under the

Companies Act for conversion of a private company into public
Company and vice versa.

Introduction:

Section 2(68) of Companies Act, 2013 defines private companies. According to that, private
companies are those companies whose articles of association restrict the transferability of shares and

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prevent the public at large from subscribing to them. This is the basic criterion that differentiates private
companies from public companies.

The maximum number of the members for Private Company is 200 (except in case of One Person
Company). This maximum number does not include any former employee or present employees.

Provision of Conversion of a private company into Public Company:

Pursuant to Section 14 of the Act, a company, by approval of its members through a special
resolution, may alter its articles of association including alterations having effect of conversion of a
private company into a public company. For conversion, a private company to take the following
procedural steps:

i. Notice For A Meeting of the Board of Directors

The first step for conversion of private company into public company would include
issuing a notice for a meeting of the Board of Directors (“BOD”) at least seven days prior to convening
such a meeting. The Board Meeting should be held to discuss the following agendas- to adopt new
Memorandum of Articles (MoA) subject to the approval of shareholders, to adopt new Articles of
Articles (AoA) subject to the approval of shareholders, to get the approval of Conversion of Private
Company to Public Company from the shareholder, fix date, time and the place for holding EGM in the
Company, to get approval for EGM and authorize someone to circulate notice of EGM.

ii. Notice of the General Meeting

The second step would be to issue a notice of the General Meeting to all the concerned
parties, that would include the Members, Directors and Auditors of the company.

iii. Special Resolution in the General meeting

The next step for conversion of private company into public company would be to pass the
necessary Special Resolution in the General meeting in order to get shareholder’s approval for the
Conversion of the company into a public company along with alteration in AOA.

iv. Fillings of Necessary eForms with the Registrar of Companies

Furthermore, the concerned Company would need to file MGT – 14 and INC – 27 with
the Registrar of Companies. The aforesaid forms are e-forms. A copy of special resolution is needed to
be filed with the Registrar of Companies by filing of MGT-14 (E – form) within thirty days of passing of
the special resolution in the general meeting. Further, Rule 33 of the Incorporation Rules mandates the
application for conversion to private company be filled in INC 27 (e-form) by paying the prescribed fee.
Furthermore, certain documents are to be attached along with the aforesaid form and that would
include the minutes of the member’s meeting where the approval for conversion and altered AOA was
received.

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 v. Cancelation of Previous Registration and Issuance of New Incorporation
Certificate

After all the formalities as discussed above have been completed on the company’s
end, the Registrar shall then scrutinize the documents and satisfy themself as per the necessary
provisions of the Statute. Further, the Registrar shall cancel the previous registration and issue a new
incorporation certificate.

Conclusion:

From the above discussion we have seen the Companies Act, 2013, provides for Conversion of
Private Company to Public Company. By alteration in the Memorandum of Association (MoA) and
Articles of Association (AoA), the Conversion can be done of Private Company to Public Company.
Though the procedure of Conversion is time-consuming but it an historical landmark to the history of
company law.

Q No 5: State the doctrine of ulta vires with leadind case law.

Introduction:

Companies have to borrow funds from time to time for various projects in which they are
engaged. Borrowing is an indispensable part of day to day transactions of a company, and no company
can be imagined to run without borrowing from time to time. Balance sheets are released every year by
the companies, and you will hardly find any balance sheet without borrowings in the liabilities clause of
it. However, there are certain restrictions while making such borrowings. If companies go beyond their
powers to borrow then such borrowings may be deemed as ultra-vires.

Meaning of Ultra-Vires:

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 It is a Latin term made up of two words “ultra” which means beyond and “vires”
meaning power or authority. So we can say that anything which is beyond the authority or power is
called ultra-vires. In the context of the company, we can say that anything which is done by the
company or its directors which is beyond their legal authority or which was outside the scope of the
object of the company is ultra-vires.

Origin of the Doctrine:

The doctrine of ultra-vires first time originated in the classic case of Ashbury Railway
Carriage and Iron Co. Ltd. v. Riche, (1878), which was decided by the House of Lords. In this case the
company and M/s. Riche entered into a contract where the company agreed to finance construction of a
railway line. Later on, directors repudiated the contract on the ground of its being ultra-vires of the
memorandum of the company. Riche filed a suit demanding damages from the company.

Later, the majority of the shareholders of the company ratified the contract. However, directors
of the company still refused to perform the contract as according to them the act was ultra-vires and the
shareholders of the company cannot ratify any ultra-vires act. When the matter went to the House of
Lords, it was held that the contract was ultra-vires the memorandum of the company, and, thus, null
and void.

Types of Ultra-vires Acts:

Ultra-vires acts can be generally of four types:

i. Acts which are ultra-vires to the Companies Act: Any act or contract which is entered
by the company is ultra-vires to the Companies Act, is void-ab-initio, even if memorandum
or articles of the company authorized it. Such act cannot be ratified in any situation.
ii. Acts which are ultra-vires to the Memorandum of the company: An act is called
ultra-vires the memorandum of the company if, it is done beyond the powers provided by
the memorandum to the company.
iii. Acts which are ultra-vires to the Articles of the company but intra-vires the
company: All the acts or contracts which are made or done beyond the powers provided by
the articles but are within the powers and authority given by the memorandum are called
ultra-vires the articles but intra-vires the memorandum.

iv. Acts which are ultra-vires to the directors of the company but intra-vires the
company: All the acts or contracts which are made by the directors beyond the powers
provided to them are called acts ultra-vires the directors but intra-vires the company. The
company can ratify such acts and then they will be binding.

Effects of ultra vires Transactions – Doctrine of Ultra Vires

i. Void ab initio: The ultra vires acts are null and void ab initio. These acts are not binding on
the company. Neither the company can sue, nor it can be sued for such acts
ii. Estoppel or ratification cannot convert an ultra-vires act into an intra-vires act.

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 iii. Injunction: when there is a possibility that company has taken or is about to undertake an
ultra-vires act, the members can restrain it from doing so by getting an injunction from the
court.
iv. Personal liability of Directors: The directors have a duty to ensure that all corporate
capital of the company is used for a legitimate purpose only. If such funds are diverted for a
purpose which is not authorized by the memorandum of the company, it will attract a
personal liability for the directors.

Exceptions to the Doctrine:

i. Any act which is done irregularly, but otherwise it is intra-vires the company, can be
validated by the shareholders of the company by giving their consent.
ii. Any act which is outside the authority of the directors of the company but otherwise it is
intra-vires the company can be ratified by the shareholder of the company.
iii. If the company acquires property in a manner which is ultra-vires of the contract, the right
of the company over such property will still be secured.
iv. Any incidental or consequential effect of the ultra-vires act will not be invalid unless the
Companies Act expressly prohibits it.
v. If any act is deemed to be within the authority of the company by the Company’s Act, then
they will not be considered as ultra-vires even if they are not expressly stated in the
memorandum.
vi. Articles of association can be altered with retrospective effect to validate an act which is
ultra-vires of articles.

The doctrine of ultra-vires in Companies Act, 2013:

Section 4 (1)(c) of the Companies Act, 2013, states that all the objects for which incorporation
of the company is proposed any other matter which is considered necessary in its furtherance should be
stated in the memorandum of the company.

Whereas Section 245 (1) (b) of the Act provides to the members and depositors a right to file
a application before the tribunal if they have reason to believe that the conduct of the affairs of the
company is conducted in a manner which is prejudicial to the interest of the company or its members or
depositors, to restrain the company from committing anything which can be considered as a breach of
the provisions of the company’s memorandum or articles.

