Corporate Law

Module 2: Company Law 2013 Part II

2.1: Membership

 Meaning

A member, in relation to a company, means every person who holds some shares of the
company and whose name is entered as a beneficial owner in the records of a depository.

 Who can become a member?

A person who is of sound mind and is capable of contracting can become a member. Following
are the criteria required for a person to be competent of becoming a member:

(i) Minor:

Since a minor is not capable of entering into a contract, he cannot become a member. But since
Diwan Singh V. Minerva Films Ltd, a minor can hold shares in a joint stock company as long as
he is represented by a lawful guardian who holds shares in the name of the minor. Though, the
minor will not have any liability.

A minor, on becoming a major can cancel the contract and remove his name from all registers
or can continue to be a member of the company. A company cannot be forced to admit a minor
as a member.

(ii) Company and Subsidiary Company:

A company can become a member of another company as a company is a legal entity but a
subsidiary company cannot buy shares of its holding company. It can buy shares of another
company. A subsidiary company can become a member of the holding company in the
following cases:
 (a) The subsidiary company is a legal representative of a deceased member of the holding
company.

(b) Subsidiary company is concerned as a trustee.

(c) If the subsidiary company is already a member of the holding company before the Act,
and it continues to be so.

(d) When a subsidiary company is a member of the holding company before becoming a
subsidiary of the holding company.

(iii) Trust:

A trustee who buys shares of the company will be treated as a member. A trustee as a company
cannot buy shares but an individual can buy shares in its name for and on behalf of the trust but
he will have to make a declaration to the public trust within the prescribed time or else it will
lead to penalty.

(iv) Partnership Firm:

A firm is not a legal entity and hence cannot hold shares of a company. But the partners of a
firm can hold shares as individual or as nominees of the partnership firm.

(v) Society:

Only societies which are registered under Societies Registration Act, 1860 can hold shares of a
company.

(vi) Other: Even though an insolvent cannot be an official assignee but he may be a member as
long as his name appears in the register of members.

(vii) Non-resident: Under Foreign Exchange Regulation Act, 1973, a non-resident can become a
member only after the permission given by Reserve Bank of India.
  Acquisition of Member

Member of a company is a person:

(i) Who has subscribed his name in the memorandum,

(ii) Whose name is registered and has agreed in writing to become a member,

(iii) Who holds equity shares of the company and is a beneficial owner.

Acquisition of member can be done through following ways:

(i) By subscribing to the memorandum: A person who is neither been allotted any shares and
not paid any money is a member if he has subscribed for the shares and his name is entered in
the Register of members. But that person is liable to pay money for the shares which he has
agreed to subscribe.

(ii) By undertaking qualification Share: A director who has agreed to take qualification shares, is
already a member, irrespective of the fact that if he has signed a memorandum of the company
or not. They are liable for the amount of the shares.

(iii) By Allotment: If a person has agreed to take shares (excluding re-issue of forfeited shares)
by allotment, he has agreed to become a member of the company.

(iv) By Transfer: If a person buys shares from other person and his name is entered in the
register, he becomes a member of the company. Two things are necessary for membership:
(a) a written application by a person to become a member, and (b) entry in the register.

(v) By Transmission: On death of a member, his shares are transferred to his successor without
any instrument of transfer. AOA gives certain formalities to be followed for this transmission.

(vi) Membership by acquiescence and estoppels: If a person knows that his name is present in
the register, yet does not take any steps to take his name off, is considered a member of the
company. If a person does not know that his name is present in the register, he shall not be
considered a member.
(vii) Joint Member: If more than one person has shares in a company under a single name shall
be treated as a single member for sending notices, dividends, etc. and the name that appears
first in the register is treated as a main member.

 Cessation of membership

Membership can be ceased in the following events-

(i) Transfer of Shares: If a company goes into liquidation within a year of transfer of shares, that
person is liable.

(ii) Forfeiture of Shares

(iii) Surrender of Shares (if permitted)

(iv) Sale of Shares: A company sells its shares after exercising rights of lien.

