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Company Law Notes: BA LLB Hons

Company Law Notes briefly explain the types of Business Organizations with special focus on companies, types of companies, their formation and registration process, objectives and powers, working and operations, dissolution and winding-up, and rights and liabilities.

By Justice Mirror Staff
company illustration

Table of Contents

This page contains the Company Law Notes 1 (Corporate Law) of the 5 Year BALLB Hons. course in law schools. These notes briefly discuss the history, philosophy, objectives, and laws concerning companies and corporations in India.

Kindly note that we neither guarantee the exhaustiveness nor correctness of these notes. Don’t take them as a substitute for your regular law school classes.

Kindly refer to your Professors and Standard Books for a better understanding and clarity if you have doubts over any of the issues discussed in these class notes.

Also as these notes were hastily written during offline classes, they are full of grammatical errors. We regret the inconvenience caused.

For notes on other law school subjects, kindly click here.

SYLLABUS OUTLINE: COMPANY LAW NOTES

This Semester

  • Companies Act 2013
  • Insolvency and Bankruptcy Code 2018

Next Semester

  • SEBI Rules
  • Competition Law

Instructions-

  • Browse the MCA website for Latest Company law
  • Read the Business section of Newspapers and also the Economic Times. 

INTRODUCTION TO COMPANIES

A company is defined under S.2(20) of the Companies Act 2013

S.2(20)-Company means a company incorporated under this Act or under any previous company law; 

Incorporation involves-

  • Formation of Company (S.3)
  • Registration with Register 

Effect of registration (S.9)

A new person comes into being which is fiction of law. 

Formation of a Company

Mentioned in S.3 of the Companies Act. It also mentions the types of Companies

Public Company-

  • Any 7 or more persons can incorporate a public company. 
  • It will have right to collect money/shares from public. 
  • There will be no restriction as to no. of members from public. 
  • Min. 25% shareholding should vest with public. 

Private Company–

  • Any 2 or more persons can constitute private company
  • The maximum number is limited at 200. 
  • Does not have right to offer share to public. 
  • It does not offer free transferability of share. 
  • Approval of board of director is needed. 

OPC-One person company

  • Purpose should be lawful
  • Not against the laws of the nation, public policy, morality, etc

Process involved in incorporation of a Company-

  • Making and signing of the constituent document that include-
    • MoA-Memorandum of Association 
    • AoA-Articles of Association
  • Those who sign are known as subscribers. 
  • Registrar will tell other requirements for formation of company. 
  • If all legal process has been complied with, the ROC will issue the certificate of incorporation.
  • Once its registered as ‘X’ company, a new person comes into being. 
  • This new person is separate, independent person. 
  • Artificial Juristic Person for the purpose of doing business
  • Legal entity
  • It works for society. 

Political relevance-lobbying 

Philosophy behind Company-Enormous Legal, social, economic, political relevance

Evolution of Companies

  • Can be traced back to England
  • During 17 and 18 centuries, lots of companies were incorporated in UK
  • Process–
    • Royal Charter or Act of Parliament
    • They used the word “Body Corporate”
  • This process was cumbersome and lengthy 
  • So Businesses were generally in the form of partnership.
    • This led to large partnerships
    • To deal with this-concept of representatives to run the business on behalf of others.
    • So “Separation of ownership from management” emerged
    • This led to corruption and misappropriation. 
    • The process became fraudulent
    • So the need of a law to regulate all this was felt.
    • The first legislation which was passed was ‘Bubbles Act 1720’
  • Bubbles Act 1720
    • Instead of prohibiting fraudulent practices, they prohibited the formation of a company to run a business.
    • As a result there was lot of setback to business
  • In 1825 the law was repealed. 
  • 1844-Joint Stock Companies 1844
    • There will stock (capital) managed jointly by people.
    • Provided that if you have large partnership, it has to be registered.
    • But still they were known as partnership. 
    • But the act still did not include limited liability. unlimited liability is personal liability. 
  • 1856-JE Stock Companies Act 1856
    • For the first time it allowed limited liability. 
    • The law was amended several times since then.
  • Indian Scenario
    • JE Stock Companies Act 1856
    • Indian Companies Act 1866 which amended in 1882. 
    • Indian Companies Act 1913
      1. Its considered to be one of the best laws on Companies
    • Indian Companies Act 1956 
      1. The act was amended every year till 2002. 
    • The New Companies Act 2013 
  • But Common Law still plays a huge role. 
  • Certain body corporates like ONGC that are incorporated under their own specific laws. 

Corporations-companies incorporated under their own specific Statutes

Whether there is a constitutional right to form a company?

Yes, right to form association implicit u/a 19 subject to reasonable restriction. 

Darius Rutton Kavasmanek v Gharda Chemicals Ltd 2015 Bom HC

Whether there exist a right to form association for the people who want to form a company? In this case the numerous valuable patents of the company were registered in the name of the Director (who was the controlling shareholder of the company), instead of being registered in the name of the company. The plaintiff said that patents are property rights and should be in the name of the company.  SC said that objections are invited before granting the patents, any objections should have been raised there. The controller of patents takes due diligence in granting patents, and as no objection was raised in time, the SC said the patent is valid. All those who are forming an association for lawful purposes will have the right to form association under art. 19(4) but such right will be subject to reasonable restriction. 

Lots of flexibility has been given to turn private company into public company into proprietorship, etc

The only way to form a company is through incorporation under the Companies Act 2013. There is no other way. Registration is merely a process. 

For the formation of a public company, at least 7 people are required who will fill the document, sign it and give it to registrar for registration and incorporation. The registrar will give a certificate of incorporation. 

Corporation is used for those companies that incorporated under their own special statute. 

But all of them are body corporates.

S.2(11) says that body corporate or corporation includes a company incorporated outside India but does not include the following-

  • Cooperative Societies
  • Any other body corporates not being a company which the central government may by notification specify.

The main features of body corporates and company are same but they have been brought into existence in different ways. 

S.1-Talks about applicability of companies act 2013

  • All companies under companies act 2013 and those incorporated under previous laws
  • Insurance co (inconsistent with Insurance Act 1938 or IRDA 1999)
  • Banking co (Subject to Banking regulation 1949)
  • Companies engaged in generation or supply of electricity (subject to electricity act 2003)
  • Any other company governed by special act (subject to that special act)
  • Any such body corporates by any act specified by central govt. (subject to exceptions, modifications, adaptations as specified by the central govt. by notification).

This act extends to whole of India. 

Corporate Social Responsibility (CSR)

Companies have always been authorised to make charitable contributions. Now it has been decriminalised. 

DIFFERENT FORMS OF BUSINESS ORGANISATIONS

  • Sole-Propritership
  • Traditional Partnerships
  • Limited Liability Partnerships
  • Company

SOLE PROPRITERSHIP

Sole person manages the business and earns the profit. It’s not a legal entity. There is no mutual agency because he is the single person. Liability is unlimited. There will be personal liability. When the person dies, the business dies. 

