Notes

Anjali Sharma, Lov ely Professional UniversityUnit 01: Introduction to Companies Act, 2013

Unit 01: Introduction to Companies Act, 2013

CONTENTS
Objectives
Introduction
1.1 Definition of a Company
1.2 Lifting or Piercing the Corporate Veil
1.3 Company, Partnership and Limited Liability Partnership
1.4 Types of companies

Summary
Keywords
Self Assessment
Answers for self Assessment
Review Questions
Further Readings
Objectives
After studying this unit, you will be able to:

i) Cognize the features of a company

ii) Comprehend the circumstances leading to lifting up of corporate veil
iii) Understand the difference between a company, partnership and limited liability
partnership

Introduction
The Companies Act 2013 was introduced in India by the government to ease the process of doing
business in India and improve the corporate governance. It makes a comprehensive provision to
govern all the listed and unlisted companies of the country and empowers shareholders and
highlights higher value for corporate Governance, thereby making the companies more
accountable. It is an Act of the Parliament of India regulatingthe incorporation of a company,
defines the responsibilities of a company and its directors and also discusses about the dissolution
of a company. The Act replaced the Indian Companies Act 1956 partially after receiving the assent
of the President of India on 29 August 2013.The Companies Act2013 is divided into 29 chapters in
total, that contains 470 clauses as against 658 Sections in the previous act and has 7 schedules. It
came into force on 12th September 2013 with only certain provisions of the Act notified.The entire
chapter is written keeping in view the latest provisions of Companies Act 2013 as amended by the
government from time to time.

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Short title, extent, commencement and application. —
Short title
This Act may be called as Companies Act, 2013.
Extent of the Act
The act extends to the whole of India.
Application
The provisions of this Act shall apply to—
(a) companies incorporated under this Act or under any previous company law;
(b) insurance companies, except in so far as the said provisions are inconsistent with the provisions
of the Insurance Act, 1938 (4 of 1938) or the Insurance Regulatory and Development Authority Act,
1999 (41 of 1999);
(c) banking companies, except in so far as the said provisions are inconsistent with the provisions of
the Banking Regulation Act, 1949 (10 of 1949);
(d) companies engaged in the generation or supply of electricity, except in so far as the said
provisions are inconsistent with the provisions of the Electricity Act, 2003 (36 of 2003);
(e) any other company governed by any special Act for the time being in force, except in so far as
the said provisions are inconsistent with the provisions of such special Act; and
(f) such body corporate, incorporated by any Act for the time being in force, as the Central
Government may, by notification, specify in this behalf, subject to such exceptions, modifications or
adaptation, as may be specified in the notification.

1.1 Definition of a Company

The term company in general means a group of persons associated together in achieving some
common objective. However, it is not a legal definition of a company. It refers to as an association
of persons incorporated under the existing law of a country. The legal definition of a company is
covered under section 2(20) of the new companies act 2013 which states that:
“Company means a company under this Act or any previous company law”
This Act here means Companies Act 2013 and previous law means Companies Act 1956 or some
earlier companies act.Eminent scholars and writers have defined the term in their own way.
According to Lord Justice Lindley a company is“an association of many persons who contribute
money or money’s worth to a common stock, and employ it in a common trade or business, and
whoshare the profit or loss arising there from”. The common stock so contributed is denoted in
money and is ‘the capital’ of the company. The persons who contribute to it, or to whom it belongs,
are members. The proportion of capital to which each member is entitled is his ‘share’. The member
may sell his share in the company, thus, withdrawing himself and making someone else a member
to whom he transfers shares. Thus, shares in a company are transferable. As a natural consequence
of transferability of shares, the company has what is commonly known as perpetual succession.
With the withdrawal or death of a member of a company, the latter does not come to an end. The
life of the company is independent of the lives of the members of the company. Members may come
and members may go, the company continues until it is dissolved.

Prof. Henry describes a company as “it is an artificial person, created by law, having a separate
entity, with a perpetual succession and a common seal”. So, one can conclude the important points
that we can conclude from the definition that, Firstly, the members may sell their share in the
company, thus, add someone else on their place as a member. This, implies that the shares in a
company are transferable. Secondly, as a natural consequence of transferability of shares, the
company has what is commonly known as perpetual succession. Any death or retirement of a
member, does not affect corporate entity of the company. Note, this definition is not exhaustive as
this section lays emphasis on incorporation and registration of a company. So, to know the exact
meaning and characteristics of a company, we make a detailed discussion in the next section.

Characteristics of Company
A company may have the given characteristics:

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Unit 01: Introduction to Companies Act, 2013 Incorporated Association: A company

1. gets created as it gets registered under the
Companies Act. In fact, it comes into being from the date mentioned in its certificate of
incorporation. This certificate acts just like a birth certificate of a company.Assume that
there is an association, which is not registered, then it is deemed to be an illegal
association. So, if today you get your company registered under Companies Act 2013, then
it shall be termed as incorporated association.

Example: Suppose Raghu gets his ice-cream company incorporated in Nagpur, Maharashtra on
23rd August 2021. He ensured that all the provisions laid under Companies Act 2013 for getting
his company registered are fully obeyed with. The registrar of companies released a certificate of
incorporation to the company with date of 23rd August 2021. It is from this day on wards, the
company shall be considered as an incorporated association.

2. Separate Legal Entity: The law considers a company as distinct (separate) from the people
who constituted it. A company can own and deal in property and other such assets.
Themoney and property of the company belongs to it only and obviously not to its
members. The company is responsible to repay creditors dues only and get sued for its
deeds. One point needs to be noted here, that is a company is not the agent or the trustee
of the subscribers, it has its own distinct legal identity. It is not liable to pay personal debts
of the members even if they hold substantial part of company share capital. Also,
members of a company cannot be sued for actions performed by the company.

Case Study: To understand the concept better, let us consider a case situation of ‘Salomon vs
Salomon & Co. Ltd.’
Issue: Mr. Salomon was a shoe manufacturer and his business was financially sound. He formed a
company and name it as ‘Salomon & Co. Ltd.’ for taking over and carrying on earlier business. The
members in this newly formed company were Mr. Salomon, his wife, four sons and a daughter. The
members of board of directors were Salomon and his sons.Salomon transferred his previous
business to newly formed company for 40,000 pounds. In payment of this consideration, he took
20,000 shares of 1 pound each and debentures of 10,000 pounds. These debentures implied that the
company owed 10,000 pounds to Salomon and for repayment of this, a charge was created in his
favor on assets of company. One share was given to each remaining member of Salomons’
family.Due to trade depression, the company’s business failed and it went into liquidation. On
winding up assets of company were 6,000 pounds while its liabilities were 17,000 pounds(out of
which 10,000 pounds belonged to Salomon as a secured creditor and remaining were due to
unsecured creditors). After making payment to Salomon nothing was left to pay the unsecured
creditor. The problem aroused when unsecured creditors filed a suit on grounds that the company
had no separate entity. The company was sham. It was essentially an agent of Salomon,
andtherefore, Salomon being the principal, was personally liable for its debt. And thus, they should
be paid first. Can we say that he should be made liable?
Rule:Separate legal entity concept gets applicable in this case. The company is separate from Mr.
Salomon.
Analysis:In the given case,Mr. Salomon was a secured creditor and hence entitled to get payment
of his dues first.Since, company assets realized were just 6,000 pounds and amount lent by Mr.
Salomon was 10,000 pounds, nothing was left to pay to unsecured creditors. If we see even Mr.
Salomon did not receive all his money from company as it was into losses. Thus, the case got
closed. Conclusion: From the given case, it gets clear that a company formed and registered under
Companies Act has a separate entity. It means, the company is not liable to pay personal debts of
the members even if they hold substantial part of companys’ share capital. Similarly, the members
of a company cannot be sued for actions performed by the company.

3. Limited Liability: The term ‘limited’ means something which is defined or specific. It
means an obligation to pay to creditors. A liability can be either limited or unlimited.
Limited liability can be of two types namely limited by share and limited by guarantee.
Liability limited by share refers to as a condition as per which shareholders are legally
liable to pay the debts of a company only to the extent of the nominal value of their shares.

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Example: Assume that the face value of a share in a company is ₹ 10 and the shareholder paid
₹ 8. In this case his liability to the company is for the remaining balance of ₹ 2 only and nothing
more than that.
In case of a company limited by guarantee.It involves liability of members limited to such amount
that they undertake to contribute to the assets of company at the time of winding up. Let us take an
example.

Example: Suppose Mohan is a member of a company limited by shares. He guarantees that

in the event of winding up of the company he would contribute ₹1,000 to the assets of
company. In this case, liability of Mohan is limited to the extent of ₹ 1,000 only and not more
than that.

Did you know? The amount of limited by guarantee is fixed in Memorandum of Association.
In case of an unlimited liability, the legal liability of the members or shareholders is not limited.It
means that its members or shareholders have a joint and several non-limited obligations to meet
any insufficiency in the assets of thecompany to enable settlement of any outstanding financial
liability in the event of the company's formal liquidation.

Example: Assume that a company has a debt of Rs. 50 lakhsto pay and undergoes continuous
losses. The official liquidator assesses that the assets of the company are Rs. 35 lakhs. The
remaining amount of Rs. 15 lakhs shall be paid by the members or shareholders jointly and
severally. It means their personal assets may also be used to pay off the debts of the company.

4. Perpetual Succession: A company has a continued existence. Unlike other non-registered

business entities, a company is a stable business organization. Its life doesn’t depend on
the life of its shareholders, directors, or employees. Members may come and go but the
company goes on forever. However, its life may be put to an end as per the procedure laid
under the act.

Example: Mr and Mrs. Peterson get their chocolate manufacturing business registered as
‘Peterson& Pvt. Ltd.’ after complying the provisions laid under Companies Act. They also
became the members of the company. One fateful night, due to bursting of cylinder, both die in
factory along with 3 workers. In this example, even though all members (husband and wife) died
yet the corporate existence of the company continues. It remains unaffected with their death.

5. Common Seal: A company as an artificial legal person has no body, mind or soul like
human beings. Obviously, it cannot sign documents for itself. It acts through natural
person who are called its directors.But having a legal personality, it can be bound by only
those documents which bear its signature. Therefore, the law provides for the use of
common seal, with the name of the company engraved on it, as a substitute for its
signature. Any document bearing the common seal of the company will be legally binding
on the company. Common seal is the official signature of the company. Under Companies
Act 2013, a common seal was required for a Company to provide various authorizations
and attestations on behalf of the Company. However, now as per latest amendments, the
requirement for common seal is made optional. Now a company without any common
seal, needs to authorize 2 directors or by a director and the Company Secretary, wherever
the company has appointed a Company Secretary to sign on its behalf.

Example: Alex and Jolly Pvt. Ltd. company does not have any common seal. It authorized Julie
and Mosez as its directors to sign all contracts and other legal documents on its behalf. Any
contract and legal document signed by both the directors shall be legally binding on the company.

6. Transferability of Shares: Shares in a company are freely transferable, subject to certain

conditions, such that no share-holder is permanently or necessarily wedded to a company.

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Unit 01: Introduction to Companies Act, 2013 When a member transfers his shares to
another person, the transferee steps into the shoes
of the transferor and acquires all the rights of the transferor in respect of those shares.
Separate Property: A company is a distinct legal entity. It is capable of owning, enjoying and
disposing of property in its own name. Even though, the capital and assets are contributed by the
shareholders, they are not private and joint owners of property of the company. They cannot claim
to be owner of the company's property during the existence of the company. A company is the real
person in which all its property is vested and by which it is controlled, managed and disposed of.

Samuel is a member of a liquor manufacturing company. He wants to run his own

spa saloon. He needs a crane of his company for lifting the items to be used in
Example: construction of his spa saloon. The company can deny lending him the crane as he
is asking it for personal use

Capacity to Sue: The term ‘Sue’ means filing a case in court. This characteristic highlight that a
company can sue or be sued in its own name as distinct from its members.
Maria was an employee in a local pharmaceutical company who resigned. She did not receive her 3
months’ salary. She files a suit against the manager of the company for the delay as she had some
previous personal grudges with him to settle. In such a situation, her application shall be rejected as
the case should be in the name of company and not its manager.

1.2 Lifting or Piercing the Corporate Veil

Normally, the Courts consider a fictional veil (not a wall) between the company and its members.
This means that a company is distinct from its members. Lifting of corporate veil means to separate
the corporate personality of a company from the personalities of its shareholders’. This protects
them from being personally liable for the debts and other obligations of the company. At times it
may happen that the corporate personality of the company is used to commit frauds and improper
or illegal acts. It is then required to Lift the corporate veil. Since an artificial person is not capable of
doing anything illegal or fraudulent, the corporate veil might have to be removed to identify the
persons who are really guilty.
Circumstances under which the corporate veil needs to be lifted:

1. Protection of Revenue: Tax planning may be legitimate provided it is within the framework of
law. A Court may ignore the corporate entity of a company where it is used for evasion of tax.The
given case analysis illustrates the point:
Case Study: Re Dishaw Maneckjee Petit, AIR 1927 Bom 371

Issue: Sir Dinshaw Petit got assessed for super-tax on an aggregate income of Rs. 11,35,302
arising
in the previous year. In the year 1921 hehad formed four private companies to evade income-tax
which he called family companies for convenience of reference, although in fact no other member
of his family took any direct benefit thereunder. The names of these four companies were namely:
Petit Limited; The Bombay Investment Company Limited; The Miscellaneous Investment Limited,
and the Safe Securities Limited. Each of these companies took over a particular block of investments
belonging to the assessee.The companies made investments and whenever interest and dividend
income were received by the companies, he applied to the companies for loans, which were
immediately granted, and he never repaid. The question arises as to whether the sums in dispute
represent
Indian taxable income of the assessee under Sections 2 (15), 3, 6,12, 55, 56 and 58 of the
Income-tax Act, 1922? Rule: Penetration of Corporate Veil needs to be done in case of evasion of tax.
Analysis:The alleged loans of the dividends year by year to the assessee, it appeared clear that it
was the assessee who received those dividends in the first instance from the Maneckjee Company.
There was no suggestion that the Maneckjee Company had been instructed to pay those dividends
to the family company. Accordingly, the rest was merely a matter of book entries, viz., to credit the
cash to the company and then to transfer it to the debit of the assessee’s account. The actual cash
which after all was the important thing was kept by the assessee throughout. And one startling
circumstance was that beyond the accounts there was nothing in writing whatever to establish the
alleged agreement for loan by the family company. Of the importance of that alleged agreement
there could be no doubt that by it thefamily company practically bound itself hand and foot to do

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Company Law no business, for its cash immediately on receipt was to be handed back to its vendor
and promoter
at a fixed rate of interest. And yet there was not even a minute on the subject.
Conclusion: In this case, the assessee wanted to avoid income-tax. Solely for this purpose, he
formed four private companies, in all of which he was the majority shareholder. The companies
made investments and whenever interest and dividend income were received by the companies, he
applied to the companies for loans, which were immediately granted, and he never repaid. Hence,
in this case the corporate veil of all the companies were lifted and the income of the companies
were treated as if they were of Sir Dinshaw Maneckjee Petit.
2. Prevention of Fraud and improper conduct: The legal personality of a company may also

be
disregarded in the interest of justice where the machinery of company has been used for some
fraudulent purpose like defrauding creditors or defeating or circumventing law.The given case
analysis illustrates the point:
Case Study: Jones V Lipman [1962]
Issue: Mr. Lipmen contracted to sell a house with freehold title to Jones for £ 5,250.00. Before the
completion of contract, his mind changed. He sold and transferred the land to some other company,
in which he and a clerk were the sole directors and shareholders for £ 3,000,00. The company was
set up for the sole purpose of receiving this land. An amount of $1,554.00 of the £3,000.00 were
borrowed by the company from a bank and the remaining owing to Lipmen.Can we say that the
company of Lipmen as valid? What can the court do in such a situation?
Rule: If a company is formed with a fraudulent motive, then the corporate veil may be lifted.
Analysis: No, the company is not valid in eyes of law as it is a sham. It was created to evade a pre-
existing obligation.
Conclusion: The company was formed by Lipmen to avoid selling his house to Mr. Jones. Since, the
very purpose of formation of company is void in the eyes of law, hence corporate veil may be lifted
by the court to take adequate action against Mr. Lipmen. It can order to cancel or set aside the
transfer and order Mr. Lipmen to convey the land to Mr. Jones.

3. Determine enemy character of a company : Sometimes, it becomes necessary to determine the

character of a company in order to assess whether it has obtained any enemy character or not? A
doubt may arise that the company is owned and controlled by the enemies of a country. In such
cases, the court may lift the corporate veil and examine the character of persons who are in real
control of affairs of a given company. This is so as trading with an enemy company is against
public policy.The given case analysis illustrates the point:

Case Study: Daimler Co. Ltd. vs Continental Tyre Rubber Co. (1916)
Issue: A company was incorporated in England for selling tyres manufactured in Germany by a
German company. Bulk of shares in English company were held by German company and
remaining shares of this English company (except one) were held by Germans residing in Germany.
Moreover, all directors of this English company were also Germans residing in Germany. Hence,
the control of company was in the hands of Germans. During World War-I English company filed a
case to recover trade debts. A question arises regarding the legal status of English company and
whether it can recover its dues? Rule: If a company is owned and controlled by the enemies of a
country, the court may lift the
corporate veil and examine the character of persons who are in real control of affairs of a given
company. Analysis: The company is not valid in the eyes of law. It is an alien company and making
payment
of debt to it would lead to trading with the enemy, and therefore the company cannot get its debts
recovered. Conclusion: The character of the company in the case is enemy and hence it may be
denied from
getting its dues clear.

4. Where the company is Sham(cloak or hoax: The term Sham means something false, fake,
or fictitious that purports to be genuine. The court also lifts the veil where the company is
cloak or hoax. The given case analysis illustrates the point:

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Case Study: Gilford Motor Co. Ltd. v Horne, (1933)

Issue: An employee entered into an agreement that after his employment gets terminated, he shall
not enter into a competing business or he should not solicit their customers by setting up his own
business. After the defendant’s service was terminated, he set up a company of the same business.
His wife and another employee were the main shareholders and the directors of the company.
customers of the previous company.Can the company be considered as valid?
Although it was in their name, he was the main controller of the business and the business solicited

Rule: Where a company is sham, the court may lift the corporate veil.
Analysis:The company in this case was formed to avoid contractual obligation. The Court held that
the formation of the new company was a mere cloak or sham to enable him to breach the agreement
with the plaintiff.
Conclusion:Since, the formed company was a sham, hence the court lifted the corporate veil.
5. Company avoiding legal obligations: A court may disregard legal personality of the
company and proceed as if no company existed if a company was formed to avoid legal
obligation.The given case analysis explains the point:

Case Study: Workmen of Association Rubber Industries Ltd. v. Associated Rubber

Industry Ltd.,
Issue: A company was earning handsome profits. This means that its liability to pay
bonus was also high. To split profits and reduce its liability of paying dividend, it came
up with a plan. It created a subsidiary company and transferred some of its investment
and securities.
Rule: A court may disregard legal personality of the companyproceed as if no company
existed, in case it was formed to avoid legal obligation.
Analysis: In the given case just to divert the profits, a fake company is created. This
helped the company to split its profits and reduce its dividend payment liability.
Conclusion:The supreme court held that the purpose of creating the company was to
reduce liability. Hence lifting the veil becomes important to protect the interest of
workers.

6. Company acting as an agent and trustee of the shareholders: Sometimes a company may
act as agent or trustee of its members or another company. In this case veil may be lifted to
know the reality.So, that the persons for whom company is acting so becomes liable for
acts of company.

Case Study: Re F.G (Films) Ltd [1953]

Issue: Adlabs, an American company produced a film in the name of Bonnet, a Britrish company to
avoid certain technical difficulties. Bonnet compa/ny had 100 shares out of which 99 shares were
held by Adlabs. All funds of Bonnet company to produce a film were provided by Adlabs. This
movie was sought to be registered as an English company. The board of trade of films refused to
register it as English film. A question arises whether the corporate veil should be lifted or not? Rule:A
company may act as agent or trustee of its members or another company. The veil may be
lifted to know the reality.In this way the persons for whom company is acting so becomes liable for
acts of company. Analysis: In this case separate entity of Bonnet company was lifted and court
considered it as
acting as agent of Adlabs and asked it to register the film.
Conclusion: Separate entity of bonnet was lifted and court considered it to be acting as agent of
Adlabs and asked to register the film

7. Avoidance of Welfare Legislation: There are large no. of welfare legislations like Payment
of Bonus Act, Payment of GratuityAct and Provident Fund etc. In order to fix the liability
for offences under welfare legislations, the court may lift the veil and determine the
persons responsible for the defaults or offences. Sometimes a company may form a
subsidiary to avoid or reduce liability under the welfare legislation, in such a situation
corporate veil needs to be lifted.

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8. Protecting Public Policy: The court invariably lift the corporate veil to protect the public
policy and prevent transactions contrary to public policy. Thus, where there is a conflict
with public policy, the courts ignore the form and consider the substance.

Case Study: Connors Bros v. Connors

A company was de facto under the control of a German. Germany was at war with England at that
time. The company was not allowed to work as that would have meant giving money to the
enemy’s company. It was considered against public policy.

9. Dummy Company
In case a dummy company is formed to carry on personal business, corporate veil may be lifted.

Mr. Andrew was carrying a Jewellery business. He formed a company with himself and wife
as the only members. No business took place. Only a bank account was opened in the name of
company. It had no assets. Mr. Andrew carried on his business in same way as he was doing before
the new company formulated. Mr. Bobby kept some Jewellery with Mr. Andrew for ornamentation
which gets stolen. Mr. Bobby filed a case against Mr. Andrew. Mr. Andrew said the Jewellery was
delivered to him as a managing director, so he cannot be held personally liable. The court ignored
separate entity and Mr. Andrew was personally held liable for Jewellery entrusted to him.
B. Statutory exemptions
1. Holding and Subsidiary company relationship: A holding company has control over subsidiary
company. A subsidiary company is the one on which control is exercised. Lifting the corporate veil
of subsidiary company becomes essential in the given circumstances:

a. Where business, property, bank and other accounts, employees, management etc. of both
companies intermingled.
b. Where business of two companies is not held separately to the public.
c. Where subsidiary is unable to meet its normal obligation.
d. Subsidiary is formed to get unfair advantage (divide profit, reduce tax liability or other
liabilities of holding company)

Example: Supreme Court sets aside govt.’s decision on merger of subsidiary

National Spot Exchange Ltd. (NESL) with Financial Technologies India Ltd. (FTIL)
The Supreme Court set aside the Central Government order on amalgamation of the over ₹5,600
crore scam-hit National Spot Exchange Ltd. (NSEL) with Financial Technologies India Ltd. (FTIL),
now known as 63 Moons Technologies Ltd., as a violation of both the Constitution and the
Companies Act. The Bombay High Court and the Supreme Court in particular analyzed in great
detail as to whether it was ‘essential’ and in the ‘public interest’ to merge the two companies. In this
case, the rights and interests of shareholders and creditors were not properly taken care off. The
economic loss caused to them through an amalgamation would require assessment and payment of
compensation to them.
The Supreme Court had concern on “Public interest” of 63,000 shareholders of FTIL, who were
compelled by the merger to bear a huge liability, which would reduce the market value of their
shares to nil. Asno compensation was provided to either the shareholders or creditors of FTIL for
the economic loss caused by the amalgamation in breach of Section 396(3), it is clear that an
important condition precedent to the passing of the final amalgamation order was not met. Hence,
this deal could not happen.

2. Failure to refund application money: The directors of a company are jointly and severally
liable to pay application money with interest if the company fails to refund application money
of those applicants who have not been allotted shares within 130 days of date of issue of
prospectus.

3. Number of Member falling below Minimum Requirement as per Companies (Amendment)

Act, 2017: If at any time the number of members of a company is reduced, in the case of a
public company, below seven, in the case of a private company, below two, and the company
carries on business for more than six months while the number of members is so reduced,
every person who is a member of the company during the time that it so carries on business
after those six months and is familiar of the fact that it is carrying on business with less than

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seven members or two members, as the case may be, shall be severally liable for the payment
of the whole debts of the company contracted during that time, and may be severally sued.
Misdescription of company name: Where an officer or agent of a company does any act or
4.
enters into a contract without fully or properly mentioning the company’s’ name and address
of its registered office, he shall be personally liable. Thus, where a bill of exchange, hundi or
promissory note is signed by an officer of a company or any other person on its behalf, without
mentioning this fact that he is signing on behalf of the company, he is personally liable to the
holder of the instrument unless the company has already paid the amount.
Fraudulent Trading: Sometimes in the course of winding up of a company it may appear that
5. some business of the company has been carried on with intent to defraud creditors of the
company, or any other person or for fraudulent purpose. In such a case, the court may declare
that any persons who were knowingly parties to carrying on of the business in this way are
personally liable without any limitation of liability for all or any of the debts or other liabilities
of company as the court may direct. The court may do so on application of official liquidator,
or the liquidator or any creditor of the company.

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1.4 Types of companies
A. Classification is on the basis of Incorporation: It can be of further two
types,
namely: Statutory and Registered. Statutory companies are created by a special act of
legislature. For example: State Bank of India under State Bank of India Act 1955. These are
mostly concerned with Public utilities.

Example: Railway and tramways

Gas & electricity companies and enterprises of national importance registered companies are
those which were formed and registered under companies act 1956 and prior.
B. On basis of liability

Company with limited liability can be either companies limited by shares orCompanies limited by
guarantee. Liability Limited by share is a condition as per which shareholders are legally liable to
pay the debts of a company only to the extent of the nominal value of their shares.

Example: If the face value of a share in a company is ₹ 10 and the shareholder has paid ₹
8, his liability to the company is for the remaining balance of ₹ 2 only and no more.
Companies limited by guarantee involves liability of members limited to such amount that
they undertake to contribute to the assets of company at the time of winding up.

Example: Alex was a member of a company limited by shares. He guaranteed that in the event
of winding up of the company he would contribute ₹1,000 to the assets of company. In this case,
liability of Alex is limited to the extent of ₹ 1,000 only and not more than that.

Notes: This amount is fixed in Memorandum of Association.

Company with Unlimited Liability is a hybrid company (corporation) incorporated with or without
a share capital and where the legal liability of the members or shareholders is not limited. It means
that its members or shareholders have a joint and several non-limited obligations to meet any
insufficiency in the assets of the company to enable settlement of any outstanding financial liability
in the event of the company's formal liquidation.
C. On basis of number of members
It can be categorized as a Public or Private Company

Private Limited Company Public Limited Company

Minimum Capital- NIL Minimum Capital- NIL

Right to transfer the shares: Restricted Right to transfer of shares are allowed

Minimum members 2 (Two), Minimum members 7 (Seven),

Maximum members 200 (Two Hundred) Maximum members No Limits

Public offer is not applicable and no requirement of In case of public offer of securities, the securities
dematerialization of securities have to be in Dematerialized Form

Listing of securities on Stock exchange Securities offered in Public Offer, to be listed in

Not Applicable Recognized Stock Exchanges

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Unit 01: Introduction to Companies Act, 2013

Quorum of Meetings Quorum of Meetings
Two members personally present Five in case of Members up to 1000;
Fifteen in case of Members more than 1000 up to
5000;
Thirty in case of Members exceed 5000.

