Short Notes

Company Law

Unit 1

Question: Discuss the theory of corporate personality and its significance in corporate law.
How does this theory impact the legal status and operations of a corporation?

Answer: The theory of corporate personality, or corporate personhood, is a cornerstone of

corporate law, treating corporations as separate legal entities distinct from their shareholders,
directors, and employees. This principle grants corporations rights and responsibilities similar to
those of individuals, such as owning property, entering contracts, and suing or being sued.

Definition and Legal Basis

• A corporation is a "legal person" upon incorporation, with its own rights and obligations.

• It can own property, enter contracts, incur debts, and sue or be sued in its own name.

• This concept was solidified in the landmark case Salomon v. Salomon & Co. Ltd.
(1897), which established that a corporation is a separate entity from its members,
reinforcing principles like limited liability and separate legal personality.

Key Features and Legal Basis

Corporations are independent from their members, allowing them to operate, incur liabilities, and
own property in their name. This concept, established in Salomon v. Salomon & Co. Ltd.
(1897), confirmed that incorporation creates a distinct legal entity, protecting shareholders from
personal liability through limited liability. Corporations enjoy perpetual succession, meaning
their existence is unaffected by changes in ownership or management. Their shares can be freely
transferred, encouraging investment. Governance is typically centralized, with boards of
directors managing operations on behalf of shareholders.

Significance

The Companies Act, 2013, codifies these principles, emphasizing limited liability, legal
independence, and perpetual succession. Landmark cases like Lee v. Lee’s Air Farming Ltd.
(1961) and Macaura v. Northern Assurance Co. (1925) highlight the practical implications,
reinforcing that corporate assets and liabilities remain separate from personal assets of
shareholders.

This theory underpins modern business by ensuring corporations operate as stable, independent
entities, protecting investors while promoting accountability and economic growth.
Question: Explain the meaning and nature of a corporation. What are the defining
characteristics that distinguish a corporation from other forms of business entities?

Answer: A corporation is a distinct legal entity, separate from its shareholders, directors, and
employees, with its own rights and responsibilities. Recognized as an "artificial person" under
the Companies Act, 2013, this concept allows corporations to act independently, owning
property, entering contracts, suing, and being sued in their own name. This separation provides
significant advantages, particularly limited liability, shielding shareholders' personal assets from
corporate debts. The landmark case Salomon v. Salomon & Co. Ltd. (1897) firmly established
this principle, holding that corporations are independent of their founders and shareholders.

As separate entities, corporations operate with features like perpetual succession, meaning their
existence continues regardless of changes in ownership or management. This ensures stability,
enabling long-term planning and uninterrupted operations. For instance, even if shareholders
leave or directors change, the corporation remains intact, providing a robust structure for
business continuity. Additionally, corporations benefit from transferability of shares, allowing
ownership to change hands easily, enhancing liquidity and attracting investors.

Corporations are managed through a centralized governance structure, typically a board of

directors elected by shareholders. This framework ensures professional and strategic
management while separating ownership from day-to-day operations. The board's fiduciary
duties, as outlined in the Companies Act, 2013, emphasize acting in the company's best
interests, further strengthening accountability.

Another critical advantage is the ability to raise capital through the issuance of shares and
securities. This capability supports significant growth and expansion, distinguishing corporations
from sole proprietorships and partnerships, which rely heavily on personal funds or limited
partner contributions. Furthermore, corporate assets are owned by the corporation itself, separate
from shareholders' property, as upheld in cases like Macaura v. Northern Assurance Co. Ltd.
(1925), ensuring clarity in asset management.

Corporations face higher regulatory compliance compared to other business entities, with
detailed statutory obligations under the Companies Act, such as maintaining records, conducting
audits, and filing annual returns. These measures promote transparency and protect stakeholders.
Non-compliance, as seen in cases like Sahara India Real Estate Corporation Ltd. v. SEBI
(2012), can result in severe penalties, underscoring the importance of adhering to legal
frameworks.

Unlike sole proprietorships and partnerships, where the business ceases to exist with the owner's
death or partner withdrawal, corporations offer continuity and independence, making them
reliable for investors and creditors. This stability, combined with shareholder protections,
liquidity of shares, and robust governance, positions corporations as a preferred structure for
large-scale business operations.
Question: Analyze the uses and abuses of the corporate form, particularly focusing on the
concept of lifting the corporate veil. Under what circumstances do courts and regulatory
authorities decide to lift the corporate veil, and what are the legal and ethical implications
of this action? Provide relevant case law.
Answer: The corporate form is designed to separate the legal identity of a company from its
shareholders, providing limited liability and encouraging business activities. However, this
separation can be misused for fraudulent purposes, leading to the doctrine of "lifting the
corporate veil," where courts disregard the company’s separate personality to hold individuals
accountable.

Legal Framework for Lifting the Corporate Veil

Under common law, the corporate veil may be lifted in cases of fraud, evasion of statutory
obligations, or where the company is a mere façade to avoid legal responsibility. This principle
stems from cases like Gilford Motor Co Ltd v. Horne (1933), where the court pierced the veil
to prevent the defendant from evading a non-compete agreement by setting up a new company,
and Jones v Lipman (1962), where the veil was lifted to enforce a contract violated by the
creation of a new company. Legal provisions such as Section 397 of the Companies Act, 2013
(India) empower the courts to look behind the corporate veil in cases of oppression and
mismanagement, while Section 421 of the same Act allows the tribunal to lift the veil in cases of
fraud, misrepresentation, or illegal activities.

Circumstances for Lifting the Veil

1. Fraud: Where the corporate structure is used to conceal fraudulent activities (e.g., Prest
v Petrodel Resources Ltd [2013]).

2. Evasion of Statutory Obligations: To prevent the company from evading legal

obligations, such as in Adams v. Cape Industries plc (1990), where the veil was lifted to
hold the parent company liable for the subsidiary’s actions.

3. Sham or Façade: If the company is found to be a mere façade for the actions of its
owners or directors, as in Smith, Stone & Knight Ltd v. Birmingham Corporation
(1939).

Legal and Ethical Implications

Legally, lifting the veil ensures accountability, particularly in cases of fraud or wrongful conduct,
providing protection for creditors and stakeholders. However, this action can create uncertainty
in business, as it undermines the fundamental principle of limited liability.

Ethically, piercing the veil serves justice by ensuring that individuals cannot evade liability
behind the corporate structure. It promotes fairness and accountability in business practices,
ensuring that companies cannot be used for unlawful or unethical purposes.
Question: Discuss the various kinds of companies recognized under corporate law. How can
a company convert from one type to another, and what are the legal procedures and
implications involved in such conversions?

Answer: Under corporate law, various types of companies are recognized, each serving distinct
purposes and governed by specific legal provisions. These companies can be categorized based
on their liability, number of members, and ownership. Below is a discussion of the different
kinds of companies and the legal procedures for their conversion, along with the implications of
such conversions.

Types of Companies

1. Private Company: A private company is a company with a limited number of

shareholders, typically restricted to 200 members, and its shares cannot be publicly
traded. The key feature is that it offers limited liability to its shareholders. It is governed
by Section 2(68) of the Companies Act, 2013.

2. Public Company: A public company can have an unlimited number of shareholders, and
its shares can be traded on the stock exchange. It offers limited liability to its members. A
public company is governed by Section 2(71) of the Companies Act, 2013.

3. One-Person Company (OPC): A one-person company is a type of private company that

has only one member and one director, offering the advantages of limited liability while
being governed by Section 2(62) of the Companies Act, 2013.