(v) Insolvency

(vi) Death: The shares are transferred to the successor of that person.

(vii) Rescission due to misrepresentation

(viii) Redeem its Preference Shares

(ix) Issue of Share Warrants in place of Share Certificate

(x) Winding up of the company

 Rights of Members

(i) Right to receive notices of all general meetings.

(ii) Right of priority to have shares offered in case of increase of capital.

(iii) Right to attend and vote at meetings.

(iv) Right to appoint directors and auditors of the company.

(v) Right to receive copies of annual accounts of the company.

(vi) Right to transfer his shares.

(vii) Right to receive share certificate.

(viii) Right to inspect the proceedings of any general meeting.

(ix) Right to inspect the register of members and debenture holders and copies of annual report

(x) He can apply in court for rectification if his name is omitted from register of members.

(xi) Right to ask for statutory report after a statutory meeting.

(xii) Right to receive dividends in case of preference shares.

(xiii) Right to be registered as a shareholder in Company’s Book.

(xiv) Right of Privilege of immunity from personal liability of Company’s debts.

(xv) Right to participate in dividend distribution, if ordered in the discretion of directors.

(xvi) Right to rescind the contract and claim damages in case of his acquiring shares on account
of mis-statement in the prospectus.

(xvii) Right of priority to have shares offered to him in case of increase of capital by company.

(xviii) Right to petition to high court for relief in cases of oppression and mismanagement.

(xix) Right to petition to high court for winding up of the company.

(xx) Right to petition to Central Govt. for ordering an investigation into the affairs of company.

(xxi) Right to participate in appointments of directors and auditors in annual general meetings.

(xxii) Right to apply to Central Govt. to call for annual general meeting if board of directors fails
to call such meeting.

(xxiii) Right to apply to Court for an extra ordinary meeting of the company.
(xxiv) Right to participate in distribution of assets in case of liquidation of the company.

(xxv) Right to bring representative suits and company’s cause of action, to remedy
mismanagement and compel the company to enforce its rights.

 Liabilities of Members

(i) In case of unlimited company, the liability of each member is unlimited and every member is
liable in full for all debts of the company.

(ii) In case of company limited by guarantee, each member is bound to contribute certain sum
of money which is specified in the liability clause of the MOA.

(iii) In case of company limited by shares, each member is liable to pay only the full nominal
amount of shares held by him.

(iv) He is liable as a contributory in the case of winding up of the company.

(v) A shareholder is liable even after he has transferred his shares, until his name is present in
the register.

(vi)Unless the majority of members do not act oppressively or fraudulently, he is liable to abide
by their acts.

(vii) He is liable to accept the shares allotted to him within a reasonable time.

(viii) He is liable to pay for the shares allotted to him during allotment or the calls made. If he
has already paid the full amount during application, then the liability of the member ceases.

(ix) A member has to forfeit his shares in case of non-payment. He can forfeit only if the
following condition relating to forfeiture are there:

(a) Forfeiture must be in accordance with the company’s articles.

(b) Forfeiture can only be done in case of non-payment.

(c) Forfeiture can only be done after the issue of notice regarding the amount payable.
 (d) A formal resolution declaring forfeiture must be passed and a notice of the same
served on the defaulting shareholder.

(e) The power to forfeit shares must be exercised in good faith and for the benefit of the
company.
2.2: Dividends

Meaning

A company pays a proportion of profit to shareholders as dividends. The amount not

distributed is assumed to be re-invested in the business. Every company is liable to pay
dividend except Section 8 Companies which are the promoters of art, commerce, etc.

Types of Dividends

(i) Final Dividend (ii) Interim Dividend

Sources of Dividend

(i) Out of the profits earned in the current year, after providing for depreciation.

(ii) Out of the profits of any previous year, after providing for depreciation.

(iii) Any amount received from the Central or State Govt. for the payment of dividends.

Points to be considered before declaring the dividend

(i) Unrealized gain, notional gain or revaluation of assets shall not be considered for dividends.