Case Laws relating to Doctrine of Ultra Vires:

Jahangir R. Modi vs Shamji Ladha (1866-67)

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 In India the first concept of ultra vires was noticed in the case of Jahangir R. Modi vs
Shamji Ladha , where the plaintiff had purchased 600shares in a company and the defendant(directors
of the company) had also purchased some shares in the same company. The memorandum of the
company did not allow the members to sell or purchase any shares of the company. The plaintiff sued
the directors of the company and asked for the compensation for the purchase of the shares from the
court. The Bombay High Court held that “a shareowner can maintain an action against the directors of
the company to compel them to restore to the company the funds to it that have been employed by
them in a transaction that they have no authority to enter into, without making the company a party to
the suit”.

Conclusion

It can be concluded that an UV act is void and cannot be ratified. It prevents the wrongful
application of the company’s assets likely to result in the insolvency of the company and thereby
protects creditors. It also prevents directors from departing the object for which the company has been
formed and, thus, puts a check over the activities of the directions. However, it has sometimes led to
injustice of third parties acting in good faith.

Q No 6: Discuss the dooctrine of Indoor Management with it’s

exception.

Introduction:

The doctrine of indoor management is also known as “TURQUAND’S RULE”. The

doctrine of indoor management protects outsiders, who have entered into any contract with the
Company, by placing the parties in the first place and companies policy, behind it, i.e. if a company is
said to enter into a contract, the obligations of following companies policies fall on the member of the
Company and not on any party, who enters a contract with the company. The doctrine of indoor
management is opposite to the doctrine of Constructive notice, at the same time it protects the right
implementation of the doctrine of constructive notice, by balancing the scale.

Dосtrine оf Indооr Mаnаgement

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 The doctrine of indoor management is an exсeрtiоn tо the earlier doctrine of
соnstruсtive notice. It is important to note thаt the doctrine of соnstruсtive nоtiсe dоes nоt
аllоw outsiders tо hаvе nоt iсe оf the internal аffаirs оf the соmраny.

Henсe, if аn асt is аuthоrized by the Memоrаndum оr Аrtiсles оf Аssосiаtiоn,

then the outsider can assume that all detailed fоrmаlities аre оbserved in dоing the асt. This is
the Doctrine of Indoor Mаnаgement оr the Turquаnd Rule. This is based on the landmark case
between The Rоyаl British Bаnk аnd Turquаnd. In simрle wоrds, the doctrine оf indoor
management mеаns thаt а соmраny’s indoor affairs are the соmраny’s problem.

Therefоre, this rule оf indооr mаnаgement is imроrtаnt tо реорle dealing

with a сомраny through its directors or other persons. They саn аssume thаt the members оf
the соmраny аre рerfоrming their асts within the sсорe оf their арраrent аuthоrity. Henсe, if an
act which is valid under the Аrtiсles, is dоne in а раrtiсulаr mаnner, then the outsider dealing
with the соmраny can assume that the director/other officers have worked within their
authority.

Provisions under Company Act,1956

The provision under the Indian Act which imbibes the Turquand rule is section 290, which peruses as
under:

Section 290:- Validity of acts of directors:- Acts done by an individual as a director will be
considered valid, though it might a short time later be found that his appointment was invalid by reason
of any deformity or exclusion or had ended by ethicalness of any provision contained in this Act or in the
section: Given that nothing in this section will be considered to offer validity to acts done by a director
after his appointment has been demonstrated to the company to be invalid or to have ended:

Another Provision that straightforwardly adheres to the above-expressed guideline is section

81 of the Indian Companies Act, 1956 which bears the heading ‘further issue of offers’. Genuine allottees
of offers are ensured by the Doctrine of Indoor Management under s-81.

Exceptions to the Doctrine of Indoor Management

The doctrine of indoor management does not apply to several situations. Some of these
include:

i. Knowledge of Irregularity: The doctrine has no bearing in the case of individuals who are
aware of wrongdoings within the organisation. If you are aware of internal misdeeds and
still enter into a contract, the doctrine will not protect you.
ii. Ignorance of the Articles and Memorandum of Association: If you depend on the
organisation for being ignorant about the details laid down in the Memorandum of
Association and the Articles of Association, the doctrine will not protect you.

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 iii. Outsider Behaves Carelessly: If an officer with whom you are dealing regarding the
contract behaves very suspiciously and you do not report him, the doctrine will not protect
you.
iv. Suspicion of irregularity: If any person managing the organization is suspicious with
regards to the conditions rotating around a contract, then, at that point, he will enquire into
it. If he neglects to enquire, he can’t depend on this rule.
v. Forgery: If you enter into a contract with forged documents, the doctrine will not protect
you, and the organisation will not be responsible for the outcome.

Case: Anand Behari Lal versus Dinshaw & Co

In the history of property matters, no organisation authorises its accountant to enable a

transfer of the properties owned by the organisation. In this case, the organisation's accountant did just
that. A plaintiff accepted this, and the organisation denied protection for his gross carelessness. The
transaction was considered a void transaction.

Conclusion:

The above examples clearly state how the doctrine of indoor management can protect in
some situations and is not liable to provide the same in some other cases. This doctrine was established
to counter the doctrine of constructive notice as the latter impacted the outside members harshly. The
doctrine does not spare government authorities, and it effectively protects society from all organisation
authorities who indulge in misusing the seat they occupy.

Q No 7: Explain in details, the constitution, power and

functions of the National Financial Reporting Authority
(NFRA) as per Companies Act, 2013.
Introduction:

The National Financial Reporting Authority (NFRA) is a body constituted under the
provisions of Section 132 of the Companies Act, 2013. The constitution of this authority is effective from
1st October 2018. The Union Cabinet approved the proposal to set-up the National Financial Reporting
Authority (NFRA), intended to serve as an Independent Regulator for auditing profession. After various
recent scams like PNB scam and other financial scams and frauds in the country, NFRA is a very
welcoming move by the present government.

Composition of the NFRA:

The Companies Act requires the NFRA to have a chairperson who will be appointed by the
Central Government and a maximum of 15 members. All the members including the chairperson who

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are in full-time employment should not be associated with any audit firm (including related consultancy
firms) during their term of office and 2 years after their term.

However, the draft NFRA rules outline the following composition of the authority:

i. Chairperson is a Chartered Accountant and a person of eminence having expertise in

accountancy, auditing, finance or law;
ii. Member – Accounting;
iii. Member – Auditing;
iv. Member – Enforcement;
v. One representative of the MCA not below the rank of Joint Secretary or equivalent (ex-
officio)
vi. One representative of RBI, being a member of the RBI Board is to be nominated by the RBI;
vii. One representative of SEBI, being the Chairman of SEBI or whole-time member of SEBI is to
be nominated by SEBI;
viii. A retired chief justice of high court or a person who has been the judge of a high court for
more than 5 years is to be nominated by the Central Government,
ix. President of the Institute of Chartered Accountants of India (ex-officio).

Function of NFRA:

The Functions of the NRFA can be discussed as follows-

i. Make recommendation to Central Government (CG) on formulation of accounting/auditing

policies/standards.
ii. Monitoring & enforcing the Accounting & auditing standards’ compliance.
iii. Oversee the service quality of associated professions ensuring compliance with such standards
& suggesting improvement measures if required.
iv. Performing such other functions related to above functions.

Powers of NFRA:

The Power of the NRFA can be discussed as follows- To investigate the matters of professional
or other misconduct committed by a prescribed class of CA firms or CAs. No other authority can initiate
or continue proceedings where the NFRA has initiated an investigation. Such an investigation can be
initiated either suo moto (by itself) or on a reference made by the Central Government.

The same powers as a Civil Court under the Code of Criminal Procedure, 1908, in respect of a
suit involving the following matters.

 Discovery & production of Books of Accounts/any other documents.

 Summoning & enforcing attendance of person & examining them on oath.
 Inspection of any books, registers & other documents of persons mentioned above.