4. Section 8 Company (Non-Profit Company): These companies are formed for

promoting commerce, art, science, charity, or other similar objectives, and no part of the
income is distributed to members. They are governed by Section 8 of the Companies
Act, 2013.

5. Limited Liability Partnership (LLP): An LLP combines the features of a partnership

and a company, where partners have limited liability. It is governed by the Limited
Liability Partnership Act, 2008.

6. Government Company: A government company is one in which at least 51% of the

shares are held by the government, either central or state. It is governed by Section 2(45)
of the Companies Act, 2013.

7. Foreign Company: A foreign company is one incorporated outside India but operates in
India through a place of business. It is governed by Section 2(42) of the Companies Act,
2013.

Conversion of a Company from One Type to Another: Companies can convert from one type
to another in accordance with the provisions laid out in the Companies Act, 2013. The
conversion process typically involves legal formalities that ensure the company meets the
requirements of the new structure.

Private to Public Company

A private company can convert into a public company by passing a special resolution in the
general meeting and complying with the following steps:

• Alteration of Articles of Association (AoA): The company must amend its AoA to
reflect the rights of shareholders in a public company.

• Minimum Shareholders: The company must have at least seven shareholders.

• Appointment of Directors: It must ensure that the minimum number of directors as

required for a public company (three directors) is appointed.

• Filing with the Registrar: The company must file the special resolution and a revised
AoA with the Registrar of Companies (RoC).

Legal Implications: The company will become subject to stricter regulations, including the need
for an annual general meeting (AGM), board of directors' meetings, and disclosure requirements
under securities law.

2. Public to Private Company

A public company may convert into a private company by following these steps:

• Special Resolution: A special resolution must be passed by the shareholders.

• Alteration of AoA: The AoA must be amended to reflect that the company is now
private.

• Filing with the RoC: The special resolution and amended AoA must be submitted to the
RoC for approval.

Legal Implications: The company will be exempt from some of the regulatory requirements
applicable to public companies, such as compulsory public disclosure, and it will no longer be
able to offer shares to the public.

3. Private Company to One-Person Company (OPC)

A private company may convert into an OPC by meeting the following requirements:

• Eligibility: The company must have only one member (shareholder) and one director
after the conversion.

• Special Resolution: A special resolution must be passed for the conversion.

 • Application to RoC: The company must apply for conversion to the RoC with necessary
documents, including a revised AoA and MoA (Memorandum of Association).

Legal Implications: The company will benefit from simpler compliance requirements, but it will
be limited to a single member and director. Additionally, its ability to raise capital will be
restricted compared to a private or public company.

Each conversion involves significant legal and procedural changes, impacting the company’s
governance, liability structure, and regulatory compliance. The legal implications include a shift
in the company’s obligations under corporate law, changes in the rights of members, and, in
some cases, a restructuring of its operations and capital-raising mechanisms.
Question: Explain the process of incorporating a company with a focus on the role of
promoters. What are the key responsibilities and legal obligations of promoters during the
promotion stage? Discuss the importance of the promotion stage in the overall
incorporation process, providing relevant case laws and legal provisions.

Answer: Incorporating a Company: Role of Promoters

The incorporation of a company involves several key steps, one of the most critical being the
promotion stage, where the groundwork for the company is laid. Promoters play a crucial role in
this stage, as they are the individuals or entities responsible for bringing the company into
existence. Their responsibilities and legal obligations significantly impact the overall success and
legal standing of the company. The process of incorporation generally follows these steps:

1. Decision to Form a Company: The promoters make the initial decision to form the
company, determining its purpose, structure, and legal framework.

2. Drafting of Documents: Promoters are responsible for preparing the foundational

documents required for incorporation, such as the Memorandum of Association (MoA)
and the Articles of Association (AoA), which define the company’s objectives, rules, and
internal governance.

3. Appointment of Initial Directors: Promoters often suggest and appoint the first
directors of the company.

4. Filing with Registrar of Companies (RoC): The promoters are responsible for
submitting the necessary documents, including the MoA, AoA, and other forms
prescribed by the Companies Act, 2013, to the Registrar of Companies (RoC) to register
the company officially.

5. Subscription of Shares: Promoters typically subscribe to the initial shares of the

company, which is essential for its capital formation at the time of incorporation.

Key Responsibilities and Legal Obligations of Promoters

1. Duty of Disclosure and Good Faith: Promoters owe a duty of good faith to the company
and its shareholders. They must disclose any personal interests in the transactions they
undertake on behalf of the company. If a promoter stands to benefit personally from a
contract or transaction related to the company, they must disclose this interest under
Section 184 of the Companies Act, 2013. A breach of this duty could lead to legal
consequences, including claims for damages by the company or other stakeholders.

2. Duty to Act in the Best Interests of the Company: Promoters must act in the best
interest of the company during the promotion phase. They must not misuse the
company’s name or resources for personal gain. Equity law (e.g., Buckland v.
 Sutherland [1910] 1 Ch 26) holds that promoters must avoid conflicts of interest and not
enter into self-serving contracts before the company is formed.

3. Contractual Liability: During the promotion stage, promoters may enter into contracts
or agreements on behalf of the company. However, until the company is incorporated, it
cannot be a party to those contracts. Therefore, promoters are personally liable for any
contracts made on behalf of the company prior to its registration. This is referred to as
pre-incorporation contracts. After incorporation, the company may choose to ratify
these contracts, thus relieving the promoters of liability. In Kelner v. Baxter (1866) L.R.
2 C.P. 174, the court held that a company could not be bound by a pre-incorporation
contract unless it ratified the contract after formation.

4. Compliance with Legal Provisions: Promoters must ensure that the company complies
with all applicable legal provisions under the Companies Act, 2013 and other relevant
regulations. This includes ensuring proper filings, meeting statutory requirements, and
adhering to the law during the promotion stage.

5. Raising Capital and Subscribing to Shares: Promoters typically subscribe to a portion

of the company’s share capital. They may also assist in securing additional capital from
investors. This is essential for the financial health of the company at its inception.

Importance of the Promotion Stage in the Incorporation Process

The promotion stage is vital for the following reasons:

1. Foundation of the Company: This stage sets the groundwork for the company’s
operations, determining its legal structure, objectives, and governance. The MoA and
AoA, which are drafted during this stage, form the legal constitution of the company.

2. Creation of Legal Identity: The company only gains its legal identity once it is
registered with the RoC, making the promoter's role crucial. This registration establishes
the company as a separate legal entity, distinct from its promoters, and allows it to enter
into contracts, own property, and incur liabilities in its name.

3. Establishing Credibility: A company that is properly promoted and incorporated gains

credibility with investors, lenders, and regulatory bodies. This enhances the company’s
ability to raise capital, enter into contracts, and operate legally.

4. Risk Management: The promotion stage allows for the identification and management
of potential risks, such as legal liabilities from pre-incorporation contracts, financial
obligations, and regulatory compliance issues. This is critical to avoid disputes or
challenges to the company’s formation.

Legal Provisions
Several legal provisions govern the duties and responsibilities of promoters during the promotion
stage:

• Section 35 of the Companies Act, 2013: Provides for the legal effects of the MoA and
AoA, which are fundamental documents drafted by the promoters.

• Section 184 of the Companies Act, 2013: Requires disclosure of interest by promoters in
contracts with the company.

• Section 36 of the Companies Act, 2013: Addresses pre-incorporation contracts and the
company’s liability upon incorporation, subject to ratification.

• Section 2(54) of the Companies Act, 2013: Defines “promoter” and provides a
framework for understanding the role of promoters in company formation.