(ii) A certain percentage of profits should be set aside as reserves before the declaration of
dividends.

(iii) Dividends can only be paid from General Reserves. No other reserves can be used.

(iv) the company has to pay the dividends of previous year (if not paid), before declaring
dividends for the current year.
Circumstances under which dividends will be paid in case of non-profit

(i) Rate of dividend will be the average rate paid in the last 3 years. If dividend is not paid in last
3 years, then this rule shall not be applied. 𝑌𝑒𝑎𝑟1 + 𝑌𝑒𝑎𝑟2 + 𝑌𝑒𝑎𝑟3
𝑅𝑎𝑡𝑒 =
3

(ii) The amount withdrawn from the accumulated profits shall not exceed 1/10 of the sum of
the paid-up share 1
𝐴𝑚𝑜𝑢𝑛𝑡 𝑤𝑖𝑡ℎ𝑑𝑟𝑎𝑤𝑛 < × (𝑝𝑎𝑖𝑑 − 𝑢𝑝 𝑠ℎ𝑎𝑟𝑒 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 + 𝐹𝑟𝑒𝑒 𝑟𝑒𝑠𝑒𝑟𝑣𝑒𝑠)
capital and free 10

reserves.

(iii) The amount withdrawn will first be used to set off the losses incurred before payment to
equity shareholders.

(iv) The balance of reserves after withdrawal should be more than 15% of the paid-up share
capital. 𝐵𝑎𝑙𝑎𝑛𝑐𝑒 𝑜𝑓 𝑅𝑒𝑠𝑒𝑟𝑣𝑒𝑠 > 15% × 𝑝𝑎𝑖𝑑 − 𝑢𝑝 𝑠ℎ𝑎𝑟𝑒 𝑐𝑎𝑝𝑖𝑡𝑎𝑙

Punishment for Failure of Payment of Dividend

If the dividend is not paid within 30 days after the declaration, every director will be imprisoned
for 2 years and a fine of at least 1000 will be paid for everyday during which such default is
made. No offense shall be deemed if:

(i) If dividend is not paid by the reason of Operation of Law.

(ii) Where a shareholder gave direction regarding the payment of dividend.

(iii) Where there is dispute regarding dividend.

(iv) Where the dividend is adjusted by the company against sum due from the shareholder.
2.3: Winding up of a Company

Provisions relating to winding up of a company are governed by the Insolvency and Bankruptcy
Code. A company can wind up either voluntarily or the procedure relating to compulsory
winding up.

Types of Winding up of a Company

(i) Winding up by way of Tribunal: It is when external members like creditors are involved in the
process of winding up of the company.

(ii) Voluntary Winding Up: This is when the company wants to carry out the process through
resolution of the board and members.

Grounds for Winding up of a Company

(i) If the tribunal thinks that the company is unable to pay debts.

(ii) If the company has taken special resolution to wind up the affairs of the company.

(iii) If the company has acted against sovereignty and integrity of India.

(iv) If the tribunal is sick of the company.

(v) If the tribunal or registrar or any other person thinks that the company has done something
fraudulent or unlawful.

(vi) If the company has not filed the annual returns.

(vii) If the tribunal finds it just and equitable for the company to wind up.
Procedure of Winding up of a Company

(i) Filing of petition: A petition can be filed by: (a) Trade creditors, (b) Company,
(c) Contributories of the company, (d) Govt. authorities, (e) Registrar of the Company.

(ii) Statement of Affairs of the Company: A statement of affair, which is not more than 30 days
old, must be submitted along with the petition. A duplicate must be filed with the affidavit.

(iii) Advertisement: The petition must be advertised in English for a period of 14 days before the
date of hearing.

(iv) Appointment of Provisional Liquidator: After the submission of the petition, the tribunal will
appoint a liquidator which will perform responsibilities which are mentioned in accordance to
the requirement of the company.

(v) Send Notice to Provisional Liquidator: The registrar will send a copy of notice to the official
liquidator within 7 days of the order.