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 Where professional or other misconduct is proved, it shall have the power to impose the
following punishment:

Penalty:
For individuals a fine between Rs. 1,00,000 to 5 times the fees received;
For firms a fine Between Rs. 5,00,000 to 10 times the fees received;
Debarring the member/firm from practice as a member of ICAI between 6 months to 10 years as
may be decided

Conclusion:

The introduction of NFRA is an important step to build up a transparent mechanism for

accounting, auditing and financial reporting. Unlike NACAS, NFRA will not be just being an advisory body;
instead it has been empowered to regulate accounting standards and auditing policies along with
powers to investigate certain matters related to professional misconduct by chartered accountants in
corporate bodies. Therefore, it has a huge role to play in the field of financial reporting for effective
corporate governance.

Q No 8: What is winding Up ? Discuss the circumstances in which a

company can be wound up.

Meaning of Winding Up:

Winding up of a company is defined as the condition when the life of the company is
brought to an end. In others words Winding up refers to closing the operations of a business, selling off
assets, paying off creditors, and distributing any remaining assets to the owners. Once the winding-up
process is complete, the dissolution step comes into play. This is when the company formally under law
ceases to exist.

Circumstances in which a Company May Be Wound Up:

A company may be wound up in two ways. These are-

A. Wound up by a Tribunal

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 A company can be legally forced to wind up by a court order. In such cases, the company is
ordered to appoint a liquidator to manage the sale of assets and distribution of the proceeds to
creditors. A company may be wound up by a tribunal where the petition has been filed under the
following circumstances −

i. A special resolution is passed by the company that the company shall be wound up by the
tribunal.
ii. Failure of the company in reporting a statutory report at the registrar’s office.
iii. Non-commencement of the company in business within one year of incorporation.
iv. Number of members has reduced below 7 for a public company or 2 for a private company
respectively.
v. The debts of the company are unpayable by the company.
vi. The tribunal is just equitable to wound up the company.
vii. The company is unable to file its balance sheet or annual return for five financial years
consecutively.
viii. The company has acted against the sovereignty and integrity of the country.

B. Voluntary Winding-Up

A company's shareholders or partners may trigger a voluntary winding up, usually by the passage
of a resolution. If the company is insolvent, the shareholders may trigger a winding-up to avoid
bankruptcy and, in some cases, personal liability for the company's debts. There are two ways by which
the company declares voluntary winding-up:-

i. By Ordinary Resolution: A company may wound up voluntarily if the given period or

duration of the company has expired. Such period should be mentioned in the articles of the
company or if there is any mentioning in the articles, that company shall dissolve on the
occurrence of a particular event and if such event occurs then the company, by passing an
ordinary resolution can start the process of winding-up.
ii. By Special Resolution: A company may wound up voluntarily after getting 75% majority
from its shareholders and board of directors. The process will only start when the special
resolution has been passed. After the resolution has passed the same has to be published in the
Official Gazette and in leading newspapers of that district/city within 14 days.

Consequences of Winding Up
The most important consequences of the winding up of a company are as follows −

i. As Regards the Company Itself: Winding up doesn’t take away the existence of the
company completely. The company continues to exist as a corporate entity till its
dissolution. All the ongoing business of the company is administered by the liquidator during
the phase of liquidation.
ii. As Regards the Shareholders: Contributors − a new statutory liability comes into
existence. Every transaction of share during the liquefaction done without the approval of
the liquidator is termed void.

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 iii. As Regards the Creditors: The creditors cannot file a case against the company except
with the consent of the court. If the creditors already have decrees, they cannot proceed
with the execution. They must explain their claims and justify their claims to the liquidator.
iv. As Regards the Management: With the appointment of the liquidator, all the powers of
the directors, chief executives and other officers tend to cease. Only the powers to give
notice of resolution and the power of appointment of the liquidator upon winding up of the
company are given to the members.
v. As Regards the Disposition of the Company’s Property: All the dispositions of the
company’s properties are void if the dispositions are not approved by the court or the
liquidator.

Conclusion:

It can be further concluded that National Company Law Tribunal (NCLT) plays an
important role in the winding-up of a company. It takes all measures to protect the interest of the
creditors, debenture holders and gives a conclusive guideline so that the process of winding-up can be
followed smoothly & effectively and at the same time has made an effort to be extremely transparent
and easy.

Q No 9: When and how to constitute the Serious Fraud Investigation Office

(SFIO)? Discuss it’s powers and functions as per Companies Act, 2013.

Introduction:

Serious Fraud Investigation Office (SFIO) is a fraud-investigating agency set up to investigate

corporate frauds of very serious and complex nature. The authorization of SFIO is limited to investigating
frauds related to a company under the Companies Act. The investigation done by SFIO is considered
separate from other normal investigation into the affairs of the company. SFIO falls under the
jurisdiction of the Ministry of Corporate Affairs. The SFIO is involved in major fraud probes. It
coordinates with the Income Tax Department and the Central Bureau of Investigation (CBI) for fraud
investigation.

Constitution of SFIO:

SFIO was set up in the backdrop of stock market scams of 2000-02, phenomena of plantation
companies and vanishing companies and failure of non-financial banking companies. The Vajpayee

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Government decided to set up SFIO on 9 January 2003, based on the recommendation of Naresh
Chandra Committee on corporate governance (appointed by the Government of India in 2002) and in
the backdrop of stock market scams as also the failure of non-banking companies resulting in a huge
financial loss to the public.

The SFIO is headed by a Director as Head of Department in the rank of Joint Secretary to
the Government of India. The Director is assisted by Additional Directors, Joint Directors, Deputy
Directors, Senior Assistant Directors, Assistant Directors, Prosecutors, and other secretarial staff. It also
has the authority to arrest people who are connected to or involved in the fraud but only the Director,
Additional Director, and Assistant Director have this authority.

INVESTIGATION INTO THE AFFAIRS OF THE COMPANY BY SFIO:

The Companies Act empowers the Central Government with the right to investigate the
affairs of the company, especially in cases of an alleged fraud or even in the oppression of the minority
shareholders. As per section 212 of the Act, the Central Government may refer any matter for
investigation to SFIO, of it is of the opinion that it is necessary to investigate on the basis of:

i. On receipt of a report of the Registrar or inspector under section 208 where further
investigation into the affairs of the company is necessary;
ii. On intimation of a special resolution passed by a company that its affairs are required to be
investigated;
iii. In the public interest; or
iv. On request from any Department of the Central Government or a State Government.

The case shall not be investigated by other departments when assigned to SFIO. As per section 212 (2)
of the Act, when any case has been assigned by the Central Government to the SFIO for investigation
under this Act, no other investigating agency of Central Government or any State Government shall
proceed with investigation in such case in respect of any offence under this Act and all existing cases will
be transferred to SFIO. The investigation officer of SFIO shall have powers of inspector under section
217.

Powers of SFIO:
As per the resolution of 2nd July 2003, SFIO is to take up only the investigation of frauds
characterized by:

i. Complexity, having inter-departmental and multi-disciplinary repercussions.

ii. Significant involvement of public interest to be judged by size, either in terms of monetary
malpractice or in terms of the persons affected.
iii. The potential of investigations leading to, or assisting towards, a clear improvement in systems,
laws or procedures.

Powe of Arrests

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 Most provisions of the Act came into force on April 1, 2014. While powers of arrest to the
SFIO, which comes under the corporate affairs ministry, the provision has been notified only now. The
ministry has notified the rules pertaining to arrests in connection with Investigation by the SFIO and they
came into effect from August 24, 2017.

The Serious Fraud Investigation Office (SFIO) has the power to arrest people who violate
the company’s law. The director, as well as additional or assistant director level officials at the SFIO,
have the authority to arrest a person if they believe that the person guilty of any offence with regard to
the case being probed, provided there is a written complain of the offence. The responsible authority for
all the decisions relating to the arrest is the Director of SFIO. If a person is caught in connection with the
government or foreign company under investigation, it is important that prior approval of the central
Government is provided to the SFIO.