Advantages–

  • Ease of doing business
  • No formalities
  • Less expensive 
  • Don’t need authorisation/sanctions
  • Don’t need to have a business space also.
  • Individual party to all contracts.
  • Receives all the income and profits.
  • Starts and ends with the intention of the person. Ends with death of the proprietor also.

Disadvantages–

  • Individually liable for all kinds of debt
  • Unlimited liability 

TRADITIONAL PARTNERSHIPS

They are formed under the Partnership Act 1932 which provides that any 2 or more person can form such partnerships. Registration is not mandatory but beneficial. There is upper cap of 100 partnerships. It’s not a legal entity. There is mutual agency ie all partners are agents to each other as well agents to partnership firm. If any unlawful activity is done by any partner, all other partners will also be held liable as well as the partnership firm.

So. Liability is joint, several and unlimited. For criminal offenses, there will be several liability. There is no personal liability but joint liability.  If there is death of one partnership, the partnership will dissolve as per agreement. If the partnership is for a particular purpose, it is dissolved when the purpose has been achieved.

Advantages-

  • It’s not subject to public disclosure
  • Less expensive
  • Lesser formalities 
  • Starts with legal agreement between two or more partners. Ends with reduction (death/retirement) in number to one, dissolution. 

Disadvantages- 

  • Unlimited liability 
  • Jointly and severally liable 

LIMITED LIABILITY PARTNERSHIPS (LLP)

There are under LLP Act 2008. It’s a Hybrid between a Traditional Partnership and a Company. India was the last country to have it. 2 or more persons who are partners can register their partnership as LLP. There is no upper limit cap. It’s a legal entity. At least 2 partners have to be designated partners. There is a limited liability. Partners are agent of the firm but not of each other. They will be liable for the act of the firm and not the act of other partners. There is no personal liability.

Benefits of LLP- 

  • Mutual agency becomes half. 
  • Its considered a Legal entity. All the cases will be filed against the Partnership firm.

You get a shield of independent legal entity. Your relationship with partners is governed by the partnership agreement and relationship with the Partnership firm is governed by the LLP Act. LLP can be dissolved by agreement, voluntary winding up. It’s governed under the provision of LLP Act 2008. Can be wound up by NCLT as well. Company by passing special resolution can wind up. Board of directors may not be party to it. S.63 of the LLP Act 2008

COMPANY

As per S.3 a company can be formed by any 7 or more persons (Public Company); Any 2 or more persons (Private Company); or 1 person (One Person Company or OPC). It’s a legal entity. Companies act gives flexibility that company can have limited or unlimited liability to its members. There is no partnership agreement and no agency relationship. They cannot be agents of the company unless they are designated as such. There is no personal liability. Cannot be wind up voluntarily as per 2013 Act. Now it is done by IBC. Now it can be wound up by the NCLT, IBC. The registrar of Company can strike off the name of company from the register of companies. But it will exist for 20 more years. 

Most flexibility is in sole-proprietorship.

Compliances at 3 levels-

  • Entry Levels-
  • During the Business- 
  • Exit Level- 

Ad-Hocism-Repetitive amendments in Company Law

What is a Corporation?

Entity formed under a Law. It’s A legal entity. It gets 2 roles-

  • Enjoys or is able to acquire legally enforceable rights or interests.
  • Obtains legally enforceable obligations

Legal entity is of 2 kinds

  • Natural 
  • Artificial/Juristic

Corporation is of 2 kinds-

  • Corporation Sole-refers to the office of the person
    • President of India
    • Mayor of a City 
  • Corporation Aggregate– 

A Company can-

  • Sue
  • Hold property
  • Can be sued
  • Can dispose off property
  • It can be a beneficiary in a trust 
  • Can commit tortuous act
  • Can be victim of tortuous act
  • Enter into contract

S.9-From the date of incorporation mentioned in the certificate of incorporation, such subscribers to the memorandum and all other persons, as may, from time to time, become members of the company, shall be a body corporate by the name contained in the memorandum, capable of exercising all the functions of an incorporated company under this Act and having perpetual succession with power to acquire, hold and dispose of property, both movable and immovable, tangible and intangible, to contract and to sue and be sued, by the said name.

What differentiates a Company from natural person?

  • Perpetual succession
    • Come to an end only by dissolution.
  • Common Seal and Signature
    • Company cannot sign like Humans
    • Requirement of Common seal has been done away with

ADVANTAGES OF A COMPANY

SEPARATE LEGAL ENTITY/PERSONALITY

Solomon v Solomon and Solomon Co Ltd 1897

Solomon was a shoe manufacturing businessman acting as sole-proprietorship. He formed a company called Solomon and Solomon Co Ltd and transferred the business to the company. He valued the business at 40,000 pounds and sold his business to this newly formed company. He got 20,000 shares of 1 pound each and became a creditor to the company and got 10,000 pound worth of debentures, so he became a secured creditor as an encumbrance was created over the assets of the company. Since UK law required 7 persons to form a company, The members of the company were solomon, 4 sons, daughter and his wife, these 7 members incorporated the company. The other 6 members got 1 share of 1 pound each. The board was composed of Solomon and 2 of his sons. The business went into a loss and after 1 year they decided to wind up the company. The liquidator appointed looked into the assets and liabilities of the companies, the assets were worth 6,000 pounds and the liabilities for secured creditors were 10,000 pounds (to solomon) and 7,000 pounds to the unsecured creditors. Unsecured creditors eventually sued for the debt owed to them. They said the company is an agent in the hands of Solomon and his sons so they should be held liable for the losses. It was held that the company was liable for the debt, not the directors or the shareholders. This is despite the fact that Salomon was the only director, and that he effectively had total control. The House of Lords said that the same hands and mind might be doing the business, but a company has independent existence and is separate from the people conducting the business. There was no sham and Solomon should be paid as a secured creditor. The companies act does not say that the members must be independent or unconnected to the company and each other. 

Shareholders lend their money to the Company which has separate legal character. So the company will be liable and not Solomon. 

There is no requirement that they need to apply their own mind or have substantial interest in the company. 

The observation in the HoL was that Companies Act says that after incorporation, company will be a separate entity. The Act specifies areas where the Board will decide things, and certain decisions by shareholders and some requiring consensus of both. 

Kandoli Tea Company Ltd, Re (1886):

There was a tea estate belonging to certain individuals who transferred the tea estate to the company. As per the law certain entities were exempt from ‘ad valorem’ duty-a tax on real estate or personal property. When the shareholders transferred the estate to the company, they claimed exemption from this duty. Court said that shareholders cannot demand exemption as company is a separate legal entity, and shareholders are not to be considered ‘owners’ of the company. They are two different legal persons altogether.
Company cannot be ‘owned’ by anyone. 

It was the first case in India on this issue. 

Note–If a company’s right is infringed, the right party to file a suit is the company and not its shareholders.

Rustom C Cooper v UOI 1970

Charanjit Lal Chowdhary v UOI 1951

If the fundamental rights of the company are infringed, the company must institute the suit in its own name, and not any of the shareholders or directors.