The promotion stage is a critical part of the incorporation process, and promoters bear significant
responsibility in ensuring the company is established legally and ethically. Their duties include
acting in good faith, ensuring compliance with legal provisions, and managing risks associated
with pre-incorporation activities. The importance of this stage lies in its role in establishing the
company’s legal identity, securing necessary capital, and ensuring that the company operates
within the bounds of the law. Any failure or mismanagement during this stage can lead to legal
liabilities and challenges, potentially affecting the company’s operations in the long term.
 UNIT II
Question: How does the Doctrine of Ultra Vires affect the ability of a company to alter its
Memorandum of Association, and what are the legal steps required for such an alteration
under the Companies Act, 2013?
Answer: As per Section 2(56) of 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 this
Act. Memorandum of Association is a legal document that contains specific information
regarding the working of the company, it also defines the scope of activities of the company.
Memorandum of Association is also called the charter of the company which contains the rights
and duties of the members and their relation with the company. Every memorandum of a
company has a certain object clause which mentions the reason why the company has been
incorporated. It is expected that the company will act according to the object clause and will not
act outside the object clause, if the company does any act which is not a part of the object clause,
then that act of the company would be declared ultra vires. The literal meaning of this doctrine is
acts done beyond power. An ultra vires act is void and cannot be ratified by the directors even if
they want to ratify it.

Every memorandum of a company has a certain object clause which mentions the reason why the
company has been incorporated. It is expected that the company will act according to the object
clause and will not act outside the object clause, if the company does any act which is not a part
of the object clause, then that act of the company would be declared ultra vires. The literal
meaning of this doctrine is acts done beyond power. An ultra vires act is void and cannot be
ratified by the directors even if they want to ratify it. Section 13 of the Companies Act, 2013
contains the provisions as to how can a memorandum of association be changed.
In Ashbury Railway Carriage and Iron Company Ltd v. Riche (1875), the object clause in the
memorandum of the company was to sell, lend, hire or make the railway carriages and wagons of
all kinds. The directors of the company entered into an agreement with Riches for financing a
railway line, later the company did not perform the contract and the plaintiff sued the defendants
for breach of contract. one thing to be noted here is that the members of the company ratified the
contract before its non-performance. The issue before the court was whether the contract was
valid and could the members of the company ratify the same contract. It was held that the acts of
the company was outside its object clause and therefore not within the memorandum and
therefore declared the contract void.
House of Lords was of the view that the company incorporated within the company’s act is
bound to do the acts as per the object clause in the memorandum and therefore in the above case
financing of the railway line was outside the object clause of the company and therefore it was
ultra vires.
Acts which are not ultra vires
There are 3 situations under which an act will not be termed as ultra vires, all these situations can
also be termed as exceptions:
1. If the act was done is within the object clause.
2. If some special powers have been conferred by a statute so that the main task can be
made effectual, then also the act done will not be ultra vires.
3. Sometimes certain acts done are neither within the object clause nor some special power
had been conferred, but still, the act done would not be ultra vires if it is found in the
inquiry that the act done was incidental and consequential to the act and was done to
fulfil the main task.
Question: What is Article of Association and what are the legal procedures for altering the
Articles of Association? In what ways do the Doctrines of Constructive Notice and Indoor
Management impact the enforceability of the Articles of Association.

Answer: Under the Companies Act of 2013, Section 2(5) covers the definition of Articles of
Association. According to the aforesaid Section, AOA or ‘Articles’ contain all the rules and
regulations framed by the Directors of the company to govern the internal management and
governance, which can also be altered from time to time. In a nutshell, as mentioned earlier, it is
a rulebook that regulates the inner workings of the company while binding the company to its
workers and vice versa.

Section 14 of the Companies Act, 2013, states the power of a company to alter its AOA, given
that such alteration is within the bounds of the MOA and is passed by the prescribed procedure
of passing a special resolution. As mentioned earlier, Section 14 of the Companies Act, 2013
states the requirements for the alteration of Articles of Association, which may include addition,
deletion, substitution or modification of the clauses in the aforesaid document. The Articles of
Association can also be altered by the National Company Law Tribunal (NCLT), given that the
alteration is either subtraction or declaration of a clause as void due to any contravention with the
Memorandum of Associations of the company or any legislation of the country. The main power
of alteration is mostly only in the hands of the shareholders and Directors of the company and
the Tribunal can only do so if there are any contraventions of the clauses with law or if the
alteration is necessary for the functioning of the company or to protect the interests of the
shareholders from unfair exploitation. Even in case of any mistake in the Articles of Association,
be it clerical or otherwise, it can only be rectified by the shareholders.
The Doctrine of Constructive Notice is a legal principle that affects the enforceability of a
company's Articles of Association (AOA). It posits that anyone dealing with a company is
deemed to have knowledge of the company's public documents, including the Memorandum of
Association (MOA) and the Articles of Association (AOA). These documents are filed with the
Registrar of Companies and are available for public inspection. This doctrine aims to protect the
company from claims by third parties who allege ignorance of the company’s internal
regulations.
Question: What are the mandatory contents of a prospectus under the Companies Act,
2013, and what liabilities do company directors face for mis-statements in the prospectus?
Answer: Section 2(70) of the Companies Act, 2013 defines a prospectus as “prospectus means
any document described or issued as a prospectus and includes a red herring prospectus referred
to in section 32 or shelf prospectus referred to in section 31 or any notice, circular,
advertisement or other document inviting offers from the public for the subscription or purchase
of any securities of body corporate.”
A prospectus is a document that provides all the essential information about the company at the
time of raising an investment from the public. It can be understood as an invitation to offer the
securities of the company. The public intending to invest in the company can make an offer
above the offered price but within the price band.
The prospectus must provide general information about the company, such as its name,
registered office address, corporate identity number, date of incorporation, and type of company
(whether public or private). It must outline the objectives of the company as specified in its
Memorandum of Association.
The capital structure section should detail the share capital, including authorized, issued,
subscribed, and paid-up capital, along with information about different classes of shares and the
rights attached to them. Management details should include the names, addresses, and
designations of directors, key managerial personnel, and promoters, as well as their directorships
and interests in other companies.
The prospectus must clearly state the details of the offer, including the purpose of the issue, the
total number of securities offered, the price band, the method of pricing, the use of proceeds from
the issue, and the estimated project cost. The prospectus should also address any pending
litigations involving the company, its directors, and promoters, and disclose any defaults on
financial obligations. It must list all material contracts, agreements, and documents referred to in
the prospectus, and specify where these documents can be inspected.

Additionally, any other information material to investors' decision-making should be included to

ensure full transparency.

Under the Companies Act, 2013, directors of a company face significant liabilities for any
misstatements in the prospectus, which can be either untrue or misleading statements, or
omissions of required information. These liabilities are both civil and criminal.

Civil liability is outlined in Section 35 of the Act. If a prospectus contains any untrue or
misleading statement, any person who subscribes to the securities based on the prospectus can
claim compensation. This applies to every person who was a director at the time of the issue,
every person who authorized the issue of the prospectus, and every promoter of the company.
Directors can be held liable to compensate investors for any loss or damage they suffer due to
reliance on the misstatements.
Criminal liability is imposed by Section 34 of the Act. If a prospectus includes any statement
which is false or misleading in form or context, every person who authorizes the issue of such a
prospectus can be punished with imprisonment for a term which may extend to 10 years, a fine
which may extend to Rs. 3 crores, or both.