Conclusion:

From the above discussion we have seen that the SFIO is a fraud investigation
organization and has the primary responsibility of investigating serious, sophisticated frauds perpetrated
by individuals and/or businesses, and also acts as a regulatory agency entrusted with resolving and
prosecuting white-collar crimes in partnership with the Income Tax Department and the Central Bureau
of Investigation. Thus it is considered as an important part under the company law.

Q No 10: Who is an Independent Director? Discuss the qualifications of a

person as an Independent Director of a company. Discuss function and
duties of Independent Director.

Meaning of Independent Director:

The Companies Act,1956 does not provide us with the specific definition of an
Independent Director. But Independent Directors are in the limelight as per the Companies Act, 2013 .
Section 146(6) of the Act deals with Independent Directors. An independent director is a director who is
not an employee of the company and doesn’t hold a personal stake in any of its business (e.g., stock
ownership). Instead, these directors serve on boards for many different reasons, often to provide
leadership, improve strategy and governance, help with succession planning, and serve as liaisons
between shareholders and management.

Qualifications of Independent Directors :

Section 149(6) of the Companies Act 2013 lists the various qualifications required to be
considered as a candidate for the post of ID in the BOD of the Company. They are as follows-

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 i. He must not be a managing director, a whole-time director or a nominee director of the
company;
ii. He, in the opinion of the Board, must be a person of integrity and possess relevant expertise and
experience;
iii. He should never have been a promoter[5], or should never have been related to a promoter of
the company or its holding, subsidiary or associate company;
iv. He should not have a pecuniary relationship with the company, other than remuneration or
transactions not exceeding ten percent of their income;
v. He should not have relatives who fulfill the requirements of Section 149(6)(d) and (e).
vi. He too should not fulfill the requirements of section 149(6)(e),
vii. He shall have to fill a form of a declaration stating that he has fulfilled the conditions under sub-
section 6 if he either attends the Board meeting for the first time as the director and thereafter
in every first meeting of the financial year. Also if there is any change in their circumstances
which may affect his or her status as director this declaration must be filled.

ROLE AND FUNCTIONS:

The role and function of Independent Directors can be discussed as follows-

i. Help in bringing an independent judgment to bear on the Board’s deliberations especially on

issues of strategy, performance, risk management, resources, key appointments and standards
of conduct;
ii. Bring an objective view in the evaluation of the performance of board and management;
iii. Scrutinize the performance of management in meeting agreed goals and objectives and monitor
the reporting of performance;
iv. Satisfy themselves on the integrity of financial information and that financial controls and the
systems of risk management are robust and defensible;
v. Safeguard the interests of all stakeholders, particularly the minority shareholders;
vi. Balance the conflicting interest of the stakeholders;
vii. Moderate and arbitrate in the interest of the company as a whole, in situations of conflict
between management and shareholder’s interest.

DUTIES OF INDIPENDENT DIRECTOR:

The independent directors have the following duties—

i. Undertake appropriate induction and regularly update and refresh their skills, knowledge and
familiarity with the company;
ii. Seek appropriate clarification or amplification of information and, where necessary, take and
follow appropriate professional advice and opinion of outside experts at the expense of the
company;
iii. Strive to attend all meetings of the Board of Directors and of the Board committees of which he
is a member;

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 iv. Participate constructively and actively in the committees of the Board in which they are
chairpersons or members;
v. Strive to attend the general meetings of the company;
vi. Not to unfairly obstruct the functioning of an otherwise proper Board or committee of the
Board;
vii. Pay sufficient attention and ensure that adequate deliberations are held before approving
related party transactions and assure themselves that the same are in the interest of the
company;
viii. Report concerns about unethical behaviour, actual or suspected fraud or violation of the
company’s code of conduct or ethics policy.

Case Law: Energy Watchdog vs. Union of India & Ors, 2017

It was held in this case that, ‘Appointment process of independent directors shall be
independent of the company management. While selecting independent directors the board shall
ensure that there is appropriate balance of skills, experience and knowledge in the board so as to ensure
the credibility and authenticity of the acts and decisions of the Board.

Conclusion:

From the above discussion we have seen that though the Independent Directors doesn’t
hold a personal stake in any of its business of a company but they often providing leadership, improving
strategy and governance, helping with succession planning, and serving as liaisons between
shareholders and management serves an important role to a company. Thus it is considered as an
important part of the Company Law.

Q No 11: Define DIN or Director Identification Number ‘’. What are the
procedures for appointment and removal of Directors of a Company?
Discuss the power and Duties of Directors. Discuss the legal position of a
Director of a Company.

Director Identification Number:

The concept of a Director Identification Number (DIN) has been introduced for the first
time with the insertion of Sections 266A to 266G of Companies (Amendment) Act, 2006. DIN (Director
Identification Number) is a unique Identification Number allotted to an individual who is/proposed to be
appointed as a Director of a Company. It is allotted by the Central Government once the applicant
applies for DIN through Form DIR-3 provided under Section 153 & 154 of the Companies Act, 2013.

It is unique for every individual and no one can obtain more than one active DIN. As per the
rule all the existing and intending Directors of a company have to obtain DIN within the prescribed time
frame as notified.

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Appointment of Directors
Section 152 of the Companies Act 2013 says that an individual appointed as the
company’s Director has to be a natural person. A new Director can be appointed to the company by the
Board of Director by passing an ordinary resolution in an Extraordinary General Meeting or an Annual
General Meeting. It is mandatory for any individual who is to be added as a Director of the company for
the first time to get DIN or Director Identification Number issued by the Ministry of Corporate affairs.

The first step to appoint a director in a company is to take a consent letter from the other
directors of the company in DIR-2 along with ID and address proof etc. The next step is to analyze the
Articles of Association (AoA) of the company to understand the procedure to add a director.

According to the AoA if the director of the company can only be appointed by the
shareholders, then the Directors have to conduct a shareholders’ meeting. But in another case, like,
director of the company can be appointed by Board Meeting or by passing circulation after resolution. In
both cases, Notice for such a meeting should hold all the details for the concern process.

Once after passing the resolution in either of the above cases, an appointment letter is
prepared for the confirmed director and then filing of Form DIR -12 has to be done within the time
period of 30 days of the passing of the resolution.

Removal of Director:

Section 169 governs removal of a Director. A director may be removed from office in one of
the following ways:

i. Removal by ordinary resolution: A director holds office at the wish of the shareholders.
They can be removed by passing an ordinary resolution at a meeting of the shareholders. An
ordinary resolution is one that is passed on a majority vote of the shareholders, that is those
owners holding between them more than 50% of the ordinary voting rights.
ii. Retirement by rotation: At each annual general meeting of the company, one-third of the
total number of directors must retire from office and be subject to re-election. Shareholders
can remove a director from the board simply by failing to re-elect them. Executive directors,
however, are exempt from this requirement.
iii. Disqualification by the court or other authority : The Court has power to disqualify a
person from holding the office of director for up to 15 years. It can also remove a
disqualification. The court can disqualify a directors on the following grounds that they are
not at least 16 years old (the minimum age requirement), fail to maintain accurate
accounting records, served with a Debt Relief Order etc
iv. Removal under the company's articles of association: A company's memorandum
and articles of association can also specify circumstances when a director may be
disqualified.

Power of Directors :

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 Most corporations have not included a separate article or passed a resolution stating that
directors do not have the authority to conduct certain tasks. However according to Companies Act
2013, the Directors of a Company has the following powers in the Company.

i. Power to make calls in respect of money unpaid on shares

ii. Call meetings on suo moto basis.
iii. Borrow and invest funds for the Company
iv. Approve Financial Statements and Board Report
v. Approve bonus to employees
vi. Power to grant loans or give guarantee in respect of loans
vii. Approve Amalgamation/Merger/ Takeover
viii. Diversify the business of the Company

The directors are granted the above-mentioned powers collectively. Actually, the board is
to delegate authority to the concerned director in order to do this. This is permitted by both the Model
Articles and Table A of the Act.