No restriction on amount of managerial Managerial Remuneration is restricted to 11% of

remuneration Net profit (subject to conditions); OR at least Rs.
30 lakh p.a. depending upon paid up capital

Retire by rotation is not applicable At least two-third of total number of directors

be liable to retire by rotation and eligible of
being re-appointed in AGM

D. Classification on basis of Control

On this basis, a company can be a holding or Subsidiary company. A holding company is a parent
company designed to own or control other businesses. A subsidiary is owned or controlled by a
parent company, but that parent company might not be a holding company.
A company is said to be the holding company if that particular company holds at least 50% of the
other companies and has the authority to make management decisions, influences and controls the
company’s board of directors. A holding company may exist for the sole purpose of controlling and
managing subsidiary companies.

E. Classification on basis of ownership

It can be a Government company or a Non-government company. A Government company is that in
which not less than 51% of the paid-up share capital is held by the Central Government, or by any
State Government or Governments, or partly by the Central Government and partly by one or more
State Governments.

Example: Bharat Sanchar Nigam Limited: BSNL is a government owned telecommunications

service provider
Non-government company’s’ or NGOs’ are Organizations, which are independent of government
involvement. NGOs are a subgroup of organizations founded by citizens, which include clubs and
associations providing services to their members and others. These are are usually non-profit
organizations, and many of them are active in humanitarianism or the social sciences.
F. Classification on basis of Nationality
a) Foreign company: It means any company or body corporate incorporated outside India which-
has a place of business in India whether by itself or through an agent ,physically or
throughelectronic mode ; and
b) conducts any business activity in India in any other manner

IBM and Microsoft etc.

b) Domestic company: It refers to a company that is incorporated in and conducts business affairs
in its own country. It can be public/private/OPC.
G. Other companies
a) Associate company
(1) A company will be treated as an Associate company of another company, if the former is
having a significant influence that is a control of at least 20% of total voting power, or control of
or participation in business decisions under an agreement.

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Company Law
or
(2) having influence over the latter's decision-making process under and agreement
or
(3) Both are Joint venture companies.
b) Small companies
‘‘Small companies means a company, other than a public company which have :-
Paid up share capital of not more than 2 crore rupees andTurnover of which as per its last profit
and loss account does not exceed 20 crore rupees.

Notes: 1. Threshold in small companies has increased to Paid up capital from 50

lakh to 2 crore rupees and
2. Annual turnover also been raised from 2 crore to 20 crore rupees.
3. It is beneficiary to more than 2 lakh companies in compliance required.

c) Dormant Company
A company not carrying any significant accounting transaction for a period of two years can apply
to Registrar of company to get itself declared as dormant Company.

Example: Achiever metal private limited and jvk wires private limited
H. One-person company
It comprises a single person as a shareholder and can be contrasted with private companies. These
companies get all the benefits of a private company such as they to have access to credits, bank
loans, limited liability, legal protection, etc. Only a natural person who is an Indian citizen and
whether resident in India or otherwise resident in India–

(a) shall be eligible to incorporate a One Person Company;

(b) shall be a nominee for the sole member of a One Person Company.
Explanation I. “– For the purposes of this rule, the term “resident in India” means a person
who has stayed in India for a period of not less than 120 days (earlier one hundred and eighty-
two days) during the immediately preceding financial year

Did you know? Who can form an OPC?

• Any individual who have stayed in India for at least 120 days in during the
immediately preceding calendar year.
• Minor can neither incorporate OPC nor be entitled to hold shares of OPC
beneficial interest.
• No minor shall become nominee of the One Person Company

Notes: Major changes after amendments are:

1. Non-resident individuals with entrepreneurial potential are now enabled to set up One
Person Companies (OPC) with no paid-up capital and turnover restrictions, reducing
registration timeline from 182 days to 120 days. Earlier only Indian resident citizens were
permitted to set up OPCs
2. Removal of restriction of paid up capital and average annual turnover
I. Illegal Association

J.

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 Notes

Unit 01: Introduction to Companies Act, 2013 No association or partnership consisting of more
than such number of persons as may be
prescribed shall be formed for the purpose of carrying on any business that has for its object
the acquisition of gain by the association or partnership or by the individual members thereof,
unless it is registered as a company.

Summary
• On 29th August 2013, the Act got passed by the Parliament after receiving the assent of the
President of India. It consolidated and amended the law relating to companies.

• In previous act there were 658 sections and 15 schedules and in Companies Act 2013 there
are 29 chapters, 470 sections and 7 schedules.

• 98 different sections of the companies Act came into force with few changes like earlier
private companies’ maximum number of members were 50 and now it will be 200.
• A new term of “one-person company” is included in this act that will be a private
company and with only 98 sections of the Act notified.
• A company is an incorporated association with a separate legal entity, limited liability,
perpetual succession, common seal, transferability of shares, separate property and has a
capacity to sue.

Keywords
• The Central Government: The Central Government is the supreme authority responsible
for the
• administration of company law.
• Perpetual Succession: It refers to continuous succession of a corporation.Its life doesn’t
depend on the life of its shareholders, directors, or employees. Members may
come and go but the company goes on forever.
•
Incorporated association: A company formed and registered as per the provisions of
Companies Act.
•
Common seal: An official seal used by a company. Documents which need to be executed
as deeds (as opposed to simple contracts), may be executed under the company's common
seal.
Self Assessment
1. _______ does not have a separate legal entity?
A. Company
B. Partnership
C. Limited Liability Partnership
D. Partnership and Limited Liability Partnership

2. ______must be registered with the Registrar of Companies?

A. Company
B. Partnership
C. Limited Liability Partnership
D. Company and Limited Liability Partnership

3. The companies which are formed under special Act are called as ..................................
A. Chartered Companies
B. Statutory Companies
C. Registered Companies
D. None of these

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Company Law
4. Property of the company belongs to....................................
A. Company
B. Shareholders
C. Members
D. Promoters

5. In the case of company, audit is......................................

A. Optional
B. Situational
C. Compulsory
D. None of the above

6. In a Limited Liability Partnership, Minimum number of Partners should be____

A. 4
B. 3
C. 2
D. 1

7. Maximum number of partners that a Limited Liability Partnership can have is____
A. Two
B. Seven
C. Two Hundred
D. There is no such Limit is there

8. _________ a condition as per which shareholders are legally liable to pay the debts of a
company only to the extent of the nominal value of their shares.
A. Limited by shares
B. Liability limited by guarantee
C. Unlimited Liability
D. Liability limited by directors

9. A company need not have a common seal, provided it has authorized:

A. 2 directors to sign documents on behalf of company
B. 2 directors or by a director and the Company Secretary
C. 1 director and 1 auditor to sign documents on behalf of company
D. 4 directors and 1 auditor to sign documents on behalf of company
10. A company has a ________ which states that a company is not liable to pay personal debts of

the members even if they hold substantial part of company share capital.
A. Common Seal
B. Separate Legal Entity
C. Capacity to sue
D. Transferability of shares

11. A company not carrying any significant accounting transaction for a period of two years can
apply to Registrar of company to get itself declared as :
A. Public company
B. Private company
C. Government company
D. Dormant Company

12. A Government company is that in which not less than ____ of the paid-up share capital is
held by the Central Government.
A. 11%
B. 21%
C. 51%
D. 91%

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Unit 01: Introduction to Companies Act, 2013

13. Any individual who have stayed in India for at least ____ days in during the immediately
preceding calendar year.
A. 100 days
B. 120 days
C. 130 days
D. 140 days

14. A Public Company having 1,0000 must ensure a quorum of ____members to hold a valid
meeting.
A. 5
B. 10
C. 15
D. 20

15. In a Public companyat least ____of total number of directors be liable to retire by rotation
and eligible of being re-appointed in AGM.
A. 1/3rd
B. 2/3rd
C. 4/5 th
D. 3/5th

Answers for self Assessment

1. B 2. D 3. B 4. A 5. C.

6. C 7. D 8. A 9. B 10. B

11. D 12. C 13. B 14. A 15. B

Review Questions
1. Define a company. Explain the essential features of a company with a relevant example of
each.
2. “A company is a legal entity distinct from its members.” In what circumstances, the court
may ignore this principle.
3. What is a corporate veil? When can the veil be pierced?
4. Discuss the difference between
a) Company and Partnership
Company and Limited Liability Partnership
b)
Partnership and Limited Liability Partnership
c)
Write short notes on:
5.
Lifting up of Corporate Veil b) Perpetual Succession
a)
Separate legal entity d) Common Seal
b)

Further Readings
1. A Text Book Of Company Law (Corporate Law) By P.P.S. Gogna, S. Chand
& Company
2. Elements Of Company Law By N.D. Kapoor, Sultan Chand & Sons (P) Ltd.

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Company Law

Web Links
https://www.thehindu.com/business/Industry/nsel-ftil-merger-sc-sets-aside-
govts-decision/article26996111.ece
https://www.barandbench.com/columns/supreme-court-rationale-setting-aside-
merger-ftil-nsel

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Anjali Sharma, Lov ely Professional University Unit 02: Incorporation of Company, 2013

Unit 02: Incorporation of Company, 2013

CONTENTS
Objectives
Introduction
2.1 Incorporation of a Company
2.2 Process of Incorporation
2.3 Certificate of Incorporation
2.4 Certificate of commencement of Business
2.5 Promoter
2.6 Rights of a promoter

Summary
Keywords
Self Assessment
Answers for Self Assessment
Review Questions
Further Readings
Objectives
After studying this unit, you will be able to:

i) comprehend the need of incorporation of a company

ii) understand the process of incorporating a company as per the provisions of
Companies (Incorporation) Second Amendment Rules, 2021

iii) Comprehend the role of promoter in the incorporation of a company

Introduction
Incorporation is the procedure by which a business becomes formally recognized.A legally established
firm becomes a separate legal entity from those who dedicate their money and time to operate it.The
term "promotion" denotes to the first step in the process of launching a business.Such a person is
better known as the ‘promoter’ of the entity.

2.1 Incorporation of a Company

A company can be formed for any lawful purpose by: i. seven or more persons, if the company is to
be a public company; ii. two or more persons, if the company is to be a private company; or iii. one
person, if the company is to be a One Person Company, that is to say, a private company, by
subscribing their names or his name to amemorandum and complyingwith the requirements of this
Act in respect of registration.
This can be performed by signing a memorandum in their or his name and complying with the
registration requirements of this Act. The Ministry of Corporate Affairs (MCA) announced the
release of a new form SPICe+ in January 2020 as part of the country's Ease of Doing Business policy.
The new Spice Plus or Spice+ form has replaced the old Spice 32 form, indicating that it is being
phased out.

Notes: Spice Plus, or Spice+, is a new form that has superseded the original Spice system.

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Company Law

2.2 Process of Incorporation

Step 1: Reserve name of company

• A promoter may reserve the name for a new company by filling the Part A of SPICe+
(Simplified Proforma for Incorporating Company Electronically Plus)

Notes: One has to fill the INC-32 form for the company registration.

From the 23rd of February 2020 onwards, the Reserve Unique Name, or ‘RUN' form, started getting
used for a ‘change of name' of an existing company.A user must choose the sort of company he
wants to form in Part A of the form (Producer, OPC, or Company Under Section 8). He can choose
the class, category, and sub-category for the company. As the Ministry of Corporate Affairs' web
portal is user-friendly, numerous types, classes, and sub-categories are already available as drop-
down options when you click the drop-down button.Thereafter, the facts regarding the primary
division of carrying out industrial activity must be supplied, as well as the suggested name of the
company that is to be incorporated. The web form details are provided below:

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Unit 02: Incorporation of Company, 2013

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Company Law

The promoter must next click on the auto check option, which runs a first-level automatic review of
the proposed company name against the Name Rules that we will explore in the Memorandum of
Association chapter.
Step 2: Fill part B of form

The user (promoter) must now submit a name reservation form and continue with the
incorporation process.After that, part B of the form becomes available, with several areas to fill out.
Incorporation of a company, allotment of a DIN, mandatory issue of a PAN Number, TAN
Number, EPFO registration, ESIC registration, Profession Tax registration, opening a bank account
for the company, and assignment of GSTIN are the important services offered in Part B of SPICe+
(if so applied).In section B, the user must fill in essential company information such as where the
company will be established, its correspondence address, and the names of all subscribers to the
memorandum of association and initial directors. Also, mention the capital that will be used to start
a new business.
After that, you must fill out the necessary information to obtain a Permanent Account Number and
a Tax Deduction Account Number.Mandatory attachments must also be sent via the web.The user
must click the submit button after filling out these details and performing a pre-scrutiny.After
providing all of these details and completing a pre-scrutiny, the user must click the submit button.
Once the online form has been successfully submitted, a push notice is received.Part B in PDF
format can be used to apply a Digital Signature Certificate.

All relevant linked forms like AGILE PRO, eMOA and eAOA also gets enabled with this step.

Step 3: Fill AGILE-PRO –Web form

For registration with GSTN, ESIC, EPFO, Professional tax registration number, and Bank account
number, a user (Promoter) must fill out the associated eForm with SPICe.

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Unit 02: Incorporation of Company, 2013

The following is an example of an AGILE-PRO-web form:

Step4: eMOA

Instead of a printed document, the Ministry of Corporate Affairs made it easier to prepare a
Memorandum of Association in a soft format.The preparation of MOA is now governed by e-form
INC-33.All that is required is to enter the company's items.

In this web form, digital signature certificates (DSC) are utilised instead of actual signatures.

There is no need for a witness signature because the DSC of the witness is attached in this scheme.

In case of incorporation of a company falling under section 8 of the Act, FORM No. INC-13
(Memorandum of Association) (spice plus) is to be used.

Step 5: eAOA Using the e-Form INC-34 (spice plus) form, the article of association can now be

drafted
electronically.This web form is a streamlined proforma that includes pre-drafted Articles of
Association clauses for incorporating businesses.The user must first pick the clauses that will be
included in the Articles, then check to see if any are not appropriate or need to be changed, and
then select them.The process of filing documents has been made much easier with the use of web
forms.The FORM No. lNC-31 (Articles of Association) (spice plus) is to be utilised when forming a
company under section 8 of the Act.

Step 6: Other attachments

While filling the web form of getting an entity registered, some documents also needs to be
provided. The list of such documents includes:i) Memorandum of Association, ii) Articles of
Association, iii) declaration by the first director(s) and subscriber(s), iv) office address proof, v)
copy of utility bills, vi) copy of certificate of incorporation of foreign body corporate (if applicable),
vii) a resolution passed by promoter company, viii) interest of first director(s) in other entities, ix)
consent of Nominee (INC–3), x) proof of identity as well as residential address of subscribers, xi)

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Company Law

proof of identity as well as residential address of the nominee andxii) proof of identity and address
of applicant I, II, III, optional attachments (if any) and attachments – Part A.

After SPICe+ has been entirely filled out with all pertinent information, it is converted to PDF
format for affixing a Digital Signature Certificate (DSC).If the applicant wants to make any
modifications to the information provided, he or she can do so and then generate an updated PDF
to attach the digital signature certificate and upload it.

Step 7: Declaration by Professionals

SPICe + Form requires a professional's digital signature certificate, as well as their membership and
certificate number, from a Company Secretary, Chartered Accountant, Advocate, or Cost
Accountant.They must attest to the accuracy and completeness of the information submitted.
Step 8: Fee submission
The fee that an applicant needs to submit vary case to case.
Case I: In case a company having share capital

Nominal Share Capital Fee applicable

Up to Rs. 15,00,000 NA

More than Rs. 15,00,000 Rs. 500

Case II: Company not having share capital

Number of members Fee applicable

Up to 20 members NA

More than 20 members Rs. 500

Step 9: Submission of Form

After all of the essential information has been input correctly and all of the required documents
have been attached, the application form is sent.If the Registrar of Companies (ROC) is satisfied
after reviewing the application form, it will issue certification of incorporation.The Registrar will
provide the firm a Certificate of Incorporation in Form No. INC-11 once the registration process is
finished.

2.3 Certificate of Incorporation

A private limited company (Pvt Ltd) is one that does not sell its stock to the general public and
always uses the suffix Pvt in its name.
A legal document or a legal permission to operate is required for such a firm to exist.
The procedure for forming a company is outlined in Section 7 of the Companies Act 2013, which
specifies the Certificate of Incorporation (issued by the Ministry of Corporate Affairs or the State
Government) as the last stage.It gives the company a legal identity as well as a licence.
The Registrar of Companies issues the certificate of incorporation whenever a promoter has
completed the step-by-step procedure to have a company registered under the Companies Act
2013.A unique corporate identity number [CIN] will be assigned to the company by the registrar.
The Corporate Identity Number, or Business CIN No., is a 21-digit alphanumeric code/number
assigned to every company incorporated in India once the Registrar of Companies registers it.
Following the creation of a company, the concerned ROC issues a certificate with the firm's
approved name and a unique Corporate Identification Number (CIN No. or CIN Code). The date
on which the certificate of incorporation bears the date of the company's birth, i.e. the day on which
the business is formed.

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Unit 02: Incorporation of Company, 2013

Contents of Certificate of Incorporation

A private limited company's Certificate of Incorporation contains the following information:

• The company's full name and its abbreviated form.
• A declaration stating the corporate objective.
• The address of the registered office.
• Registered agent details for the given address.
• The number of shares that are authorized to be issued.
• Description of the different types of stock that can be issued, if there is more than one type.

Case Study: Moosa Goolam Arif v. Ebrahim GoolamAriff (1913):

Issue: Five of the seven people who signed a company's memorandum of association were
minors.On the memorandum of association, the minors' guardians signed separate signatures for
each minor.The certificate of incorporation was issued by the Registrar.The legality of the certificate
of incorporation has been questioned.Is it possible to challenge the validity of certificate of
incorporation?
Solution to the case

Rule: The legality of a certificate of incorporation might be contested if it was obtained by providing
misleading and erroneous information while concealing material facts.

Analysis: The certificate serves as proof that all of the requirements of the Companies Act have
been met.As a result, it is well understood that whenever a company is formed, the only way to put
it out of business is to use the provisions of enactments that govern company winding up.Although
the Registrar should not have issued the certificate, it was found to be conclusive for all purposes.
Conclusion: The validity of an incorporation certificate might be contested.Whatever the
shortcomings in the formalities, the Certificate of Incorporation, once issued, serves as
incontrovertible proof of the company's existence.

Example: Issue: On August 31, 2021, a promoter filed an online application with the Registrar
of Companies in Haryana to register his toy firm, Jumanji Pvt. Ltd. (without share capital).The
promoter's numerologist advised him to get a certificate of incorporation with a date of September
6, 2021.The registrar, on the other hand, issued the certificate of incorporation on September 4, 2021,
which the firm received by mail on September 6, 2021.Meanwhile, on September 4, 2021, ‘Jumanji
Pvt. Ltd.' signed a contract with M/S Chandan Shaw & Co. for the purchase of supplies for its
business on credit for Rs. 10,000. The items were provided on a 20-day credit basis by the
seller.M/S Chandan Shaw & Co. claimed their money at the end of the credit period, but the
company refused to pay them, claiming that it could only enter into authorised transactions starting
September 6, 2021.Determine if M/S Chandan Shaw & Co. can collect funds from ‘Jumanji Pvt. Ltd.'
Solution to the case

Rule: A certificate of incorporation certifies that an entity exists and is authorised to conduct
business. Even though the corporation acquired the certificate on September 6th, 2021, the
certificate date is September 4th.This means that the business can start operating as soon as it is
formed.

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Notes

Company Law Conclusion: The company was incorporated on September 4, 2021, which means it

is now able to
lawfully conduct business.Due to the fact that the products were purchased on credit, ‘Jumanji Pvt.
Ltd.' is obligated to repay M/S Chandan Shaw & Co.

Modification of Certificate of Incorporation

If the company wants to change its name after receiving the Certificate of Incorporation, it must
first check for the availability of a new name.According to rule 29 of the Companies
(Incorporation) Rules, 2014, it must hold an extraordinary general meeting (EGM), approve a
special resolution, and apply to the Registrar for name approval.The Registrar will issue a new
Certificate of Incorporation following approval.The Certificate of Incorporation, on the other hand,
will not be changed if the company's address is changed.The company will have to fill out the
necessary papers and verify that the company's master data is updated.Because the address on
the Certificate of Incorporation is current as of the date of incorporation, no modifications can be
made retroactively.

2.4 Certificate of commencement of Business

Before beginning any company or exercising any borrowing rights, all firms with a share capital
must obtain a commencement of business certificate.According to the Companies (Amendment)
Ordinance 2018, all companies registered on or after November 2, 2018 must file a declaration in
form 20A within 180 days of the company's incorporation date in order to receive a certificate of
commencement.

Notes: Declaration for Commencement of business is re-introduced (Companies

(Amendment) Ordinance, 2018)

Did you know? :The following businesses are exempt from filing Form 20A:

• Companies formed before November 2, 2018 (i.e. before the Companies (Amendment) Ordinance,
2018 took effect).
• Companies formed after November 2, 2018 that do not have a share capital.

Did you know?

'Commencement : What is the effect of conclusiveness of the 'Certificates of Incorporation' and
of Business'?

The Certificate of Incorporation is definitive evidence of a company's legal existence and legality of
incorporation.Regardless of any registration flaws, the company becomes a legal commercial entity
once a Certificate of Incorporation is granted.The printed Certificate of Incorporation makes a
company as a legal entity with perpetual succession. After conclusiveness of the certificate of
incorporation, the company can enter into valid contracts. Regardless of any deficiencies in the
procedures, the Certificate of Incorporation, once issued, serves as incontrovertible evidence of the
company's existence.The birth of a corporation cannot be called into doubt if it is registered with
illegal objects.The only option is to close the company down.After getting a Certificate of
Incorporation, a private company can immediately begin operations.
With a certificate of incorporation, a company can start operations after raising the necessary
finances from friends, relatives, or through private agreement.A company, on the other hand, must
complete two further phases in its formation.

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Unit 02: Incorporation of Company, 2013

The Consequences of Obtaining a Certificate of Business Start-Up -

The Registrar issues a Certificate of Commencement of Business, on finding the documents such as
memorandum of association, articles of organization, and consent of Directors found
satisfactory.This certificate provides as confirmation that the company is legally permitted to
operate.The formation of a public corporation is complete after this certificate is issued, and the
company can lawfully begin doing business.

2.5 Promoter
Definition of a Promoter
Promotion is a broad phrase that refers to the preliminary measures conducted in preparation for a
company's registration and floating.The persons who assume the task of promotion are known as
promoters, who can be individual, syndicate, association, partnership or company.
General definitions
The term "promoter" is a business term, not a legal term.Although it is not defined in the Act, a
number of court rulings have sought to clarify it.“A company promoter is a person who comes up
with a scheme for the formation of a company, has the memorandum and articles prepared,
executed, and registered, finds the first directors, settles the terms of preliminary contracts and
prospectus (if any), and makes arrangements for advertising and circulating the prospectus and
placing the capital,” according to Palmer.A “Promoter is one who undertakes to organise a
corporation with reference to a specified object and to set it starting, and who takes the required
actions to accomplish that purpose,” according to Justice Cockburn.
Guthmann and Dougall discusses that a promoter is someone who brings together the men, the
money, and the resources to form a viable business.Section 2(69) defines the term‘promoter’ as
follows-

(a) who has been recognised as such in a prospectus or by the company in the annual return
referred to in section 92; or

(b) who has direct or indirect control over the affairs of the company as a shareholder, director, or
otherwise;

or (c) in whose advice, directions, or instructions the company's Board of Directors is accustomed
to act

A promoter's responsibilities include:

1. generating a business idea and founding a firm.
2. To research the idea and determine whether the firm's information is profitable or not.
3. To gather the required number of people for the formation of a company and select its first
directors.
4. To finalize the contents of the company's memorandum and articles of organization, and to have
these documents produced and printed, as well as to arrange for the company's registration.
5. To make significant business decisions, such as:
i. What will the company's name be?
ii. Where will it be registered (in which district and state)?
iii. What is the amount of capital to be introduced?
iv. How will the share capital be structured?
v. Who will act as the capital issue's broker or underwriter?
vi. Who is going to be your banking partner?
vii. Who will serve as the Auditor?
viii. Who shall be named as a legal adviser, and so forth.

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ix. To draught and print the prospectus x. To enter into preliminary contracts
xi. To cover preliminary costs
xii. Obtaining a loan from a bank or other financial organization
xiii. To fulfil any other activities required for the formation of a corporation
xiv. To conduct negotiable transactions

It can be explained as follows:

a) Quasi-Trustee: The promoter's position is fiduciary in relation to the company he is promoting,

and his status is quasi-legal.Because there is no trust or principal in existence at the time of his
efforts, a promoter is neither a trustee nor an agent of the firm he promotes.
b) Fiduciary: A promoter owes a fiduciary duty to a proposed company that will be established
soon.Because the corporate entity of the company does not exist until it is constituted in accordance
with the rules of the Companies Act, the promoter is neither a trustee nor an agent of the
company.Lord Cairns declared in the famous judgment of Erlanger v New Sombrero Phosphate Co
(1878) 3 App Cas 1218 that a company's promoters unquestionably occupy a fiduciary position.They
are in charge of forming and shaping the company.They have the authority to determine how, when,
in what form, and under what supervision it will come into being and begin to operate as a trading
business.

Fiduciary Duty of a Promoter can be summarized as:

(i) Obligation not to make any secret profits: If a promoterearns any undisclosed profits, he owes
it to the public to reveal all money obtained in this manner.
To provide the Company with a negotiating advantage.
(ii)
To provide the Company an advantage in negotiations.
(iii)
To make a complete disclosure of potential conflicts of interest:Assume that a promoter signs
(iv)
a contract to sell the firm a property that he acquired while serving in a fiduciary capacity for
the company but never disclosed.In this case, the corporation has the option to either disclaim
or cancel the sale.
Not to make unfair use of positionRegarding Prospectus: A promoter must ensure that: -
(v)

1. A prospectus or a statement in lieu of a prospectus contains all relevant information.

2. A prospectus or statement in lieu of a prospectus contains no inaccurate or misleading
statements.
3. The prospectus contains no substantial factual errors.

2.6 Rights of a promoter

1. Right of indemnity: When more than one individual acts as the company's promoters, one
promoter can sue another promoter for the money and damages he paid. Promoters are jointly and
severally accountable for any false statements made in the prospectus, as well as for any hidden
gains.
2. Right to receive valid preliminary expenses: A promoter is entitled to collect genuine
preliminary expenses incurred in the establishment of the company, such as advertising costs,
solicitors' fees, and surveyors' fees.It depends upon the discretion of the directors of the company.

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Unit 02: Incorporation of Company, 2013

It is up to the company's board of directors to decide.