(vi) Winding Up Order: The winding up order which is made would be sent to the company
liquidator within 7 days by the registrar.

(vii) Custody property: All assets, documents, actionable claims, and books of the company will
be taken by the company liquidator.

(viii) Affairs of the Company: If the affairs are wound up, the company liquidator will make an
application to the tribunal for the dissolution of the company.

(ix) Dissolving the Company: If the tribunal finds out that the accounts are in order, then it
would pass an order for dissolving the company.

Procedure of Winding up of a Company through Voluntary Method

(i) Passing of Resolution and Special Resolution: After checking for provision for dissolution in
MOA and AOA, the company would arrange for a general meeting for passing of the resolution.
The special resolution must require 75% or 3/4 th of the majority of the members. After passing
of the resolution, the company will appoint a liquidator. Creditors will represent themselves
during voluntary winding up.

(ii) Declaration of Solvency: The Company will declare solvency by showing company finances to
the trade creditors.

(iii) Preparation of Winding up: The liquidator appointed will prepare a report showing
information about the assets, liabilities, and other forms of trade liabilities which will be
disclosed in the general meeting of the company.

(iv) Application to Tribunal: If the tribunal finds that the accounts are in order, it would pass an
order for dissolution of the company.

 National Company Law Tribunal

NLCT is a quasi-judicial body which was set up to resolve the disputes that arise in Indian
Companies.

Powers of NLCT

(i) Class Action: It is a procedural device that permits one or more plaintiffs to file and
prosecute a lawsuit on behalf of a large group.

(ii) Deregistration of Companies: Tribunal can cancel the registration and dissolve the company
and also declare unlimited liabilities of the members.

(iii) Oppression and Mismanagement: It permits dilution of the eligibility criteria with the
permission of tribunal.

(iv) Refusal to Transfer Shares: The tribunal can refuse the members of the company to transfer
shares.

(v) Deposits: Aggrieved depositors can also take part in class action for seeking redressal for the
acts/ omissions of the company which hurt their rights as depositors.
(vi) Reopening of Accounts and Revision of Financial Statements

(vii) Tribunal Ordered Investigation

(viii) Conversion of Public Company to Private Company

(ix) Tribunal Convened AGM

(x) Compounding of Offence

(xi) Changing of Financial Year

2.4: Directors

A director is a person appointed to perform duties and functions of director. In a Public

Company there should be at least 3 directors, in a Private Company there should be at least 2
directors and in a one person company there should be minimum 1 director. There can be
maximum 15 directors.

 Qualifications and Disqualifications of a Director

Any person can become a director, given that he is competent to contract. A person shall not
be eligible for appointment as a director if,

(i) He is of unsound mind.

(ii) He is an undischarged insolvent.

(iii) He has applied to be adjudicated as an insolvent and his application is pending.

(iv) He has been convicted by a court of any offence.

(v) An order disqualifying him for appointment of director.

(vi) He has not paid any calls in respect of any shares of the company and 6 month period has
passed after the appointment of the shares.

(vii) He has been convicted of the offence dealing with related party transactions during the last
5 years.

 Appointment of Directors

A director can be appointed in the following ways:

(i) Appointment of First Director:

(ii) Nominee Director:

(iii) Additional Director Section:

(iv) Independent Director Section:

(v) Resident Director Section:

(vi) Alternate Director:

(vii) Appointment of Director in Casual Vacancy:

 Removal of Director

NIL

 Duties of Directors

(i) A director must function in accordance provisions made in the AOA.

(ii) A director must act in the best interests of company’s stakeholders and promote company’s
aims and objectives.

(iii) A director must use his independent judgement in carrying out his responsibilities.

(iv) A director must be aware of conflict of interest and endeavor to avoid them in the best
interest of the firm.

(v) A director should take care of considerations made and that the transactions made are in
best interests of the company.

(vi) Director has to assure that the vigilance mechanism and users are not prejudicially affected
on such use.

(vii) Director must take care of sensitive proprietary information, trade secrets, technology, etc.
are protected and not leaked.