Duties of Directors:

Section 166 of the Companies Act 2013 stipulates the following duties of the directors of a
Company:-

i. A director must function in line with the company’s Articles of Association.

ii. A director must act in the best interests of the company’s stakeholders, in good faith and
promote the company’s objectives.
iii. A director shall use independent judgment in carrying out his responsibilities with due care, skill
and diligence.
iv. A director should constantly be aware of potential conflicts of interest and endeavour to avoid
them in the best interests of the firm.
v. Before authorizing related party transactions, the director must verify that appropriate
considerations have taken place and that the transactions are in the company’s best interests.
vi. To assure that the company’s vigilance mechanism and users are not prejudicially affected on
such use.
vii. A company’s director may not assign his or her office, and any such assignment shall be invalid.
viii. If a corporate director violates the terms of this section, he or she will be fined not less than one
lakh rupees but not more than five lakh rupees.

LEGAL POSITION OF DIRECTOR

Directors are the persons duly appointed by the Company to lead and manage its affairs
and their legal position. At times they have to act as agents, managing partner, trustees, Employee, and
Officer.

i. Directors as Agents: A company as an artificial person, acts through directors who are
elected representatives of the shareholders and who execute decision made for the benefit

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 of shareholders. Hence directors share a relationship of an agent and a principal with the
company.
ii. Directors as Managing Partners: The management of company is vested in the hands of
many executives. So, the directors are virtuals managing partners and the Directors elected
by shareholders are like partners to the shareholders.
iii. Directors as trustees: Directors are trustees of the company’s money and property and
they have to safeguard them and use them for the sake of the company and on behalf of the
company.
iv. Directors as employees: Directors are professionals who manage the company for the
benefit of themselves and for the benefit of the shareholders. However, if a director accepts
employment in the same company under a separate contract of service, then, in addition to
the directorship, he is also treated as an employee or servant of the company.
v. Directors as officers: “Officer” includes any director, manager or key managerial
personnel or any person in accordance with the directions or instructions the Board of
Directors or any one or more of the directors who is or are accustomed to act. Therefore
Director is treated as officers of an company.

Conclusion
From the above discussion we have seen that a Director is an agent of the Company for the
conduct of the business of the company. Directors of a company have fiduciary relationship with the
company as well as the shareholders when he acts as an agent or officers of a company. The director as
the Companies Act, 1956 indicates, holds an extremely important position in the administration and
management of a Company. Thus they are considered as important part of a Company.

Q No 12: Enumerate the formalities for incorporation of a Public Company.

State the effect of Incorporation.

Introduction:

The Companies Act 2013 (‘Act’) regulates the company incorporation procedure and the
provision of the company registration certificate. Incorporation of a company is a process by which a
company is registered. In other words the incorporation of a corporation refers to the legal method
that's accustomed to typing a company entity or a corporation. Incorporation of a company is the
formal, legal process of setting up a corporation. This can be a company, a club or a non-profit
organisation. However, it usually refers to the formal process of setting up a company, whereby the
company does not have to be new but may have existed for some time, e.g. when a sole trader decides
to register his company.

Formalities for Incorporation of a Public Company:

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 A group of seven or more people can come together so as to form a public
company whereas, only two are needed to form a private company. The following steps are involved in
the incorporation of a Public company.

i. Ascertaining Availability of Name: The first and foremost step in the company
registration process is reserving the name of the company. There are two ways to go for it:
RUN and Spice. RUN or Reserve Unique Name is a web form in the website of the Ministry of
Corporate Affairs, wherein applicants can check if their new business name is available or
not and then apply for a desirable name for the company. Filling the Spice-32 form is
another way to finalize the name.
ii. Procuring Digital Signature Certificate: Once the company name has been approved
by MCA and registered, the next step is procuring a Digital Signature Certificate for your
private limited company. Digital Signature Certificate is a form of a digital key, which holds
all the vital information about the registered signatory like name, address, email, phone
number, and the authority which has provided the certificate.
iii. Applying for Director Identification Number or DIN: Director Identification Number or
DIN is the unique identification number for Directors of a registered company. Only once
DIN is approved, the corporation documents can be filed under Registrar Form No.-DIR-3.
iv. Writing Memorandum of Association (MoA): Under Section-4(6) of The Companies Act,
2013, Memorandum of Association or MoA must be in a respective form prescribed in Table
A, B, C, D and E of Schedule-I. MoA is like the Constitution of the Company. It will highlight
all the fundamental information about the company, its stakeholders, directors, and their
relationship with the company.

v. Writing Articles of Association (AoA): Articles of Association or AoA is the document

that enlists the purpose of the company, how its business will operate, how its Directors
have been appointed, and more.
vi. Application for the Incorporation of Company: Once all these documents are ready
and completed, the applicant may file for the incorporation of company, and under Section
7 of the Companies Act 2013, the application needs to be filed with the registrar under
whose jurisdiction the company’s address is located. The application for company
registration can be made via e-Form SPICe accompanied by SPICe MOA and AOA. Once the
due procedures are completed, the Registrar of Companies grants a Certificate of
Incorporation, which is evidence of the company’s existence.
vii. Commencement of Business: According to S.11 of the Companies Act, 2013. Company
having a share capital shall not commence any business or exercise any borrowing power
unless- Director should file Declaration with Registrar in Form No. INC.21 [Rule 24] in such a
manner as may be prescribed, with the Registrar that every subscriber to the memorandum
has paid the value of the shares agreed to be taken by him and the paid up capital is not less
than 5 Lakh Rupees in case of Public Company and not less than One Lakh in case of Private
Company.
viii. Registered Office: Section-12 of The Companies Act, 2013 that the company on and from
the 15 days of its incorporation and at all times thereafter, have a registered office capable
of receiving and acknowledging all communications and notices as may be addressed to it

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 and company shall furnish to the registrar verification of its registered office within a period
of 30 days of its incorporation in such manner as may be prescribed.

Effects of Incorporation of a Company:

The various effects of Incorporation of a Company are as follows-

i. Separate Legal Identity: Once a business is incorporated, it becomes a separate legal

identity. An incorporated company, unlike a partnership firm which has no identity of its own,
has a separate legal identity of its own which is independent of its shareholders and its
members.
ii. Transferable Shares: According to Section 82 of the Companies Act of 2013, the shares of a
company are deemed to be movable and transferrable in the manner provided by the articles of
the company. This enables the member to sell his shares in the open market and to get back his
investment without having to withdraw money from the company.
iii. Capacity to Sue: An incorporated company is also vested with the power of suing individuals
and other companies in its name.
iv. Flexibility: Every company has complete independence to form policies suited to their
organisation provided they do not violate general principles of law and equity.
v. Limited Liability: The company being a separate entity, leading its own existence, its members
are not liable for its debts. The liability of the members is limited to his or her share in the
company and the liability ends there. No one is bound to pay more than what he has put in.

Conclusion
From the above discussion we have seen that Incorporation of a company has its own pros
and cons. Incorporation greatly depends on the needs of the business, if the members perceive the
business as scalable then the high incorporation costs are completely justified. Thus it is considered as
an important of company law.

Q no 13: Discuss the composition, role and function of National Company

Law Tribunal.

Introduction:

Development and innovation are stages in various sectors in the social order. The Companies
Act, 2013 has undergone many amendments with new policies for good governance in corporate law.
The Law Commission of India in its 124th report in the year 1988, pointed out that increase in the
different types of litigation coming before courts have to some extent been responsible for backlogs of
cases. Thus, the establishment of separate tribunal to deal with the disputes under the Companies Act
constituted National Company Law Tribunal and National Company Law Appellate Tribunal. The Central
government constituted NCLT under Section 408 of Companies Act, 2013. It commenced on June 1,
2016, and it was set up on the basis of the recommendations of the Justice Eradi Committee.