Bacha F Guzdar v CIT 1955 SC

Mrs. Guzdar had certain shares in a tea company. As 60% of agricultural income is exempt from taxation, she argued that the dividend she received was the income of the company. The Court stated that once dividend has been distributed to the shareholders, it is no longer the property of the company. Ratio: A Company is a separate legal person in the eyes of the law, and can hold separate property.

  • Limited Liability
  • Transferability of shares
  • Perpetual succession

Lee v Lee’s Air Farming Ltd. : (IMP-must mention in all lifting of the corporate veil questions)

Lee incorporated a company and he was the sole managing and governing director. He also appointed himself pilot of the company. During one of the flight, crash occurred and Mr. Lee died. His wife claimed compensation which workers of the company were to be paid under workmen compensation Act. Is director the worker of the company? 

No, Director is an officer and not worker of the company. But that does not stop him from providing other services to the company as a worker. He was given compensation because when he died he was working as worker/pilot. 

Lee was the MD of the airline company, and was a pilot of it as well. On one of his assignments, there was an accident, and he died. His wife wanted compensation on the grounds that Lee was a workman of the company. It was given, as Lee was both master and servant at the same time. This is the advantage of corporate form of existence, allowing people to perform such dual roles. 

However, we cannot stretch this to go against public interest. When it does, the court has to lift the veil, and court has to expose the human beneficiaries behind the corporate veil. 

LIMITED LIABILITY

Shareholders of a company are liable in proportion of their share. 

  • Liabilities limited by shares
    • Has share capital and shareholders
  • Liabilities limited by guarantees
    • It does not issue shares. It has members. The members undertake/give guarantee to pay the amount which they guaranteed to pay if the company goes into liquidation. 
    • Shareholders and Members are different. 
    • All shareholders are members but vice versa is not true.  
  • Liabilities limited by both

The company makes call so that shareholders pay on demand.

Macaura v Northern Assurance Company (1925 HoL)
M created a company and sold his property (timber) to this company. He was the sole-shareholder. Then he filed for insurance of the timber in his own name and not in the name of the company. After some time, the timber was destroyed in a fire and he claimed the insured the money.  The insurance company said that the timber belonged to the company, and not to him-the shareholder, and therefore, he has no insurable interest. On this basis, the claim was rejected. 

Dhulia Amalner Moto Transport Company v R. R. Dharamsi (1953): 

A group of partners were running a traditional partnership firm plying buses. After some time some partners formed a company and transferred their buses to the company, and the company started plying buses. The company earned profit. The minority partners who had earlier not agreed for the making of company objected to the dividend or profit received.  They filed a case against other partners, saying that the buses belonged to partnership, and the they should also get cut of profits. 

Court held that they should have sued the company and not the members as the right party to be sued was the company. Partnership agreement didn’t have any restriction on moving out, so now the buses belonged to the company, as did the profits amounting from that. The Company is a separate entity from partnership, and the partners are merely shareholders of company and not ‘owners’. 

PERPETUAL SUCCESSION

The company will continue its existence in perpetuity until it is dissolved as per the provisions of the Company’s Act by following proper winding up procedure. Winding up precedes dissolution. Only in case ‘Corporate restructuring’ it can be directly dissolved by the order of tribunal.

Underlying Principle–The king is dead. Long live the King. 

COMMON SEAL

Earlier, there used to be a requirement of a common seal, but it has been done away with post 2015, and deleted from Section. 

South London Greyhound Racecourse limited vs. Wake (1931)-In case the seal of the company is affixed without the approval of the shareholders through a resolution, even if the director has attested the document, it will not be valid if the AoA requires that the shareholders should approve it in a GM. 

SEPARATE PROPERTY

It’s an extension of the separate legal personality. The property of the company is only the property of the company and not its shareholders, members, guarantors. 

Macaura v Northern Assurance Company (1925 HoL)
M created a company and sold his property (timber) to this company. He was the sole-shareholder. Then he filed for insurance of the timber in his own name and not in the name of the company. After some time, the timber was destroyed in a fire and he claimed the insured the money.  The insurance company said that the timber belonged to the company, and not to him – the shareholder, and therefore, he has no insurable interest. On this basis, the claim was rejected. 

Bacha F. Guzdar v CIT (1955) 

Ms. Guzdar was a member of a tea company. Earning of tea estate was by law considered agricultural income and only 40% percent income was taxable. Owner was getting dividend, which she considered as income, so she said she must get 60 percent tax exemption on that as well. But this was not considered, as company not equal to shareholder. Company cannot get that exemption as she claimed.

TRANSFERABILITY OF SHARE

It has lots of benefits. It provides liquidity and stability to the company. 

S.44 of the Company Act provides that the share or debentures in a company shall be a movable property.

S.44-Nature of shares or debentures-The shares or debentures or other interest of any member in a company shall be movable property transferable in the manner provided by the articles of the company.

CAPACITY TO SUE AND BE SUED

It’s also an extension of the separate legal personality. It can file a criminal case against anyone provided it is represented by someone. It can file a case of defamation as well. It also a right to seek damages. If a criminal case is filed against the company, generally the corporate veil is lifted and the person responsible is punished. 

PROFESSIONAL MANAGEMENT

The company can engage professional managers on its own. It delegates responsibilities to them. It has board of directors. 

FINANCIAL MANAGEMENT

In public companies, the sources of collecting funds and raising capital from public gets widened. It can issue shares, seek loans, preferential allotments, etc. This is not open for private company and partnerships, etc. 

LIFTING OF THE CORPORATE VEIL (CV)

That a Company is a separate legal personality is a Fiction created by Law. A person has its own privacy and so has the company. Only insiders can look inside the veil and not the outsiders. Normally lifting of this veil is not allowed by courts. But there are situations, where some fraud or irregularity is committed behind this veil. In those circumstances it becomes inevitable to lift the veil to hold responsible the guilty person. 

The general rule is that the corporate veil should not be lifted. Only two exceptional circumstances can affect this rule-

  • Statutory Provisions
  • Judicial pronouncement

R v McDonnell 1996

When the need to lift corporate veil arise?

If the defendant is the sole responsible person in the company then it can be presumed that he is behind the irregularity. 

Eg-A company has 5 directors. 3 our abroad. 2 are here and out of those 2 one is dominant decision maker. If this can be established, then corporate veil can be lifted. 