Directors can avoid liability if they can prove certain defenses. These defenses include
withdrawing their consent before the issue of the prospectus, the prospectus being issued without
their knowledge or consent (provided they gave public notice upon becoming aware of it), and
having reasonable grounds to believe and actually believing that the statement was true up to the
time of the issue of the prospectus.
 Unit III
Question: What do you understand by shares of a company? Explain about its nature and
its types and also explain how shares are issued and allotted?
Answer: Shares of a company represent ownership in the company's capital, giving
shareholders a proportionate claim on profits, voting rights, and, in the event of liquidation,
residual assets. Shareholders are part-owners of the company, but the company itself is a distinct
legal entity, as established in Salomon v. Salomon & Co. Ltd.
Nature of Shares:
Shares are units of ownership that give shareholders rights depending on the class of shares.
They are considered movable property and are transferable, subject to company regulations. In
companies with limited liability, a shareholder’s liability is restricted to any unpaid amount on
their shares.
Types of Shares:
1. Equity Shares: These grant ownership rights, including voting, and entitle holders to
dividends and residual assets after creditors and preference shareholders. However,
equity shareholders bear the greatest risk, as they are the last to be paid in liquidation.
2. Preference Shares: These carry preferential rights to dividends and repayment of capital
but generally lack voting rights. They can be further classified as cumulative, non-
cumulative, participating, non-participating, convertible, or non-convertible, depending
on the rights attached to them.
Issuance and Allotment of Shares:
The process of issuing shares is governed by the Companies Act, 2013, and can occur through
public offerings, private placements, rights issues, or bonus shares. Shareholders or investors
apply for shares, which are then allotted by the company through a resolution passed by the
board. Once allotted, the company issues share certificates, or for listed companies, credits the
shares to the shareholder’s Demat account.
The legal framework for the issuance of shares includes sections like Section 26 (for public
offers), Section 42 (private placements), Section 62 (rights issues), and Section 53 (dealing with
the prohibition on issuing shares at a discount). These provisions ensure that the process of
issuing and allotting shares is regulated and fair for investors.
In summary, shares represent ownership in a company, and their issuance and allotment are
subject to the legal provisions laid out in corporate law, notably the Companies Act, 2013. Both
equity and preference shares have their distinct features and rights, influencing the shareholder’s
role and risk.
Question: What do you understand by Underwriting? Explain about the alteration in share
capital and discussed the ways in which it can be reduced.
Answer: Underwriting in the context of company law refers to a contractual arrangement
wherein an individual, institution, or financial entity (known as the underwriter) agrees to
subscribe to a portion or the entirety of a company's shares or debentures that are not taken up by
the public during an issuance. This ensures that the company raises the necessary capital even if
there is not enough public interest in its securities.
Underwriting is typically done in exchange for a commission and provides a safety net for
companies, ensuring that they receive the funds they intend to raise. It is commonly used during
public issues of shares or debentures, particularly for Initial Public Offerings (IPOs). The
underwriter assumes the risk by agreeing to purchase any unsubscribed shares, ensuring the
success of the issue.
Alteration in Share Capital:
Under the Companies Act, 2013, a company can alter its share capital by following the
procedure laid down in Section 61. The alteration must be authorized by the company’s articles
of association, and a special resolution must be passed in the general meeting. The alteration may
include:
1. Increase in Share Capital: A company can increase its authorized share capital by
issuing new shares, typically done to raise additional funds or for expansion purposes.
2. Consolidation and Subdivision of Shares: A company can consolidate its shares,
reducing the number of shares and increasing their nominal value, or subdivide them,
increasing the number of shares and reducing their nominal value.
3. Conversion of Shares into Stock: Shares can be converted into stock, where shares are
consolidated into a larger sum called "stock." This gives flexibility to shareholders to
transfer fractional parts of their holdings.
4. Cancellation of Unissued Capital: If any shares have not been taken up or are unissued,
the company can cancel them, thus reducing the share capital.
Reduction of Share Capital:
The reduction of share capital is a more complex process governed by Section 66 of the
Companies Act, 2013, and requires approval from both the shareholders and the National
Company Law Tribunal (NCLT). It may be carried out in the following ways:
1. Extinguishment of Liability on Unpaid Shares: A company can reduce its share capital
by extinguishing or reducing the unpaid liability on its shares. This means if shareholders
have partly paid for shares, the company can forgive the unpaid portion, reducing the
capital.
2. Buy-back of Shares: The company can repurchase its own shares from shareholders,
effectively reducing the amount of its paid-up capital. This is done under Section 68 of
 the Companies Act, 2013, subject to several conditions like solvency, liquidity, and limits
on the amount that can be repurchased.
3. Cancellation of Paid-up Capital that is Lost: If a company has suffered losses and part
of the capital has been lost or is no longer represented by available assets, it can reduce
the share capital by canceling the shares, thus adjusting the company's balance sheet.
4. Return of Surplus Capital: If the company has excess capital that is not required, it may
return this capital to shareholders by reducing the nominal value of the shares and paying
the excess to the shareholders.
Legal Framework and Approvals:
• For reduction of share capital, Section 66 mandates that the company must pass a special
resolution and obtain confirmation from the NCLT.
• The reduction must be fair and equitable, with proper disclosure to creditors, who may
object if their interests are compromised.
• In certain cases, such as a buy-back of shares, other provisions such as Section 68 come
into play, ensuring that the reduction of capital does not harm the company's financial
stability.
In summary, underwriting serves as a risk-mitigation mechanism for companies during the
issuance of shares, while the alteration and reduction of share capital are methods that companies
can use to manage their capital structure effectively, subject to statutory regulations.
Question: What do you understand by the Transfer and Transmission of Securities?

Answer: Transfer and Transmission of Securities are distinct legal concepts under corporate
and securities law, specifically in the context of the Companies Act, 2013, and other securities-
related regulations.

Transfer of Securities: The term refers to the voluntary act of moving ownership of shares or
securities from one party to another. The transfer is typically carried out between two living
persons, either for a consideration or as a gift. The primary feature of a transfer of securities is
that it requires the execution of a transfer deed, and the transferor and transferee must both be
involved in the process.

The main elements of transfer include:

• Voluntary Act: It is initiated by the shareholder (transferor).

• Execution of Transfer Deed: For registered companies, the transferor must submit a duly
executed transfer deed along with the relevant share certificate.
• Stamp Duty: In case of physical transfer, applicable stamp duty must be paid.
• Board Approval: The company's board of directors may review and approve the transfer
in certain cases, particularly for private companies or restricted shares.

After due registration, the transferee is recorded as the legal owner in the company's register of
members.

Companies Act, 2013: Sections 56 and 58 provide the relevant provisions regarding the transfer
of securities. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, lay
down the procedure for listed companies.

Transmission of Securities: Transmission of securities occurs due to the operation of law, where
the ownership of shares is transferred due to the death, bankruptcy, or insolvency of the
shareholder. Unlike transfer, which is a voluntary act, transmission is an involuntary legal
consequence, and no transfer deed is required. Section 56 of the Companies Act, 2013, also
governs the transmission of securities.

The process entails:

• Death of a Shareholder: When the original shareholder dies, the legal heirs, nominees, or
executors of the will may apply for the transmission of shares to their names.
• Insolvency or Bankruptcy: Shares may also be transmitted if the shareholder is declared
bankrupt or insolvent, with the official receiver assuming ownership of the shares.
• Legal Documentation: In cases of death, the legal heirs must submit documents such as
the death certificate, succession certificate, or probate. In case of insolvency, a court
order may be necessary.
• No Stamp Duty: Transmission does not attract stamp duty, unlike transfers.
• Board Approval: The company’s board generally approves the transmission after
verifying the necessary documents.
Question: What do you understand by dividend? Explain declaration of dividend and
discuss about management of unpaid dividend.