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What is NCLT?

National Company Law Tribunal (NCLT) is a quasi-judicial body which was set up to resolve the
disputes which are arising in Indian Companies. It is the successor to the Company Law Board. It is
governed by the rules framed by the Central Government. NCLT is a special court where cases relating to
civil court have been barred from the jurisdiction.

Composition of the National Company Law Tribunal:

Composition of the National Company Law Tribunal consists of a President and such number
of other Judicial and Technical Members as may be prescribed. The President of the Tribunal shall be
appointed by the Central Government after consultation with Chief Justice of India. A person who is or
has been judge of a High Court for five years is eligible to be appointed as president of National
Company Law Tribunal. The Members are to be appointed by the Central Government on the
recommendation of a Selection Committee. A person shall not be qualified for appointment as a Judicial
Member unless he:

i. Is or has been a judge of High Court; or

ii. Is or has been a District Judge for atleast five years; or
iii. Has, for atleast 10 years been practicing as an advocate

Power and Functions:

The various power and functions of NCLT are as follows:

i. Class action –

Section 245 of Companies Act, 2013 provide remedies where the offender will be punished and
the people involved whether it is the company or directors or auditor or experts will be liable for civil
action wherein they have to compensate the shareholders and depositors for the losses caused to them
on account of the fraudulent practices or improprieties. The company restrains from doing any activities
outside the scope of Memorandum of Association (MOA) and Article of Association (AOA). A class action
can be filed against any type of companies whether the private or public company.

ii. Deregistration of Companies –

In section 7(7) of Companies Act, 2013 where a company has been got incorporated by
furnishing any false or incorrect information or representation or by suppressing any material fact or
information in any of the document or declaration fields empowers cancellation of the registration and
dissolving the company.

iii. Refusal to transfer shares –

Complaints of rejection of companies to transfer shares and securities and adaptation of

register of members u/s 58 & 59 of the Companies Act, 2013. This section deals with remedies in case of

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default or fraud by the company to provide acknowledgment of contracts dealing with the transfer of
securities.

iv. Annual General Meeting –

Under section 97 & 98 of Companies Act, 2013, general meetings are required to assess the
opinion of shareholders from time to time. If the embers of the company fail to convene the meeting
within a particular time then the member of the company may give an application with a reasonable
circumstance to the tribunal to convene such meeting

v. Conversion of Public Company into Private Company –

Section 13, 14, 15 & 18 of the Companies Act, 2013 read with Rule 41 of Companies (Incorporation)
Rule, 2014 regulates the conversion of public limited company into a private company. An approval of
NCLT has required for such conversion and the tribunal may at its discretion impose certain conditions
subject to which approval may be granted under section 459 of the Companies Act, 2013.

vi. Reopening of Accounts and Revision of financial statement –

Section 130 and 131 of the Companies Act, 2013 prohibit the company from suo moto opening
its accounts or revising its financial statement. Section 130 is mandatory where the tribunal may direct
the company to reopen its account when certain circumstances are shown. And section 131 allows the
company to revise its financial statement but does not permit the reopening of accounts. The company
can suo moto approach the tribunal u/s 131 of the Act via its directors for revising its financial
statement.

vi. Change in a financial year –

Section 2(41) of the Companies Act, 2013 every company is required to follow a uniform
financial year ending on 31 March. It provides an exception where certain companies can apply to the
st

tribunal to have a different financial year.

vi. Order investigation –

Section 213 of Companies Act, 2013 hands over power to NCLT with respect to the
investigation. An investigation into the affairs of the company can be ordered on an application of 100
members. Furthermore, if any person who is not related to the company is able to convince the tribunal
about the existence of circumstances to order an investigation then the tribunal has the power to order
an investigation. Any investigation ordered by NCLT can be conducted either in India or in any other
country.

Conclusion:

From the above discussion we have seen NCLT is the successor to the company law board.
With the establishment of NCLT, there will be a speedy remedy in resolving the company law disputes
and will be disposed of expeditiously. Also National Company Law Tribunal (NCLT) which was set up to

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resolve the disputes which are arising in Indian Companies serves an important role to provide justice to
the Companies.

Q no 14: Discuss the changes brought about by the Companies Act, 2013

Introduction:

“The Companies Act 2013 regulates the formation and functioning of corporations or
companies in India. The 1956 Act was based on the recommendations of the Bhabha Committee. This
Act was amended multiple times, and in 2013, major changes were introduced. The new law is aimed at
easing the process of doing business in India and improving corporate governance by making companies
more accountable. The 2013 Act also introduces new concepts such as One Person Company, small
company, dormant company and corporate social responsibility (CSR) etc. The Act introduces significant
changes in the provisions related to governance, e-management, compliance and enforcement,
disclosure norms, auditors, mergers and acquisitions, class action suits and registered valuers.

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The reforms brought in via the Act of 2013:

The reforms brought in via the Act of 2013 are as below:

i. Cross Border Merger

The Companies Act, 2013 under Section 234 allows the merger/ demerger of Indian
company with a foreign company, but the same was prohibited by The 1956 Act. It is to be noted that
the 2013 Act allows merger/demerger with only those foreign companies which have been notified by
the Government of India.

ii. Short Form Merger/Fast Track Merger:

Since this merger takes place either between two or more small companies or
between a parent and a wholly owned subsidiary company, therefore, there is no need of acquiring
prior approvals from NCLT and not even any approval form any other regulatory body is required in this
kind of merger, but the Central Government, Registrars of Companies (ROC), Registrars of Companies
(OL) are those approvals which have been mandated by this act even in cases of short form or fast track
mergers

iii. Reverse Merger

For regulation of this kind of mergers, the 1956 Act provides that as soon as the merger is
completed, the unlisted company get listed automatically without there being any process of IPO.
However, Section 232 (h) of the Companies Act 2013 expressly states that in case of amalgamation
between a listed company and an unlisted company, the resultant entity will be treated as an unlisted
company.

iv. Corporate Social Responsibility

The Ministry of Corporate Affairs brought forward the Voluntary Guidelines regarding Corporate Social
Responsibility in 2009 with the aim of encouraging the ethical, environmental and social responsibility of
the companies which been incorporated within the 2013 Act and thus the following of these guidelines
has been mandated as they have obtained legal sanctity.

v. Conversion Of Public Company Into Private Company

Previously, under the Act of 1956, for the alteration of converting of a company from public to
private to take effect, such conversion must be approved by the central government. Now, under 2013
Act, it is mandatory to acquire Tribunal’s approval before such alteration.

vi. Decision Making Power Of The Board

Where in the Companies Act of 1956, only an ordinary resolution which required a simple
majority of shareholders was mandated, on the other hand, the Companies Act, 2013 mandates that
certain powers inherited in the board can only be exercised by them after certain criteria is met.

vii. One Person Company

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 One of the freshest and important introductions brought by the Companies Act, 2013 is the
concept of ‘One Person Company’ (OPC). From this new concept of OPC the legislators thought of
providing the young and budding businessman with all the benefits which a private limited company
enjoys.OPC is defined in Section 2 (62) of The Companies Act, 2013, which reads as follows: “One Person
Company means a company which has only one member”

viii. Dormant Company

The idea of a dormant company is a newly introduced concept in the Companies Act 2013, previously
absent in the 1956 Act. This idea is borrowed from UK’s company law. Section 455 defines dormant
company. Therefore, a dormant company may be a company which has been formed for a future
project or for the purpose of holding any property either physical or intellectual without there being a
need of existence of any active company.

ix. Merger of a Listed Company into an Unlisted One

In the Companies Act, 2013, it has been provided that as per tribunal’s order the merger of a
listed company into an unlisted company will not in itself result in listing of an unlisted company. Now
the situation is that even after the merger the unlisted company will remain unlisted until the rules
governing listing of a company are complied with i.e. till the SEBI guidelines regarding allotment of share
to public are complied with.