LIFTING OF CV UNDER JUDICIAL PRONOUNCEMENT

  • Determination of Character
    • Whether the company is working against the country’s interest. 
    • Dainler Co. Ltd v Continental Tyres and Rubber Co. Ltd 1916
      1. A UK company incorporated under UK company’s Act used to sell German Tyres in UK. All directors of the company were also Germans. The issue was whether the company was an enemy company or friend of UK. Its activities were found to be anti-UK and has assumed enemy character. 
    • People’s Pleasure Park Co. v Rohlder 1908
      1. Certain lands were transferred to one person one the condition that he will not furthered transfer it coloured person. After some year the buyer transferred it to a company whose members were Negros. Court said that corporate veil needs to be lifted to find the character of the company. And that transfer to company does not mean transfer to coloured people.
  • For the Benefit of Revenue
    • When the person does an act to gain undue benefit in the name of company, then CV can be lifted to ascertain whether the company has done that or some person.
    • Dinshaw Maneckjee Petit 1927
      • The defendant formed 4 private companies and with each of them he agreed to hold a block of investment into each one of them. And whatever income earned used to be credited to account of these 4 companies. He then handled those income by getting it in the form of loans. 
      • This Person was getting a lot of money, so he incorporated 4 companies which did not have any function, and would get the cash back from him using loans, which would not show as income. Thus, he evaded taxes. Corp veil lifted, where it was seen that the companies were just a veil for evading taxes. 
  • Fraud or Improper Conduct
    • Gildford Motor Company Ltd. v Hall 
      • Principal shareholder of the company was elected Managing director under the condition that during his service, he was not to entice away customers of the company. 
      • After some years, he formed another company, which enticed away the customers of the previous company. 
      • His defence was it was the company taking the customers, not him. This argument was not accepted by the Court. 
  • To determine Government Companies
    • It is a company in which the majority shareholding is by the government. 
    • There are a large number of private companies, but a lot of them have president as shareholder, and some with govt. officers as shareholders. In these cases, government works through these private companies, they can be flexible and conduct commercial functions w/o much interference. 
    • Should these companies be considered as ‘private’ companies by court, or as government companies ? Should the corp veil be lifted to see what the actual nature is? Should govt company be seen as agency or trustee of its members or any other company where it will lose its individuality? 
    • Company which has managerial control will be the holding company. 
    • It’s a company where govt. holds not less than 51% share. 
    • In case of a govt. Company, there needs to be a check on whether the govt. Company has lost its individuality and whether it is acting as an agent or is acting as a trustee. When a govt. Company performs some function of public nature, it is acting as an agent of the govt . In such a case it loses its individuality in favor of its principal. Such function must be sovereign for a company to be considered an agent and an extension of the govt.. In any other function, the separate individual identity of the company is maintained. 
    • All govt companies are not state or extensions of state. Those who fulfill the conditions laid down in the case of Ajay Hasia and AAI cases. 
    • Once you are instrumentality of state under Article 12, it holds public trust. CV is lifted to ascertain whether it is merely a govt. company or instrumentality of state.
    • Som Prakash Rekhi vs. UOI (1981) SC
      • There was a company called Burma shell in India, the assets and business of this company was acquired and vested in the central govt in 1981. The requisition had to be through an incorporated company and could not be done by the govt.
      • Some employees had some pending rights in this company and now they claimed those interests (in the nature of provident fund) against the govt. He filed a petition for recovery of his dues and it was dismissed on the ground that the company was acquired by a business that was private in nature and was not an extension of the govt. Therefore no writ jurisdiction could be exercised against the pvt. Company even if the govt. Owned it. 
      • In the SC, Justice Krishna Iyer said that the company was acquired for public interest because it was producing some important product and the new company through which the company was acquired was doing a public duty, even though it was constituted as a private company. As it was doing a public duty, it is an extension of the state and you must lift the corporate veil. He also explained why the govt. Needs to act through a pvt. Company for efficiency. 
  • Whether the Subsidiary is acting as an Agent of the Parent Company
    • If a subsidiary company is formed to act as an agent of holding company, court can lift the corporate veil because that is not allowed.
    • Merely because a company is subsidiary of the holding company does not mean they are one.
    • S.129-Companies are to present financial statement before shareholders every year
    • Rationale-To stop parent company from doing illegal acts in the name of subsidiary. Also under law, both companies have distinct legal personalities
    • State of UP v Renusagar Power Co
      • In case there is a wholly owned subsidiary but act as an agent, corporate veil can be lifted.
      • It was a company incorporated by the state of UP for generation and exclusive supply of electricity. This was found to be an extension of the govt. 
    • Merchandise Transport Ltd v British Transport Commission 1982
      • This company had thousands of vehicles and wanted licences for them but couldn’t do so as it filed an application in its own name by forming a subsidiary company as there was a limit over how many vehicles a company could own. 
      • Court said it can lift the veil to see if they are one company and acting as sham.
    • In which case can business of subsidiary can be considered the business of parent company?
      • Smith, Stone and Knight Limited v Birmingham Corporation (1939)
        • A company acquired a partnership through forming a subsidiary company. The parent company had all shares except few in the subsidiary company and the profits of the subsidiary company were treated as the profits of the parent company. 
        • The managers and effective control of the subsidiary company was in the hands of the parent company. 
        • Another company acquired the subsidiary company through a hostile takeover, the parent company then filed a petition for loses and recovery of compensation for their losses because the relationship between the companies was disturbed. 
        • J. Atkinson gave some grounds for deciding the relationship b/w the parent and subsidiary companies- 
          • Were the profits treated as profits of the parent? 
          • Were the persons conducting the business appointed by the parent? 
          • Was the parent the head and brain of the trading venture? 
          • Did the parent govern the venture, decide what should be done and what capital should be embarked on the venture? 
          • Did the parent make the profits by its skill and direction? 
          • Was the parent in effectual and constant control?
        • In this case the compensation was allowed because the subsidiary company was acting on behalf of the parent company and the takeover disturbed their working. 
      • SAE (India) Ltd v EID Parry (India) Ltd 1998 Mad
        • Parent and subsidiary company have distinct legal personality. 
        • The holding company shall be liable if it offers a guarantee to pay the debt of the subsidiary company. 
  • To ascertain Economic Offenses 
    • Latest Development-Fugitive Offenders Act
    • Santanu Ray v UOI 1989
      • S.11(a) of Central Excise & Salt Act 1944
      • The Veil could be lifted by adjudicating authorities to determine which of the directors behind the company infringed this provisions. 
  • Whether the Company is used for some Illegal/Improper Purpose
    • State of Rajasthan v Gotan Lime 2015
      • There was a partnership firm Gotan Limestones Khanji Udyog which was in the business of mining limestones and held 40 years lease of mining limestone from state govt.
      • This wanted to transfer the licensing of mining to a pvt. Ltd company. So for that purpose it converted itself into a private company from partnership. State Govt. did not object to this change. But after sometime, this company sold its shareholdings to a 3rd company for 160 crores which was alleged to be the cost of lease. 
      • At this point they replaced the directors on board and this company became a subsidiary of ultra-tech cement ltd and got listed on BSE. 
      • Now the state government objected to this. 
      • So they converted them into private company in order to sold the lease to 3rd company
      • Court held that corporate veil can be lifted to ascertain the true nature of the transactions.
  • Determination of Technical Competence of the Company
    • New Horizons Ltd v UOI 1995
      • Dept of telecommunication in Hyderabad invited tenders for supplying telephones, printing, etc. The condition was competency of printing 50K lines. 
      • This company New Horizon was a joint venture. They along with other companies submitted the tender. 
      • One of the respondent got the tender. NHL’s tender was rejected on the ground that as a JV it did not have enough experience.
  • Mere Sham/Cloak 
    • Vodafone International Holdings v UOI 2012
      • For the first time the word sham was explicitly discussed in two context
        • Sham in case of transaction 
        • Sham in the form of entity
      • In both cases, corporate veil can be lifted
      • Lots of bubble/Shell companies for money laundering activities. 
  • Fraudulent Scheme of Arrangement/Compromises
    • Arrangements and compromised falls under corporate restructuring 
    • Arrangements between company and shareholders 
    • Compromise is bw company and customers. 
    • Companies undergo arrangements, mergers, compromise to expand their business, etc.
    • Financial re-engineering 
    • Vodafone Case

LIFTING OF CORPORATE VEIL UNDER STATUTORY PROVISIONS

If any statute is violated then the court can lift the veil to ascertain who is liable. When a company is being wound up and it is found that the company is a defaulter under the IT Act then the company can lift the veil to see who has done the misdeed.