Answer: A dividend refers to the portion of a company’s earnings distributed to its shareholders,
often as cash or additional shares. It serves as a return on investment for shareholders and is
typically declared when a company has stable profits. The declaration of dividends is governed
by Section 123 of the Companies Act, 2013, which permits dividends to be declared from the
company’s current profits, undistributed profits of previous years, or government-provided funds
in the case of a government company. The process involves the board of directors recommending
the dividend, which is then approved by shareholders in an annual general meeting (AGM). Once
declared, dividends must be paid within 30 days, as per the legal mandate, failing which the
company may face penalties.

The management of unpaid dividends is addressed under Section 124 of the Act. If a declared
dividend remains unclaimed or unpaid for 30 days, it must be transferred to a designated Unpaid
Dividend Account within 7 days. The company is required to provide details of unpaid
dividends on its website to notify shareholders, who can then claim the amount by making a
formal application.

If the dividend remains unclaimed for seven years, the funds, along with any underlying shares,
are transferred to the Investor Education and Protection Fund (IEPF), in accordance with
Section 124(5). Shareholders can still claim these amounts by applying to the IEPF authority,
though this process involves additional steps.

The legal framework ensures dividends are distributed transparently and within the stipulated
time-frame, while also safeguarding shareholders' rights to claim unpaid dividends even years
later. The IEPF, governed by Section 125, serves to protect investors' interests by absorbing
unclaimed dividends and providing a mechanism for recovery. Overall, the rules promote
corporate governance and protect shareholder rights in relation to dividend distribution.

The fund comprises unclaimed dividends, matured deposits, debentures, application money, and
other unpaid amounts that have remained unclaimed for the prescribed period. Any shareholder
wishing to claim their unpaid dividend from the IEPF must make an application to the IEPF
authority in the prescribed manner, and upon due verification, the IEPF authority may release the
amounts claimed.
The legal framework surrounding dividends ensures that companies are able to distribute profits
to their shareholders in a fair and transparent manner while protecting shareholders' rights to
claim unpaid dividends even after several years. It also encourages companies to maintain
corporate governance standards in managing their financial affairs, including their obligations
toward shareholders.
Question: What do you understand by unpaid dividend and also describe about Investor
Education and Protection Fund? Highlights the provision of punishments in case of failure
to distribute dividends.

Answer: An unpaid dividend refers to a dividend that has been declared by a company but has
not been paid to or claimed by the shareholders within the prescribed period of time, typically 30
days from the date of its declaration, as mandated by the Companies Act, 2013. Dividends may
remain unpaid due to various reasons, such as the failure of shareholders to claim their
dividends, inaccurate shareholder records, or shareholders not encashing dividend warrants.

Under Section 124 of the Companies Act, 2013, if a dividend is not paid or claimed within 30
days, the company is required to transfer the unpaid amount to a special Unpaid Dividend
Account within seven days of the expiry of that 30-day period. The company must also provide
details of shareholders who have not claimed their dividends on its website and other prescribed
platforms, enabling shareholders to track their unclaimed dividends.

If a dividend remains unclaimed for seven years from the date of transfer to the Unpaid
Dividend Account, the company must transfer the unpaid amount, along with any associated
shares, to the Investor Education and Protection Fund (IEPF), a statutory body created under
Section 125 of the Companies Act, 2013. The IEPF is designed to promote investor awareness
and protect investors’ interests by absorbing unclaimed amounts such as unpaid dividends,
matured deposits, or application money. Shareholders or their legal heirs can claim the
transferred dividends or shares from the IEPF by submitting an application through the
prescribed process.

The law imposes penalties for failure to comply with dividend distribution regulations.
According to Section 127 of the Companies Act, 2013, if a company fails to pay a declared
dividend within 30 days of the declaration (without a valid legal reason such as a court order), it
may face strict penalties. The company will be liable to pay interest at the rate of 18% per
annum on the amount of the unpaid dividend for the period of the default. Additionally, every
officer of the company who is in default may be subject to imprisonment for a term that may
extend to two years, along with a fine ranging from ₹1,000 to ₹1,00,000 for each day during
which the default continues.

In Kasturi & Sons Ltd. v. Sri Chandrasekaran and Ors. (1995), the Madras High Court
addressed a company's obligation to pay dividends once declared. The court held that a declared
dividend becomes a debt owed by the company to its shareholders. The company is legally
bound to pay it within the prescribed period, typically within 30 days under the Companies Act.
Any failure to do so without legal justification results in liability for penalties. This case
highlighted the legal duty of companies to distribute dividends promptly and respect shareholder
rights.

These provisions ensure that companies meet their obligations to shareholders and safeguard
shareholder rights, while the establishment of the IEPF provides a secure mechanism for
unclaimed funds and promotes investor education.
Question: What do you understand by Debenture? Explain its Kinds. Also mention about
Debentures Holders and Debenture Trustees.

Answer: A debenture is a type of debt instrument issued by a company to raise capital. It

represents a loan taken by the company from investors, where the company agrees to repay the
principal amount with interest at a future date. Unlike shares, debentures do not confer any
ownership rights to the holders but give them a fixed return in the form of interest. Debentures
are typically unsecured, meaning they are not backed by any specific asset of the company,
though certain kinds may be secured by a charge on the company’s assets.

The legal framework for debentures in India is provided by the Companies Act, 2013,
specifically under Section 71, which lays out the rules for issuing debentures, including the
requirement for appointing debenture trustees in certain cases and the rights of debenture
holders.

Kinds of Debentures:

Secured and Unsecured Debentures: Secured debentures are backed by a charge on the
company’s assets, providing security to the holders in case of default. Unsecured debentures, on
the other hand, do not have such backing and therefore carry a higher risk for the holders.

Convertible and Non-Convertible Debentures: Convertible debentures can be converted into

equity shares of the issuing company at a later date, either fully or partially. Non-convertible
debentures (NCDs) do not carry such a conversion option and are purely debt instruments.

Redeemable and Irredeemable (Perpetual) Debentures: Redeemable debentures have a

specific maturity date on which the principal amount will be repaid to the holder. Irredeemable or
perpetual debentures do not have a fixed maturity date and are not repayable unless the company
goes into liquidation.

Registered and Bearer Debentures: Registered debentures are those where the name of the
holder is recorded in the company’s register, and the transfer of ownership requires an official
registration. Bearer debentures, on the other hand, are transferable by mere delivery, and the
holder of the physical debenture certificate is considered the owner.

Zero-Coupon Debentures: These debentures do not pay periodic interest. Instead, they are
issued at a discount to their face value and redeemed at the full value, with the difference
representing the return to the debenture holder.

Debenture Holders:

Debenture holders are the creditors of the company, as opposed to shareholders who are
considered owners. Debenture holders are entitled to receive fixed interest payments at regular
intervals, irrespective of the company’s profit. Their role is primarily passive, and they do not
participate in the company’s management. In case of liquidation, debenture holders are paid
before shareholders, making their investment less risky compared to equity holders. However,
they have no voting rights in the company, except in rare circumstances where decisions affect
their interests, such as changes in the terms of the debenture issue.

Debenture Trustees:

Under Section 71(5) of the Companies Act, 2013, companies that issue secured debentures are
required to appoint debenture trustees. A debenture trustee is typically a financial institution,
bank, or trust company that acts as a representative of the debenture holders and ensures that the
interests of the debenture holders are protected.