3. Claim to payment: Unless a contract specifies otherwise, a promoter has no right to remuneration
from the company.Although the company's articles may provide for the directors to pay promoters a
specific amount for their services, this does not provide the promoters any contractual right to sue the
company.This is merely a power given to the company's directors.
Duties and Obligations of Promoter
1. To reveal the hidden profit: All concealed earnings made by the promoter without full disclosure to
the firm must be reported to the corporation.It is his duty to disclose all the money secretly obtained by
way of profit. The company may sue him for an amount of profit and recover the same with interest. It
can also rescind the contract and recover the money so paid. However, he is empowered to deduct
the reasonable expenses incurred by him.
2. To reveal all relevant information: All significant facts should be disclosed by the promoter.If a
promoter agrees to sell the company a property without making a full disclosure and the property
was acquired while he was in a fiduciary relationship with the company, the company may either
reject the sale or affirm the contract and reclaim the promoters' profit.
3. Repayment of benefits received as a trustee:A promoter has a fiduciary responsibility to the
company.It is the promoter's responsibility to repay the firm what he has obtained as trustee, not
what he may obtain at any moment.
4. Duty to disclose private arrangements:It is the duty of the promoter to disclose all private
arrangement resulting him profit by the promotion of the company.
5. Promoter's duty to future allottees: When the promoters are stated to be in a fiduciary
relationship with the business, this does not indicate that they are just in this relationship with the
company or with the signatories of the company's memorandums.They will likewise have this
relationship with future share allottees.
Liabilities of Promoter:
The liabilities of promoters are given below: 1. Profit liability: A promoter owes the firm a fiduciary

duty to account for all covert profits he

makes without fully disclosing them to the company.If the promoter fails to report the profit, the
corporation may take one of the two options below.

(i)
The corporation has the right to sue the promoter for a profit and recover it with interest.
(ii)
The company has the option to cancel the contract and receive a refund of the money paid.
2. Liability for omissions in the prospectus: Section 26 of the Companies Act of 2013 specifies the
information that must be included in a prospectus.A promoter may be held accountable if the
section's provisions are not followed.If a Promoter is found guilty of misrepresentation, he or she
faces civil and criminal penalties.Criminal liability for misrepresentation is addressed under Section
34 of the Companies Act of 2013.Under Section 447 of the Act, a promoter who is at fault bears the
same liability as a fraudster.A promoter may be held accountable under sections 34 and 35 for any
untrue statement in a prospectus to a person who subscribes for shares or debentures on the basis
of that prospectus.The promoter's culpability in such a case, however, would be restricted to the
original share allotee and would not extend to subsequent allotters.

A person who commits fraud is subject to imprisonment for a period ranging from six months to 10
years, according to Section 447. Promoter is also liable to a fine, which can extend to three times the
amount involved in the fraud. In cases where the fraud involves public interest, the term of
imprisonment shall not be less than three years. Section 35 of the Companies Act provides for civil
liability for misstatement in prospectus.

3. Personal liability: The promoter is personally liable for all contracts made by him on behalf of
the company until the contracts have been discharged or the company takes over the liability of the

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Notes

Company Law promoter.The promoter is personally liable for all contracts made by him on behalf of

the company
until the contracts have been discharged or the company takes over the liability of the
promoter.The death of promoter does not relieve him from liabilities.
4. Liability at the time of winding up of the company: National Company Law Tribunal can make
an order for examination of a Promoter just like any director or officer of a company, in a case
where after winding up order, the liquidator states in his report that a fraud has been committed in
promotion or formation of company.
Preliminary Contracts/Pre-Incorporation Contracts made by Promoters:

Preliminary contracts are made by the promoters with different parties on behalf of the company
yet to be incorporated. Such contracts are generally entered into by promoters to acquire some
property or right for and on behalf of the company to be formed.

The promoters enter into preliminary contracts, generally as agents or trustees of the company.
Such contracts are not legally binding on the company because two consenting parties are
necessary to a contract whereas the company is non-entity before incorporation.
The company has no legal existence until it is incorporated. It therefore follows:

1. That when, the company is registered, it is not bound by the preliminary contract.

Case Study: Re English & Colonial Product Co. (1906) 2 ch. 435

Issue: Promoters of a proposed company appoint a solicitor to draft memorandum of association

and article of association of company and get it registered. Accordingly, the solicitor filed a suit
against the company for recovery of his service charges and expenses incurred by him.

Solution to the case

Rule:Company is not bound by Pre-incorporation Contracts entered into by the Promoter.

Analysis: In this case company was not held liable as the court observed that those expenses were
incurred before it existed.
Conclusion:For the pre-incorporation contracts a company is not liable.

2. That the company when registered cannot ratify the agreement as it was not a principal with
contractual capacity at the time of contract. A contract can be ratified only when it is made by
an agent for a principal who is in existence and who is competent to contract at the time when
the contract is made.

Case Study: Natal Land & Colonisation Co. v. Pauline C. Syndicate (1904) AC 120

Issue: Mr. A entered into a contract with B, who acted on behalf of a proposed syndicate. Under the
contract Mr. A was to give a lease of coal mining rights to the syndicate. The syndicate was then
registered as B & Co. On registration it asked for agreed mining rights, which Mr. A refused. The
company filed a suit against Mr. A claiming that he should be ordered to give lease of mining rights
to B & Co.
Solution to the case

Rule: A Company cannot enforce Pre-incorporation Contracts.

Analysis:Contract of lease happened before the company could actually come into existence.

Conclusion:It was held that legal action by B&Co. is not maintainable as it was not in existence
when the contract between Mr. A and syndicate were signed.

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Unit 02: Incorporation of Company, 2013

3. That if the agent undertook any liability under the agreement, he would be personally liable
notwithstanding that he is described in the agreement as an agent and that the company may have
attempted to ratify the agreement.
4. The company cannot enforce the preliminary agreement.

The preliminary contracts made by promoters generally provided that if the company adopts the
agreement the promoter’s liability shall cease and if the company does not adopt the agreement
within a certain time either party may rescind the contract. In such a case promoter’s liability
would cease after the lapse of fixed time.
Natal Land & Colonization Co. v. Pauline C. Syndicate (1904) AC 120
Issue: Mr. A entered a contract with B, who acted on behalf of a proposed syndicate. Under the
contract Mr. A was to give a lease of coal mining rights to the syndicate. The syndicate was then
registered as B & Co. On registration it asked for agreed mining rights, which Mr. A refused. The
company filed a suit against Mr. A claiming that he should be ordered to give lease of mining rights
to B & Co.

Solution to the case

Rule: ACompany cannot enforce Pre-incorporation Contracts.

Analysis: Legal action by B&Co. is not maintainable as it was not in existence when the contract
between Mr. A and syndicate were signed.
Conclusion: Since the company did not exist when the two parties entered into the contract, no
legal action is possible.
Summary

A business needs a certificate of incorporation to carry out lawful activities under its business name. A
good time to file an application to obtain a certificate of incorporation is generally after business
owners have decided that they want to operate their company as a corporation, after the promoter has
decided its name, abbreviated form, a statement specifying the business purpose, registered office
address and the name of the registered agent for the address, number of shares that are authorized to
be issued and the description of the different types of stock that can be issued if there is more than
one type.
Keywords

Pre-incorporation contract: Such a contract never binds a company since a person cannot contract
before or its existence. It is so because a company before incorporation has no legal existence.
Promoters: Promoters are described to be in fiduciary relationship (relationship of trust
and confidence) with the company.
Promotion: ‘Promotion’ is a term that denotes preliminary steps taken for the purpose of
registration and floatation of the company.
Self Assessment

Q1. Name will be reserved by using Part A of

A. SPICe+
B. SPICE –
C. SPICe-
D. SPICE++

Q2. If a Company is Listed in the stock exchange, its Corporate Identification Number will start
with alphabet ………

A. X

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Company Law

B. Y
C. U
D. L

Q3. A company CIN No. Code, shall have …... digits alpha-numeric code.

A. 11
B. 12
C. 21
D. 31

Q4. Minimum number of members required to apply for incorporation certificate in a public ltd
company is

A. 3
B. 7
C. 2
D. 50

Q5.The application for a company's registration should be submitted to the registrar of the state
where the company's ______will be located.

A. Manufacturing plant
B. first branch
C. business office
D. any of the above

Q6. Contracts entered into by a public company after it has received its certificate of incorporation
but before it has received its certificate to begin doing business are known as____

A. Provisional contracts
B. Construction contracts
C. Basic contracts
D. Contingent contracts

Q7. Which of the given order is true regarding the stages of formation of a public company?
A. Promotion, Commencement of Business, Incorporation, Capital Subscription
B. Incorporation, Capital Subscription. Commencement of Business, Promotion
C. Promotion, Incorporation, Capital Subscription, Commencement of Business
D. Capital Subscription, Promotion, Incorporation, Commencement of Business

Q8. Preliminary Contracts are signed____

A. Before the incorporation
B. After incorporation but before capital subscription
C. After incorporation but before commencement of business
D. After commencement of business

Q9. Preliminary Contracts are____

A. binding on the Company
B. binding on the Company, if ratified after incorporation
C. binding on the Company, after incorporation
D. not binding on the Company

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Unit 02: Incorporation of Company, 2013

Q10. Identify the false statement regarding the Promoter:

A. Until the contracts are discharged or the firm assumes the promoter's duty, a promoter is
personally liable for all contracts established on behalf of the company.

B. A promoter's death does not absolve him of his obligations.

C. Until the contracts are discharged or the firm assumes the promoter's liability, a promoter is
personally liable for all contracts made on behalf of the company.

D. When a promoter dies, he is no longer liable.

Q11. In case of misstatement in Prospectus, a Promoter is liable to a fine:

A. Which can go up to two times the amount of the fraud.
B. If the fraud is in the public interest, the term of imprisonment must be at least three years.
C. The term of imprisonment shall not be less than three years if the amount involved in the
fraud is three times the amount involved in the fraud or if the crime involves public interest.
D. The period of imprisonment shall not be less than three years, if the fraud concerns the
public interest and the amount involved in the fraud is three times the amount engaged in
the fraud.

Q12. The company may_________, if a promoter contracts to sell a property to the company
without giving a full disclosure, and the property was acquired when he was in a fiduciary
position to the firm.
A. Perform the obligations laid under the contract.
B. Repudiate the sale or affirm the contract
C. Repudiate the sale or affirm the contract and recover the profit made out of it by the
promoters
D. Recover the profit made out of it by the promoters

Q13. Identify which of the given is not a right of promoter?

A. Right of indemnity
B. Right for entertainment
C. Right to receive the legitimate preliminary expenses:

D. Right to receive the remuneration

Q14. Consent of Nominee is taken in:

A. INC–3
B. INC-2
C. INC-1
D. INC-4

Q15. The charge for submitting an incorporation form for a company with a share capital of
more than Rs. 15,00,000 shall be:

A. NIL
B. Rs. 100
C. Rs. 500
D. Rs. 1,000

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Notes

Company Law
Answers for Self Assessment

A 2. D 3. C 4. B 5. C
1.

A 7. C 8. A 9. D 10. B
6.

D 12. C 13. B 14. A 15. C

11.

Review Questions
1. Discuss the duties and obligations of a Promoter?

2. Who is a Promoter? Discuss his position in relation to the company he promotes.

3. Discuss the process of incorporation of a company in detail.

4.Explain certificate of incorporation in detail.

5. Discuss the rights and liabilities of a promoter in detail.

Further Readings
1. A Text Book Of Company Law (Corporate Law) By P.P.S.Gogna, S. Chand & Sons

2. Elements Of Company Law By N.D.Kapoor, Sultan Chand & Sons (P) Ltd.

Web Links
http://www.mca.gov.in/MinistryV2/homepage.html

https://cleartax.in/s/certificate-of-incorporation

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Anjali Sharma, Lo vely Professional University Unit 03: Company Documents

Unit 03: Company Documents

CONTENTS
Objectives
Introduction
3.1 Memorandum of Association
3.2 Clauses or Contents of Memorandum of Association
3.3 Alteration of Memorandum of Association
3.4 Doctrine of Ultra Vires
3.5 Article of Association
3.6 Procedure of altering the articles
3.7 Difference between MoA and AoA
3.7 Doctrine of Constructive Notice
3.8 Doctrine of Indoor Management

Summary
Keywords
Self Assessment
Answers for Self Assessment
Review Questions
Further Readings
Objectives
After studying this unit, you will be able to:

• Comprehend the relevance, form, contents and alteration of Memorandum of Association

and Article of Association.
• Cognize the concepts of doctrine of indoor management and constructive notice.

Introduction

The Memorandum of Association's objectives are carried out via the Articles of Association. The
contents of the Memorandum of Association (MOA) and Articles of Association (AOA) must be
finalized during the establishment of a corporation. These documents should be written and
posted through the Ministry of Corporate Affairs' web page. Instead of utilizing a physical form, the
memorandum of association and articles of association must be prepared digitally using form INC-
33 and INC-34 forms respectively. Whether you're forming a company under Section 8 of the Act,
you'll need to fill out FORM No.INC-13 (Memorandum of Association) (spice plus).

3.1 Memorandum of Association

Meaning of a Memorandum of Association

A memorandum of Association is the business's charter, and it lays out the basic terms under which
the company can be formed. It contains the company's formation objects. The company must act
within the boundaries of the MOA's stated objectives. It both defines and limits the company's
authority. Anything done outside of the scope of the MOA will be considered ultra vires. Their actions
will be void and null. The outsider has to transact after properly reading the MOA.

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Notes
Company Law
Purpose of MOA

1. For Prospective Shareholders

To find out:

i) How the money will be spent?

ii) What are the risks associated with the investment?

2. For Outsiders:To determine whether the contracts negotiated are within the company's
objectives?

Printing of Memorandum of Association

A Memorandum of Association should be laser printed neatly and legibly. It should be broken
down into paragraphs and numbered properly. In the case of public Subscribers, it must be signed
by 7 people, and in the case of private Subscribers, it must be signed by two people.

Tables for drafting Memorandum of Association

Because there are several tables for different companies, the company must adopt one that is
suitable to it. The summarized table describes the form to be used by different companies regarding
the drafting and submission of a Memorandum of Association:

Table coding Form details

Table A For company limited by shares.

Table B For company limited by guarantee and not having a share capital.

Table C For a company limited by guarantee and having a share capital.

Table D Form for an unlimited company.

Table E For unlimited company and having share capital.

3.2 Clauses or Contents of Memorandum of Association

A company's Memorandum of Association contains eight clauses in total. These are outlined in
further detail below:

1. Name Clause: A Promoter who wants to start a business must choose at least one good name,
and up to six names in order of preference, that reflect the firm's main objectives. It's crucial to
make sure the name doesn't clash with the name of any other company that's already been
registered, as well as the standards for emblems and names (Prevention of Improper Use Act,
1950).

The promoter can check the availability of a proposed company's name on the Ministry of
Corporate Affairs' portal. He must log in to the site and apply to the relevant Registrar of
Companies (RoC) to check the availability of the name in eForm1A.A charge of Rs. 500/- must
be paid along with the form, which must also include the digital signature of the applicant
proposing the firm. If the suggested name is not available, the user must submit a new
application with a new name. Within 60 days of receiving name approval, the applicant can file
for new company registration by submitting the relevant forms (Forms 1, 18, and 32).

Avoiding any undesirable name

a) Identical or confusingly similar to the name of an existing company registered under this act
or any earlier company law, for example, I cannot keep my company name of ITC Limited
because it is already registered. It has a diverse footprint spanning industries such as

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Unit 03: Company Documents

cigarettes, FMCG, hotels, packaging, paperboards and specialty papers, and agribusiness, and
is headquartered in Kolkata.
b) A deceptive/misleading name, implying the company is affiliated with or endorsed by the
Central Government, any State Government, or any local authority, corporation, or entity
established by the Central Government or any State Government under any current law.
c) Search word or expression as may be prescribed.

Prohibition of use of certain names

The Emblems and Names (Prevention of Improper Use) Act of 1950 makes it illegal to use or
register a corporation or firm with any of the names or emblems listed in the act's schedule.
Name, emblem, or official seal of the United Nations Organization, World Health
Organization, Central Government and State Governments, President of India or any state
governor and Indian Flag should be avoided in the name of a company.

Suffix to added

The last words of the name must be limited or private limited, depending on the situation.

It is not necessary for the term "business" to be included in the name.

Publication of a firm's name:

a) Every company should have a common seal with its details written in legible characters and
in the local language, provided it has not authorized 2 directors or 1 director and 1 company
secretary. If it has then no need of common seal.

b) Have its name engraved in legible characters on its seal;

c) Have its name, registered office address, and CIN (corporate identity number), as well as
telephone, fax, e-mail, and website addresses, printed on all business letters, letter papers,
billheads, and notices and other official publications. It should also have its name printed on
hundis, promissory notes, and bills of exchange.

Did you know? : For the sake of ‘Ease of Doing Business,' the Ministry of Corporate Affairs
reduced its requirements for name approval under the Incorporation Rules 2016.Now, a proposed
corporate need not reflect its operation and does not have to be in accordance with the
objectives.A company name can be imprecise or truncated, and it can engage in entirely new
economic activities without changing its name.

2. Registered Office Clause/ Situation Clause

The old name for situation clause used to be known as Registered Office clause. A company's
Memorandum of Association must include the name of the state in which the company's
registered office will be located. This determines the company's domicile and includes the
names of the registrars. A newly created company must have its registered office within 30
days of its incorporation, rather than 15 days, per Section 12(1) of the Companies
(Amendment) Act 2017.
A Memorandum of Association of an entity must state the name of the State in which the
registered office of the company is to be situated. This decides domicile of company and also
has the names of the registrars enrolled. As per Sec 12(1) Companies (Amendment) Act 2017, a
newly incorporated company shall have its registered office within 30 days of its incorporation
instead of 15 days. After the date of incorporation of the company, notice of any change in the
situation of the registered office, verified in the manner prescribed, must be sent to the
Registrar within 30 days of the change, who will record it.
Objective Clause
3.
The Memorandum clearly states the company's objectives, as a corporation can only do what is
connected to the objectives in the Memorandum. When a corporation is registered, these

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Notes
Company Law
objectives define and limit the scope of its operations and abilities. It can be changed in
accordance with the Act's provisions. Subscribers to the memorandum have the option of
choosing the company's goal.

Notes: Points to be kept in mind while drafting Object Clause are---

(i) It must not be illegal;

(ii) It must not be contrary to the Companies Act; and
(iii) It must not be contrary to public policy
(iv) It can't be against the law of the land
(v) It must be crystal clear and unmistakable.

Purpose of an object clause

The purpose of an object clause is basically to inform MOA subscribers about the uses to which
their money may be put. It also assists, the creditors and other parties interacting with the company
about the firm's permissible spectrum of enterprise or operations.

4. Liability Clause: Liability refers to as an obligation to pay some fixed amount to the creditors.
Liability limited by shares is a condition as per which shareholders are legally liable to pay the
debts of a company only to the extent of the nominal value of their shares. Companies having
Liability limited by Guarantee does not usually have a Share capital or shareholders, but
instead has members who act as guarantors. So, what so ever type of liability that the
shareholders shall undertake needs to be clearly mentioned in the MOA of the company.
Company with Unlimited Liability is a hybrid company incorporated with or without a share
capital and where the legal liability of the members or shareholders is not limited.
5. Capital Clause: The Memorandum of Association having a share capital shall state the amount
of share capital with which the company is to be registered and its further division into shares
of a fixed amount. This clause shall provide information regarding the registered/ authorized/
nominal Capital, Equity/ Preference shares and Number and value of shares into which capital
is divided. Equity shares means all shares which are not preference shares and provide voting
rights to its holder. These have no preferential or special rights in respect of annual dividends
(but paid out of profits after preference shareholders) and in the repayment of capital at the
time of liquidation of the company are called equity shares. Preference shares Carry a
preferential right in terms of - payment of dividend, either fixed or amount @ a fixed rate and
repayment of capital in the case of winding up of company as they receive it first before
anything is paid to the equity shareholders.
i) Amount of share capital with which the company is to be registered and the division
thereof into shares of a fixed amount and the number of shares which the subscribers
to the memorandum agree to subscribe which shall not be less than one share; and
ii) The number of shares each subscriber to the memorandum intends to take, indicated
opposite his name;

Notes: In the case of One Person Company, the name of the person who, in the event of
death of the subscriber, shall become the member of the company

6. Succession Clause: This clause states that the persons subscribing their signatures at the end of
the Memorandum are desirous of forming themselves into an association in pursuance of the
Memorandum.

W.E.F from 1 Jan 2017 we can use INC 33 for filling eMOA in that case we require Digital
Signature Certificate of subscribers as well as of witness.

7. Association Clause: The subscriber must make a declaration reading as under: -

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 Notes

Unit 03: Company Documents “We, the several persons, whose names and addresses are
subscribed, are desirous of being
formed into a company in pursuance of this memorandum of association, and we respectively
agree to take the number of shares in the capital of the company set against our respective
names”

Notes: Signature Name, Address, Description and occupation of the subscribers; Number
of equity shares taken by each subscribers and Signature, Name, Address, description and
occupation of the witnesses also needs to be mentioned.

8. Succession Clause: According to this clause the memorandum must state the name of the
person who shall become the member of the company in the event of death of the subscriber.

3.3 Alteration of Memorandum of Association

The expression ‘alter’ means to modify, change or vary; to make or become different; to change in
character, appearance, etc. to change in some respect.Section 13 of the Companies Act states that
a company may alter the provisions contained in its MoA.

(i) Alteration is possible with the approval of members of a company via Special Resolution
(ii) No alternations shall have any effect unless registered with the Registrar
(iii) The alteration is done with reference to Companies (Incorporation) Second Amendment
Rules, 2017 notified by MCA; Rules 28/ 30 relating to shifting of registered office and
Forms INC 23/ INC 26 Amended; The Companies (Amendment) Act, 2017 (Amendment
Act) (Passed on 3rd January, 2018) and Companies (Incorporation) Amendment Rules,
2018. (come into force from the 26th day of January, 2018).

Steps for alteration in Memorandum of Association:

Step 1: Informing about a Board Meeting of Directors as per section 173 and SS-1. A notice of Board
Meeting should be issued to all the directors of company at least 7 days before the date of Board
Meeting. There should be also an attachment of meeting agenda, notes to agenda and draft
resolution.
Step 2: Hold the Board Meeting

At the Board meeting, the given resolutions for the alteration of MOA must be passed.This requires
obtaining an approval for the Alteration in Memorandum of Association and recommend the
proposal for members’ consideration by way of special resolution.A specific date, time, and venue
of the general meeting must be fixed. An authorized director or any other person should send the
notice for the same to the members.

Step 3: Issue a Notice of General Meeting(Section 101)

Notice of Extraordinary General Meeting needs to be given at least 21 days before the actual date of
its conduct. This meeting can also be called on a Shorter Notice with the consent of at least majority
in number and ninety-five percent of such part of the paid-up share capital of the company giving a
right to vote at such a meeting. The parties who need to attend such a meeting includes all the
Directors, Members and Auditors of Company.

Notes: The notice shall specify the place, date, day and time of the meeting and contain a
statement on the business to be transacted at the EGM.
Step 4: Hold General Meeting(Section 101)

To hold a general meeting, it is important to check the Quorum.Quorum of Meetings. In case of a

private or public company, that depends upon their total members. In case of a Private company at
least 2 members must be personally present to attend such meeting. If the members in a Public

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Notes
Company Law Company are up to 1000 then quorum to hold a valid meeting is of 5 members. Incase
the members
are more than 1000 and up to 5000, then 15 members should be present but if the total exceeds
5000
members, then 30 members must be present. Apart from quorum, it is also important to check
whether auditor is present. In case auditor is absent, then check out the person is on leave, whether
such a leave is granted or not(As per Section- 146).In this meeting, a Special Resolution approving
the alteration in MOA should be passed [Section-114(2)].
Step 5: Filing of form with ROC: (Section 117)
File the form MGT-14 (Filing of Resolutions and agreements to the Registrar under section117) with
the Registrar along with the requisite filing within 30 days of passing the special resolution, along
with given documents: -

Certified True Copies of the Special Resolutions along with explanatory statement; Copy of the
Notice of meeting send to members along with all the annexure and a printed copy of the Altered
Memorandum of Associations.
Following changes can be made in the contents of a Memorandum of Association.
1. Alteration in name clause: Changing the name of a company depends upon case to case. It can
be done on its own discretion or on the direction of central government. If the company wants
to alter its name on its own, then it needs to pass a special resolution for the same. This
requires a prior approval of the central government. The company with a new name must
intimate its new name within 30 days to the registrar. Thereafter, a fresh Certificate of
Incorporation shall be issued to the company with its new name on it.

Example: 8K Miles Software Services Limited company got its new name as Securekloud
Technologies Limited on 20th January 2021.
Aashee Infotech Ltd. Got renamed as Jatalia Global Ventures Limited on 24th April 2019.

A company name may be changed on directions of central government, if, through inattention or
otherwise, a company on its first registration or on its registration by a new name, is registered by a
name which, —
(a) in the opinion of the Central Government, is identical with or too nearly resembles the name
by which a company in existence had been previously registered, whether under this Act or
any previous company law, it may direct the company to change its name and the company
shall change its name or new name, as the case may be, within a period of three months from
the issue of such direction, after adopting an ordinary resolution for the purpose;
(b) on an application by a registered proprietor of a trademark that the name is identical with or
too nearly resembles a registered trademark of such proprietor under the Trade Marks Act,
1999, made to the Central Government within three years of incorporation or registration or
change of name of the company, whether under this Act or any previous company law, in the
opinion of the Central Government, is identical with or too nearly resembles an existing
trademark, it may direct the company to change its name and the company shall change its
name or new name, as the case may be, within a period of six months from the issue of such
direction, after adopting an ordinary resolution for the purpose.

(c) Notice of change to registrar -Where a company changes its name or obtains a new name
under (a) and (b)

(d) it shall, within a period of fifteen days from the date of such change, give notice of the change
to the Registrar, along with the order of the Central Government,

(e) On receipt of notice of change, Registrar shall carry out necessary changes in the certificate of
incorporation and the memorandum.

Did you know? : Penalty for not complying with any direction given by Central Govt.