  • Misstatements in Prospectus
    • The prospectus (document inviting others to invest) is issued by company but is drafted by a few and signed by one of the directors. CV can be lifted to ascertain that person. 
    • A prospectus is the face of the company, and people make their decision to invest on the basis of what the prospectus says. The prospectus is obviously created by natural persons, and they should be held responsible. 
    • There is both civil and criminal liability, and the only defence is that those persons sincerely believed that the statement made was true.
      • S.34-Civil liability
      • S.35-Criminal liability
  • Failure to return Application Money
    • When a company issues an IPO, and it doesn’t receive the minimum subscription of 90% of its announced capital, it has to return the application money given to it by those who subscribed within 30 days. If this is not done, the directors are jointly and severally liable.
    • Governed under S.39
    • A company is need of money and it wants to raise capital of 1 crore by raising IPO instead of taking loans. It issues share to public. The minimum subscription for IPO to be successful is to receive 90% of the IPO. It not then IPO fails, then it has to return the money within 30 days then additional interest of 15% per annum will be applicable. 
  • Misdescription of Company’s Name
    • Since the Company is an artificial person, it cannot introduce itself or sign things. Some natural person does this. If the directors whether intentionally or unintentionally describe the name wrongly, they are liable (example, referring ‘A&B’ Company as ‘AB’ Company).
    • Company required to put its name on lots of documents.
    • If its has been put wrongly, CV can be lifted
    • Hendon v Adelman 1973 Delhi HC
      • One of the directors of the company mentioned the company name as LR Agencies Ltd instead of L&R Agencies Ltd.
      • Whether done advertantly or inadvertantly, CV can be lifted
  • Contravention of S.73, 76 and 76A
    1. Related to acceptance of deposits from public
  • S.219-For facilitating the inspector to investigating company’s affairs, CV can lifted
  • S.216-Investigating the ownership of the company
    • Company is not owned by anyone, being a separate legal personality, it owns itself. But since it is artificial, CV can be lifted-
      • To determine the true person who are financially interested in success or failure of company
      • To determine people who are controlling the policies of company
      • To determine people who had/have beneficial interests in the company

PERSONAL LIABILITY OF DIRECTORS WHEN CV IS LIFTED UNDER STATUTORY PROVISION

  • Section 3A-Statutory minimum requirement of membership. 
  • Section 464-If a company is non compliant of incorporation provisions, then
    the directors of the company can be made liable. 
  • Section 12-If a contract is made mis describing the name of the company,
    then the person making the mis description will personally be held liable. 
  • Section 339-Liability for fraudulent conduct of business
    1. This sec is applicable only during the winding up of the company if it appears to NCLT on an application made to it by the liquidator, creditor or contributories that-
      1. It wanted to defraud any creditor or any other person or
      2. The purpose of company was fraudulent
  • S.464-In case of non-compliance of the norms of the companies act, incorporation advantage can be taken away-
    1. It prohibits association or partnership of person exceeding certain number. The number of partners should not exceed 100 without registration. 
    2. Exceptions
      1. Hindu Undivided Family carrying on any business for gains. 
      2. Under any other special Act
  • Section 138 and 141 of the Negotiable Instruments act 
  • Sections which relate to liability of directors is also valid because the leg
    itself is lifting the corporate veil. 

DISADVANTAGES OF A COMPANY

  • Lifting of the corporate veil
    • This concept does not exists in other forms of business
  • Formality and Expenses
    • Lots of procedures to be followed in incorporating company
  • Loss of Privacy 
    • Disclosure norms are stringent. 
    • Public companies are required to make certain mandatory disclosures. Leads to more accountability
  • Detailed winding up procedure
    • Now IBC and NCLT processes
  • Control by a few
    • A company might have lakhs of shareholders but the controls lies in a few.
    • Only those shareholders who can buy a large stake in the company control the company. 
  • Greater Public accountability
    • By strict statutory compliances 
  • More possibility of fraud
    • Decisions are taken by a select few.
    • Fraud is easy because the company is an artificial person and natural persons who run the company can undertake fraudulent activities in the name of the company.

FORMATION OF A COMPANY

SECTION 3-Constitution of public, private or a one person company. They have to form a memorandum and submit the document to registrar.

Any company can be formed either as a limited liability (limited by shares or guarantee) company or unlimited liability company. During formation, a company also has to present guarantor. 

If there is a change in name of the second person, the name has to be informed to the company and the Registrar of Companies (ROC) But there will no alteration to the Memorandum of the company 

TYPES OF COMPANIES

Private Company

  • Minimum 2 person required. Maximum can be 200
  • Shares not publicly listed 
  • Subject to a lesser number of mandatory disclosures
  • Do not want to be governed by regulatory authorities in the same way as public companies are
  • Owned, controlled and managed entirely by a small group of individuals

Public Company 

  • Minimum 7 members and maximum can be unlimited.

One Person Company

  • Defined u/s 2(62)-it only has one person as a Member. 
  • However, it must be registered as a private company. The person must subscribe at the time of incorporation. 
  • Appoint a nominee at the time of incorporation who shall become a Member in case of the death of the original member or if he becomes incapable of contracting. 
  • The Nominee should give his written consent so there is proof he had agreed to become a Member. His written consent must be registered with the RoC. 
  • What if this clause wasn’t there? Nobody would be able to make decisions for the company.

Why are OPCs preferred over Sole Proprietorships?

  • Separate legal entity – Separate property, can sue and be sued
  • Limited liability
  • Perpetual succession
  • Loan is not the sole responsibility of the Owner
  • Registration is required

Under the 2013 Act, SP can convert to an OPC, and avail the benefits formerly not accrued.

Can a body corporate form an OPC?

No, (allowed under Singapore’s company law) but in India, only a natural person constitutes a ‘person’ for the purposes of an OPC. If an artificial person were allowed to form an OPC, they’d be allowed to circumvent regulations that apply to body corporates, taking action indirectly they wouldn’t be allowed to do directly. SPs are allowed because they gain a separate legal personality which they otherwise didn’t have.

3(1)(c)-OPC is a kind of a private company. It has the following conditionalities attached to it–

  • Paid up share capital-should be less than 50 lakh rupees or such higher amount as may be prescribed but not more than 5 crore rupees
  • Turnover-As per its last PNL account, it doesn’t exceed 2 crore or such higher amount as may be prescribed not exceeding 20 crore rupees.