The Debenture Trustee Regulations issued by SEBI (Securities and Exchange Board of India)
lay down the duties and responsibilities of debenture trustees. These responsibilities include
ensuring that the company issuing the debentures complies with the terms of the debenture issue,
particularly with respect to maintaining the security over the assets, making timely payments to
debenture holders, and safeguarding the debenture holders' rights in the event of default.

Debenture trustees have the right to approach a tribunal or court on behalf of the debenture
holders in case of default or breach of the terms of the debenture issue. They act as
intermediaries between the debenture holders and the company, providing an additional layer of
protection to the investors.
Question: What do you understand by Public Deposits Hybrid Instruments?

Answer: Public deposits refer to the money collected by companies from the public, including
shareholders, employees, or other individuals, as a source of short-term financing. This is an
alternative to borrowing from banks or issuing debt instruments. Public deposits typically offer a
higher rate of interest than traditional bank deposits, but they also carry higher risk as they are
unsecured liabilities of the company. These deposits are governed by strict regulations,
particularly under the Companies Act, 2013, and guidelines set by the Reserve Bank of India
(RBI), ensuring that companies cannot misuse this method of raising funds.
Under Section 73 of the Companies Act, 2013, companies (other than banking companies and
non-banking financial companies) can accept public deposits, but they must comply with a set of
prescribed conditions. These conditions include limits on the amount that can be raised, the
period for which the deposit is taken, and the obligation to repay the principal and interest at the
end of the term. Additionally, companies are required to maintain a deposit repayment reserve
account to safeguard the interests of depositors and ensure timely repayment.
Hybrid Instruments:
Hybrid instruments are financial instruments that combine features of both equity and debt.
These instruments provide the flexibility of debt (in terms of fixed interest payments) while also
offering the potential for capital appreciation or equity-like benefits. Hybrid instruments are
often used by companies to raise capital without diluting equity ownership or increasing debt
obligations excessively.
Some common examples of hybrid instruments include:
Convertible Debentures: These are debt instruments that can be converted into equity shares
after a specific period or under certain conditions. They provide investors with the benefit of
fixed interest payments initially (like a debt instrument) and the potential to become shareholders
later.
Preference Shares: Preference shares are a type of equity instrument but carry debt-like features,
such as fixed dividend payments. Preference shareholders have a priority claim over ordinary
shareholders when it comes to dividend payments and repayment during liquidation, but they
usually do not have voting rights.
Non-Convertible Debentures (NCDs) with Warrants: These are NCDs (debt instruments) that
are issued with warrants attached, allowing the holder to purchase equity shares in the future.
The NCD offers regular interest payments, while the attached warrant provides the opportunity
to buy shares at a predetermined price.
Hybrid instruments are popular among investors seeking the benefits of both stable income and
potential for capital growth, while companies use them to strike a balance between debt and
equity financing. However, they carry varying levels of risk depending on their structure and the
issuing company’s financial health. These instruments are often governed by the regulatory
framework of the Companies Act, 2013, and guidelines issued by SEBI (Securities and Exchange
Board of India).
Question: What do you understand by Charges and Mortgages? Mention about the
registration of charges and inter-corporate investments.
Answer: A charge and a mortgage are both legal mechanisms used by companies and individuals
to secure loans or other financial obligations by offering assets as collateral. While both involve
pledging property or assets to secure a debt, there are distinctions between them in terms of
structure, nature, and legal treatment.
Charges: A charge refers to the security interest created on the property or assets of a company
or individual to secure the repayment of a debt. In a charge, no transfer of ownership or
possession of the asset takes place; instead, a legal or equitable right is granted to the creditor
over the assets. Charges are typically classified into two types:
Fixed Charge: A fixed charge is created on a specific, identifiable, and immovable asset (like
land, building, or machinery). The borrower cannot sell or dispose of the asset without the
creditor's consent.
Floating Charge: A floating charge is created over the company's general pool of assets, such as
stock-in-trade, inventory, or receivables, which can fluctuate in value and composition. The
company is free to deal with the assets in the ordinary course of business until the charge
"crystallizes," which usually happens upon a default or a specific event that converts the floating
charge into a fixed charge.
Mortgages: A mortgage is a specific type of charge in which the borrower transfers an interest in
immovable property to the lender as security for a loan, with the condition that the transfer
becomes void upon repayment of the debt. The key characteristic of a mortgage is that it
typically involves immovable property, like land or a building, and results in the lender having a
direct legal interest in the property.
The Transfer of Property Act, 1882 governs mortgages in India, defining various kinds of
mortgages, such as simple mortgage, usufructuary mortgage, mortgage by conditional sale, and
equitable mortgage.
In contrast to charges, mortgages often imply a more direct control or legal right over the
property. In an equitable mortgage, for instance, a borrower deposits title deeds with the lender,
giving the lender an interest in the property without formal registration.
Registration of Charges:
The registration of charges is governed by Sections 77 to 87 of the Companies Act, 2013.
Companies are required to register any charge created on their assets with the Registrar of
Companies (RoC) within 30 days of its creation. This requirement applies to both fixed and
floating charges.
Failure to register a charge renders it void against the liquidator or any creditor of the company
in the event of insolvency or winding-up. It is critical because it ensures that creditors and
stakeholders are aware of the company’s liabilities and potential claims against its assets.
The registration process includes submitting a prescribed form (Form CHG-1 for new charges or
Form CHG-4 for satisfaction of charges) along with relevant documents, including the
instrument creating the charge. Once registered, the RoC issues a Certificate of Registration of
the charge, which acts as evidence of the charge’s validity.
Inter-Corporate Investments: Inter-corporate investments refer to the investments made by one
company in the securities or assets of another company. These investments may be in the form of
equity, debentures, or loans. Section 186 of the Companies Act, 2013 regulates inter-corporate
loans and investments and imposes restrictions on the extent and conditions under which a
company can make such investments or loans.
The key provisions under Section 186 include:
Limitations: A company cannot make an investment, provide a loan, or give guarantees or
securities in excess of 60% of its paid-up share capital, free reserves, and securities premium, or
100% of its free reserves and securities premium, without obtaining prior approval by way of a
special resolution in a general meeting.
Disclosure Requirements: Any company making inter-corporate investments must disclose the
details of such investments in its financial statements and must also ensure that these investments
are registered and comply with any relevant regulatory framework.
Rate of Interest: If a company is providing loans to another company or entity, the interest rate
on such loans should not be lower than the prevailing yield on government securities of a similar
tenure.
The purpose of these provisions is to ensure transparency, safeguard the interests of the
shareholders, and prevent misuse of corporate funds by limiting excessive exposure to financial
risks through inter-corporate investments.
In summary, charges and mortgages are legal methods of securing debts, with a charge being
more flexible and often used for both movable and immovable property, while mortgages
typically relate to immovable property. The Companies Act, 2013 mandates the registration of
charges to protect the interests of creditors and prevent fraudulent claims. Inter-corporate
investments are regulated to ensure that companies do not over-leverage their assets, and specific
limits and conditions are imposed to maintain corporate financial stability.
 UNIT IV
Question 1: What are the legal procedures and qualifications for obtaining membership in
a company under the Companies Act, 2013, and what rights and obligations does such
membership entail?
Answer: The Companies Act, 2013 governs the formation, operation, and dissolution of
companies in India, including the procedures for obtaining membership, the qualifications
required, and the rights and obligations that come with membership. Below is a detailed
explanation of these aspects.
Legal Procedures for Obtaining Membership in a Company: Membership in a company can
be obtained in several ways, primarily through shareholding or subscription to the company’s
articles of association. The following steps outline the procedures for obtaining membership:
1. Application for Shares: A prospective member must submit an application to the
company for the purchase of shares. The application should specify the number of shares
the applicant wishes to acquire and may include payment for the shares.
2. Allotment of Shares: Once the application is received, the company’s board of directors
will consider the application and may approve it based on the company's policy. Upon
allotment, the company must issue a share certificate to the new member, which acts as
proof of membership.
3. Payment of Subscription Money: The member must pay the subscription money for the
shares allotted. This payment can be made in full or in part, as specified in the company's
articles.
4. Inclusion in the Register of Members: Upon successful allotment and payment, the
member’s name is entered in the Register of Members maintained by the company,
signifying the person’s official membership status. This register must be kept updated and
is subject to inspection by shareholders and certain regulatory authorities.
5. Compliance with Articles of Association: Members must also comply with any
additional requirements set out in the company’s articles of association related to
membership.
Qualifications for Membership: Under Section 89 of the Companies Act, 2013, the