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Unit 03: Company Documents

• In case of failure to comply, a fine of Rs 1000 per day to the company
• and Rs 5000-100,000 to every officer

e-forms to be filled for alteration

(i) The existing company needs to reserve the name through ‘RUN’. After the name is approved,
(ii) MGT-14 (necessary resolution for the alteration of Memorandum of Association and Articles of
Association (MOA and AOA) needs to be filed. eForm INC-24 (Application for approval of
Central Government for change of name) needs to be filed to give effect to change in name.
(iii)

(source-Companies (Incorporation) Amendment Rules, 2018)

Case study: Ewing vs. Buttercup Margarine Co. Ltd

The plaintiff, who carried on business under the trade name of the Buttercup Dairy
Company, was held entitled to restrain a newly registered company from carrying on
business under the name of the Buttercup Margarine Company Ltd on the ground
that the public might reasonable think that the registered company was connected
with his business. However, if the company’s business is different from that of the
complaining party, confusion is not likely to arise and an injunction will not be
granted. To avoid the risk of choosing a name that ultimately turns out to be
desirable, the promoters should enquire from the registrar whether the name they
intend to give the company is “too like” that of a company already in the register of
companies. After obtaining confirmation that the name is a registerable one they
should immediately make a written application for its reservation under section 19(1)
of the Act. Any such reservation shall remain in force for a period of 30 days or such
longer period, not exceeding 60 days as the Registrar, for special reasons may allow.
Every public company must write the word “limited” after its name and every
private limited must write the word “private limited” after its name. Companies
whose liabilities are not limited are prohibited from using the word “limited”.

2. Alteration of registered office clause:

a) Shifting of the Registered Office outside the local limits of any city, town or village where
such office is situated requires passing of special resolution by the company and notice of
the change shall be given to the Registrar within 15 days of the change, who shall record the
same.
b) Shifting of the registered office within the same State from the jurisdiction of one Registrar
of Companies to the jurisdiction of another Registrar of Companies requires passing of
special resolution by the company and confirmation by the Regional Director on an
application made by the company in this regard. The shifting of registered office shall not be
allowed if any inquiry, inspection or investigation has been initiated against the company or
any prosecution is pending against the company under the Act.
c) Shifting of Registered Office from one State or Union territory to another State. The
alteration of the memorandum relating to the place of the registered office from one State to
another requires [Sec. 13(2)]:
i. Passing of the special resolution, and
ii. Approval of the Central Government
Procedure for Alteration of Memorandum of Association
An application for the purpose of seeking approval for alteration of memorandum with regard to
the change of place of the registered office from one State or Union territory to another, shall be
filed with the Central Government along with the fee and shall be accompanied by the following
documents:

• a copy of the memorandum and articles of association;

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Company Law
• a copy of the special resolution sanctioning the alteration by the members of the company;
• the list of creditors and debenture holders giving details of their addresses and amounts
dues;
• an affidavit from the directors of the company that no employee shall be retrenched as a
consequence of shifting of the registered office from one state to another state; a copy of the
• notice served on the Registrar, Chief Secretary of the State Government or Union territory
where the registered office is situated at the time of filing the application,
and to the SEBI in case of listed companies.

The company shall at least 14 days before the date of hearing advertise the application in a
vernacular newspaper and an English newspaper circulating in that district; serve individual
notice(s) on each debenture holder and creditor of the company; and serve a notice together with
the copy of the application to the Registrar and to the Securities and Exchange Board of India.
Before confirming the alteration, the Central Government shall ensure that, with respect to every
creditor and debenture holder who, have objections to the proposed shifting either his consent to
the alteration has been obtained or his debt or claim has been discharged or has determined, or has
been secured to the satisfaction of the Central Government.The Central Government may make an
order confirming the alteration on such terms and conditions, if any, as it thinks fit, and may make
such order as to costs as it thinks proper:
Shifting of registered office shall not be allowed if any inquiry, inspection or investigation has been
initiated against the company or any prosecution is pending against the company under the Act. A
certified copy of the order of the Central Government approving the alteration shall be filed by the
company with the Registrar of each of the States within such time and in such manner as may be
prescribed, who shall register the same, and the Registrar of the State where the registered office is
being shifted to, shall issue a fresh certificate of incorporation indicating the alteration.A company
may change its registered office from one place to another within the local boundaries of the same
city or town or village. It needs to pass a board resolution and needs to intimate the registrar of
such change within 30 days to the registrar. The registrar will make a record of the same. In case the
company wants to shift from one city to another within the same state (ROC is same), then it needs
to pass a special resolution. The notice of change should be given to the registrar by the company
within 30 days (The company shall file the special resolution with the registrar within 30 days).
3. Alter object clause
A company, which has raised money from public through prospectus and still has any unutilised
amount out of the money so raised, shall not change its objects for which it raised the money
through prospectus unless a special resolution is passed by the company through postal ballot and
the notice in respect of the resolution for altering the objects shall contain the following particulars:

i. The total money received the total money utilized for the objects stated in the prospectus;
ii. the unutilized amount out of the money so raised through prospectus;
iii. the particulars of the proposed alteration or change in the objects;
iv. the justification for the alteration or change in the objects;
v. the amount proposed to be utilised for the new objects;
vi. the estimated financial impact of the proposed alteration on the earnings and cash flow of
the company;
vii. the other relevant information which is necessary for the members to take an informed
decision on the proposed resolution;
viii. the place from where any interested person may obtain a copy of the notice of resolution
to be passed.
ix. the details, as may be prescribed, in respect of such resolution shall also be published in
the newspapers (one in English and one in vernacular language) which is in circulation at
the place where the registered office of the company is situated and shall also be placed on
the website of the company, if any, indicating therein the justification for such change;

The dissenting shareholders shall be given an opportunity to exit by the promoters and
shareholders having control in accordance with regulations to be specified by the Securities and

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Exchange Board of India. In case of companies which have not raised money through prospectus,
objects can be changed any time by passing of special resolution. The Registrar shall register any
alteration of the memorandum with respect to the objects of the company and certify the
registration within a period of 30 days from the date of filing of the special resolution.
5. Alteration in the Liability Clause

Ordinarily it cannot be altered so as to make the liability of the members unlimited. However, with
the authority of the Articles of Association, a company may pass special resolution altering liability
clause of the Memorandum of Association so as to make the liability of directors or of any one
director or manager unlimited. But, in such a case any person holding office as director or manager
before such alteration shall not be liable until the expiry of his present term or unless he has
accorded his consent to his liability becoming unlimited. Alterations, which are likely to impose
additional liability on a member or which are likely to compel a member to buy additional shares of
the company after the date on which he became a member, not be made except with the consent of
the member concerned in writing. However, in case a company happens to be a club or any other
association and the alteration requires the member to pay recurring or periodical subscriptions or
charges at a higher rate, the member will be bound by the alteration although he does not agree in
writing to be bound by the alteration.
6. Alteration of the Capital Clause

Alterations in the capital clause of the Memorandum of Association may be of the following type:

• Alteration of the share capital

• Reduction of share capital
• Variation of the rights of shareholders
• Alteration of the Share Capital

Following kinds of alteration in share capital may be made by a limited company having a share
capital, if authorized by its articles by passing of ordinary resolution at the general meeting (Section
61):
• increase its authorized share capital;
• consolidate or sub-divide its share capital into shares of larger or smaller denominations;
• convert its fully paid–up shares into stock, and re-convert that stock into fully paid–up
shares of any denomination;
• Cancel shares which have not been taken or agreed to be taken by any person, and
diminish the amount of its share capital.

Reduction of the Share Capital [Sec. 66]

To provide protection to interests of the investors especially creditors of companies, reduction of
share capital is permissible with strict stipulation of the law. A company limited by shares or a
company limited by guarantee and having a share capital, may, reduce its share capital by adopting
any of the following methods of reduction:

i. extinguish or reduce the liability on any of its shares in respect of share capital not paid-
up;
ii. either with or without extinguishing or reducing liability on any of its shares, cancel any
paid-up share capital which is lost, or is unrepresented by available assets; or
iii. either with or without extinguishing or reducing liability on any of its shares, pay off any
paid-up share capital which is in excess of the wants of the company;

Procedure of Reduction
The articles of association of the company must authorize the company to reduce its share capital.
(In case the articles do not authorize the company to do so, articles of the company have to be
altered to authorize the company for the same). The company must pass a special resolution
referred to as “a resolution for reducing share capital”. The company has to apply, by petition to
the Tribunal for an order confirming the reduction:

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Company Law Provided that no such reduction shall be made if the company is in arrears in the
repayment of any
deposits accepted by it or the interest payable thereon. The Tribunal shall give notice of every
application made to it for reduction of share capital to the Central Government, Registrar and to the
Securities and Exchange Board, in the case of listed companies, and the creditors of the company
and shall take into consideration the representations, if any, made to it by that Government,
Registrar, the Securities and Exchange Board and the creditors within a period of three months
from the date of receipt of the notice:

The Tribunal may, if it is satisfied that the debt or claim of every creditor of the company has been
discharged or determined or has been secured or his consent is obtained, make an order confirming
the reduction of share capital on such terms and conditions as it deems fit.
The order of confirmation of the reduction of share capital by the Tribunal shall be published by the
company in such manner as the Tribunal may direct.

(5) The company shall deliver a certified copy of the order of the Tribunal and of a minute
approved by the Tribunal showing—
• the amount of share capital;
• the number of shares into which it is to be divided;
• the amount of each share; and
• the amount, if any, at the date of registration deemed to be paid-up on each share,
• to the Registrar within thirty days of the receipt of the copy of the order, who shall register
the same and issue a certificate to that effect.

In the following cases reduction of share capital does not require sanction of the Tribunal.

i. forfeiture of shares
ii. surrender of shares
iii. cancellation of unissued capital (also known as diminution of share capital)
iv. buy-back of shares by the company
v. redemption of preference shares, and
vi. purchase by the company of shares of a member under an order of the Tribunal for
prevention of oppression and mismanagement.

If any officer of the company—

Did • knowingly conceals the name of any creditor entitled to object to the
you know? reduction;
knowingly misrepresents the nature or amount of the debt or claim
•
of any creditor; or
abets or is privy to any such concealment or misrepresentation as
•
aforesaid, he shall be liable under section 447.

3.4 Doctrine of Ultra Vires

‘Ultra’ means beyond, and ‘vires’ means powers. Memorandum of Association of a company defines
the powers of a company. Any act done contrary to or in excess of the scope of the activity of the
company as laid down by its memorandum of association is ultra vires the company, i.e., beyond the
legal powers and authority of the company, and shall be wholly void and not binding on the company.
Acts ultra vires the company can neither be legalized nor ratified even with the unanimous consent of
all the members of the company.
Rationale of the Doctrine

The doctrine of ultra vires is primarily developed to protect the interest of the investors and the
creditors. The doctrine prevents a company to employ the money of the investors for a purpose
other than those stated in the object clause of the memorandum of association. Thus, the
investors and creditors may be assured by this doctrine that their investment will not be directed
for the activities which they did not contemplate while making investment in the company.

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The doctrine prevents the wrongful application of the company’s assets to result in losses or
insolvency of the company. It puts a check on the directors of the company from deviating from the
objects for which the company is formed. A company only has the capacity to do those acts which
fall within its objects as set out in its memorandum of association or are reasonably incidental to the
attainment of such objects.
Establishment of the Doctrine

The doctrine of ultra vires was established and applied in 1875 by the House of Lords in the case of

Case Study: Ashbury Railway Carriage & Iron Co. Ltd. v. Riche.

Issue: In this case, the company’s objects, as stated in the memorandum of association,
were:
(a) To make and sell, and lend or hire railway carriages and wagons, and all kinds of
railway plants, fittings, machinery and rolling stock;

(b) To carry on the business of mechanical engineering and general contractors;

(c) To purchase, lease, work and sell mines, minerals, land and buildings, and

(d) To purchase and sell as merchants, timber, coal, metals, or other materials and to
buy and sell any such materials on commission or as agents.
The directors entered into a contract with the defendant, Riche for financing the
construction of a railway line in a foreign country and the company subsequently
purported to ratify the act of the directors by passing a special resolution at a general
meeting. The company, however, repudiated the contract. Riche thereupon sued the
company for breach of contract.

Rule: If the borrowing is ultra vires the memorandum of association it is incapable of

ratification by the company even with the assent of every shareholder
Analysis: The purpose of the memorandum is to enable the shareholder, creditors and
those who deal with the company, to know what is its permitted range of enterprise.
The Court finally gave the decision in favour of the plaintiff, Ashbury Railway
Carriage Co. Ltd. and turned down the arguments of the defendant, Riche. The
Memorandum of Association of Ashbury defined its objects as “to make and sell, or
lend on hire railway carriages and wagons and all kinds of railway plants etc.; to carry
on the business of mechanical engineering and general contractors…”. The company
entered into a contract with M/s. Riche, a firm of railway contractors, to finance the
construction of a railway line in Belgium. On repudiation/cancellation of his contract
by the company on the ground of its being ultra vires, Riche brought an action for
damages for breach of contract on the ground that the words “general contractors”
gave power to the company to enter into such contract and, that, it was well within the
powers of the company.

Conclusion: The House of Lords held the contract as ultra vires the MoA (or company)
and, therefore, declare it null and void. The doctrine of ultra vires should not be
unreasonably understood and applied. It does not restrain a company from doing such
things which are reasonably fair and incidental to its objects or which the company is
authorized to do under the Companies Act.

For example, a company which has been authorized by its memorandum to purchase
land had implied authority to let it and if necessary, to sell it. However, it has no
power to go beyond the objects or to do any act which has not a reasonable proximate
connection with the object or which would only bring an indirect or remote benefit to
the company. There is difference between objects and powers. Powers are not to be
stated in the memorandum. Even if stated, these can be used only to achieve the

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Company Law
objects of the company. In no case, these can become independent objects by
themselves. Acts of a company may also be ultra vires the Articles or ultra vires the
powers of the directors. Acts ultra vires the Articles can be validated and made
binding upon the company by altering the Articles of Association with special
resolution at a general meeting. Alteration of Article of Association with retrospective
effect, if to the benefit of the company, shall be valid. An act beyond the scope of the
powers of the directors may also be ratified by the general body of the shareholders.

Effects of Ultra Vires Transactions

Following are the effects of ultra vires transactions:

a. Injunction. Any member of the company can bring injunction against the company to restrain it
from doing ultra vires acts.
b. Liability of Directors towards the Company. The directors of the company are personally liable
to make good those funds of the company which they have used for ultra vires It is the duty of the
directors of the company to employ funds and properties of the company for the purposes laid
down in the memorandum of association of the company.
c. Liability of Directors towards the Third Party. Directors are the agents of the company. It is
their duty to conduct the affairs of the company within the powers of the company as laid down in
the memorandum. Where the directors represent the third party that the contract entered into by
them on behalf of the company is within the powers of the company, while in reality the company
has no such powers under the memorandum, the directors will be personally liable to the third
party for his losses on account of breach of warranty of authority.

Case Study: Week v. Propert (1873)The directors of a railway company through an

advertisement, invited applications to invest in the company by way of loans and
bonds. The limit of borrowing as put in the memorandum had been exhausted. Week
lent to the company on the faith of it. Held that the loan is ultra vires but Week could
sue the directors for breach of warranty of authority.

d. Contract Void. A contract which is ultra vires the company will be void and of no effect whatsoever.
“An ultra vires contract being void ab initio, cannot become intra vires by reason of estoppel, lapse of
time, ratification, acquiescence or delay”. However, if the contract is only ultra vires the powers of the
directors but not ultra vires the company, it may be ratified in the general meeting and thereby the
company will be bound by it.
e. Ultra vires acquisition of Property. When money of a company is spent ultra vires in acquiring a
property, the right of the company over that property would be secure. This is because the property
represents corporate capital, though acquired wrongly.
However, where the payment for ultra vires acquired property/asset has not been made, the
vendor can obtain a tracing order to recover the property from the hands of the company. A
company cannot be allowed to benefit from such transactions at the cost of the other party.

f. Ultra vires Borrowings. A bank or other person lending to company for purposes ultra vires the
memorandum cannot recover the money under that loan agreement. But nothing prevents the
company from repaying that money. The lender is also entitled to a tracing order, and if the money
lent is traced in specie or into any investment held by the company, the lender can recover it from
the company in that form. Further, if that money is used by the company in discharging any debts
or liabilities of the company, the lender will, on accounts of principle of subrogation, step into the
shoes of the creditors whose claims have been paid off by the company and acquire rights against
the company.
g. Ultra vires Lending. If the money has been lent by the company and the lending is ultra vires, the
contract would be void. No action can be brought on it, but the company can sue for recovery of its

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money. This is because the borrower who has made a promise to repay that money, cannot be
allowed to refrain from paying it back on the ground that it is without authority.
h. Ultra vires Torts. In order to make the company liable for the torts (civil wrongs) of its
employees, it is to be proved that the tort was committed in the course of an activity which falls
within the purview of the company’s memorandum, and the tort was committed by the employee
in the course of his employment.

Issue: A company, having the statutory powers to run tramways, starts operating
omnibuses–a venture entirely outside its memorandum. The driver of one such bus
negligently injures X. Can the company be held liable?

Rule: In order to make the company liable for the torts (civil wrongs) of its employees,
it is to be proved that the tort was committed in the course of an activity which falls
within the purview of the company’s memorandum, and the tort was committed by
the employee in the course of his employment.
Analysis: The company cannot be held liable for injury to X because the company
does not have any existence outside its corporate sphere. Therefore, X ’s remedy is
only against the driver and not against the company.
Conclusion: From the case details it gets clear that the tort was committed in the
course of an activity which falls very much within the purview of the company’s
memorandum. Hence, X ’s can seek a remedy against the driver only and not against
the company.

3.5 Article of Association

The Articles of Association (AoA) is a document that defines the purpose of a company and specifies
the regulations for its operations. The document outlines how tasks should be accomplished within an
organization, including the preparation and management of financial records, and the process of
director appointments.

Tables for drafting AoA: The companies act specifies different e-tables to be used for the draft of
AoA.

Table Details

F Company limited by shares

G Company limited by guarantee and having share capital

H Company limited by guarantee and not having share capital

I Unlimited company and having share capital

J Unlimited company and not having share capital

According to section 5, companies like unlimited companies, companies limited by guarantee,

private companies limited by share must have own articles. Articles of an Unlimited company must
state: a) Number of members with which the company is to be registered b) If it has a share capital,
then amount with which company is to be registered. Articles of a company limited by guarantee
must state the number of members with which the company is to be registered. Articles of a private
company having share capital shall contain provisions which:

a) Restrict the right to transfer shares

b) Limit number of its members to 50

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Company Law
c) Prohibit any invitation to the public to subscribe for any shares in, or debentures of, the
company

Form and Signature of Articles:

The article shall be:

a) Printed

b) Divided into paragraphs

c) Signed by each subscriber of memorandum.

Contents of AoA
1. Share Capital and variation of rights

2. Lien

3. Call on Shares

4. Transfer of Shares

5. Transmission of Shares

6. Forfeiture of Shares

7. Alteration of Capital

8. Capitalization of Profits

9. Buy-back of Shares

10. General meetings

11. Proceedings at General Meetings

12. Adjournment of meeting

13. Voting rights

14. Proxy

15. Board of Directors

16. Proceedings of the Board

17. Chief Executive Officer, Manager, Company Secretary or Chief Financial officer

18. The seal

19. Dividend and Reserves

20. Winding up

Circumstances under which companies need to alter their Articles of Association

Conversion of Private Company into Public Company or Public Company into Private Company
OR Alteration in any of the existing Articles.

3.6 Procedure of altering the articles

Step 1: Convene a Meeting of Board of Directors As per Section 173 & Secretarial Standard
(SS- 1)
A notice of this meeting must be sent to all the Directors of Company at their addresses registered
with the Company, at least 7 days before the date of conduct of such a meeting. A shorter notice can
also be issued in case of urgent matter to be discussed. In this notice an Agenda, Notes to Agenda

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and Draft Resolution with the Notice must be attached. In this notice an Agenda, Notes to Agenda
and Draft Resolution with the Notice must be attached.
A Board Resolution need to be passed in the meeting for the given reasons:

i) for alteration of articles;

ii) to authorize a Company Secretary or any Director to sign and file the relevant form with
Registrar of Companies and to do such acts, deeds and things as may be necessary to give effect to
the Board’s decision;
iii) to fix the day, date, time and venue of the General Meeting and to approve the draft notice
convening the General Meeting along with explanatory statement annexed to the notice as per
requirement of the Section 102 of the Companies Act, 2013 and authorize the Director or Company
Secretary to sign and issue notice of General Meeting.
Once the Board meeting gets over its important to prepare and circulate Draft Minutes within 15
days from the meeting so held, by Hand/ Speed Post/ Registered Post/ Courier/ E-mail to all the
Directors for their comments.
Step 2: Convene General Meeting
Notice of General Meeting shall be given at least clear 21 days before the conduct of actual date of a
General Meeting. A Shorter Notice can also be issued with the consent of at least majority in
number and 95% of such part of the paid-up share capital of the company giving a right to vote at
such a meeting as per Section 101. Notice will be sent to all the Directors, Members, Auditors of
Company, Secretarial Auditor, Debenture Trustees and to others who are entitled to receive the
notice of the General Meeting. Notice shall specify the day, date, time and full address of the venue
of the Meeting and contain a statement on the business to be transacted at the Meeting. Well, now
on a fixed day the General Meeting will be held and a Special Resolution for alteration of Articles of
Association shall be passed.

Disclose the proceedings of General Meeting to the Stock Exchange within 24 hours from the
conclusion of the meeting and post the same on Company’s website within 2 working days.
Prepare the minutes of General Meeting, get them signed and compile accordingly.

Step 3: Filing of Form MGT-14 with ROC

File the form within 30 days of passing the Special resolution in the General Meeting, along
important documents as an attachment namely:

1. Certified True Copies of the Special Resolutions along with explanatory statement

2. Copy of the Notice of meeting sent to members along with all the annexure

3. Altered Articles including the provision of entrenchment inserted in the Articles, if any.

4. Copy of Attendance Sheet of General Meeting

5. Shorter Notice Consent, if any.

Step 4: Alteration of Articles to be noted in every copy

As per section 15(1): Every alteration made in the articles of a company shall be noted in every
copy of the articles.

Provision for Entrenchment Clause

An entrenchment clause is the one that makes certain amendments either impossible or difficult. It
contains specified provision of articles may be altered only if more restrictive conditions or
procedure is followed. Any entrenchment Clause which is against the provision of Companies Act,
2013 or Memorandum of Association is void and unenforceable. An entrenchment provision can be
made at the time of incorporation of the company, or after the incorporation of the company by
way of an amendment to the articles of association of the company. Where the articles contain such
provision Company shall give the notice to registrar in the prescribed manner

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Company Law Statutory right of alteration
Sec 14 of the act gives a clear and statutory power to the company to alter AOA. This power cannot
be taken away from the company. Any clause in articles of association providing that company
cannot alter its article, is invalid

Notes: Amendments in articles must be agreed to by all members in case of a private

company and in case of public company amendments in articles should be done by special
resolution.
Limitations of Alteration

✓ Must
Must notconflict
be inconsistent with the Act
Must not
not sanctionwith Memorandum of Association
✓ Must not increase the liabilityillegal
Must be for the
anything
benefit of the company
of a member

✓
✓
✓
Alteration
Breach of by special resolution only
✓ Contract

✓ Must not result

No power in tribunal
of the the expulsion of a articles
to amend member
Alteration may be with retrospective effect
✓
✓
3.7 Difference between MoA and AoA
✓
Basis for
Memorandum of Association Articles of Association
Comparison

Memorandum of Association is a document Articles of Association is a

that contains all the fundamental document containing all the rules
Meaning
information which are required for the and regulations that governs the
incorporation of the company. company.

Type of
Information Powers and objects of the company. Rules of the company.
contained

It is subordinate to the
Status It is subordinate to the Companies Act.
memorandum.

The memorandum of association of the

Retrospective The articles of association can be
company cannot be amended
Effect amended retrospectively.
retrospectively.

The articles can be drafted as per

Major contents A memorandum must contain six clauses.
the choice of the company.

Only a private company is

Obligatory Yes, for all companies. required to frame its articles while
a public company limited by

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Basis for
Memorandum of Association Articles of Association
Comparison

shares can adopt Table F in place

of articles.

Compulsory filing
at the time of Required Not required at all.
Registration

Alteration can be done, after passing

Special Resolution (SR) in Annual General Alteration can be done in the
Meeting (AGM) and previous approval of Articles by passing Special
Central Government (CG) or Company Law Resolution (SR) at Annual General
Alteration Board (CLB) is required. Meeting (AGM)

Regulates the relationship

Defines the relation between company and between company and its
Relation
outsider. members and also between the
members inter se.

Acts done beyond

Absolutely void Can be ratified by shareholders.
the scope

3.8 Doctrine of Constructive Notice

The Doctrine of Constructive notice talks about assuming the person or entity has all the knowledge
about the law which a reasonable person should have. In this doctrine, it is noted that no person
cannot give the excuse of he was not aware of any specific notice or law, such in conditions like a
legal notice of company which is published in a newspaper which the designated for legal notices or
posting them in the designated court house. As these places are public, it is assumed that the person
involved in a dispute have acknowledged about this notice. The articles and memorandum of
association of a company are registered with registrar of companies, as of this office of the registrar is
a public office the above-mentioned documents become public documents, and these documents
become accessible for all. So, it is the duty of all persons belonging to the company to have
knowledge about the public documents, their conduct should be relatable to the provisions of the
documents.
Meaning of Constructive Notice

The constructive notice states that every outsider dealing with the company is deemed to have a
proper notice or knowledge of Memorandum of Association and Article of Association. These
documents assume character of public documents and are open as well as accessible to public to
see. It is the duty of every person dealing with the company to have thorough knowledge of
contents of MoA and AoA.

Case Study:
Issue: The Article of the Company stated that the cheque must be signed by 2 or 3
directors and the secretary. But the issue regarding this case was that the Director who
signed the cheque was not properly appointed at the time of signing.

Rule: Section 399 of the Companies Act 2013 states that it is essential for outsiders to
read and gain knowledge of memorandum of association, article of association and

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Company Law
other important public documents published by the company before entering into a
contract. Ignorance of such knowledge of facts is not acceptable by law.
Analysis: In this case directors’ appointment was not done as per the provisions laid
regarding their appointment. Still, the director signed the cheque.
Conclusion: Appointment of the Director came under the Internal Management of the
Company. Even if the director was not properly appointed, the third party was entitled
to receive or cash the cheques as Mr. Mahony is entitled to presume that the Directors
were properly appointed

3.9 Doctrine of Indoor Management

The doctrine evolved 150 years ago and is also known as Turquand’s rule. The role of the doctrine
of indoor management is opposed to the role of the doctrine of constructive notice. The doctrine of
indoor management protects outsiders against the actions of the company. It is a possible
safeguard against the possibility of abusing the doctrine of constructive notice. The person who is
entering into a transaction with the company just needs to ensure that proposed transaction is not
inconsistent with the articles and memorandum of the company. Such a person is not bound to see
the internal irregularities of the company. In case there are any internal irregularities then the
company shall be liable as the person must have acted in the good faith anddid not know about the
internal arrangement of the company. The rule is based upon the obvious reason of convenience in
business relations. Firstly, the articles of association and memorandum are public documents and
they are open to the public for inspection. Hence an outsider “is presumed to know the constitution
of a company, but what may or may not have taken place within the doors that are closed to him.”