(viii) Director must not assign his assignment to others. If done, then it would be invalid.
(ix) In case of violation of terms by director, he shall pay a fine of minimum 1lakh but not more
than 5lakh.

Fiduciary Duties of Directors

(i) Duty of Loyalty: Decisions taken should be in the interest of the company and not the
individual interests.

(ii) Duty of Care: The directors, where they do not have clash of interest must make decisions in
the interest of the company.

(iii) Duty of disclosure of facts: Director must disclose all facts to the members.

(iv) Must be in accordance with the provisions of AOA: Directors must act in accordance with
the provisions made in Articles of Association.

(v) No secret Profit: Directors must not sacrifice the company in order to make extra profits.

 Provisions for Women Directors

Every listed company must have one women director.

Every other public company having paid–up share capital of one hundred crore rupees or more
or turnover of Rs.300 crore or more should have one women director.
Further is provides that the Woman Director should submit the consent form No 112 along with
the Director’s Identification Number Provided by Central Government.
Any new company registered under this act should comply the provisions of an appointment of
woman director with in a period of 6 months from the date of incorporation.
  Role of ICC in Protection of women in case of Sexual Harassment at Workplace

Introduction

More than 50% of women face sexual harassment, crude jokes, and unwelcome gestures in the
workplace. They do not report such sexual harassment because of: (a) fear of lawful
termination, (b) unnecessary work pressure, and (c) spoiling the team environment.

Sexual Harassment of Women under the Workplace Act has three purposes:

(i) Protect women against sexual harassment at the workplace.

(ii) Prevent sexual harassment.

(iii) Provide redressal mechanism for complaints relating to sexual harassment at the workplace

Internal Complaint Committee

ICC must be adhered by an employer of a workplace with more than 10 employees. ICC plays an
important role in the functioning of the provisions of the Act and to ensure fulfilment of its
objectives.

Qualifications of becoming a member of ICC

(i) Presiding Officer: The presiding officer must be a female employee or a nominee of a female
employee who works at a senior position.

(ii) Employee: Two members of ICC should be the employees working in the company.

(iii) Outside Member: One person should be from an NGO or association which works for
women’s cause.

The tenure of the above mentioned members should not be more than 3 years.
Disqualification ofa member of ICC

(i) Disclosing of confidential information

(ii) If there is a conviction into an offence against a member

(iii) If the person is found guilty or some disciplinary proceedings are pending against him.

(iv) If the person has abused the position.

Quick read

1. The members appointed from NGO should be paid by the employer. They are entitled to an
allowance of Rs. 200 per day, excluding the travel costs.

2. A complaint can be filed by: (a) Aggrieved women, and (b) Relative, Friend, Co-worker of the
complainant if she is incapable (physical or mental) of filing a complaint.

3. A complaint can be filed within a period of 3 months from the rate of incident of sexual
harassment.

4. Powers of ICC:

(a) Summoning and enforcing the attendance of a person related to the incident.

(b) Discovery or production of documents.

(c) Other matters relating to the incident of sexual harassment.

(d) Initiate action against the person once he is found guilty.

5. The amount compensation paid should be calculated on the basis of: (a) mental trauma, pain,
suffering, and emotional distress, (b) loss in career opportunity, (c) medical expenses incurred
by the victim, (d) income and status of the perpetrator, and (e) feasibility of payment in
instalment or lumpsum.
6. General duties of the ICC are:

(a) Implement anti-sexual harassment policy at the workplace.

(b) Submit an annual report.

(c) Create awareness at the workplace.

(d) Publicize the policy framework

(e) Provide a safe and accessible mechanism of complaint to the victims

(f) Initiation of inquiry at the earliest

(g) Redress the complaints in the best possible manner

(h) Provide for interim relief

(i) Provide an opportunity for conciliation

(j) Follow the principles of natural justice at all stages of the proceedings

(k) Forward the complaint to the police, where required

(l) Submit recommendations along with the inquiry report

(m) Maintain confidentiality in regard to the proceedings taking place before the
Committee.