qualifications for becoming a member of a company are as follows:
1. Natural Person: A person must be a natural person (individual) or an entity authorized
by law. Corporate entities can also be members but must act through authorized
representatives.
2. Capacity: The applicant must have the legal capacity to contract, which means they
should not be a minor or of unsound mind.
3. Minimum Subscription: Members must meet any minimum subscription requirements
as stipulated in the company’s articles of association. This can vary based on the
company’s capital structure.
 4. Payment of Subscription Price: The prospective member must agree to pay for the
shares and fulfill any conditions attached to the shareholding, including the payment of
calls (if applicable).
Rights of Members: Membership in a company confers several rights, which may vary based on
the type of company (public or private) and the provisions of the company's articles. Key rights
include:
1. Voting Rights: Members have the right to vote on resolutions at general meetings, with
the number of votes typically corresponding to the number of shares held.
2. Right to Receive Dividends: Members are entitled to receive dividends declared by the
company in proportion to their shareholding, subject to the company's profitability and
board decisions.
3. Right to Information: Members have the right to access certain information and
documents, such as the company’s financial statements, minutes of meetings, and the
register of members, under Section 136 of the Companies Act.
4. Right to Attend General Meetings: Members can attend general meetings, participate in
discussions, and raise questions regarding the company’s affairs.
5. Right to Transfer Shares: Members can transfer their shares, subject to the provisions of
the Companies Act and the company’s articles of association.
6. Right to Appoint Proxies: Members have the right to appoint a proxy to attend and vote
at meetings on their behalf.
Obligations of Members: Alongside the rights, membership also entails certain obligations:
1. Payment of Calls: Members must pay any calls on shares as and when they are made by
the company. Failure to do so can result in penalties or forfeiture of shares.
2. Compliance with Articles: Members must adhere to the company’s articles of
association and any rules and regulations set forth therein.
3. Duty of Good Faith: Members are expected to act in good faith towards the company
and other members, particularly in matters that affect the company’s interests.
4. Disclosure of Interest: Members must disclose any personal interest they may have in
transactions or decisions being made by the company that may lead to a conflict of
interest.
5. Liability for Company Debts: In the case of a company limited by shares, members’
liability is limited to the amount unpaid on their shares. However, in the case of a
company limited by guarantee, members may be liable for the amount they guaranteed in
the event of liquidation.
In summary, obtaining membership in a company under the Companies Act, 2013, involves a
structured process that includes applying for shares, allotment, and registration.
Question: Examine the different types of corporate meetings under the Companies Act,
2013, and elaborate on the procedures governing each. Additionally, analyze the various
forms of voting rights available to shareholders and the distinctions between ordinary and
special resolutions, outlining the specific situations where each type of resolution is
required."
Answer: The Companies Act, 2013 delineates various corporate meetings and the procedures
governing them, as well as shareholder voting rights and the distinctions between ordinary and
special resolutions.
Types of Corporate Meetings
1. Annual General Meetings (AGMs): Mandatory yearly meetings for shareholders, held
within six months of the financial year-end. The first AGM must occur within nine
months from the end of the first financial year. The agenda typically includes approval of
financial statements, declaration of dividends, and appointments of directors and auditors.
Notice must be given at least 21 days in advance.
2. Extraordinary General Meetings (EGMs): Convened to address urgent matters
requiring immediate attention, such as changes in share capital. An EGM can be called by
the Board or upon requisition by shareholders holding at least 10% of voting power.
Similar to AGMs, a 21-day notice is required unless shorter notice is agreed upon.
3. Board Meetings: Required for the Board of Directors to discuss company management
and operations, with a minimum of four meetings held annually, spaced no more than 120
days apart. A notice period of at least seven days is required.
Voting Rights of Shareholders: Voting rights include:
• Show of Hands: Default method where each member has one vote, requiring a simple
majority.
• Poll Voting: Demanded by members holding at least 10% of voting rights; votes are
based on shares held.
• Electronic Voting: Required for certain companies, facilitating participation.
• Postal Ballot: Allows shareholders to vote by mail for specific resolutions.
Ordinary vs. Special Resolutions
• Ordinary Resolutions: Require a simple majority of votes for routine matters (e.g.,
approval of accounts, dividend declarations). Governed by Section 114 of the Act.
• Special Resolutions: Require at least 75% of votes for significant matters (e.g.,
alterations to articles). Governed by Sections 114 and 117 of the Act.
In summary, the Companies Act, 2013 establishes structured procedures for corporate meetings,
delineates voting rights, and differentiates between ordinary and special resolutions to ensure
effective governance and shareholder engagement.
Question 3: Discuss the legal provisions under the Companies Act, 2013, concerning the
appointment, qualifications, and removal of directors, and critically examine the various
types of directors, including executive, non-executive, and independent directors, in
relation to these provisions.
Answer: The Companies Act, 2013 provides a comprehensive framework concerning the
appointment, qualifications, and removal of directors in companies. This legislation establishes
specific legal provisions that govern these aspects to ensure effective corporate governance.
Appointment of Directors
According to Section 152 of the Companies Act, 2013, directors are appointed in the following
manner:
1. First Directors: The first directors of a company are named in the articles of association
or, if not specified, are appointed by the subscribers to the memorandum of association.
2. Subsequent Appointments: In the case of a public company, at least two-thirds of the
directors must retire by rotation. The directors who retire are eligible for reappointment.
The appointment of directors requires a proper resolution to be passed at a general
meeting.
3. Consent and Declaration: A director must provide written consent to act as a director
and make a declaration that they meet the qualifications required by the Companies Act.
Qualifications of Directors
The qualifications for being appointed as a director are specified in Section 164 of the
Companies Act. Key qualifications include:
1. Age: A person must be at least 21 years old and not exceed the age of 70 years.
2. Competency: Directors must possess the requisite skills and experience. They should not
be disqualified under any provisions of the Companies Act or any other law.
3. No Disqualifications: A person cannot be appointed as a director if they are an
undischarged insolvent, declared of unsound mind by a competent authority, or convicted
of an offense involving moral turpitude, among other disqualifications.
Removal of Directors
The removal of directors is governed by Section 169 of the Companies Act, which outlines the
following provisions:
1. By Ordinary Resolution: A director can be removed before the expiry of their term by
passing an ordinary resolution at a general meeting, after giving them reasonable
opportunity to be heard.
2. Special Notice: A special notice is required for the removal of a director, meaning the
company must inform the director concerned at least 14 days before the meeting.
 3. Legal Recourse: A director who is removed has the right to appeal to the tribunal within
three weeks of the resolution.
Types of Directors: The Companies Act, 2013, recognizes various types of directors, including:
1. Executive Directors: These directors are involved in the day-to-day operations of the
company. They hold specific managerial roles and responsibilities. Typically, executive
directors are full-time employees of the company and are involved in strategic decision-
making.
2. Non-Executive Directors: These directors do not engage in the daily management of the
company but contribute to policy-making and provide oversight. They bring an
independent perspective and can be essential in safeguarding the interests of
shareholders. Non-executive directors may receive remuneration but are not involved in
the company's operational activities.
3. Independent Directors: Defined under Section 149(6) of the Companies Act,
independent directors are non-executive directors who do not have any material or
pecuniary relationship with the company, its promoters, or its directors. Their role is to
ensure unbiased judgment and to protect the interests of minority shareholders.
Independent directors must meet specific criteria and must provide a declaration of
independence at the time of their appointment.
Critical Examination of Provisions: The provisions under the Companies Act, 2013, provide a
robust legal framework for the appointment, qualifications, and removal of directors. They
ensure a clear demarcation between different types of directors, facilitating accountability and
transparency in corporate governance. However, the effectiveness of these provisions can be
subject to scrutiny.
The reliance on ordinary resolutions for the removal of directors may be exploited in cases of
conflict, particularly if controlling shareholders wish to remove a director who advocates for
minority interests. Moreover, while independent directors are intended to serve as a check on
management, their effectiveness can be compromised if they lack real independence from the
company or its management.
Additionally, while the Act establishes certain qualifications for directors, there are concerns
about the enforcement of these provisions. Instances of non-compliance and inadequate oversight
may undermine the integrity of the board, particularly in companies with concentrated
ownership.
In conclusion, the legal provisions concerning directors under the Companies Act, 2013, aim to
promote good governance practices. However, the practical challenges in implementing these
provisions call for ongoing scrutiny and enhancement of regulatory measures to ensure that the
interests of all stakeholders are adequately protected.
Question: What are the obligations, powers, and duties of a director under the Companies
Act, 2013, and how is the Director Identification Number (DIN) related to these
responsibilities?
Answer: Under the Companies Act, 2013, directors hold a significant role in corporate
governance, with clearly defined obligations, powers, and duties.