Case Study: Royal British Bank V. Turquand

Suppose that directors of a company borrowed some money from Mr. Turquand. The
article of the company provided that the directors could borrow money after passing the
resolution in the general meeting.The directors simply borrowed the money from Mr.
Turquand without passing resolution. In this case shareholders claims that as there was
no such resolution passed in general meeting, so the company was not bound to pay the
money. It was held that the company is bound to pay back the loan to Mr. Turquand. As
per the articles of association, directors could borrow provided a resolution is passed,

So, Mr. Turquand had the right to assume that the necessary resolution must have been
passed. He may be unaware about internal irregularities of companies. It was held that
Turquand could sue the company on the strength of the bond as he was entitled to
assume that the necessary resolution had been passed. Lord Hatherly in this case
observed- “Outsiders are bound to know the external position of the company, but are
not bound to know its indoor management.”

Exceptions:

1. Knowledge of irregularity: The rule will not apply if the person dealing with the company has
a slight knowledge about the lack of authority of the person who is acting on behalf of the
company in this situation the doctrine will not apply.

Case Study: Howard v. Patent Ivory Co.

Issue: As per the Articles of the company, the directors were authorized to borrow up
to 1,000 pounds. Their limit to borrow could be raised provided consent was given in
the General Meeting. They borrowed 3,500 pounds from one of the directors who took
debentures Without the resolution being passed. Can the directors be held liable?
Rule: Outsiders are bound to assume that the necessary resolution has been passed

Analysis: The directors have borrowed excess money without following the proper
procedure.

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Conclusion: The directors shall be personally liable for money borrowed in excess of
their authority.

2. Negligence: In case an officer of a company is doing something which he shall not ordinarily
be doing within his authority, the person dealing with him must make proper inquiries and
satisfy himself as to the officer’s authority. If he fails to make an inquiry, he is prevented from
relying on the rule.
3. Forgery: Forgery involves a false document, signature, or other imitation of an object of value

Case Study: B. Anand Behari Lal v. Dinshaw& Co. (Bankers) Ltd., Issue: An

accountant of a company enters into a contract to transfer its immovable

property of company in favor of Anand Behari. He does not check power of
attorney executed in favour of accountant by the company. Can the transfer of
property have held valid?
Rule: In case an officer of a company is doing something which he shall not
ordinarily be doing within his authority, the person dealing with him must make
proper inquiries and satisfy himself as to the officer’s authority.
Analysis: The person transferring the immovable property had no authority but
the buyer did not verify his authority
Conclusion: Hence, the transfer was void as it was beyond the scope of authority
of an accountant.

used with the intent to deceive another. Those who commit forgery are often charged with the
crime of fraud. Documents that can be the object of forgery include contracts, identification
cards, and legal certificates. The rule does not apply to the transaction as Obviously in such
transactions the consent of aggrieved party shall be missing. These are void ab initio. Here the
question of consent cannot arise as the person whose signature is forged he is not even aware
of the transaction.

Rouben v. Great Fingal Consolidated

Issue: Secretary of the company forged the signature of two of the directors and
issued a certificate without the authority. The issue of the certificate required the
signatures of two directors as given in the article. Can the transaction be held
valid?
Rule: Transactions done through forgery are These are void ab initio
Analysis: Forged the signature of two of the directors were done and a certificate
without the authority got issued by the secretary of a company.
Conclusion: Holder of the certificate cannot take the advantage of the doctrine as
it was forged transaction which is void ab initio.

4. Act outside the scope of apparent authority

If an act is done in contradiction to their authority, it is considered void ab ignition.

Example: Assume that a manager Mr. Charley, signs the bill of exchange of a company with his
own signature under the words stating that he signed on behalf of the company. It shall be
considered as forgery on part of Mr. Charley, when the bill was drawn in favour of a payee to whom
he is personally indebted.

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Company Law
Difference between Doctrine of Constructive Notice and Doctrine of Indoor
Management

Doctrine of Constructive Notice Doctrine of Indoor Management

1. Protects the company against the outsider 1. Protects outsider against the company

2. It is confined to the external position and 2. It is confined to the internal position and
affairs of the company affairs of the company

Conclusion
Memorandum and Articles are the two very important documents of the company, which are to be
maintained by them as they guide the company on various matters. They also help in the proper
management and functioning of the company throughout its life. That is why every company is
required to have its own memorandum and articles.
Summary
Memorandum and Articles are the two very important documents of the company, which are to be
maintained by them as they guide the company on various matters. They also help in the proper
management and functioning of the company throughout its life. That is why every company is
required to have its own memorandum and articles.

Keywords
Name Clause: This clause specifies the name of the company. The name of the company should not
be identical to any existing company. Also, if it is a private company, then it should have the word
'Private Limited' at the end.
Liability Clause: Liability clause states the nature of liability of the members.

Memorandum of Association: The Memorandum of Association of a company is its charter

which contains the fundamental conditions upon which alone the company can be incorporated.

The Capital Clause: It states the amount of share capital with which the company is

registered and the mode of its division into shares of fixed value, i.e., the number of shares into

which the capital is divided and the amount of each share.

The Object Clause: The objects clause defines the objects of the company and indicates the sphere

of its activities.

Article of Association: The articles of association of a company and its bye laws are regulations
which govern the management of its internal affairs and the conduct of its business.
Doctrine of Indoor Management: Doctrine of indoor management allows all those who deal with
the company to assume that the provisions of the articles have been observed by the officers of the
company.
Doctrine of Ultra Vires: Any act done by the company which is neither authorized by its objects
nor by the Companies Act is ultra vires the powers and authority of the company. An act which is
ultra vires the company is void and cannot bind the company. Since the act is void, it cannot be
ratified by the shareholders either.

Self Assessment

1. Prospective Investors use a Memorandum of Association to:

A. know how the money is going to be used and what risk the investment is prone to

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B. know how the money is going to be misused and what expectations can be kept for the
returns
C. know the objects of the company if the contracts entered are outside those objects
D. Know the objects of the company’s formation and acts it can go beyond the objects specified
in the MOA

2. In case of a Public company, a Memorandum of Association must be signed by:

A. Five subscribers
B. Six subscribers
C. Seven subscribers
D. Ten subscribers

3. Identify the false statement regarding the Memorandum of Association:

A. It must be illegal
B. Must not be against the provisions of Companies Act
C. Must not be against Public policy
D. Must be Clear and definite

4. Which clause in a Memorandum of Association must state the name of the person who shall
become a member of the company in the event of the death of the subscriber

A. Name Clause
B. Object Clause
C. Location Clause
D. Succession Clause

5. Alteration of a Memorandum of Association is possible with the approval of members of a

company via

A. Ordinary Resolution
B. Special Resolution
C. State Government
D. Central Government

6. A company makes certain alterations in its objective clause, which it has not registered with
the Registrar. In such a situation, can the alteration be considered valid?

A. Yes, as alteration must be made after passing ordinary resolution

B. Yes, as alteration must be made after passing special resolution
C. No, as alteration in memorandum of association must be registered with the registrar
D. No, as alteration in memorandum of association must be registered with the Chartered
Accountant

7. If a company wants to alter its Memorandum of Association, which of the following is most
essential?

A. Special resolution must be passed

B. Ordinary resolution must be passed
C. Ordinary resolution needs to be passed with prior approval of Central Government
D. Special resolution needs to be passed with prior approval of Central Government

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Company Law
8. Identify which of the following is involved in case the central government asks a company
to change its name?

A. The company needs to pass a special resolution

B. The company needs to pass an ordinary resolution within a period of 3 months from
receiving the orders for change in name by central government
C. The company needs to pass a special resolution within a period of 5 months from receiving
the orders for change in name by court
D. The company needs to pass a special resolution within a period of 8 months from receiving
the orders for change in name by court

9. The term ultra vires is:

A. doing an act beyond the legal power and authority of the company
B. doing an act within the legal power and authority of the local authorities
C. doing a legal act within the legal powers and authority of the company
D. doing a valid act beyond the legal powers and authority of the central government

10. A telephone company put up telephone wires in a certain area. The company had no power in
the memorandum to put up these wires there. The other company in whose area these wires
were laid, cut them down. Can the company claim damages from the other company for cutting
off its wires?

A. No, as laying telephone vires in a certain area was intra vires act on part of telephone
company
B. No, as even though laying telephone vires in a certain area was ultra vires act on part of
Telephone Company yet cutting of wires is very much permissible by law to protect ones’
rights. Hence, the telephone company that cut the wires need not to pay the damages
C. Yes, as even though laying telephone vires in a certain area was ultra vires act on part of
Telephone Company yet cutting of wires is not permissible by law. Hence, the telephone
company that cut the wires shall have to pay the damages
D. Yes, as laying telephone vires in a certain area is intra vires act on part of telephone
company and hence can recover proportional damages from the other company for cutting
off its wires

11. The Articles of Association needs to be submitted to the Registrar of Companies during the
formation of a company in Form _____along with the Memorandum of Association in Form ____

A. INC-32 and INC-33

B. INC-33 and INC-34
C. INC-35 and INC-36
D. INC-34 and INC-33

12. ___ form needs to be filled with the Registrar of Companies to alter the article of association.

A. MGT-13
B. MGT-14
C. MGT-15
D. MGT-16

13. Notice of General Meeting shall be given at least clear ___ days before the conduct of actual
date of a General Meeting.

A. 10
B. 11

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Unit 03: Company Documents
C. 12
D. 21

14. A Shorter Notice can also be issued with the consent of at least majority in number and
____of such part of the paid-up share capital of the company giving a right to vote at such a
meeting as per Section 101.

A. 65%
B. 85%
C. 95%
D. 105%

15. In the case of doctrine of constructive notice, there is a presumption that an outsider has
________

A. Ignored the certificate of incorporation

B. Has read the memorandum of association and article of association
C. Read the prospectus
D. Read the partnership deed carefully

Answers for Self Assessment

1. A 2. C 3. A 4. D 5. B

6. C 7. D 8. B 9. A 10. C

11. D 12. B 13. D 14. C 15. B

Review Questions
Q1. What is a memorandum of association? Explain the various contents of it in detail.

Q2. Differentiate between MoA and AoA.

Q3. What are articles of association? Enumerate some of the items included therein.

Q4. Discuss the procedure to alter the contents of a memorandum of association.

Q5. Discuss the concept of doctrine of indoor management and its exceptions with relevant
examples.

Further Readings
A Textbook Of Company Law (Corporate Law) By P.P.S. Gogna, S. Chand & Company

Elements Of Company Law by N.D. Kapoor, Sultan Chand & Sons (P) Ltd.

Web Links
https://www.taxmann.com/post/blog/5734/all-about-memorandum-of-association/

https://taxguru.in/company-law/process-alteration-moa-section-13-companies-act-
2013.html
https://www.indiafilings.com/memorandum-of-association-amendment

https://lawgupshup.com/2019/09/ashbury-railway-carriage-iron-co-ltd-vs-riche/

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Anjali Sharma, Lovely Professional University Unit 04: Prospectus

Unit 04: Prospectus

CONTENTS
Objectives
Introduction
4.1 Definition of a Prospectus
4.2 Purpose of a Prospectus
4.3 Legal rules regarding the issue of Prospectus
4.4 The Companies (Amendment) Act, 2017 with regard to the Contents of Prospectus
4.5 Public Issue of Prospectus
4.6 Contents of Prospectus
4.7 Types of Prospectus
4.8 Golden rule of framing a Prospectus
4.9 Mis-statement in Prospectus

Conclusion
Summary
Keywords
Self Assessment
Answers for Self Assessment
Review Questions
Further Readings
Objectives

After studying this unit, you will be able to:

• Cognize the relevance of a Prospectus and Comprehend its types

• Understand the legal consequences of mis-statement in a prospectus

Introduction

Once a company gets formally incorporated, it needs money to finance its activities. This amount
can be easily arranged through the issue of shares, debentures or private contracts. But, arranging
funds through public as a private money may not be sufficient enough for the needs of company.
As a matter of fact, a public company may be formulated. The money from public may be invited by
issuing the shares or by inviting the public through a prospectus to purchase the shares and
debentures of the company. Thus, the public may subscribe to the shares or debentures of the
company.

4.1 Definition of a Prospectus

Section 2(70) of the Companies Act 2013 defines Prospectus as “any document issued for
advertisement or other document inviting offers from the public for the subscription or purchase of any
securities of a body corporate”. It is an invitation issued to the public to offer for purchase/subscribe
shares or debentures of the company. In simple words, any advertisement offering shares or
debentures of the company Private limited companies are strictly prohibited from

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Company Law issuing a prospectus and they cannot invite the public to subscribe to their shares. A
prospectus can
only be issued by public limited institutions. Making it an open invitation prolonged to the public
at large.

4.2 Purpose of a Prospectus

1 To inform public about the company
. Induce people to invest in shares or debentures of a company
2 Provide authentic information about company and terms and conditions of issue of shares
. and debentures

4.3 3 Legal rules regarding the issue of Prospectus

.
1. It must be signed by every person who is named as director or proposed director or his duly
authorized attorney.
2. It must be dated as that date becomes the date of its publication.
3. Statement of an expert may be included in prospectus if concerned expert is not interested in
formation, promotion or management of company. It is must to ensure that such an expert must
have given a written consent to issue of prospectus. He must not have withdrawn consent before
delivery of prospectus for registration. This fact must be also stated in the prospectus.
4. A copy of prospectus must eb registered with the registrar of companies before the issue of
prospectus.
5. A prospectus must be issued within 90 days of delivery of its copy to the registrar for
registration.
6. Every prospectus issued by the company on its face should state that its copy is already provided
to the registrar and also what all documents were attached to the copy so delivered.
7. Once registration of prospectus is over, the terms and conditions of a contract states in
prospectus cannot vary or differ.
8. When the company issued an application form for the purchase of shares or debenture, then the
form must be accompanied by an abridged prospectus.

4.4 The Companies (Amendment) Act, 2017 with regard to the

Contents of Prospectus
Every prospectus issued by or on behalf of a public company either with reference to its formation or
subsequently, or by or on behalf of any person who is or has been engaged or interested in the
formation of a public company, shall be dated and signed and shall:

I. State such information and set out such reports on financial information as may be specified by
the Securities and Exchange Board in consultation with the Central Government.
II. Provided that until the Securities and Exchange Board specifies the information and reports on
financial information under this sub-sectionthe regulations made by the Securities and
Exchange Board under the Securities and Exchange Board of India Act, 1992, in respect of such
financial information or reports on financial information shall apply.

Declaration of Compliance
Every prospectus shall make a declaration about the compliance of the provisions of this Act and a
statement to the effect thatnothing in the prospectus is contrary to the provisions of this Act the
Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act,
1992 and the rules and regulations made there under. No prospectus shall be issued by or on behalf
of a company or in relation to an intended company unless on or before the date of its publication,
there has been delivered to the Registrar for registration, a copy thereof signed by every person who
is named therein as a director or proposed director of the company or by his duly authorized
attorney.

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4.5 Public Issue of Prospectus
The Prospectus has issued to the public at large, so the question arises that the prospectus is whether
a general offer to the public? No, a prospectus is not an offer but merely it is an invitation to offer
according to the Indian Contract Act. The prospectus is a constructed document that shall be issued to
the public as an invitation for the subscription of shares.
When the new company is incorporated, they issue a prospectus through which the public gets to
know about the existence of the Company. The company tries to convince the public that they give
the best opportunity to them for their investment. If the public is convinced then they give an offer
through the application for the purchase of shares and debentures.

Prospectus — invitation of offer

Application for purchase of shares — Offer

Allotment of Shares — Acceptance

After acceptance, the contract is binding to the Companies and the shareholders.
A Company gets 120 days for this whole process after the prospectus was issued. But if the company
fails to do so i.e. obtain a minimum subscription from the public with a specified period, then the
amount they received from the public is returned to them. Also, the company didn’t get the “Certificate
of Commencement of Business” because the public doesn’t rely upon or interested in this company.

Notes: Any private communication like Invitation made to friends and relatives of the
directors will not be an invitation to the public and therefore not a prospectus.

4.6 Contents of Prospectus

The Prospectus has issued on the behalf of the company. Section 26 of the Companies Act, 2013,
read with Rule 3 of the Companies (Prospectus and Allotment of Securities) Rule 2012: - For the
formation of the Public Company, the prospectus must be signed and dated and contains the
following information:
1. General Information:

• Name and Addresses- It includes the name and registered office address of the Company.
It must also include the name and address of the Company Secretary, Auditor, Chief
Financial Officers, Legal Advisor, Banker, Trustee.
• Issued Listed at (Name of Stock Exchange)
• Opening and Closing Date of the issue- Details of opening and closing date of the
Subscription list.
• Rating of the shares and debentures
• Details about underwriters
• A statement by the Board of Directors- A statement was given by the Board of Directors
about the separate bank account in which the money raised from the issue shall be
deposited. Also, the Board of the Director discloses that how much amount they used or
utilized.
• Consent of the directors/ auditors/ bankers to the issue, experts opinion or another
person as may be prescribed.

2. The capital structure of the Company:

• Issued, subscribed, and paid-up capital

• Size of the present issue

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Company Law
3. Terms of the Present Issue:

• The Authority for the issue

• Procedure and schedule for allotment and issue of securities
• How to apply- Availability of Prospectus and Terms & Mode of Payment for the
subscription
• Special tax benefits to the shareholders and Company

4. Particulars of the Issue:

• Objects of the Issue

• Project Cost

5. The company, Management and Project:

• History, main objects and present Business of the Company

• Plant location, machinery, technology, etc.
• Backgrounds of promoters, collaboration, etc.
• Infrastructure and facility
• The products and services
• Information related to threat factors of certain specific projects or their imminent legal
actions, the gestation period of the project, and all other information related to it.

6. Financial Performance of the Company:

• Balance Sheet Data, Profit and Loss Account

• Any change in accounting policy during the last three years
• Stock market quotation of shares and debentures

7. Details of all payment’s refunds, interest, dividend, dues, etc. 8. Detail of Companies under

same management- If there are numbers of companies under the

same management, disclose all the details of these companies.
Advertisement of the Prospectus Section 30 of the Companies Act 2013 contains the provisions

regarding the advertisement of the

prospectus. In any manner where an advertisement of any prospectus of a company is published, it
shall be necessary to specify therein the contents of its memorandum as regards the objects, the
liability of members and the amount of share capital of the company, and the names of the
signatories to the memorandum and the number of shares subscribed for by them, and its capital
structure.

4.7 Types of Prospectus

1. Red Herring Prospectus: As specified under Art 31 of the Companies Act 2013 a red herring
prospectus is issued prior to the prospectus when a company is proposing to make an offer. It
shall file it with the Registrar at least three days prior to the opening of the subscription list and
the offer. A red herring prospectus shall carry the same obligations as are applicable to a
prospectus and any variation between the red herring prospectus and a prospectus shall be
highlighted as variations in the prospectus.
2. Shelf Prospectus: A prospectus that has been issued by any public financial institution,
company, or bank for one or more issues of securities or class of securities as mentioned in the
prospectus is known as Shelf prospectus. When a shelf prospectus is issued then the issuer

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does not need to issue a separate prospectus for each offering, he can offer or sell securities
without issuing any further prospectus. The provisions related to shelf prospectus have been
discussed under section 31 of the Companies Act, 2013.
3. Abridged prospectus: A summary of a prospectus filed before the registrar. It contains all the
features of a prospectus known as Abridged prospectus. An abridged prospectus contains all
the information of the prospectus in brief so that it should be convenient and quick for an
investor to know all the useful information in short. Section33(1) of the Companies Act, 2013
also states that when any form for the purchase of securities of a company is issued, it must be
accompanied by an abridged prospectus.
4. Deemed Prospectus: A deemed prospectus has been stated under section 25(1) of the
Companies Act, 2013.A document will be considered as a deemed prospectus through which
the offer is made to the public for sale when any company offers securities for sale to the
public, allots or agrees to allot securities. The document is deemed to be a prospectus of a
company for all purposes and all the provision of content and liabilities of a prospectus will be
applied upon it.
5. Statement in Lieu of Prospectus: It is a document filed with the Registrar of the Companies
(ROC) when the company has not issued prospectus to the public for inviting them to
subscribe for shares. The statement must contain the signatures of all the directors or their
agents authorized in writing. It is similar to a prospectus but contains brief information. The
Statement in Lieu of Prospectus needs to be filed with the registrar if the company does not
issue prospectus or the company issued prospectus but because minimum subscription has not
been received the company has not proceeded for the allotment of shares.

4.8 Golden rule of framing a Prospectus

The ‘Golden Rule’ for framing of a prospectus was laid down by Justice Kindersley in New Brunswick
& Canada Rly. The Golden Rule of Prospectus has a meaning and a moral in it, which says whatever
information comes from the company to the public, through the medium of a prospectus, must be true,
fair and accurate. Those who issue a prospectus hold out to the public great advantages which will
accrue to the persons who will take shares in the proposed undertaking.
A company issues prospectus to attract the general public to purchase its shares, interested people
rely on the information presented in the prospectus and on the basis of which they desire to make
an investment in the shares of the issuing company. The public is invited to take shares on the faith
of the representations contained in the prospectus. The public is at the mercy of company
promoters. According to the ‘Golden Rule’ the followings must be kept in mind when preparing the
prospectus of a company:

• The prospectus must be an honest statement of the company’s profile; there must be no
misleading, ambiguous or erroneous reference to the company in its prospectus.
• Every important aspect of a contract of the company should be clarified.
• The contents of the prospectus should conform to the provision of the Companies Act.
• The restrictions on the appointment of directors must be kept in mind.
• The conditions of civil liability as laid down must have strictly adhered to issue and
registration of prospectus or legal requirement regarding the issue of the prospectus.

4.9 Mis-statement in Prospectus

The persons liable for an untrue statement in the prospectus under Sec-62 are;

(a) Director – every person who is a director of the company at the time of the issue of the
prospectus;
(b) Proposed Director – every person who has authorized himself to be a director, either
immediately or after an interval of time;
(c) Promoter – every person who is a promoter of the company;

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Company Law (d) Authorized person – every person who has authorized the issue of the prospectus.

Exemption from Liability -Sec 35(2)

a) No person shall be liable if he proves that he had though consented to become a director of the
company but withdrew hisconsent before the issue of the prospectus, and that it was issued
without his authority or consent; or

b) that the prospectus was issued without his knowledge or consent, and the moment he became
aware of its issue, he immediately gave a reasonable public notice of it that it was issued without
his knowledge or consent.
c) that he had reasonable grounds to believe that the statement was true or the inclusion or
omission was necessary andbelieved in it up to the time of issue of the prospectus.
Note: A person may also not be liable for a misleading statement made by an expertthe report is a
correct and fair representation of the statement, or a correct copy or a correct and fair extract of the
report or valuation; andhe had reasonable ground to believe that such expert was competent to
make the statement and had given the consent required by sub-section (5) of section 26to the issue
of the prospectus and had not withdrawn that consent before delivery of a copy of the prospectus
for registration.
Liability for compensation
All those persons as discussed in previous slide are liable to pay compensation to every such
person who suffered losses by subscribing shares/ debenturesor any other security relying upon
the faith of prospectus under the 2 heads that is Liability of compensation for misstatement and for
damages under general law
Unlimited liability in case of intent to defraud [Sec 35(3)]

A Prospectus that was issued with an intention to defraud the applicants for the securities of a
company or any other person or for any fraudulent purpose, every person referred to in subsection
(1) shall be personally responsible, without any limitation of liability, for all or any of the losses or
damages that may have beenincurred by any person who subscribed to the securities on the basis of
such prospectus.

Remedies against the company

Company is also liable for misleading information. It can be made liable only if it is proved that the
false prospectus is issued by the directors within the scope of their authority. Liability of company
is only for those misstatements which amount to “fraud”
Consequences for Mis-statement in Prospectus
The prospectus is a trusted legal document on which people can rely before subscribing or purchasing
securities from the company. But any misstatement that occurs in the prospectus leads to punishment
in the form of a fine or imprisonment. Misstatement includes an untrue or misleading statement, non-
disclosing facts, which is issued in the prospectus. The liabilities for Misstatement in a prospectus are
Civil Liability (Section 35) and Criminal Liability (Section 34).
A. Civil Liability
According to the provision of Section 35 under the Companies Act, 2013, civil liability arises when a
person who has subscribed for securities on the faith of the misleading prospectus has remedies
against the company and the directors, promoters, experts & every person who authorized the
issue of prospectus.
(i) Remedies against Company: -

In against company, two remedies are available:

(a) Rescind the Contract– The person who purchases the shares can rescind the contract if he

found
any misstatement in the prospectus and the money will be refunded to him which he pays to the
company while purchasing securities.

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Right to rescind or terminate the contract is available if the person proves the following:
• The prospectus was issued on the behalf of the company;
• The statement must be untrue;
• The statement must be a material misrepresentation;
• The misrepresentation must have induced the shareholders to take the securities and he
must have relied on the statement in applying for securities;
• The misrepresentation of statement must be of fact and not of law
• That he has taken an action promptly to rescind the contract within a reasonable time and
before the company goes into liquidation.

(b) Damages for Fraud – In this case, the person only claims damages against the company but he
cannot rescind the contract because of unreasonable delay, affirmation (provide assurance), and
commencement of winding- up. At these stages, the shareholder can file a suit against the company
for the misstatement and claim damages for it.
Remedies against the directors, promoters, experts & every person who authorized the issue of
prospectus–
In cases where it is proved that a prospectus has been issued with intent to defraud the applicants,
then, every person referred to in subsection (1) of Section 35[5] shall be personally accountable
without any limitation of liability any of the losses or damages that may have been sustained by
any person who subscribed to the securities based on such prospectus.
Defences available to avoid criminal liability:
Under Section 35 (2) of the Act, if the person proves that, having a director of the company given
his consent for issuing prospectus but he withdrew his consent before the issue of the prospectus
and that it was issued without his authority or consent; that the prospectus was issued without his
knowledge or consent and that on becoming aware he gave a reasonable public notice that it was
issued without his knowledge or consent.

B. Criminal Liability

According to the provision of Section 34 of the Companies Act, 2013, criminal liability arises where
prospectus contains any untrue statement, then, every person who has authorized the issue of the
prospectus shall be punishable under Section 447. The punishment involves imprisonment for a
period of 6 months which can be extended to 10 years or a fine, maybe the amount involved in the
fraud, or it can be extended 3 times the amount involved in the fraud or both.