Conclusion:

The Companies Act, 2013 has introduced certain change and new ideas which will have
to be adopted by companies as well the society governed by this act. Though, there are no two opinions
regarding the boldness and appropriateness of the new step taken by the Government of India to
overhaul the outdated companies act of 1956, but the effectiveness of this step is debatable as not all
the aims and goals set forward by the legislature. This was so because on paper, the provisions seemed
very effective but various difficulties were faced while implementing these provisions.

Q no 15: Write an exhaustive note on Memorandum of Association and

Articles of Association.

Introduction:

The law related to companies was brought to India by the Britishers and it has been evolving
since then. Various modifications were made to the company laws via amendments. The establishment
of the Companies Act of 2013 was a major success as it incorporated the provisions with respect to
disclosure, accountability, and corporate governance. The Act was developed to bring Indian companies
on the same pedestal as the companies in the global market. The two significant elements of
the Companies Act, 2013 are the Memorandum of Association and the Articles of Association.

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Memorandum of Association (MoA)
Section 4 of the Companies Act,2013 deals with MOA. As per Section 2(56) of the Companies
Act,2013 “memorandum” means the memorandum of association of a company as originally framed or
as altered from time to time in pursuance of any previous company law or of this Act.
MOA is said to be the principal document of the company. MoA describes the power, objective, and
operations of the company. The company can undertake those activities written under MOA. It
describes the boundaries beyond which the actions of the company cannot exceed. MOA helps the
shareholders and creditors interact and deal with the company.

The boundary beyond which the company cannot take action and give an overview of the
company’s powers and objectives. In the case of a private limited company, an MoA is signed by at least
two subscribers. However, in the case of a public limited company, an MoA is signed by seven
members.

Form of Memorandum of Association (MoA):

As per section 4 of the companies act, 2013 company shall form the MoA as specified in Tables
A to E in schedule I of the Act. Here is the list of forms with their details:

i. Table A: Form for a company having limited shares.

ii. Table B: Form for a company limited by guarantee that does not have a share capital.
iii. Table C: Form for a company limited by guarantee having a share capital.
iv. Table D: Form for an unlimited company.
v. Table E: Form for an unlimited company having a share capital.

Article of Association (AoA):

As per Section 2(5) of the Companies Act,2013 “articles” means the articles of association
of a company as originally framed or as altered from time to time or applied in pursuance of any
previous company law or of this Act. Section 5 of the Companies Act,2013 deals with AOA.
Article of Association specifies the rules and regulations of a company’s internal affairs dealing with its
management. It also defines the purpose of a company and outlines the ways in which the company
should accomplish its tasks. The tasks include preparation of financial records, and management of
financial records.

In simple terms, an AoA is a user’s manual of an organization stating its purpose and strategies
for the fulfillment of its long and short-term objectives. The main focus of an AoA is to give its readers,
information regarding the methods used by the organization to accomplish its daily, quarterly, monthly,
and yearly objectives. The document generally consists of the legal name of the company, address of the
company, financial provisions of the company, purpose of the formation of the company, provisions
related to the shareholders’ meetings, and equity capital of the company,

Forms of Articles of Association (AoA):

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 The forms of AOA in tables F to J have been mentioned under schedule I for companies ACT
2013. Here is the list of forms with their details:

i. Table F: Form for a company limited by shares

ii. Table G: Form for a company limited by guarantee having a share capital
iii. Table H: Form for a company limited by guarantee that does not have a share capital
iv. Table I: Form for an unlimited company having a share capital
v. Table J: Form for an unlimited company that does not have a share capital

Difference between MOA & AOA:

The following points reflect the key differences between these two instruments:

i. Memorandum of Association consists of the conditions which are necessary for the registration
of a company. On the other hand, the Articles of Association contain the bye-laws of the
company.
ii. Memorandum of Association has an overriding effect over the Articles of Association. Therefore,
in the cases of inconsistencies between the two, the memorandum prevails over the articles.
iii. Memorandum has to be drafted in accordance with Section 4 of the Companies Act, however,
there is discretion in formulating the articles of a company.
iv. The memorandum is to be compulsorily registered at the time of incorporation while there is no
such mandate in case of the Articles of Association.
v. Doctrine of ultra vires is applicable in the cases where a company functions outside the ambit of
its memorandum. This makes the said acts void. However, any activity outside the scope of the
Articles of Association can be performed with the consent of the shareholders.

Conclusion:

From the above discussion we have seen that Memorandum of Association and Articles of
Association, are important for a company’s functioning. While one handles the relations of the company
with the outsiders such as creditors and other stakeholders, the other regulates internal management.
However, articles have always been subordinate to the memorandum. The fact that articles are to be
framed in consonance with the five clauses of the memorandum exactly validates this point.

Q no 16: Define Prospectus. Write its main contents. Discuss the various
types of prospectus. Discuss the liabilities of inclusion of mis-statement
prospectus or untrue statement of prospectus.

Introduction

Capital in a company is vital because it indicates a company’s available finance and is used
by businesses to pay for the ongoing production of goods and services in order to produce a profit. More
the capital, the more the expansion of the company. Companies can raise funds through debt or equity
financing. In such cases, a prospectus becomes an essential tool. A prospectus is a detailed document

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containing information on the securities issued by a company to invite the potential public and investors
to subscribe to the securities.

Meaning of Prospectus:

The term "prospectus" is defined as "any document classified or disseminated as a

prospectus, including notices, circulars, and documents, as well as adverts presenting an offer to
purchase or subscribe stocks" in Section 2(70) of the Companies Act of 2013. A prospectus is, to put it
simply, a document that solicits public contributions or bids for the subscription of shares or
debentures.

Contents of a Prospectus:

The prospectus contents are specified in the Companies Act. The prospectus must touch over
the following content points:

i. Details of the company, such as name, registered office address, and objects
ii. Details of signatories to the Memorandum and their shareholding particulars
iii. Details of the directors
iv. Details of shares offered and the class of the issue as well as voting rights
v. Minimum subscription amount
vi. The amount payable on application, on allotment, and on further calls
vii. Underwriters of the issue
viii. Auditors of the company
ix. Audited reports regarded profit and losses of the company

Types of prospectus:

According to Companies Act 2013, there are four types of prospectus. These are as follows:-

i. Deemed Prospectus – Deemed prospectus has mentioned under Companies Act, 2013
Section 25 (1). When a company allows or agrees to allot any securities of the company, the
document is considered as a deemed prospectus via which the offer is made to investors. A
company usually opts for a deemed prospectus to avoid complying with regulations issued
by the SEBI.
ii. Red Herring Prospectus – A red herring prospectus is defined under Section 32 of the CA,
2013. A red herring prospectus does not provide detailed information about the quantum,
or quantity, and price of the securities offered. According to the act, the firm should issue
this prospectus to the registrar at least three before the opening of the offer and
subscription list.
iii. Shelf prospectus – Shelf prospectus is stated under section 31 of the Companies Act,
2013. A shelf prospectus offers securities for subscription in one or more issues over a
specific period of time without the need for a fresh prospectus to be issued. This is done
especially in projects where the issue size is substantial, and large sums of money are
required to be raised in order to save on the expense of filing a new prospectus every time.

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 iv. Abridged Prospectus – Section 2(1) of the CA, 2013 outlines an abridged prospectus.
Abridged prospectus is a memorandum, containing all salient features of the prospectus as
specified by SEBI. This type of prospectus includes all the information in brief, which gives a
summary to the investor to make further decisions. A company cannot issue an application
form for the purchase of securities unless an abridged prospectus accompanies such a form.