Other Types of Companies-

  • Statutory Companies
  • Registered Companies
  • Association not for Profit i.e. Section 8 Company
  • Government Companies
  • Foreign Companies
  • Holding and Subsidiary Companies
  • Investment Companies
  • Producer Companies
  • Illegal Associations

Method of conversion of a Pvt Co to Public Co

  • Special Resolution-At least 3/4 of the members must vote in favour of the same.
  • Changing the name of the Company-A private company has the words ‘Pvt. Ltd’ in its name. This must be removed.
  • Increasing the membership-The minimum membership must be not less than seven.
  • Alteration of the Articles (AoA)-Filing of the altered articles with the registrar Alteration to be noted in every copy of the articles

Method of conversion of a Public Co to Private Co

  • Special Resolution
  • Changing the name of the Company
  • Obtaining the approval of the Tribunal (NCLT)
  • As shareholders rights are being affected.
  • Altering the Articles

REGISTRATION OF COMPANIES (S.7)

Once you have decided the type of company, you have to file an application to ROC.

  • Submission of-
    • Memorandum of Association or MoA
      • Includes a charter consisting of 5 clauses/points-
        1. Name of the Company
        2. Membership of the Company
        3. Objectives of the Company
        4. Office of the Company
        5. Capital of the Company
    • Articles of Association or AoA
      1. Regulations of internal management 
    • Declaration of Compliance or DoC
      1. To be filed by secretary, CA or advocate who has been engaged in the formation of the company+any director, manager or secretary of the company who have been named in the incorporation document of the company.
      2. Subscribers to Memorandum
      3. Person incorporating the company will also have to affix their signature
    • Second Declaration
      1. To be filed by subscribers to Memorandum (STM) and First Directors 
      2. That they have not been convicted in relation to any offence relating to any promotion, formation and management of any company.
      3. That they not been found guilty of any fraud, misfeasance (misconduct) and breach of duty to the company under the companies Act or the preceding act or the previous act in the last 5 years. 
    • Third Declaration
      1. That all information provided is correct, complete and true to his knowledge and belief
      2. Information relating to interest of first directors in any other company 
  • Review of documents by RoC
    1. ROC will review the application and issues certificate of incorporation which will bring into existence the company. 
    2. He will also give the Distinct Identification Number (DIN) which is available on MCA Website.

What if any false/incorrect information is given or any material fact has been hidden?

  • If given knowingly, they will be liable u/s 447 of the Companies Act
  • As far as the status of the company is concerned, it will be determined by the NCLT which can pass following orders-
    1. Regulation of management of the company
      1. Changes in MOA, AOA, on ground of public interest
      2. Change the director, name, etc
    2. The liability of the members can be changed from limited to unlimited. 
      1. This is retrospective order 
    3. There can be removal of companies name from the companies register (RoC)
      1. It means the company can no longer run business 
    4. Winding up of company 
      1. This is done in exceptional circumstances 
      2. Once winded up, it cannot revived. 
    5. Any other remedy it may deem fit

Certificate of incorporation (CoI)

This is a conclusive evidence of compliance and date of incorporation 

Moosa Gooam Arif vs. Ebrahim Goolam Arif (1911)

In this case a company was incorporated and the MoA was signed by 7 subscribers (2 adults, 5 minors on whose behalf 1 guardian signed).  Minors are ineligible to contract. Court said that negligence was of ROC which should not have issued the COI. In this case the court said that the certificate cannot be challenged or cancelled.  The remedy is winding up. However, Judicial review is possible when the company incorporated for unlawful purposes, if found that it is unlawful the remedy is to strike of its name from the Registrar or to wind up the company. It cannot be simply cancelled because you cannot kill a person made by law, JR is allowed because something unlawful should not be made lawful by incorporation. 

TV Krishna v Andhra Prabha 1960

There was a newspaper company-Express Newspaper Private Ltd. Under a govt. law on Newspaper Companies, working journalists were to be given increased salary. Meanwhile, the company was sold to Andhra Prabha-a newly incorporated company. The Journalist challenged this sale on the ground that it was deprive them enhanced salary. Court did not cancel the certificate and held that legal persona cannot be ended by cancellation of certificate. 

Saleem Akbar Ali Nanji v UOI Bom HC

Even of the company is incorporated for unlawful purposes, the documents of incorporation cannot be challenged. The only way it cannot be extinguished is by winding up procedure.  

Certification of incorporation is conclusive evidence for-

  1. Date of incorporation 
  2. Compliance

So the certificate cannot be challenged. 

Effect of registration

S.9-From the date of incorporation mentioned in the certificate of incorporation, such subscribers to the memorandum and all other persons, as may, from time to time, become members of the company, shall be a body corporate by the name contained in the memorandum, capable of exercising all the functions of an incorporated company under this Act and having perpetual succession with power to acquire, hold and dispose of property, both movable and immovable, tangible and intangible, to contract and to sue and be sued, by the said name. 

Subscribers to Memorandum and other members will be a body Corporate by the name which has been mentioned in the name clause of the memorandum.

It will be capable of exercising all functions of an incorporated company under the companies act.

  • Perpetual Succession
  • Power to acquire, hold, dispose off property (movable or immovable, tangible or intangible)
  • Power to Contract
  • To sue and be sued under the said name. 

MEMORANDUM OF ASSOCIATION  (MoA)

S.2(56) MoA means memorandum of the company as originally framed or as altered form time to time.

Ashbury Railway Carriage Iron Company Ltd. v Ritchie (1875) IMP

This was one of the first cases to discuss the features and importance of an MoA. It was held that MoA defines the limitations on the powers of a company and contains both positive and negative limitations.

Why does a company needs a MoA? 

A company needs an MoA because it defines the powers and limitations of a company, as an artificial person, its powers must be defined by laying down the objectives beyond which they cannot work. The powers and limitations can be in affirmation or in negative. The MoA serves two purposes, it enables the outsiders to know what are its powers and what is the range within which it can work. Another purpose is that anyone dealing with the company can figure out whether its dealings are ultra vires or not. If ultra-vires then void

Something can be ultra vires the company or the director. Anything which is ultra vires the company (not mentioned in the object clause) is absolutely void but if something is ultra vires the director, it is voidable, and can may be accepted or rejected by the board of directors and the shareholders (ratification). 

Eg-If MoA sets the borrowing limit of the company as 50 crores and the company borrows 60 crores, it is void. 

S.4-Explains the Memorandum or MoA and mentions several clauses

  • Name Clause
  • Registered Office clause
  • Object clause
  • Liability Clause
  • Capital Clause
  • The name of a nominee of a one person company (OPC)

NAME CLAUSE S.4(1)(a)

S.4(1)(a)–The memorandum of a company shall state the name of the company with the last word-Limited in the case of a public limited company, or the last words-Private Limited in the case of a private limited company: 

All transactions takes place under this name

Osborn v US 1884

A company must have name to establish its identity. 