Liability
Any person who is found to be guilty of fraud involving an amount of at least 10 Lakh rupees or
1% of the turnover of the company, whichever is lower shall be punishable with imprisonment for
a term which shall not be less than 6 months but which may extend to 10 years and shall also be
liable to fine which shall not be less than the amount involved in the fraud, but which may extend
to three times the amount involved in the fraud. Provided that where the fraud in question involves
public interest, the term of imprisonment shall not be less than 3 years. Provided further that where
the fraud involves an amount less than 10 lakh rupees or 1% of the turnover of the company,
whichever is lower and does not involve public interest, any person guilty of such fraud shall be
punishable with imprisonment for a term which may extend to 5 years or with fine which may
extend to 20 lakh rupees or with both.
Defenses available under criminal liability:

(i) The defenses are available under criminal law if a person proves that, such statement or
omission was immaterial;
(ii) He has a judicious ground to consider that the inclusion or omission was necessary;
(iii) He has judicious ground to consider that the statement was true.
(iv)

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Case Study:
1. Derry v. Peek

Issue: The prospectus of a company contained a statement that the company had been authorized
by special act of parliament to use steam or mechanical power for running the trains. In fact, the
authority to use the steam was subject to the approval of Board of Trade. But, this fact was not
mentioned in Prospectus. However, the Board of Trade did not approve the use of steam, and
subsequently the company was wound up. Aman, an investor filed a suit against directors for
damages for fraud. Decide will Aman succeed as per the provisions of companies act?
Rule:Damages for fraud may be granted if a person knowingly makes a statement to deceive the
other party.
Analysis:In this case, directors genuinely believed that once act of Parliament authorizes the use of
steam, consent of Board or Trade was practically concluded.
Conclusion:The directors are not guilty of fraud as they honestly believed that once Parliament had
authorized the use of steam, the consent of Board of Trade was practically concluded
Issue: A company was formed for manufacturing leather tyred wheels for trolleys. The company
issued a prospectus stating that orders have already been received from Queen of London to be
followed by large orders later. In fact, no single order has been received for supply of wheels. All
orders received were for trial and by way of experiment. Is the prospectus valid in the eyes of law?
Rule: A contract may be rescinded due to false representation of facts.

Analysis: A misleading statement is made to the prospective investors

Conclusion of case: The issue of Prospectus is not valid as the statement contains untrue and
misleading statement.
Conclusion
The prospectus is a legal document only issued by a public company that wants to go in for raising
funds. A public company must issue a prospectus for raising funds but, in case of private company
converts into public then they should issue a prospectus or statement in lieu of prospectus with the
memorandum of association (MOA) on its conversion into a public company. A prospectus plays a
major role in the decision-making of the subscribers for the subscription of securities (shares,
debentures, and other related instruments). It is an invitation to offer for the subscription of
sharesand includes detailed information of the company’s Board of Directors, Company Secretary,
company’s management, capital structure, financial performance, recent projects of a company, and
other related information. To ensure the validity of a prospectus, it should contain all the essential
requisites and must be registered. An unregistered prospectusis considered invalid. For any
misstatement of a prospectus i.e. untrue statement or misleading statement to deceive anyone, then
such person was held guilty and was liable for fine or imprisonment.
Summary
The prospectus is a legal document only issued by a public company that wants to go in for raising
funds. A public company must issue a prospectus for raising funds but, in case of private company
converts into public then they should issue a prospectus or statement in lieu of prospectus with the
memorandum of association (MOA) on its conversion into a public company. A prospectus plays a
major role in the decision-making of the subscribers for the subscription of securities (shares,
debentures, and other related instruments). It is an invitation to offer for the subscription of shares
and includes detailed information of the company’s Board of Directors, Company Secretary,
company’s management, capital structure, financial performance, recent projects of a company, and
other related information. To ensure the validity of a prospectus, it should contain all the essential
requisites and must be registered. An unregistered prospectus is considered invalid. For any

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Unit 04: Prospectus

misstatement of a prospectus i.e. untrue statement or misleading statement to deceive anyone, then
such person was held guilty and was liable for fine or imprisonment.
Keywords

Abridge Prospectus: An ‘abridged prospectus’ need only be appended to the application form.
Prospectus: A prospectus, as per s.2 (36), means any document described or issued as prospectus
and includes any notice, circular, advertisement. Red Herring Prospectus: The ‘red-herring’
prospectus means, a prospectus which does not have the complete particulars on the price of the
securities offered and the quantum of securities offered. Shelf Prospectus: A ‘shelf-prospectus’
means, a prospectus issued by any financial institution or
bank, for one or more issues of the securities or class of securities specified in that prospectus.

Deemed Prospectus: A document will be considered as a deemed prospectus through which the
offer is made to the public for sale when any company offers securities for sale to the public, allots
or agrees to allot securities.

Self Assessment
1. If a company want to issue securities in stages, which type of prospectus it must issue?
A. Red herring prospectus
B. Deemed prospectus
C. Shelf prospectus
D. Abridged prospectus

2. What is the validity period of Shelf Prospectus?

A. 3 months
B. 6 months
C. 9 months
D. 1 year

3. Which among the following prospectus contains salient features of a prospectus is a brief
version of the information contained in the prospectus?

A. Red herring prospectus

B. Abridged prospectus
C. Deemed prospectus
D. Shelf prospectus

4. Which among the following information is not included in Red herring prospectus?

A. Issue Price
B. Number of Share offered
C. Details of Company
D. Both 1 & 2

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Company Law
5. Information memorandum + shelf prospectus together constitutes_____
A. Memorandum
B. Articles
C. Prospectus
D. None of the above

6. Any document by which the offer for sale to the public is made, where a company allots or
agrees to allot any securities of the company with a view to all or any of those securities being
offered for sale to the public, shall be ……………. Prospectus issued by the company

A. Deemed Prospectus
B. Red herring Prospectus
C. Shelf Prospectus
D. Abridged Prospectus

7. Identify the false statement regarding a Prospectus:

A. It is a legal document that outlines the company’s financial securities for sale to the
investors.
B. Induce people to invest in shares or debentures of a company
C. Provide authentic information about company and terms and conditions of issue of shares
and debentures
D. A prospectus must be verbally communicated to friends and relatives only in a company.

8. Suppose a prospectus was prepared and distributed by a company only among the
members of certain gas companies. Can we say that this an offer of shares to the ‘public’?
A. No, as there is no offer of shares to the ‘public’ as it is made to members of certain gas
companies
B. Yes, it is an offer of shares to the ‘public’
C. No, as the offer is not made in written form
D. Yes, as it is an invalid offer made to the ‘public’

9. An advertisement in a ‘The Hindu’ stated that some shares are still available for sale as per the
terms and conditions of an Infrastructure company, which may be obtained on application. Can
such advertisement be considered as a Prospectus?

A. Yes, as prospectus is invited for public to purchase the shares.

B. No, as public may not like the terms and conditions of the company.
C. Yes, as through this medium investor can privately purchase shares of the company.
D. No, as newspaper advertisement is merely a publicity stunt.

10. The managing director of a JK Lakshmipat Cement company prepared a document which
was in the form of a prospectus. The document was marked as strictly private and confidential.
But the document did not contain all material facts that need to be disclosed as per the
companies act. It was circulated among the directors and their friends. Hira Lal an outsider
received this document through some friend of a director. On the basis of this document, Hira
Lal applied for the shares of the company. Can the document so received by Hira Lal
considered a valid Prospectus in the eyes of law?

A. Yes, as prospectus is for general public to apply for issue of shares.

B. No, as the prospectus in this case is merely a private communication between directors and
their friends.
C. Yes, as prospectus is well circulated among directors and their friends.

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Unit 04: Prospectus

D. No, as the Hira is has not yet paid the call money for shares bought.

11. A Prospectus was issued by a company to borrow money from the applicants for the
infrastructure building business. This money was actually to be used for match fixing. In such a
situation what shall be the liability of directors who have signed the prospectus?

A. They shall have no liability as the money is illegally used by the company and not by them.
B. They shall have a liability limited by guarantee, for all or any of the losses or damages that
may have beenincurred by any person who subscribed to the securities on the basis of such
prospectus.
C. They shall have a liability limited by share, for all or any of the losses or damages that may
have beenincurred by any person who subscribed to the securities on the basis of such
prospectus.
D. They shall be personally responsible, without any limitation of liability, for all or any of the
losses or damages that may have been incurred by any person who subscribed to the
securities on the basis of such prospectus.

12. A Prospectus shall not be valid if it is issued more than ____after the date on which a copy
thereof is delivered to the Registrar.

A. 70 days
B. 60 days
C. 90 days
D. 110 days

13. _________is a document issued by the company when it does not offer its securities for
public subscription.

A. Statement in Lieu of Prospectus

B. Red Herring Prospectus
C. Deemed Prospectus
D. Shelf Prospectus

14. Which of the following is a civil liability for mis-statement in a Prospectus?

A. Rescind the contract

B. Either rescind the contract or claim damages
C. Claim damages
D. Neither rescind the contract or claim damages

15. Under which of the given circumstances, a person can be exempted from liability for mis-
statement in Prospectus?

A. A person who had although consented to become a director of the company but withdrew
his consent before the issue of the prospectus, and that it was issued without his authority or
consent
B. When the prospectus was got issued without the knowledge or consent, and the moment a
person became aware of its issue, he immediately gave a reasonable publicnotice of it that it
was issued without his knowledge or consent.
C. Either A but not B
D. Both A and B

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Company Law
Answers for Self Assessment

1. C 2. D 3. B 4. D 5. C

6. A 7. D 8. B 9. A 10. B

11. D 12. C 13. A 14. B 15. D

Review Questions
Q1. What is a Prospectus? What are its contents and rules regarding its issue?

Q2. Discuss the liability for mis-statement in Prospectus.

Q3. Discuss the Golden rule of framing a Prospectus and liability for mis-statement in Prospectus.

Q4. Write a short note on:

a) Deemed prospectus

b) Shelf prospectus

c) Abridged prospectus

d) Statement in lieu of prospectus.

Q5. What is Prospectus and why it is issued? Also, discuss the legal rules regarding the issue of
Prospectus.

Further Readings
A Textbook Of Company Law (Corporate Law) By P.P.S. Gogna, S. Chand & Company

Elements Of Company Law by N.D. Kapoor, Sultan Chand & Sons (P) Ltd.

Web Links
http://www.mca.gov.in/SearchableActs/Section447.htm

http://www.mca.gov.in/SearchableActs/Section31.htm

http://www.mca.gov.in/SearchableActs/Section32.htm

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Anjali Sharma, Lo vely Professional University Unit 06: Company Management

Unit 06: Company Management

CONTENTS
Objectives
Introduction
6.1 Definition of a Director Appointment, Qualification and
6.3 Disqualification of a Director Qualification of a Director
6.2 Disqualification of a director [Section 164 of Companies Act, 2013]
6.3 Remuneration for Directors Duties of a Director Powers of a
6.4 Director Position of Directors
6.5
6.6
6.7

Summary
Keywords
Self Assessment
Answers for Self Assessment
Review Questions
Further Readings
Objectives
After studying this unit, you will be able to:

i) Understand the various types and recently emerged director types

ii) Comprehend the legal procedure for appointment, qualification and disqualification
of a director
Comprehend the legal provisions for removal and resignation of a director
iii)
Understand the remuneration payable to a director
iv)

Introduction
A company is an artificial legal person and does not has any physical existence. It can act only
through natural persons to run its affairs. A person acting on behalf of a company is better
known as a Director. Directors refer to the part of the collective body known as the Board of
Directors, that is responsible for controlling, managing and directing the affairs of a company.
They are considered as trustees of company’s property and money, and they also act as the
agents in those transactions which are entered into by them on behalf of the company. It is
important to note that the Appointment of Director in a Company shall be pursuant to provisions
of Companies Act, 2013. In accordance with the Companies Act 2013, every company shall
have a certain number of directors. The minimum number of directors is fixed according to the
different type of companies- a Public Company shall have at least 3 Directors, a Private
Company shall have atleast 2 and a One Person Company shall have atleast 1 Director. The
upper limit is fixed at 15. However, a Company needs to pass a Special Resolution if it wants to
have more than 15 directors. [Section 149(1)]

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Company Law

6.1 Definition of a Director

According to Section 2(34) of Companies Act, 2013 a director is a person who is appointed as director
in the company. A person who is appointed but not designated as a director will not be considered as
a director under the meaning of this Act. Only an individual shall be eligible to be appointed as director
because in case of corporates and firms it will be difficult to fix duties and responsibilities. Minor
cannot be a director because of the ineligibility to obtain DIN (Section 152(3)). As per Section 149(3),
at least one director has to be an Indian resident.
Types of Directors

1. Residential Director: Every company shall have at least one director who has stayed in India for
a total period of not less than 182 days in the previous calendar year.Such a director is known as
Residential director. Additional Director: According to the Act, the articles of a company may
2. confer on its Board of Directors the power to appoint any person, other than a person who fails to
get appointed as a director in a general meeting, as an additional director at any time who shall
hold office up to the date of the next annual general meeting or the last date on which the annual
general meeting should have been held, whichever is earlier.This definition says that the articles
of the company has authorized the board of directors to appoint the additional directors whenever
needed.

Notes: Term of holding an office by the additional director is up to the date of next AGM.

3. Alternate Director: The Board of Directors of a company may, if so authorized by its articles or
by a resolution passed by the company in general meeting, appoint a person, not being a
person holding any alternate directorship for any other director in the company, to act as an
alternate director for a director during his absence for a period of not less than 3 months.This
director is to be specifically appointed when the original director or the whole-time director is
not present in the office due to any of the factors.

Notes: Term of office for an alternate director: Such a director shall hold office for the
remaining period office of the original director in whose place he is appointed.

4. Small Shareholders Director: Every Listed Company may have one director elected by small
shareholders "small shareholders" means a shareholder holding shares of nominal value of not
more than Rs.20,000/- or such sum as may be prescribed. A listed company may by notice to
not less than 1,000 or 1/10th(one-tenth) of total small shareholders whichever is lower shall
have a Small Shareholders director appointed by them Or A listed company may suo moto opt
to appoint a director representing small shareholders.
Notes: Term of office of small shareholder director: It shall not be more than a period
of 3 consecutive years and he shall not be liable to retire by rotation. On the expiry of
the tenure, such director shall not be eligible for re-appointment

5. Women Director: According to the Companies Act 2013, some companies have been
compulsory ordered to get at least 1 director as the women director.
The list of companies who are required to get their director as women are:
1. A listed Company
2. Any Public company having –
i. Turnover of Rs. 300 crore or more
ii. Paid up capital of Rs. 100 crore or more

6. Independent Director: As the name suggests such directors are not related in certain ways
with the company. They are not Managing directors, whole time directors or nominee
directors, such directors have to comply with the criteria’s given in section 149(6). An
independent director can be appointed for a consecutive period of not more than 2 years then a
gap of 3 years is required before their reappointment in the same company for the same
position.

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Unit 06: Company Management

Every listed public company shall have not less than one third of its directors as independent.
Following prescribed public companies shall have minimum of 2 independent directors: -
1. whose paid-up share capital is of 10 crores or more; or
2. whose turnover is of 100 crores or more; or
3. whose outstanding loans, debentures, and deposits in aggregate exceeds 50 crores.
A joint venture, wholly owned subsidiaries and dormant companies need not to have such
directors. If a company has audit committee then more than half shall be independent directors and
this will be the minimum number of independent directors in such companies.

Example: If a public company has paid up share capital of Rs. 12 crores and has 7 members
in audit committee then minimum number shall not be 2 but 4 i.e. more than half of 7.

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Company Law

6.3 Appointment, Qualification and Disqualification of a Director

A Director may be appointed by any of the given means:
1. By Promoters (First directors of the company): They are named in company’s articles
usually and gets appointed by promoters in the manner laid down in AOA. In case of a
One Person Company(as per 2013 act), an individual being member shall be deemed to be
its first director until the director or directors are duly appointed by the member in
accordance with the provisions of the section. Further, we can explore the vvarious
situations as per which they get appointed:

First Situation: When during the process of incorporation of a company, when a promoter gets the
memorandum of association and article of association drafted and submitted along with online
application form. He mentions the name of directors in the articles of association who usually
becomes the first director of a company.They remain appointed till the 1st Annual General Meeting
of the company. Second Situation: If the articles of association are silent about first director, but
articles prescribe
the manner of appointment of directors, then the first director will be determined in writing by the
subscribers of MOA or majority of them. However, until first directors are so determined, all the
subscribers who are individuals shall continue to be deemed as directors. They remain appointed
until the appointment of directors in the 1st AGM. Third Situation: If the first director is not named in
articles of association and it does not contain
any provision for appointment of first director: then the subscribers of Memorandum who are
individuals become directors. If all the subscribers to MOA are body corporates, the company will
have no directors until the first directors are appointed at annual general meeting.
2. By Members/ shareholders of the company at General Meeting: The directors are
appointed by the company in annual general meeting of shareholders. Not less than 2/3 of
total number of directors of a company, shall be rotational directors, i.e shall be liable to
retire by rotation and remaining 1/3rd may be non-rotational. Also, not less than 2/3rd of
total number of directors shall be liable to retire by rotation. The total number of directors
here means the number of directors for the time being appointed a director and not the
number fixed by AoA. The directors to retire by rotation at every annual general meeting
shall be those who have been longest in office since their last appointment, but as between
persons whobecame directors on the same day, those who are to retire shall, in default of
and subject to any agreement among themselves, be determined by lot.
i) Directors are appointed by passing an Ordinary resolution in General meeting. A Separate
resolution for appointment of each directors is to be passed
ii) In case 2 or more directors get appointed by passing a single resolution, then their
appointment shall not be considered valid.There is an option to adopt principle of
proportional representation for appointment of directors. Notwithstanding anything
contained in this Act, the articlesof a company may provide for the appointment of not less
than two-thirds of the total number of the directors of a company in accordance with the
principle of proportional representation.

3. By small shareholders: A shareholder is the one who holds shares of nominal value of not
more than Rs. 20,000 or such other sum as may be prescribed. He may be a holder of equity
shares or preference shares of both.A listed company may have one director elected by such
small shareholders in such manner and with such terms and conditions as may be
prescribed.The provisions related to small shareholder director is applicable to listed
companies only, where the appointment of small shareholder is optional or obligatory.If a
notice is served by the small shareholders for the appointment of such director, then it is

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Unit 06: Company Management obligatory or legally compulsory.A Notice must be in writing
regarding their appointment.
It shall be given at least 14 days before the meeting. The notice shall be given by at least
1/10th in number of small shareholders.The notice shall be signed by at least 1,000 small
shareholders, which shall specify name, address, number of shares held, particulars of
shares with differential rightsand folio number of Shareholders proposing the resolution
and the person whose name is proposed as a “small shareholder’s Director.’’ Only a small
shareholder can be appointed as small shareholders directors. Small shareholders shall be
appointed in suchmanner and with such terms and conditions as may be prescribed.

Notes: Disqualification of small shareholders directors - It is same as of any other

director, that is: He shall vacate the office if he ceases to be a small shareholder.
The small shareholder director shall be appointed for a maximum period of
three years and shall not retire by rotation. He may be re- elected for another
period of three years. A person cannot be a small shareholder’s director in more
than 2 companies.

4. By the Board of directors: It can be well understood as per the given cases:
a. Appointment of an Additional director: Within the maximum strength of board fixed by
articles, board may appoint such director if authorised by Articles of association by passing
a resolution at the Board Meeting. The position of additional director is same in terms of
rights, provisions, duties, liabilities as any other director. Such a Director will vacate the
office as an additional director at any time who shall hold office up to the date of the next
annual general meeting or the last date on which the annual general meeting should have
been held, whichever is earlier.
Notes:
i) No Central Govt. approval is required to appoint Additional
director. In case number of directors falling below legal
minimum, appointment of additional director by remaining
directors will be valid
ii) Legal provisions related to appointment of additional
directors is applicable to all companies( Public and private)
iii) Total number of directors additional and others must not
exceed maximum number of directors fixed by AoA.
iv) A person who fails to get appointed as director in AGM
cannot be appointed by board as an additional director

b. Casual vacancy (other than retirement of director): In the case of a public company, if the

office
of any director appointed by the company in general meeting is vacated before his term of office
expires in the normal course, the resulting casual vacancy arisesas a result of death, resignation,
disqualification or any reason other than retirement by rotation. If Articles contains provision for
filling casual vacancy, casual vacancy is filled in accordance with the regulations and provisions
prescribed in AoA. If articles of company does not contain any provision related to filling of casual
vacancy then it may be filled by Board of Directors at a board meeting by passing a resolution at the
board meeting. Provided that any person so appointed shall hold office only up to the date up to
which the director in whose place he is appointed would have held office if it had not been vacated. c.
Alternate Director:The Board of Directors of a company may, if so authorized by its articles or by
a resolution passed by the company in a general meeting, appoint a person, not being a person
holding any alternate directorship for any other director in the company, to act as an alternate
director for a director during his absence for a period of not less than three months from India:
No person shall be appointed as an alternate director for an independent director unless he is
qualified to beappointed as an independent director under the provisions of this Act.An alternate
director shall not hold office for a period longer than that permissible to the director in whose place
he has been appointed and shall vacate the office if and when the director in whose place he has
been appointed returns to India. An alternate director is excluded for the purposes of counting
number of directorships which a person can hold.
5. Appointment by nominee: Subject to the articles of a company, the Board may appoint any
person as a director nominated by any institution in pursuance of the provisions of any law for the
time being in force or of any agreement or by the Central Government or the State Government by
virtue of its shareholding in a Government company.

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Company Law 6. Appointment by Third parties/ Appointment of Nominee Directors: Third

parties here mean
the debenture holders, financial or banking companies or financial corporations who have
advanced loans to the company. Director so appointed is known as nominee director Nominee
directors are watchdogs of third parties to safeguard their fund in the assisted company. They can
also be appointed by financial company if authorized by articles of assisted company. Their number
cannot exceed by 1/3rd of the total no. of directors, also appointment should be within maximum
number of directors specified in company’s articles.

Notes: All the provision of company’s act will be applicable to nominee director, also liable
to retire by rotation.Nominee director representing financial institutions constituted under
special act, do not retire by rotation. They need not to hold qualification shares. They are
not counted for total number of directors but can be appointed even if there is no provision
in the assisted company’s article. They can be appointed even if his appointment will result
in increasing the number of directors beyond maximum number of directors. They can be
removed only by the authority appointing him.

7. By Tribunal:National Company Law Tribunal has power to appoint a nominee director

on the board of directors where the company’s affair is conducted in manner prejudicial or
oppressive to company’s member / public interest/ company’s interest. It is Applicable to
all companies i.e public and private.
The Board appoints an Independent director: He may be selected from a data bank containing
names, addresses and qualifications of persons who are eligible and willing to act as independent
directors, as maintained by any body, institute or association, as may by notified by the Central
Government, having expertise increation and maintenance of such data bank.They have a
responsibility of exercising due diligence before selecting a person from the data bank referred to
above, as an independent director shall lie with the company making such appointment.The
appointment of independent director shall be approved by the company in general meeting.The
Central Government may prescribe the manner and procedure of selection of independent directors
who fulfill the qualifications and requirements. It is important for the company and independent
directors to abide by the provisions specified in Schedule IV Companies act 2013(Sec 149(8)).

8. By Proportional Representation: Its’ a method of voting by the stockholder, giving

individual shareholders more power over the election of directors than they have under
statutory voting. It can be done by:
a) Single Transferable Vote: In this system of voting, all the names of the candidates for
election as directors are entered in the ballot paper. Each voter has only one vote to cast.
However, a voter is permitted to indicate first preference, second preference, third
preference, and so on… in the ballot paper. That candidate gets elected, if he receives the
required number of votes fixed as quota (minimum number of votes required to win the
election).If any such elected candidate gets more votes than the quota, the excess votes are
transferred to other candidates proportionally based on their next preference. If no one
exceeds the quota, then the candidates with the fewest votes are eliminated and those
ballots aretransferred to each voter’s next preferred candidate. This continues until
winners for every seat is not found.
b) Cumulative Voting: In this system, each shareholder is entitled to one vote per share
multiplied by the number of directors to be elected. In a case where multiple candidates
are being considered for multiple positions, each shareholder has the option of placing all
of his votes toward one seat or he can also choose to split his votes across multiple options.
In general, one shareholder is equal to one vote but in caseof cumulative voting one
shareholder is equal to as many votes as the number of directors to be elected.

Example: Assume that the number of directors required for the post are 3. Total
number of candidates stood in the elections for the post of directors are 5.
Majority shareholders in number are 60 minority shareholders in number are 40.
Total number of shareholders are 100.

Suppose each shareholder has one share

No. of Votes = one vote per share multiplied by the number of directors to be elected
Total Majority has (60X3) = 180 votes

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Total Minority has (40X3) = 120 votes

6.2 Qualification of a Director

As regards to the qualification of directors, there is no direct provision in the Companies
Act, 2013. There is no prescribed academic or professional qualification for directors. Their
qualification can be summed up as:
A director must be an individual.
A director must not suffer from any disqualification of directors.

1. There is no age limit as prescribed by law for a person to get appointed as a director. There
should be adequate disclosure of age in the company’s documents. It should be the duty of the
Director to disclose his age correctly. 2. In case of a public company, appointment of directors beyond
a prescribed age say 70 years,
should be subject to a special resolution by the shareholders which should also prescribe his term.
Continuation of a director above the age of 70 years, beyond such term, should be subject to a fresh
resolution.

6.3 Disqualification of a director [Section 164 of Companies Act, 2013]

As per 164. (1) A person shall not be eligible for appointment as a director of a company, if — (a) he is
of unsound mind and stands so declared by a competent court;
(b) he is an undischarged insolvent;
(c) he has applied to be adjudicated as an insolvent and his application is pending;
(d) he has been convicted by a court of any offence, whether involving moral turpitude or
otherwise, and sentenced in respect thereof toimprisonment for not less than six months and a
period of five years has not elapsed from the date of expiry of the sentence: Provided that if a person
has been convicted of any offence and sentenced in respect thereof to
imprisonment for a period of seven years ormore, he shall not be eligible to be appointed as a
director of any company; (e) an order disqualifying him for appointment as a director has been passed
by a court or Tribunal
and the order is in force;
(f) he has not paid any calls in respect of any shares of the company held by him, whether alone or
jointly with others, and sixmonths have elapsed from the last day fixed for the payment of the call;
(g) he has been convicted of the offence of dealing with related party transactions under section
188 at any time during the last preceding five years.
h) he has not complied with sub-section (3) of section 152.
(i) He has not complied with the provisions of sub-section (1) of section 165.

(2) No person who is or has been a director of a company which—

(a) has not filed financial statements or
(b) has failed to repay the deposits accepted by it or pay interest thereon or to redeem any
debentures on the due date or pay interest duethereon or pay any dividend declared and such
failure to pay or redeem continues for one year or more shall be eligible to be re-appointed as
adirector of that company or appointed to another company for a period of five years after the said
company fails to do so. Section 165 Regarding number of Directorship No person after the
commencement of this act shall hold office as a director, or any alternate
director for more than 20 companies at the same time, and also specifies a maximum number of
public companies of ten. Directors disqualified to be appointed or re-appointed

a) Has not filed financial statements or annual returns of three financial years
b) Has failed to repay deposits accepted by it or pay interest thereon or to redeem debentures on
the due date thereon or pay any dividend declared andsuch failure to pay or redeem continues
for one year or more year.

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c) The defaulting director is ineligible for re-appointment or appointment in another company for
a period of five years from the date the said company fails to do so.
Removal of a Director
Whenever a director is found negligent in doing his duties, is involved in breach of privacy or any
other
Resolution
condition,
A director cannot
he is
be removed,
removedif appointed
from by
his National
post.By
CompanyOrdinary
Law Tribunal (NCLT).
Nothing contained in this sub-section shall apply if company has availed itself to the principal of
proportional representation.