Liabilities in case of Mis-statement or Untrue statement:

The liabilities for Mis-statements in prospectus can be covered under the following heads:

i. Civil Liability:
Where a person who has subscribed for securities of a company based on any statement
included or any inclusion or omission of a matter, in the prospectus that is misleading and upon acting
on the content of the prospectus, suffers any loss or damage as a consequence, then the company and
every person who–

 is a director or or is named in the prospectus as the director of the company or agreed to

become such director,
 or is a promoter of the company,
 or has authorised/allowed the issue of the prospectus
 and is an expert who has been engaged or interested in the formation, management or
promotion of the company.

Shall be liable to pay compensation to every person, without prejudice to any punishment to
which any person may be liable, to every person who has suffered such loss or damage.

ii. Criminal Liability:

Criminal liability for misstatements in prospectuses is dealt with in Section 63 of the Companies
Act. Anyone who authorizes the publication, distribution, or issuance of a prospectus that contains
information that is false, deceptive, or both, or that includes or omits information that is likely to
mislead, is guilty of "fraud" under Section 447. . It is not necessary for such behavior to cause any unfair
gain or loss. Under this rule, it also constitutes fraud for someone to misuse their position.

If someone is found guilty of fraud, they will receive a term that ranges from six months
to ten years in prison. Additionally, he will be subject to a fine that will not be less than the sum involved
in the fraud but may be up to three times that sum. The punishment must be at least three years if the
fraud was committed for the benefit of the public.

Conclusion

From the above discussion we have seen that a prospectus contains information about the
company, its management, financial stability, and other essential information, and it is distributed to the
general public and investors to encourage them to subscribe to the securities of the company. A
prospectus can be classified into four types: Red Herring, Shelf, Abridged, and Deemed. Each prospectus
performs differently, which may help a company make a reasonable investment decision. So we can say

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that a prospectus is essential for every public company, and it must be issued in accordance with the
terms of the Companies Act, 2013.

Q no 17: Define 'share'. What are different kinds of share that may be
issued by a public company? Discuss the difference between transfer and
transmission of share.

Meaning Of Share:
A share represents a unit of equity ownership in a company. Shareholders are entitled to
any profits that the company may earn in the form of dividends. They are also the bearers of any losses
that the company may face. In simple words, if you are a shareholder of a company, you hold a
percentage of ownership of the issuing company in proportion to the shares you have bought. It is also a
type of security. It is often measured by its liability and interest. Members that own shares of a company
are referred to as shareholders. They are investors that have invested funds into the business. In return,
they will receive dividends on the profits of the business.

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Share types:
According to Section 43 of the Companies Act, 2013, a public company may issue the
following types of share:-

i. Ordinary shares:

Ordinary or equity share is the commonest variant of stock that a public company issues to
raise capital. Typically, holders of ordinary shares enjoy voting rights, can attend general and annual
meetings of a company, and are also entitled to a company’s surplus profits.

Ordinary shares classified based on two understandings. One is definition-based, and the
other is feature-based. The definition-based types of equity shares are –

a. Authorised share capital: It denotes the total amount of capital that a company can raise by
issuing stocks, as mentioned in the Memorandum of Association (MoA).
b. Issued share capital: Issued share capital refers to the amount of capital a company raises by
means of issuing stocks.
c. Subscribed capital and paid-up capital: It refers to a percentage of issued capital to which
investors have subscribed. It can happen that investors do not purchase all the shares that a
company issues.

Feature-based types of shares are –

a. Voting shares and non-voting shares : As the name suggests, entities holding these voting
shares are entitled to cast their vote in matters concerning a company’s policies or election of
directors. In the case of non-voting shares, it might entail differential voting rights or none at all.
b. Sweat equity shares: By means of sweat equity shares, companies retain efficient employees
by giving them a stake in the ownership.
c. Right shares: In a stricter sense, companies proffer existing stakeholders the right to purchase
such shares before it is open for trade to external investors.
d. Bonus shares: Companies issue bonus shares in lieu of monetary compensation for dividends.

Therefore, existing shareholders are only entitled to bonus shares.

i. Preference shares:

Preference shares entitle the owner to receive a fixed amount of dividend every year. This is
received ahead of individuals that hold ordinary shares. It is also usually as a percentage of the nominal
value (the value stated when the shares were issued). Here are the different types of shares in this
category:

a. Cumulative And Non-Cumulative Preference Shares: In the case of cumulative preference

shares, if a particular company doesn’t declare an annual dividend, the benefit is carried
forward to the next financial year. Non-cumulative preference shares don't provide for receiving
outstanding dividends benefits.
b. Participating/Non-Participating Preference Share: Participating preference shares allow
shareholders to receive surplus profits, after payment of dividends by the company. Non-

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 participating preference shares carry no such benefits, apart from the regular receipt of
dividends.
c. Convertible/Non-Convertible Preference Shares: Convertible preference shares can be
converted into equity shares, after meeting the requisite stipulations by the company’s Article of
Association (AoA), while non-convertible preference shares carry no such benefits.
d. Redeemable/Irredeemable Preference Share: A company can repurchase or claim redeemable
preference share at a fixed price and time. These types of shares are sans any maturity date.
Irredeemable preference shares, on the other hand, have no such conditions.

Differences Between Transfer of Share and Transmission of Shares:

The significant differences between transfer and transmission of shares are provided below:
i. When the shares are transferred by one party to another party, voluntarily, it is known as
transfer of shares. When the transfer of shares happens due to the operation of law, it is
referred to as transmission of shares.
ii. Transfer of shares is done intentionally whereas death, bankruptcy and lunacy are the reasons
for transmission of shares.
iii. The transfer of shares is initiated by the parties to transfer, i.e. transferor and transferee. Unlike
transmission of shares which is initiated by the legal representative of the concerned member.
iv. Transferee pays an adequate consideration to the transferor for the transfer of shares. In the
case of transmission of shares, no consideration shall be paid.
v. Execution of valid transfer deed is necessary when there is the transfer of shares, but not in the
transmission of shares.
vi. When the transfer is completed, the liability of the transferor is over. On the other hand, the
original liability of shares exists.
vii. Stamp duty is payable on the market value of shares in case of transfer while in the transmission
of shares no stamp duty is to be paid

Conclusion:

From the above discussion we have seen that a share is a percentage of ownership in a
company or a financial asset. Investors who hold shares of any company are known as shareholders.
There are various kinds of shares which a company provides for individuals. These shares represent and
entitle the holder to a stake of ownership in the company. By purchasing shares, the shareholder is
given a certain amount of rights.

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 Short note

Q n0 1: Security Exchange Board of India (SEBI)

SEBI is a statutory regulatory body established on the 12th of April, 1992. It

monitors and regulates the Indian capital and securities market while ensuring to protect the interests
of the investors, formulating regulations and guidelines. The head office of SEBI is at Bandra Kurla
Complex, Mumbai.

Structure of SEBI:

SEBI has a corporate framework comprising of various departments each managed by a

department head. There are about 20 departments under SEBI. Some of these departments are
corporation finance, economic and policy analysis, debt and hybrid securities, enforcement, human
resources, investment management, commodity derivatives market regulation, legal affairs, and more.
The hierarchical structure of SEBI consists of the following members:

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 i. The chairman of SEBI is nominated by the Union Government of India.
ii. Two officers from the Union Finance Ministry will be a part of this structure.
iii. One member will be appointed from the Reserve Bank of India.
iv. Five other members will be nominated by the Union Government of India.

Functions of SEBI

i. SEBI is primarily set up to protect the interests of investors in the securities market.
ii. It promotes the development of the securities market and regulates the business.
iii. It regulates the operations of depositories, participants, custodians of securities, foreign
portfolio investors, and credit rating agencies.
iv. It prohibits insider trading, i.e. fraudulent and unfair trade practices related to the securities
market.
v. It ensures that investors are educated on the intermediaries of securities markets.
vi. It monitors substantial acquisitions of shares and take-over of companies.
vii. SEBI takes care of research and development to ensure the securities market is efficient at all
times.

Q no 18: “Majority must prevail is the principle of Company Management”

Discuss.

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