Obligations of Directors: Directors must adhere to several key obligations, including:

1. Fiduciary Duty: Acting in the best interests of the company and its shareholders with
good faith and care.
2. Compliance with Laws: Ensuring adherence to the Companies Act and other applicable
laws.
3. Disclosure of Interest: Informing the Board of any personal interest in contracts or
arrangements with the company as per Section 184.
4. Financial Responsibility: Approving and ensuring the integrity of financial statements
and records.
5. Shareholder Protection: Safeguarding the interests of minority shareholders.
Powers of Directors: Directors possess various powers, such as:
1. Management Authority: Overseeing the company's affairs and making decisions on its
behalf.
2. Appointment and Removal of Key Personnel: Hiring and dismissing key managerial
staff.
3. Financial Decisions: Authorizing budgets, expenditures, and investments.
4. Calling Meetings: Convening board and general meetings.
5. Creating Committees: Forming committees for specific functions, like audit and
remuneration.
Duties of Directors: The duties imposed by the Act include:
1. Duty of Care and Skill: Exercising diligence in decision-making.
2. Duty to Act Within Authority: Acting within the powers granted by the company's
articles.
3. Duty to Avoid Conflicts of Interest: Refraining from situations where personal interests
conflict with those of the company.
4. Duty to Maintain Confidentiality: Protecting confidential information obtained during
their tenure.
 5. Duty to Promote Success: Acting to promote the success of the company for the benefit
of its members (Section 166).
Director Identification Number (DIN): The Director Identification Number (DIN),
introduced under Section 153, is a unique identification number assigned to directors. Its
significance includes:
1. Identity Verification: Enhancing accountability by confirming the identity of directors.
2. Regulatory Compliance: A prerequisite for appointment, ensuring compliance with
statutory requirements.
3. Tracking Responsibilities: Allowing authorities to monitor directors’ activities across
companies.
4. Transparency: Providing public access to director information, fostering accountability.
5. Record Maintenance: Serving as a reference for all company filings, aiding in
governance.
In summary, the obligations, powers, and duties of directors under the Companies Act, 2013, are
integral to promoting ethical governance. The DIN further reinforces accountability and
transparency, contributing to the overall effectiveness and integrity of corporate boards.
Question 5: Discuss about board meetings and its power.
Answer: Board meetings are essential for the effective governance of a company, serving as a
platform for the Board of Directors to make strategic decisions, review performance, and oversee
the management of the company. The Companies Act, 2013 outlines specific provisions
governing the conduct of board meetings, including their powers and the procedures involved.
Conduct of Board Meetings
According to Section 173 of the Companies Act, every company is required to hold a minimum
of four board meetings each year, ensuring that no more than 120 days elapse between two
consecutive meetings. The articles of association may specify additional requirements for
meetings.
Notice and Quorum
1. Notice: A notice of at least seven days is required to be given to all directors, detailing the
date, time, venue, and agenda of the meeting. In cases of urgency, shorter notice may be
provided if agreed upon by all directors.
2. Quorum: The quorum for a board meeting is determined by the company’s articles of
association. For a private company, a quorum is typically two directors present. For a
public company, the quorum is usually two directors, but it may vary based on the
number of directors on the board.
Powers of the Board
The Board of Directors is endowed with various powers that enable it to manage the affairs of
the company effectively. These powers include:
1. Management Powers: The board has the authority to manage the company’s operations
and implement its strategic direction. This includes overseeing financial performance,
approving budgets, and setting company policies.
2. Appointment of Key Personnel: The board is responsible for appointing key managerial
personnel, such as the Managing Director, Chief Financial Officer, and Company
Secretary. It may also determine their remuneration and terms of employment.
3. Financial Decisions: The board has the authority to approve financial statements, declare
dividends, and authorize capital expenditures. It ensures that the company complies with
financial regulations and accounting standards.
4. Corporate Governance: The board oversees compliance with legal and regulatory
requirements, ensuring that the company adheres to ethical practices and standards of
corporate governance.
5. Strategic Planning: The board is tasked with formulating long-term strategies for the
company, including mergers, acquisitions, and divestitures, as well as identifying growth
opportunities.
 6. Delegation of Authority: The board may delegate specific powers to committees (e.g.,
audit, remuneration, and risk management committees) or individual directors, retaining
oversight responsibility.
Decision-Making Process
Decisions made during board meetings can be passed through different voting methods,
including:
1. Show of Hands: The default voting method unless a poll is demanded, where each
director has one vote.
2. Poll Voting: A poll can be demanded by directors, in which votes are counted based on
the number of shares held.
3. Written Resolutions: Under certain circumstances, resolutions may be passed in writing
without convening a meeting, provided all directors agree.
Minutes of Meeting
It is mandatory for the board to maintain minutes of its meetings, which must be recorded in the
minutes book. These minutes should detail the proceedings of the meeting, including decisions
taken, votes cast, and any dissenting opinions. Maintaining accurate records of board meetings is
vital for transparency and accountability.
In summary, board meetings serve as the core mechanism for governance within a company. The
Companies Act, 2013 establishes the framework for conducting these meetings, specifying
requirements for notice, quorum, and decision-making. The powers of the board encompass
strategic management, financial oversight, and regulatory compliance, ultimately guiding the
company toward achieving its objectives. Proper conduct and documentation of board meetings
are essential for ensuring effective governance and fostering trust among stakeholders.