Removal of a director by National Company Law Tribunal

In case of oppression and mismanagement, sometimes the application is made to Tribunal, and if
the tribunal is satisfied that the relief should be granted, it mayterminate any agreement of the
company with directors and may remove any manager, managing director or any director of the
company.The person so terminated by tribunal cannot serve the company in same capacity for a
period of 5 years.The term ‘oppression’ is not clearly defined by Company Law 2013. However, the
court of law defines it as a conduct that involves a visible departure from the standards of fair
dealing and a violation of conditions that require fair – especially with regard to the right of
shareholders.
For example: Depriving a member of the right to dividend.
Issue of further shares benefiting a section of shareholders.
Not calling a general meeting and keeping shareholders in dark.
Non-maintenance of statutory records
Not conducting affairs of the company in accordance with the Companies Act.
Refusal to register transmission under will.
Failure to distribute the amount of compensation received on nationalization of business of
company among members, where required to be so distributed.
Mismanagement arises when the affairs of the company are conducted in such a manner that it is
injurious or harmful to the interests of the company orany material change in the management of
control of the company, and that by reason of such change, it is likely that the affairs of the
company will be conducted in a mannerHarmful/injurious to the interests of the company.

• Mismanagement includes:
Serious infighting between directors.
•
Where Board of Directors is not legal and the illegality is being continued.
•
Where bank account(s) was/were operated by unauthorized person(s).
•
Sale of assets at low price and without compliance with the Act. Where directors take no
serious action to recover amountsembezzled. Continuation in office after expiry of term of
directors.
• Violation of Memorandum.
• Violation of statutory provisions and those of Articles.
• Company doomed to trade unprofitably.

Special Resolution for removing a director

• To appoint a new director, a special resolution is required. Under this section, you have to
appoint somebody else in place of a director who was removed.
• A notice of a resolution needs to be sent, to remove any director to the concerned director

In the representation a director can make a written representation and request its notification
to members of company, company, if the time permits. Such a representation requires:
• Stating a fact that representation has been made.
• Send a copy of resolution to every member of company to whom notice of meeting is sent.
• If notice is not sent due to insufficient time or for company's’ default then even an oral
representation can be made

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Unit 06: Company Management Representation need not be sent out and read out at the
• meeting either of company or any
other aggrieved, if tribunal thinks that rights provided by this section are being abused to
secure needless publicity for defamatory matters.
a. Procedure for removal of a Director
By ordinary resolution a director who was not appointed by the Tribunal, can be removed before
the expiry of the period ofhis office after giving him a reasonable opportunity of being heard.
Step 1: A special notice shall be required of any resolution, to remove a director under this section,
or to appoint somebody in place of a director so removed, at the meeting at which he is removed.
Notice shall be served 14 days before the meeting.
Step2: Copy of notice: On receiving the notice of a resolution to remove a director under this
section, the company shall send a copy thereof to the director concerned. The director, shall be then
entitled to make a representation against the resolution and to be heard at the meeting.
Step3: Written representation: The concerned direct needs to make a written representation to the
company and requests its notification to members of the company.
The company shall, if the time permits it to do so, send a copy of the representation to every
member of the company to whomnotice of the meeting is sent (whether before or after receipt of the
representation by the company) Step4: Oral Representation: If a copy of the representation is not
sent due to insufficient time or for
the company’s default, the director may without prejudice to his right to be heard orally require
that the representation shall be read out at the meeting. Step5: Hold a general meeting: A general
meeting needs to be held and concerned director will
be given an opportunity to be heard. If the resolution for removal is passed by ordinary
resolution, the director shall be removed. It is also important to know the circumstances in
which director cannot be removed
a) Where the director is appointed by the system of proportional representation
b) Where the director has been appointed by tribunal
Filling of vacancy caused by Removal: A vacancy created due to the removal of a director may, if
he had been appointed by the company in general meeting or by the Board, be filled by the
appointment of another director in his place at the meeting at which he is removed, provided
special notice of the intended appointment has been given together with the notice of approval.
A director so appointed shall hold office till the date up to which his predecessor would have held
office if he had not been removed.
If the vacancy is not filled at the same meeting, it may be filled by directors as a casual vacancy in
accordance. Provided that the director who was removed from office shall not be re-appointed as a
director by the Board of Directors. Section 168 of Companies Act, 2013: Resignation notice by
director A director may resign from his office by giving a notice in writing to the Company and the
Board
shall on receipt of suchnotice take note of the same and the Company shall intimate the Registrar
and shall also place the fact of such resignation in the report of directors laid in the immediately
following General Meeting by the Company.
Mandatory Requirements for resignation
The resignation of a director shall take effect from the date on which the notice is received by the
company or the date, if any, specified by the director in the notice, whichever is later. The director who
has resigned shall be liable even after his resignation for the offences which
occurred during his tenure.
A director may resign from his office by giving a notice in writing to the company i.e. the Board of
Directors of the company.
E-mail communication or letter addressed to the company is a valid mode of communication. The
director may also forward a copy of resignation along with detailed reason for the resignation to
the Registrar in Form DIR-11 along with the fee as provided in the companies (Registration offices
and Fees) Rules,2014 within 30 days from the date of resignation. While submitting DIR-11, the
director is required to attach the documents namely: Notice of resignation filed with the company
(Resignation Letter can be attached)

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Company Law
• Proof of dispatch
• Acknowledgement received from company, if any and is mandatory if yes selected in
Form
• DIR-11 (Resignation acceptance Letter by the Company can be attached)
• Any other information can be provided as an optional attachment(s).

• Obligation on part of company

The Board of Directors shall take note of the receipt of the notice of resignation which can be
considered in the meeting of the Board of Directors. Accordingly, the resolution is passed by the Board
of Directors for accepting the resignation and the minutes of the meeting of the Board of Directors
shall be drafted.
The Board of Directors shall within 30 days from the date of receipt of notice of resignation from a
director, intimate the Registrar in Form DIR-12.
The Board of Directors shall also place the fact of resignation in the Director’s Report of subsequent
annual general meeting of the company and also it must be reflected in the website of the company.
Company is required to attach the necessary documents such as:
i) notice of resignation (Resignation Letter can be attached) and ii) evidence of cessation (board
Resolution or Resignation acceptance letter can be attached).

6.4
Remuneration for Directors
Remuneration’ means any money or its equivalent given to any person for services rendered by
him. Managerial remuneration in simple words is the remuneration paid to managerial personals.
Here, managerial personals mean directors including managing director and whole-time director,
and manager. There are 3 ways of paying remuneration to a director:

1. Automatically by Profits
2. By Shareholders’ Approval
3. By Shareholders’ and Central Government

Permissible managerial remuneration of Directors payable under section 197 of the companies act
2013
Total managerial remuneration payable by a public company, to its directors, managing director
and whole-time director and its manager in respect of any financial year:

Condition Max Remuneration in any financial year

Company with one Managing director/whole

time director/manager 5% of the net profits of the company

Company with more than one Managing

director/whole time director/manager 10% of the net profits of the company

Overall Limit on Managerial Remuneration 11% of the net profits of the company

Remuneration payable to directors who are neither managing directors nor whole-time directors

For directors who are neither managing 1% of the net profits of the company if there is a
director or whole-time directors managing director/whole time director

If there is a director who is neither a Managing 3% of the net profits of the company if there is no

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Condition Max Remuneration in any financial year

director/whole time director managing director/whole time director

Remuneration of Director under section 197 of the companies act 2013: In case of Public
Company, a company can pay not more than 11% of the net profit as calculated in a manner laid
down in section 198 of the companies act. A company having only one managing director, whole-
time director or manager shall not pay more than 5% of its net profits. A company has more than
one such directors, remuneration shall be payable not more than 11% of the net profit.
Maximum remuneration for a Director
If Capital (Rupees) of a company is Less than 5 crores, then the highest limit for Remuneration to a
Director is 30 lakhs

The percentages displayed above shall be exclusive of any fees payable under section 197(5). Until
now, any managerial remuneration in excess of 11% required government approval.
However, now a public company can pay its managerial personnel remuneration in excess of 11%
without prior approval of the Central Government. A special resolution approved by the
shareholders will be sufficient. In case a company has defaulted in paying its dues or failed to pay
its dues, permission from the lenders will be necessary.
When the company has inadequate profits/no profits: In case a company has inadequate
profits/no profits in any financial year, no amount shall be payable by way of remuneration except
if these provisions are followed.

Where the effective capital is: Limits of yearly remuneration

Negative or less than 5 Crores 60 Lakhs

5 crores and above but less than 100

84 Lakhs
Crores

100 Crores and above but less than 250

120 Lakhs
Crores

120 Lakhs plus 0.01% of the effective capital in excess of

250 Crores and above
250 Crores

Important Pointers

• Determination of Remuneration: The remuneration payable to the director shall be

determined by:
o The articles of the company
o A resolution
▪ Special resolution if articles require it to be passed in the general meeting. The remuneration
payable as per these rules shall also include the remuneration payable to the personals
working in any other capacities. However, if the services are rendered in professional a
capacity and if the nomination and remuneration committee/Board of directors believes that
the director possesses the necessary qualification for the practice of the profession,
exceptions are possible.
• Fees to directors: The directors may receive fees for attending meetings and such fees cannot
exceed the limits prescribed. Different fees for different classes of companies may be as
prescribed.
The fees can be paid:
a. Monthly

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Company Law
b. As a Specified Percentage of the Net Profits yearly
c. Partly by method (a) and partly by method (b)
• Remuneration of independent directors: An Independent director shall be entitled to a
sitting fee, a reimbursement for participation in meetings and profit related commission as
approved by Board. However, he shall not be entitled to ESOP.
• Excess Remuneration to be refunded: If any director receives any remuneration in excess of
the provisions of law, the same shall be refunded to the company or kept in trust for the
company. Such recovery shall not be waived unless permitted by the Central Government.
• Disclosure by a listed company: Every listed company shall disclose the ratio of the
remuneration paid and the median employee’s remuneration along with other prescribed
details.
• Insurance: When the company insures its personnel by providing protection against any act
done by them due to negligence, default, misfeasance, breach of duty, breach of trust, such
the premium paid for this insurance shall not be treated as part of remuneration except if the
director is proved guilty.
• Any managing director/whole time director receiving commission from the company may
also receive a remuneration or commission from the holding or subsidiary of such a
company provided the same is disclosed in the board’s report

Did You know?

Any person who contravenes these provisions shall be punishable with a minimum fine
of Rs.1 Lakh and a maximum fine of Rs. 5 Lakhs.

6.5 Duties of a Director

1. Fiduciary duties (Good Faith): The Director occupies a fiduciary position in the company.
Fiduciary position refers to a position of trust and confidence. The fiduciary position of
directors requires them to act honestly and in good faith. It is a directors’ duty to promote the
objects of a company for the benefit of its members as a whole. They must work in best interest
of company, its employees, the shareholders, the community and for the protection of
environment.

2. Due and reasonable care: A director must be the one who is more focused, well-organized and
carefully does his duties than someone who is mismanaged or confused.It is so because, a
director of a company is expected to exercise his duties with due and reasonable care, skill and
diligence and exercise independent judgment.
Duty not to involve in conflict of interest: A director of a company shall not involve in a
3.
situation in which he may have a direct or indirect interest that conflicts, or possibly may
conflict, with the interest of the company.
Duty not to obtain gain or advantage: A director of a company shall not achieve or attempt to
4.
achieve any undue gain or advantage either to himself or to his relatives, partners, or
associates and if such director is found guilty of making any undue gain, he shall be liable to
pay an amount equal to that gain to the company.
Duty not to assign his office: A director of a company shall not assign his office. Any
5.
assignment so made shall be void. So, may be if a director appoints someone else on his behalf
to look after things in his absence without information of company, or may be proper
procedure is not followed, then the company may even remove him as such an act is not a
valid in eyes of law and is ultra vires activity.

6.
6.6 Powers of a Director
A. General Powers A director is entitled to exercise all such powers and acts as the company is
authorised to do.
Exercise such powers subject to rules in Articles of Association or Memorandum of Association
or the General meeting. He cannot exercise any power which are required is to be exercised by
shareholders in general meeting.
In nutshell: 1. A director shall exercise only those powers that he gets as per the memorandum
of Association. In case a suit is to be filed, a director cannot file it onbehalf of a company until a
power is given to do so by the board through a resolution in that regard.

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If the board of directors passes a resolution to authorize a director to file an appeal in the court,
and such authorized director delegates his power to an officer of the company, then an appeal
by that officer would be competent. A director is an agent of company as a whole but not of
majority of shareholders.
B. Specific Powers or Powers at Board meeting
A director can perform powers on behalf of company by means of resolutions passed at
the meetings to:

• Approve Financial Statements and Board Report

• Approve bonus to employees
• Declare dividend in the Company
• Power to make calls in respect of money unpaid on shares
• Call meetings on suo moto basis.
• Approve Amalgamation/Merger/ Takeover
• Diversify the business of the Company
• Issue shares, debentures, or any other instruments in respect of the Company.
• Borrow and invest funds for the Company
Power to grant loans or give guarantee in respect of loans
•
Authorize buy back of securities
•

6.7 Position of Directors

1. Agents of the company: A company cannot act on its own as it can act only through
directors by the reason of which a relation of principal and agent is established between the
company and the directors. For every contract made by directors in the name and on behalf
of company, it is the company that becomes liable and not the directors. This is what the
court recognized in Ferguson v. Wilson case.
Case Study:
Issue: Mr. Denny is a director in SSP Logistics company. As per the memorandum
of association he could borrow up to Rs. 20 lakhs on behalf of company. He
borrows Rs. 10 lakh from a bank. The company sustained losses and before
repayment of such loan, the company liquidated. The bank files a case against Mr.
Denny. A question arises that can Mr. Denny be held liable for debts of company?
Rule: A Director is an agent of company and cannot be held liable for any
transaction entered within scope of power
Analysis: Mr. Denny acted within the scope of power as conferred on him
through the memorandum of association, hence, cannotbe personally made liable
for debts of company. Secondly, he is merely an agent of company who acted on
its behalf to borrow money. He cannot be forced to repay debts of the company.
Conclusion: Directors are agents of the company in the eyes of law. A company
cannot act on its own as it can act only through directors by the reason of which a
relation of principal and agent is established between the company and the
directors. For every contract made by directors in the name and on behalf of
company, it is the company that becomes liable and not the directors. Thus, Mr.
Denny cannot be held liable for debts of company. But, keep it in mind that the
Position of directors differ from agents. It is so because an agent can enter into a
contract in his own name but a director cannot. Again, an agent may not disclose
the name of his principal but a director must disclose the name of his principal.
Hence, the directors are not agents in the true sense.
Directors are Trustees of company’s money, property and their powers and such
must account for all the moneys over which they exercise control and shall refund
any moneys improperly paid away, and shall exercise their powers honestly in
the interest of the company and all the shareholders, and not their own sectional
interest. The directors of a company are trustees for the company, and for
reference to their power of applying funds of the company and for misuse of the
power they could be rendered liable as trustees and on their death, cause of action
survives against their legal representatives.

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Directors are not Trustees
In real sense directors are not trustees as a trustee is the legal owner of the trust property and
contracts in his own name. On the other hand, director is a paid agent or officer of the company
and contracts for the company. In fact, the directors are commercial men managing a trading
concern for the benefit of themselves and of all the shareholders in it.
Then to whom the directors are trustee?
Directors have no duty towards individual shareholders. From this it is very clear that, the directors are
trustees to the company and not of individual shareholders.

1. As a managing director
They are so described because like a partner of a firm, they manage the affairs of the company
and they are also usually important shareholders of the company. They do all proprietorial
functions like allotting shares, making calls, forfeiting shares etc.

Summary
A company is an artificial person with no brain of its own. It requires natural persons to carry out its
activities economically and efficiently. The directors act as the brain of the company. They handle
its management, make sure its functions run smoothly and help to execute the goals. In the
absence of directors, a company cannot grow. The Companies Act 2013 has a comprehensive
policy regarding appointing, resigning, removal etc. of directors and is easy to understand.

Keywords
Deemed Director: For certain purposes, a person even when he is not a director may be deemed
to be a director of a company.
Director: Any person occupying the position of director, by whatever name called director.
Legal Position of Director: The exact position of ‘Director’ is hard to define, as no formal definition,
either statutory or judicial, of the term has been given. However, judicial pronouncements have
described them as (i) agents, (ii) trustees, or (iii) managing partners.
Statutory Duties: The statutory duties are the duties and obligations imposed by the Companies
Act.

Self Assessment
1. Every company shall have at least one director who has stayed in India for a total period of
not less than ____in the previous calendar year.
A. 132 days
B. 182 days
C. 142 days
D. 162 days

2. Every Listed Company may have one director elected by small shareholders "small
shareholders" means a shareholder holding shares of nominal value of not more than
_____or such sum as may be prescribed.
A. Rs.5,000/-
B. Rs.10,000/-
C. Rs.15,000/-
D. Rs.20,000/-

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3. An independent director can be appointed for a consecutive period of not more than ____
A. 1 years then a gap of 2 years is required before their reappointment in the same company for
the same position.
B. 2 years then a gap of 6 months is required before their reappointment in the same company
for the same position.
C. 2 years then a gap of 3 years is required before their reappointment in the same company for
the same position.
D. 2 years then a gap of 2 years is required before their reappointment in the same company for
the same position.

4. ________ is a person who is not officially appointed by the board but he or she gives such
advice to the directors which they are accustomed to follow except when such shadow
director provides the same in his professional capacity.
A. Shadow director
B. Nominee director
C. Independent Director
D. Small Shareholder Director

5. ______ is a director who is Involved in the day-to-day management of the company or being
in the full-time salaried employment of the company (or its subsidiary) or both.
A. Shadow director
B. Nominee director
C. Independent Director
D. Executive Director

6. If the capital of a company is of 100 crores and above b ut less than 250 crores, then how
much remuneration is to be paid to the director?
A. 100 lakhs
B. 120 lakhs
C. 150 lakhs
D. 200 lakhs

7. Identify a false statement regarding refund of remuneration to a director?

A. If any director receives any remuneration in excess of the provisions of law, the same shall
be refunded to the company or kept in trust for the company.
B. Excess remuneration recovery shall not be waived unless permitted by the Central
Government.
C. Both a or b
D. Neither a nor b

8. The fiduciary position of directors requires them to act:

A. Dishonestly only
B. Honestly and in good faith
C. Honestly and bad faith
D. Cleverly and dishonestly

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9. Which of the given is a specific power of a Director?
A. Power to make calls in respect of money unpaid on shares
B. Call meetings on suo moto basis.
C. Approve Amalgamation/Merger/ Takeover
D. All of the above

10. A director who was not appointed by the Tribunal, can be removed by ____ before the
expiry of the period of his office after giving him a reasonable opportunity of being heard.
A. Ordinary resolution
B. Special resolution
C. Emergency resolution
D. White resolution

11. Which of the following is not a qualification to become a director?

A. A director must be an insolvent
B. A director must be an individual
C. A director must not suffer from any disqualification of directors
D A director must be sound mind

12. Term of office for a small shareholder director shall not be more than a period of ___
consecutive years and he shall not be liable to retire by rotation.
A. 2
B. 3
C. 4
D. 5

13. Malti is acting as a director in a public limited company. Her brother Suresh lives in Ontario,
Canada. His wedding is fixed by Malti parents who live with him to a girl from Quebec,
Canada. Suresh is Maltis’ younger brother and she is really excited to attend his wedding.
She applied for 6 months visa to Canada. Decide what arrangement should be done by the
Board of Directors in such a situation?
A. Let Malti return from overseas and meanwhile let his office be vacant.
B. A casual vacancy arises in case Malti leaves for overseas and which must be filled.
C. An alternate director needs to be appointed for 6 months.
D. Any of the above methods can be adopted by the Board of Directors.

14. Nelson was appointed properly as a director of a public limited company. Subsequently, the
company altered its articles of association and made it a compulsory qualification for the directors
to be at atleast the holder of the degree of Chartered Accountancy. Nelson did not hold that
qualification and thus he was asked to quit office. Is the company justified in doing so?

A. Yes, company is empowered to do so as per the provisions of companies act

B. No, company is very selfish and inhuman towards Nelson. However, it can be still
acceptable
C. Yes, in minutes of meeting, company can keep this as power to decide additional
qualification
D. No, as there is no such provision that prescribes additional disqualification to be director

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Unit 06: Company Management

15. ______ is a system of voting where all the names of the candidates for election as directors
are entered in the ballot paper. Each voter has only one vote.
A. Single Transferable Voting
B. Cumulative voting
C. Either single transferable voting or cumulative voting
D. Both single transferable voting and cumulative voting

Answers for Self Assessment

1. B 2. D 3. C 4. A 5. D

6. B 7. C 8. B 9. D 10. A

11. A 12. B 13. C 14. D 15. A

Review Questions
Q1. Discuss the various types of a Director?
Q2. Explain how a director may be appointed in a company?
Q3. Write a detailed note on qualification and disqualification of a director?
Q4. What are the rights of a director? What remuneration a director may obtain?
Q5. Explain in detail various powers and duties of a director.

Further Readings
1. A Text Book Of Company Law (Corporate Law) By P.P.S. Gogna, S. Chand & Company
2. Elements Of Company Law By N.D. Kapoor, Sultan Chand & Sons (P) Ltd.
Web Links

• https://cleartax.in/s/managerial-remuneration
• https://taxguru.in/company-law/appointment-directors-provisions-companies-act-
2013.html
• https://taxguru.in/company-law/rights-duties-powers-and-accountabilities-of-part-
time-directors.html
• https://www.mca.gov.in/MinistryV2/management+and+board+governance.html

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Anjali Sharma, Lov ely Professional University Unit 12: Company Meetings

Unit 12: Company Meeting

CONTENTS
Objectives
Introduction
12.1 Meaning and Definition of Meeting
12.2 Essentials of a valid meeting
12.3 Types of Meeting

Keywords
Summary
Self Assessment
Answer for Self Assessment
Review Questions
Further Readings
Objectives
After studying this unit, you will be able to:

i. comprehend the relevance of holding a meeting

ii. understand the types of meetings that needs to be conducted by a company as per the
provisions of Companies Act

Introduction
A company is an artificial person. It cannot act on itself. It needs some human intermediary to carry
out its business activities. A business can be defined as a legal institution that involves a group of
persons interested in the running of a business. A company’s management needs the efforts of
several people who debate and ponder on issues before a decision is made. The decisions are also
made in meetings that are a structured conversation between the company’s administration, typically
the directors and in some cases, representatives who address the affairs of the company and
operations. The Act has provided some provisions for the different types of meetings of shareholders,
namely: (i) Statutory Meeting; (ii) Annual General Meeting; (iii) Extraordinary General Meeting; and
(iv) Class Meetings. In this chapter we shall cognize the essentials of holding such meetings.
12.1 Meaning and Definition of Meeting

Meeting is not defined under any provisions of Companies Act of 2013, but taking references from
common business and market parlance and also from some of the decided case laws like Sharp vs.
Dawes, as decided in 1971, and through citations of various renowned authors, we can gather that a
‘Company Meeting’ is basically coming together of at least two persons to either transact any
ordinary or special business for lawful purposes.

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Company Law Ordinarily, a company meeting may be defined as gathering, assembling or coming

together of two
or more persons (by previous notice or by mutual arrangement) for discussion and transaction of
some lawful business. According to P.K Ghosh “Any gathering, assembly or coming together of
two or more persons for the transaction of some lawful business of common concern is called
meeting.” Similarly, K. Kishore discusses “A concurrence or coming together of at least a quorum
of members by previous notice or mutual agreement for transaction business for a common interest
is meeting.”

So, from the above discussion, it can be summarized about a meeting as:
1. Depending upon total members in a company, two or more persons must be present at the
meeting.
2. The assembly of persons must be for discussion and transaction of some lawful business.

3. A previous notice would be given for convening a meeting.

4. The meeting must be held at a particular place, date and time.

5. The meeting must be held as per provisions/rules of Companies Act.

12.2 Essentials of a valid meeting

A valid meeting is that which is conducted by the appropriate authority or the authorized person as per
the act, a proper notice of meeting is given to the ones who are to attend it. There must be a presence
of quorum in the meeting so called, else it stands invalid. A chairman must be present to conduct the
meeting and proper minutes should be recorded regarding the points discussed. These features are
discussed in detail below:

1. Authority to hold meeting: As per the Companies Act 2013, Board of Directors are authorized
to hold the meeting. In case the Board of Directors fails in calling and holding the meeting,
National Company Law Tribunal can also call a general meeting.

2. Notice of meeting: The notice of holding a meeting can be in writing or electronic mode. The
reason behind sending a notice is to inform about the place, day, hour, business to be
transacted-General and special to the members, auditors, directors Legal representative
deceased/ the assignees of an insolvent. It must be sent at least 21 days before the actual date
of conduct of meeting. However, it can be given in less than 21 days too but that is only under
some circumstances. In case ofdeliberate omission in giving notice to a single member, it may
invalidate the meeting.
3. Quorum: It is the minimum number of voting members who must be present at a properly
called meeting in order to conduct business in the name of the group. In a private company at
leasttwo voting members must be present. If the total number of members are less than 1,000
then five members must attend and participate in the meeting. In a Public company, if total
members are more than 1,000 but less than 5,000 then 15 members need to be present and
attend the meeting. However, if the total number of members are more than 5,000 then 30
members must be present and attending the meeting.
The Companies Act provides for when the quorum has not been met within half an hour of the
time set for the meeting to begin, then the meeting will be adjourned, and it shall be held on
the same day and at the same time next week, or any other date and time as the Board may
determine. If the meeting is adjourned then the date, time and place of the meeting will be
notified personally or via advertisement. The advertisement must be published in both English
as well as the vernacular language in a newspaper which is in circulation at a place where the
registered office of the company is situated. If the meeting is called by requisitions under
Section 100, it shall stand cancelled. If the quorum is not present at the adjourned meeting, then
the members present shall be the quorum.

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Unit 12: Company Meetings Chairman: A‘Chairman’ is designated to chair over and conduct

4. the proceedings of a meeting.

He is the chief authority in the conduct and control of the meeting. He is to put resolution in
the meeting, count the votes, declare the result and authenticate the minutes by signature.
Unless the articles of the company otherwise provide, the members personally present at the
meeting shall elect one of themselves to be the Chairman thereof on a show of hands.

Did you know?

The duties of a chairman?

Well, he must perform the given duties:

i. Must act honestly and in the interest of company

ii. Ensure that meeting is properly called and proceedings of meetings properly conducted

iii. Must preserve the order in the meeting

iv. Must give chance to members to discuss any proposed resolution

v. Must exercise his powers of adjournment of meeting and demanding of poll honestly and
correctly

5. Minutes of meeting: These are notes recorded during a meeting, highlighting the key issues
that were discussed, motions proposed or voted on, and activities to be undertaken. The
minutes of a meeting are usually taken by a designated member of the group, who provides an
accurate record of what transpired during the meeting.