The name of the Company-

  • Should not be undesirable in the opinion of Central Govt. It is undesirable when-
    1. Identical or resembles the name of another existing company. 
  • Should not indicate patronage or connection to Government (at any level)
  • The use of such name will be an offense under any law being in existence
    1. Against Public Policy
  • Undesirability is ascertained as per Rule 8 of the Companies incorporation rules of 2014. Some examples are-
    • The name of the company should not attract the provision of Section 3 of the Emblems and Names (Prevention and Improper use) Act 1950
    • It should not include the name of a registered trademark. 
    • If it includes any word or words which are offensive to any section of people. 
    • The proposed company should not have a similar name to an existing company, such that it indicates that it was calculated with an intention to deceive the public, it should not be allowed. 
  • In case of LLC (Limited Liability Company), it has to use the word “Ltd” as a suffix to its name.
  • If its a private limited company then the suffix “Pvt. Ltd” has to be used. But the central govt. can excuse this requirement for non-profit companies.
    1. Companies for promotion of art, language, culture, religion, etc.

SECTION 12-Liability for Misdescription entails personal liability

LR Agencies v ALR Agencies case

Memorandum is drafted very carefully by lawyers and the registrar has to verify so many things.

Society of Motor Manufacturers and Traders ltd. vs. Motors Manufacturers and Traders Mutual Insurance Company ltd. – the plaintiff was a company that was incorporated in 1902, the defendant company was incorporated in 1922. The plaintiff brought an action against the defendant to restrain them from using the name it was calculated to deceive the people and bank on their goodwill. However, the court said there is no calculated intention to deceive so as to be connected to and associated to other company as the main business of the other company is insurance and anyone with one reading can figure it out. 

Advance Registration of name-

Section 4(4)–A person may make an application, in such form and manner and accompanied by such fee, as may be prescribed, to the Registrar for the reservation of a name set out in the application as-

  1. the name of the proposed company; or 
  2. the name to which the company proposes to change its name. 

If someone wants the name of their future company safe, they can register it. 

The CA allows people to reserve the name of the company. The RoC can reserve the name for a maximum of 20 days (earlier it was 60 days). Within 20 days if the business is not incorporated, it puts a doubt on the intention and the reservation can be cancelled. The promoter will also be liable for a penalty upto 1 lakh. 

The full and complete name must be mentioned at all places and all official documents. The omission of the name must not be by negligence. However it can be accidental. 

Advance Registration-

  1. Name of the proposed the company
  2. Company proposes to change its name.

Cases on the use of the word ‘Ltd’

Durma time ltd. vs. Ashworth (1905)-the omission was accidental
There was BoE (Bill of Exchange) which was to be endorsed by the company and the stamp of the company was to be put on it. The company had a long name and the stamp exceeded the paper size and the ltd. text did not appear on the paper. The court held that the directors cannot be held liable because it was an accidental omission. 

Hendal v Adelman (1973)

In this case the directors were held personally liable for not mentioning L&R agencies ltd, instead of which they wrote LR agencies. This was probably negligence. The exception is section 8 companies (charitable companies) in which the central govt. Can give the license to drop the word ltd. 

Alteration of the name-Mentioned in S.13

This is a cumbersome process as the companies may try to escape their debt. Any alteration can be made by passing a special resolution. It also requires the approval of central govt. And the govt.has given the regional directors the power to approve the names. This must be given in writing. The new name must comply with section 4 (3) & (4). The approval of the central govt. Is not required in case the only thing required is the deletion or addition of the word ‘pvt.’ . The alteration of name does not affect the rights and obligations of the company, and the alteration becomes effective only when it is registered with the RoC.  The constitution of the company (MoA and AoA) does not change. Once the name change is accepted, Central govt. will issue a new certificate of incorporation. The new name becomes effective from the date of incorporation.

S.12-The company has to publish its name. 

Reliance Case study-(Look at the MoA and AoA of the reliance industries) It earlier was registered as mynylon, in 1977 it was registered as Reliance textile ind. Pvt. ltd. it also shifted its registered office from Karnataka to Maharashtra. It in 1985 changed to Reliance. Each time the MoA is altered the RoC has to issue a fresh certificate of incorporation. 

REGISTERED OFFICE CLAUSE  S.4(1)(b)

This is the 2nd clause of the MoA.This is also an Important clause.

S.4(1)(b)–The memorandum of a company shall state the State in which the registered office of the company is to be situated.

Also mentioned in S.12-

S.12 Registered office of Company-

  1. A company shall, on and from the 15th day of its incorporation and at all times thereafter, have a registered office capable of receiving and acknowledging all communications and notices as may be addressed to it. 
  2. The company shall furnish to the Registrar verification of its registered office within a period of 30 days of its incorporation in such manner as may be prescribed. 
  3. Every company shall-
    1. (a) paint or affix its name, and the address of its registered office, and keep the same painted or affixed, on the outside of every office or place in which its business is carried on, in a conspicuous position, in legible letters, and if the characters employed therefor are not those of the language or of one of the languages in general use in that locality, also in the characters of that language or of one of those languages; 
    2. (b) have its name engraved in legible characters on its seal, if any;
    3. (c) get its name, address of its registered office and the Corporate Identity Number along with telephone number, fax number, if any, e-mail and website addresses, if any, printed in all its business letters, billheads, letter papers and in all its notices and other official publications; and 
    4. (d) have its name printed on hundies, promissory notes, bills of exchange and such other documents as may be prescribed: 
    5. Provided that where a company has changed its name or names during the last two years, it shall paint or affix or print, as the case may be, along with its name, the former name or names so changed during the last two years as required under clauses (a) and (c): 
    6. Provided further that the words-“One Person Company” shall be mentioned in brackets below the name of such company, wherever its name is printed, affixed or engraved. 
  4. Notice of every change of the situation of the registered office, verified in the manner prescribed, after the date of incorporation of the company, shall be given to the Registrar within fifteen days of the change, who shall record the same. 
  5. Except on the authority of a special resolution passed by a company, the registered office of the company shall not be changed,-
    1. (a) in the case of an existing company, outside the local limits of any city, town or village where such office is situated at the commencement of this Act or where it may be situated later by virtue of a special resolution passed by the company; and 
    2. (b) in the case of any other company, outside the local limits of any city, town or village where such office is first situated or where it may be situated later by virtue of a special resolution passed by the company: 
    3. Provided that no company shall change the place of its registered office from the jurisdiction of one Registrar to the jurisdiction of another Registrar within the same State unless such change is confirmed by the Regional Director on an application made in this behalf by the company in the prescribed manner. 
  6. The confirmation referred to in sub-section (5) shall be communicated within a period of thirty days from the date of receipt of application by the Regional Director to the company and the company shall file the confirmation with the Registrar within a period of sixty days of the date of confirmation who shall register the same and certify the registration within a period of thirty days from the date of filing of such confirmation. 
  7. The certificate referred to in sub-section (6) shall be conclusive evidence that all the requirements of this Act with respect to change of registered office in pursuance of subsection (5) have been complied with and the change shall take effect from the date of the certificate. 
  8. If any default is made in complying with the requirements of this section, the company and every officer who is in default shall be liable to a penalty of one thousand rupees for every day during which the default continues but not exceeding one lakh rupees.