Following points needs to be kept in mind while preparing the minutes of a meeting:

i. It must be made within 30 days of the conclusion of every meeting

ii. Minute book
iii. Numbering of pages
iv. Signing of minutes (on each page)
- In case of Board or committee meeting, chairman of the same or next meeting
should sign on meeting minutes.
- In case general meeting, chairman of the same meeting should sign & if he’s dead
or unable then director authorised by the Board
v. A very fair and correct summary should be prepared.
6. Proxy:The term ‘proxy’ is used to refers to the person who is nominated by a shareholder
to represent him at a general meeting of the company. It also refers to the instrument
the
through which such anominee is named and authorised to attend
meeting.Any member of a company entitled to attend and vote at a meeting of the
company shall be entitled to appoint another person as a proxy to attend and vote at the
meeting on his behalf.

Notes:

i. A person appointed as proxy shall act on behalf of such member or number

of members not exceeding 50 and such number of shares as may be
prescribed (effective from 01-04-2014).
ii. Proxy need not be a member.
iii. The relationship between a member and his proxy is that of a principal and
agent. Therefore, the proxy is bound to act in accordance of with the
instructions of the member appointing him.

Provisions in Article of Association Section 105 of Companies Act 2013, Rule 19 regarding Proxy:
The Article explains appointment of proxy by Shareholders / Members, Right of Proxies, Limits for
appointment as a proxy, Penalty in case of contravention of provisions related to Proxies, Invitation
to appoint Proxy, Proxy forms, Inspection of Proxy Form etc.

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Company Law Member may appoint proxy Section 105(1): Member of the company entitled to

attend the meeting

and vote at the meeting shall have a right to appoint another person as a proxy to attend and vote
at the meeting on his behalf. The provisions regarding proxy are discussed further as:
1st Proviso to section 105(1): Proxy shall have not any right to speak at the meeting and shall
have
right to vote except on a poll.
2nd Proviso to section 105(1): Unless AOA of the company otherwise provided, Section 150(1)

shall
not be applicable of company having no share capital.
3rd Proviso to section 105(1): Person appointed as a proxy shall act on behalf of such no. of
member(s) not more than 50 members.
Rule 19 of the Companies (Management and Administration) Rules, 2019
a. In case of Section 8 Company no member of this company shall have right to appoint proxy
unless shall other person is also member of such company;
b. A person can be appointed as a proxy and holding in aggregate maximum 10% of total share
capital carrying voting rights for maximum 50 members.
Proxy form shall be in form MGT-11.

Statement in the Notice of Meeting Section 105(2): A prominent reasonable statement that a
member entitled to attend, and vote have right to appoint a proxy; or where that is allowed, one or
more proxies, to and vote instead of himself and a proxy need not to be a member

Penalty in case of contravention Section 105(3): In case of contravention of section 105(2),

then
every officer in default of the company shall be punishable with Penalty which shall not be
less than Rs. 5000.

Deposit of Form Section 105(4): The form should be submitted 48 hrs before the company,
regarding the appointment of proxy or any other document showing the validity or otherwise
relating to appointment that may be effective at such meeting.

Invitation to appoint Proxy Section 105(5): At the expenses of the company, invitation to appoint
proxy a person or no. of person specified in the invitation are issued to any member entitled to have
a notice of the meeting sent to him and to vote thereat by proxy; every officer of the company who
knowingly issues the invitations as aforesaid or willfully authorizes orpermits their issue shall be
punishable with fine which may extend to Rs. 1,00,000

Proviso to section 105(5): An officer shall not be punishable under this sub-section by reason only
of the issue to a member at his request in writing of a form of appointment naming the proxy, or of
a list of persons willing to act as proxies, if the form or list is available on request in writing to every
member entitled to vote at the meeting by proxy.
Relevant points to be consider as per section 105(6)regarding the document appointing proxy-

a. shall be in writing;

b. signed by the member appointing proxy or his attorney duly authorized by him or in case
appointer is anybody corporate, be under its seal or be signed by an officer or an attorney duly
authorized by it.
c. Proxy form shall be in form MGT-11.

Proxy forms Section 105(7): Proxy form shall be in form MGT-11

Inspection of Proxy Form Section 105(8): During the period beginning 21 hours before the time
fixed for the commencement of the meeting and ending with the conclusion of the meeting, inspect
the proxies forms filed, at any time during the business hours of the company, provided not less
than three days’ notice in writing of the intention so to inspect is given to the company.

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Unit 12: Company Meetings

12.3 Types of Meeting

A. Shareholder Meeting
1. Annual General Meeting (AGM): In compliance with Section 96 every company other than a
one-person company is required to conduct annual generalmeetings as an annual general meeting
other than any other form of meeting. The company needs to ensure that there is no difference of
more than 15 months between two annual general meetings. As per Section 101 of the act, every
member of a company should be informed through a 21 days clear notice regarding the Annual
General Meeting in writing or electronic mode. The notice provides the details about location, day,
date and time of the meeting and should also include a resolution specifying the business to be
carried out at the meeting. This notice should be distributed to each member of the company, to the
legal representative of the deceased and to the insolvent member’s assignor, to the auditor and to
the company’s director. In case a 21 days clear notice could not be sent, even a shorter notice may
also be given provided 95% of the member entitled to vote in meeting agree. Some of the important
points to be kept in mind regarding annual general meeting are:

i. A meeting needs to be called at the registered office of the company or any other such
place in city where such registered office is situated.
ii. A government company can also hold its Annual General Meeting at any other place as
the Central Government may approve.
iii. An unlisted company can hold an AGM at any place in India after obtaining consent from
its members in writing or in electronic mode.
iv. In the case of a Section 8 company, the Board decides the date, time and place of the
Annual General Meeting as per the directions given in a general meeting of the company.
v. Annual General Meeting is between 9:00 am to 6:00 pm and not on any public holiday as
so declared by Central or State Government.
vi. An annual general meeting cannot be held on a national holiday.

The gap between two meetings not more than fifteen months, and after conducting first annual
general meeting, subsequent annual general meetingsneed to be conducted between 6 months from
the end of financial year. The members (including shareholders) of the company are entitled to
attend and vote at the AGM. Members can cast their votes by a physical ballot or postal ballot or
through e-voting. Members can appoint proxies to attend an AGM and vote on their behalf. The
proxy should be appointed in writing, and the proxy form should be signed by the member. The
members can elect one among themselves as the chairman of the meeting. However, if the articles
of association of the company provide for a chairman, such person shall chair the Annual General
Meeting of the company.

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Company Law Minutes of Annual General Meeting

1. Every company has to prepare the minutes of the AGM compulsorily. The minutes of the AGM
means the written record of the proceedings of the meeting. They state the events that took place
and the resolutions passed in the AGM.

2. The Company Secretary will record the proceedings of the AGM. Where there is no Company
Secretary, any other person duly authorised by the Board or by the Chairman will record the
proceedings.
3. The minutes of the AGM should be signed and entered in the minute book within thirty days
from the AGM. The Minutes book will be kept at the Registered Office of the company or at such
other place approved by the Board. Any member/shareholder of the company, upon request to the
company, can inspect the Minutes book of the AGM on paying the prescribed fee.
4. Upon request, the company will give a copy of the minutes of the AGM to the member within
seven days of request. If the minutes are not given by seven days of the request, the company shall
be liable to a penalty of Rs.25,000 and every officer of the company who is in default shall be liable
to a penalty of Rs.5,000.If there are any urgent circumstances or emergency situation arises, when
the company was not able to conduct the annual general meeting, then the National company Law
Tribunal my grant an extension of 3 months.
Condition for extension in holding an Annual General Meeting: If, the said extension is not
available for first annual general meeting, and therefore first annual general meeting must be
conducted within 9 months from the end of financial year.

Case Study

Issue: A company intended to hold its Annual General Meeting after 5 days. A clear
notice regarding meeting details could not be sent by it. Can a valid meeting be held?
Rule: The Rule applicable is that in case a 21 day clear notice could not be sent, then a
shorter notice may also be given if agreed by 95% of the member entitled to vote in
meeting.
Analysis: A company wanted to hold its Annual General Meeting after 5 days. It could
not send a clear notice regarding meeting details.
Conclusion: No, a valid meeting cannot be held until 95% of the member entitled to
vote in meeting agree with the notice.

In case of default in holding an Annual General Meeting, a National Company Law Tribunal has a
power to call such a meeting under section 97 of Companies Act 2013 on receiving an application as
filed by a member if not held in due time. The matters that are discussed at the Annual General
Meeting are:

i. Annual accounts of company are presented

ii. Dividends are declared
iii. Appointment and retirement of auditor
iv. Appointment and retirement by rotation of directors
v. Consideration and adoption of audited financial statement.
vi. Consideration and adoption of Directors’ report and auditors’ report.

2. Extra Ordinary General Meeting: As per section 100(1) of the Companies Act, the Board can call
an extraordinary company meeting whenever it deems appropriate. Section 100(2) points out the
process for calling, in the event of a proposal, an extraordinary general meeting.
The board of directors has been vested with powers to call extraordinary general meeting. This
meeting is called between two Annual General Meetings to discuss matter requiring serious
attention.

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Unit 12: Company Meetings

Note: If the board cannot call Annual General Meeting, the Act provides calling the meeting
on requisition made by members holding not less than 1/10 of shares on day of voting or holding
not less than 1/10 of total voting power. Also, national company tribunals can call Extra Ordinary
General Meetings.
Who can call the Extraordinary General Meeting?

It can be called by the board, requisition of eligible members, Requisitionist and Tribunal.

B. Board Meeting
The Board, on suo-moto basis hold the meeting in any parts of the country. Suo moto is a latin legal
term, meaning “on its own motion” and implies that an action is taken by a group or person on their
own. In case a company has share capital, then members holding at least 1/10th of such share
capital, and if not having share capital, then members holding at least 10% of the total voting powers
in that company can request to call for such meeting. A notice to hold the meeting has to be well
written and specify the nature of business. It should be duly signed by all the members or any one
authorized person acting on behalf of all. The board needs to call meeting within 21 days of getting
such request or maximum of 45 days, by giving such notice to such members prior to 3 days of
conducting such meeting.

If Board fails to hold the meeting within 45 days, then the members can call for meeting within 3
months of from the original request made to Board at firstcan’t deny this, and also need to accept
such changes that might have occurred instance, and here the members have all the rights to have
their name on the main list of members and Board between 21st to 45th day of date of notice
provided to Board at first instance. Any reasonable expenses incurred by the requisitionists in
calling a meeting shall be reimbursed to the requisitionists by the company. If the quorum is not
present within half an hour meeting shall stand cancelled. The tribunal can conduct meeting on its
own or on any request received by the member of such company. The meeting shall be held at the
registered office or any place in the city where such registered office is situated.Notice of holding
an Extra Ordinary General Meeting needs to be given to all the members in writing or through an
electronic mode of at least 21 Clear days before convening such meeting, and one important thing
here is that if meeting is called up by the requisionists, then there’s no formality of attesting
explanatory statement to it.

3. Class meeting: Such a meeting is convened by a particular class of shareholders only and only if
they think that their rights are being altered or if they want to vary their attached rights,
asmentioned under section 48 of Companies Act 13, and under section 232 also, if under Mergers
and Amalgamation scheme, meetings of particular shareholders and creditors can be convened if
their rights or privileges are being varied to their interests in such company.They meet frequently
to discuss the working of the company. These meetings must have a purpose, must be held with
proper notice as well as have an effective chair. It must also be documented. Board Meetings are
considered to be important part of every organization in building Strong Financial Position,
Qualitative Management Decisions, Customer Relationship Management (CRM), Employee
Relationship, Future Prospects of the Company and many more in the bucket.
To keep it simple, the Board Meetings are considered to be an exchange of ideas, information’s and
decisions among the top-level management personnel for formulating and implementing the
working plan for running the Company. In light of above, to safeguard the interest of the
Stakeholders and Companies business, several statutory prescriptions are incorporated in the
Companies Act, 2013, which mandates every company to compulsorily conduct meeting in order to
ensure the actions approved by the Board are in the interest of the company and reflect the
fiduciary nature of the duties of directors. As per Section 173 of Companies’ act 2013, every
company needs to convene first board meeting within 30 days of its incorporation, and then
minimum four meetings in each calendar year, with time gap of not less than 120 days (at present it
is 180 days due to COVID-19) between two board meetings. In case of One Person company, Small

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Company Law company, any company under section 8 or any private company (Start-up), then it

requires to hold
two board meetings in each half of calendar year with time gap of at least 90 days. In case of
Specified IFSC Private & Public Company, then to hold first board meeting within 60 days of
incorporation and then hold one meeting in each half of calendar year. IFSC stands for Indian
Financial System Code. It is an eleven-character alphanumeric code that helps in transferring funds
online.
This meeting can be attended by directors either in person, or through audio-visual mode or
through video conferencing, subject to the nature of meeting being discussed and after complying
with necessary formalities as specified in Sec.173. But, there may be certain matters which cannot be
discussed through video conferencing or audio-visual means and in such cases central government
may prohibit the use of the same. Also, a director can only remain absent if granted permission by
the chairman. Every director has to be pre-notified about the meeting at his registered address and
notice should be given in not less than 7 days. Moreover, the decisions of the meetings are to be
notified to directors who were absent from it. If the person responsible for notifying defaults from
his duty, he is liable to be penalized. Compliance with the law is ascertained when directors are
notified.
Section 174 states that a definite number of members or directors need to be present in the meeting.
The board meeting is to comprise of 1/3 of total members or two directors (whatever is feasible). In
case of OPC, 1/4th of total strength or 8 members, whichever is higher.

Matters that can’t be dealt in Board Meeting

Approving Prospectus/ Boards Report/ Annual Financial Statements, scheme of Merger,

Amalgamation, Demerger, etc.
C. Other Meeting

a)

Keywords
1. Proxy: It refers to the person who is nominated by a shareholder to represent him at a
general meeting of the company. Quorum: It refers to as the minimum number of voting
2. members who must be present at a properly called meeting in order to conduct
business in the name of the group. Suo moto: It means an action is taken by a group or
3. person on their own. Ordinary Resolution: The ordinary business of the company will be
4. passed by an ordinary resolution where the votes cast in favor are more than the votes
cast against the resolution. Special Resolution: A special resolution requires at least
5. 75% votes in favor of the resolution.

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Unit 12: Company Meetings

Summary
A meeting is the assembling together of two or more persons (by previous notice or by mutual
arrangement) for discussion and transaction of some lawful business. According to the total
number of members in a company, minimum number of members must be present at the
meeting. A previous notice at least 21 days before the formal commencement of a meeting
needs to be given to all stakeholders. The meeting must be held at a particular place, date and
time. All Companies needs to comply by the provisions laid under the act to hold different types
of a meeting to ensure their validity.

Self Assessment
Q1. A company having registered office in Gujrat, wants to hold its meetings from now on in
Meerut, Uttar Pradesh. Can the meetings in case held in Amritsar valid in the eyes of law?

A. No, until travelling expenses are not paid by the company

B. Yes, meeting can be held anywhere in India
C. Yes, in case the location of meeting is accessible and well connected by road
D. No, as meeting must be held either at the registered office of the company or at some other
place within the city, town or village in which the registered office of the company is
situated

Q2. A company intended to hold its AGM after 5 days. A clear notice regarding meeting details
could not be sent by it. Can a valid meeting be held?

A. No, as Notice of AGM-21 days clear notice in writing or electronic mode must ne given to
every member
B. No, all members must be present for meeting
C. A Shorter notice may also be given if agreed by 95% of the member entitled to vote in
meeting
D. Yes, a valid meeting can be held by calling selective members who are willing to attend it on
shorter notice

Q3. Assume that a company sends a clear 21 days notice regarding its meeting to be held on 2nd
October 2020. Decide can it be considered a valid meeting.

A. No, as it is a national holiday and as per rule, a meeting cannot be called on a date and day
observed a national holiday
B. Yes, as 21 days clear notice is sent to all members
C. No, as meeting should be conducted between 9:00 am to 6:00 pm only
D. Yes, with quorum also a valid meeting may be held

Q4. Minutes of a Meeting must be made within _____of the conclusion of every Meeting.

A. 10 days
B. 30 days
C. 15 days
D. 20 days

Q5. Which of the following is not a duty of a Chairman? A. He must act honestly and in the interest

of company
B. He must ensure that meeting is properly called and proceedings of meetings properly
conducted
C. He must preserve the order in the meeting

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Company Law

D. He must make secret profits at the loss of company

Q6. Laxman Crackers Pvt. Ltd. got itself registered in Goregaon, Maharashtra. It has to hold a
meeting and suddenly all the members got informed through a notice to reach Chandigarh.
Many of the members found it very challenging to reach due to lack of means of transport and
did not reach. However, since the quorum was present, the meeting was successfully
conducted. A resolution was passed that instead of cash payment of dividend, bonus shares
shall be offered to interested existing shareholders. What shall be the legal status of decision
taken?

A. No, as meeting must be held either at the registered office of the company or at some other
place within the city, town or village in which the registered office of the company is
situated.
B. Yes, it is valid as quorum was present.
C. No, as all members should have reached for the meeting anyhow.
D. Yes, as resolution got passed through present members. Hence, the decision is valid in eyes
of law.

Q7. If there are any urgent circumstances or emergency situation arises, due to which the
company was not able to conduct the annual general meeting, then the National company Law
Tribunal my grant an extension of________

A. 1 months
B. 2 months
C. 3 months
D. 6 months

Q8. After the conduct of Annual General Meeting, every listed company has to file a report on
the AGM in form ____within a period of ___ from the conclusion of the Annual General Meeting.

A. MGT-10 and 10 days

B. MGT-15 and 40 days
C. MGT-15 and 20 days
D. MGT-15 and 30 days

Q9. Jaya, a new member of a company, asks you regarding the term Proxy in a company
meeting. Which of the given fact would you tell, to explain the Proxy?

A. A member of a company is not all entitled to appoint another person as a proxy who is not
in their relation or not a member in company.
B. The relationship between a member and his proxy is that of a principal and agent. Therefore,
the proxy is bound to act in accordance of with the instructions of the member appointing
him.
C. A person appointed as proxy shall act on behalf of such member or number of members not
exceeding sixty and such number of shares as may be prescribed.
D. None of the above is true explanation for Proxy.

Q10. Any __________gathering, assembly or coming together of two or more persons for the
transaction of some lawful business of common concern is called meeting.

A. Gathering, Assembly or Coming together

B. Assembly
C. Coming together
D. Gathering

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Unit 12: Company Meetings

Q11. The company needs to ensure that the gap between two annual general meetings is not
more than ______

A. 6 months
B. 9 months
C. 15 months
D. 12 months

Q12. Every member of a company should be informed through a _____clear notice regarding
the Annual General Meeting in writing or electronic mode.

A. 10 days
B. 21 days
C. 15 days
D. 18 days

Q13. Assume that in a company the board of directors failed to call a meeting. In such a
situation who can call for a general meeting?

A. Board of Directors
B. Either National Company Law or Board of Directors
C. Neither National Company Law or Board of Directors
D. National Company Law Tribunal [NCLT]

Q14. A company has 5,350 members and has sent a clear 21 days’ notice regarding the upcoming
meeting. The notice provides that agenda of meeting is about dividend payment. On the day of
meeting 25 members reached in time for the meeting. They together passed the resolution
regarding payment of dividend. Decide whether the resolution so passed is valid?

A. No, as 30 members must be present for a valid meeting to be held.

B. Yes, as the present members are empowered to take decision as they feel like.
C. No, as 25 members must be present for a valid meeting to be held.
D. No, as 20 members must be present for a valid meeting to be held.

Q15. Proxy form shall be in form

A. MGT-10
B. MGT-11
C. MGT-12
D. MGT-13

Answer for Self Assessment

1. D 2. C 3. A 4. B 5. D

6. A 7. C 8. D 9. B 10. A

11. C 12. B 13. D 14. A 15. B

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Company Law
Review Questions
Q1. Discuss the essentials of holding a valid meeting.

Q2. Discuss the various types of meetings that need to be conducted by a company as per
companies act.
Q3. Write short notes on:

(a) Notice of a meeting

(b) Proxy

(c) Voting by poll

(d) Resolutions

Q4. Summarise the provisions as regards Annual General Meeting.

Q5. Discuss the various types of shareholder meetings that may be conducted by a company.

Further Readings
1. A Text Book Of Company Law (Corporate Law) By P.P.S. Gogna, S. Chand &

Company

2. Elements Of Company Law By N.D. Kapoor, Sultan Chand & Sons (P) Ltd.

3. Legal Aspects Of Business By Daniel Albuquerque, Oxford & Ibh

Web Links
https://cleartax.in/s/understanding-ordinary-special-resolutions

https://taxguru.in/company-law/kinds-meetings-companies-act-2013.html

https://taxguru.in/company-law/agm-extension-2021-key-provisions-draft-
application.html

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Anjali Sharma, Lo vely Professional University Unit 13: Winding Up of Companies

• After studying this unit, you will be able to:

• Comprehend the underlying concept of winding up
• Understand the circumstances responsible for compulsory and voluntary winding up
• Understand the winding up under Insolvency Bankruptcy Code

Introduction
A company has a continued existence. Unlike other non-registered business entities, a company is a
stable business organization. Its life doesn’t depend on the life of its shareholders, directors, or
employees. Members may come and go but the company goes on forever. A company gets created
and gets ended as per the provisions laid under the Companies Act. In this chapter we shall discuss
the grounds for putting an end to a corporate entity.
13.1 Meaning of Winding-up

Winding up of a company is the process whereby its life is ended and its property administered for the
benefit of its creditors and members. An administrator, called a ‘liquidator’, is appointed and he takes
control of the company, collects its assets, pays its debts and finally distributes any surplus

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Company Law

among the members in accordance with their rights. In simple words, winding up means applying the
assets of a company in the discharge of its liabilities and returning any surplus to those entitled to it,
subject to the cost of doing so. The statutory process by which this is achieved is called ‘liquidation’.
Winding up of a company differs from insolvency of an individual in as much as a company cannot
be made insolvent under the insolvency law. Besides, even a solvent company may be wound up. As
per section 270 of the Companies Act, 2013 a company can be wound up either by a National
Company Law Tribunal (“Tribunal”) or by way of voluntary winding up.

Winding-up involves:
• Every contract of the company, including individual contracts that are completed,
transferred or ended. The company is no more able to do business.
• Any outstanding legal disputes are settled.
• All the assets of the company are sold.
• Money owed to the company, if any, is collected.
• Funds raised are distributed to the creditors.
• Surplus funds left after all the transactions are distributed amongst shareholders.
There may be several reasons for winding up of the company including mutual agreement among
stakeholders, loss, bankruptcy, death of promoters etc. Thus, winding up ultimately leads to the
dissolution of the company. In between winding up and dissolution the legal entity of the company
remains and it can be sued in a Tribunal of law. With a view to systemize the procedure of winding
up of a Company under Companies Act 2013, the Ministry of Corporate Affairs (“MCA”) vide
notification dated January 24, 2020, notified the Companies (Winding Up) Rules, 2020. The said
Rules are applicable to “companies going into winding up for the circumstances mentioned under
section 271” and “Summary procedure for liquidation under section 361”of the Companies Act,
2013 and is applicable with effect from April 01, 2020.It is important to note that the proceedings
pertaining to voluntary winding up and winding up on the grounds of inability to pay debts fall
within the realm or domain of Insolvency and Bankruptcy Code 2016 since its enforcement.

13.2 Definition of Winding-up

“Winding up is a means by which the dissolution of a company is brought about and its assets are
realized and applied in payment of its debts, and after satisfaction of the debts, the balance, if any,
remaining is paid back to the members in proportion to the contribution made by them to the capital
of the company.” “The liquidation or winding up of a company is the process through which its life
gets ended and its property is administered for the benefit of its creditors and members. An
Administrator, called a liquidator, is appointed and who takes the control of the company, collects its
assets, pays its debts and finally distributes any surplus among the members in accordance with
their rights.” As per section 2(94A) of the Companies Act, 2013, “winding up” means winding up
under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016.
13.3 Meaning of Dissolution

A company is said to be dissolved when it ceases to exist as a corporate entity. On dissolution, the
company’s name shall be struck off by the Registrar from the Register of Companies and he shall
also get this fact published in the Official Gazette. The dissolution thus puts an end to the existence
of the company. Dissolution of a company may be brought about in any of the following ways:
1.Through transfer of a company’s undertaking to another under a scheme of reconstruction or
amalgamation. In such a case the transferor company will be dissolved by an order of the Tribunal
without being wound up.

2.Through the winding up of the company, wherein assets of the company are realized and applied
towards the payment of its liabilities. The surplus, if any is distributed to the members of the
company, in accordance with their rights.

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Unit 13: Winding Up of Companies

Provisions of winding up under Insolvency and Bankruptcy Code 2016.

got Presidential assent in May 2016. Centre introduced the IBC in 2016 to resolve claims involving
insolvent companies. The bankruptcy code is a one stop solution for resolving insolvencies, which
previously was a long process that did not offer an economically viable arrangement. The code
aims to protect the interests of small investors and make the process of doing business less
cumbersome. The IBC has 255 sections and 11 Schedules. IBC was intended to tackle the bad
loan problems that were affecting the banking system. The IBC process has changed the debtor-
creditor relationship. A number of major cases have been resolved in two years, while some
others are in advanced stages of resolution. It provides for a time-bound process to resolve
insolvency. When a default in repayment occurs, creditors gain control over debtor’s assets and
must take decisions to resolve insolvency. Under IBC, debtor and creditor both can start 'recovery'
proceedings against each other. Companies have to complete the entire insolvency exercise
within 180 days under IBC. The deadline may be extended if the creditors do not raise objections
on the extension. For smaller companies, including startups with an annual turnover of Rs 1 crore,
the whole exercise of insolvency must be completed in 90 days and the deadline can be extended
by 45 days. If debt resolution doesn't happen the company goes for liquidation. IBC was intended
to tackle the bad loan problems that were affecting the banking system. The IBC process has
changed the debtor-creditor relationship. A number of major cases have been resolved in two
years, while some others are in advanced stages of resolution. It provides for a time-bound
process to resolve insolvency. When a default in repayment occurs, creditors gain control over
debtor’s assets and must take decisions to resolve insolvency. Under IBC, debtor and creditor
both can start 'recovery' proceedings against each other. Companies have to complete the entire
insolvency exercise within 180 days under IBC. The deadline may be extended if the creditors do
not raise objections on the extension. For smaller companies, including startups with an annual
turnover of Rs 1 crore, the whole exercise of insolvency must be completed in 90 days and the
deadline can be extended by 45 days. If debt resolution doesn't happen the company goes for
liquidation. This Act may also be called the Insolvency and Bankruptcy Code (Amendment) Act,
2018. It shall be deemed to have come into force on the 23rd day of November, 2017.

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