Every company needs to have a registered office to which people can send notices and get information. It is the place where the company wants all communication to be received.

  1. When the registered office has to be changed or shifted in the same city or town, it does not require any approval from the authorities it can just let them know. 
  2. If the office is to be shifted from one city to another in the same state, the company needs to obtain a special resolution from the shareholders, it need to be informed to the RoC in 30 days. 
  3. If from one state to another, you need a special resolution and then must get the approval of the central govt. within 60 days. The central govt. Must be satisfied that the alteration has the approval of shareholders, creditors and debenture holders. The central govt. Will also check whether adequate arrangements have been made to discharge the debt or liability o the creditors of that state. After the central govt. Disposes the application within 60 days, the office must be registered with the RoC of the new state who will then issue a new certificate of incorporation. 
  4. Clauses-
    1. Name of the State
    2. Place of its domicile (City)
    3. Address at which the company’s Statutory books (account books, audits books, etc) are normally kept and notices/Communication received. 

Three kind of changes

  1. Change from one place to another in the same city
    1. Company just need to pass a resolution by board of directors
  2. Change from one city to another in the same state
    1. Special resolution of shareholders is required 
  3. Change from one state to another State
    1. Longest procedure. 
    2. You need a special resolution of shareholders 
    3. Settlement of creditors (both secured and unsecured) and once it is done obtain the consent by sending them explanatory notices mentioning the reasons behind the shift. Then call a meeting and obtain their consent. 
    4. Debt of the credits must be settled and if not the company must have enough resources to settle those debts within a definite time period.
    5. and then must get the approval of the central govt. within 60 days. 
    6. If the company gets the approval, the company would move to RoC with all the documents which will remove its name and then it will go to new RoC of the state which will issue a new certificate of incorporation. 

As per Rule 25 of Companies Incorporation Act, RoC will verify all the documents. 

OBJECT CLAUSE S.4(1)(c)

(Imp)

S.4(1)(c)-The memorandum of a company shall state, the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof; 

A company at any time cannot do anything at anytime as it affects the interest of a large number of people. So it has to work according to its object. Its imp from the point of the view as it provides protection to-

  1. Creditors
    1. They have the full right to know the objects of the company before providing money 
  2. Shareholders
    1. Shareholders must be made aware of where their money is utilised and invested.
  3. Public at large 

Rationale for Object Clause-

  1. Shareholders money must be directed towards a defined object so that the shareholders know where their money is utilised.
  2. For the interest of creditors – they have a right to know the objects for which they are lending the money.
  3. It should be defined in general public interest. 
SHARE CAPITAL CLAUSE S.4(1)(e)

S.4(1)(e)-The memorandum of a company shall state, in the case of a company having a share capital-

  1. the 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 
  2. the number of shares each subscriber to the memorandum intends to take, indicated opposite his name; 

Company has to mention in its MoA its capital known as ‘Authorised Capital’ or ‘Registered Capital’ It also known as nominal capital. This is the maximum extent of capital the company can raise. It also has to specify the type of shares it is coming up with ie, Equity or Preference shares and the number of such shares being issued by the company. A company cannot raise more than the authorised share capital. Equity shares are the ones which are equal in denomination generally. 

Eg-If a co has 1 lac equity shares of Rs. 100 each then it would be able to raise 1 crore. 

At the same time it may also issue preference shares where holders of such shares are given preference in dividend and do not have voting rights. It may issue 50,000 preference shares of Rs. 150 each then 75 lac would be preference share capital. A combination of both of them would be total share capital of the company. Nominal value is the face value of shares.

Illustration–

If the nominal capital is 15 core. 

Divides it into two-

  1. Equity Shares-Equity shares are the ones which are equal in denomination generally
    1. 14 crore will be equity shares 
    2. The value will be 10 per share. It will never fall below this level
    3. Can be divided into several clauses
      1. Preferential
      2. Deferred 
      3. Qualified
      4. Special Rights 
    4. Right to vary, modify, alter, amalgamate
  2. Preferential Share-holders of such shares are given preference in dividend and do not have voting rights.

To increase share, ordinary resolution is required u/s 48. But reduction is not that simple. Reduction is as per S.66. It requires tribunals approval. 

S.66-Reduction of share capital-Subject to confirmation by the Tribunal on an application by the company, a company limited by shares or limited by guarantee and having a share capital may, by a special resolution, reduce the share capital in any manner.

DOCTRINE OF ULTRA-VIRES 

Ultra-vires means beyond the power. Anything done outside the scope of the object clause (mentioned in the MoA) would be outside the powers of the company and hence, void ab-initio. Objects clause provides an area within which the Company has to restrict itself, and cannot go beyond. So the objects clause defines the activities of Company and limits it. It provides the negative stipulation that the Company cannot go beyond objects of company, and if it does, its actions will be null and void. 

For example-If a Director has been granted the power to enter into contracts up to 50 lakhs, and he eventually contracts for 70 lakhs without permission, then he is not acting within the limits of his power. He will be personally liable.

If any statute is violated then the court can lift the veil to ascertain who is liable. When a company is being wound up and it is found that the company is a defaulter under the IT Act then the company can lift the veil to see who has done the misdeed. 

Different types of Objects-

  1. Main Object
  2. Incidental/Ancillary Object
  3. Other Objects (Now stands repealed)
  4. Any other object as per the provisions of the company’s Act. Its a kind of extension of Incidental Object

DISTINCTION BETWEEN OBJECTS AND POWERS OF A COMPANY

Objects clause gives the area within which the company has to restrict its activities. It gives a negative stipulation that anything beyond that would be ultra vires. Any such activity would be null and void.

Ashbury Railway Carriage and Iron Co. v Reche (1875)
The Co. was incorporated to manufacture and sell railway carriages, etc and to act as mechanical engineers and general contractors. They entered into contract with Reche-a financing company for construction of railway line in Belgium. The company later repudiated the contract on the ground that it is beyond the scope of object. Reche took them to court on two-grounds-first, that it comes within the objects of the company and second that most shareholders had ratified the contract.
With regard to the first reason according to Reche, construction of railway line falls within the scope of general contractor, and it will fall within general construction. Court said that it will have to be seen holistically, along with mechanical engineering and ‘railway carriages, etc’. The general contractor work must be related to the mechanical engineering, and could not be any general contractor work. Hence, Reche failed. And then the second reason fell because you cannot legitimise any action which is ultra vires of the company. 

Attorney General v Great Eastern Railway Company (1880)
Ashbury was confirmed, but court over here said that the doctrine should be applied reasonably and not unreasonably. Strict application of doctrine should not result in incidental and ancillary objects being considered ultra vires . 

A Lakshmana Swami Mudaliar v LIC 1963

The directors of the co were authorised to make payments to charitable/benevolent objects or for general public useful object. Meanwhile, LIC took over the company. They made 2 lac payment to a trust after shareholders approved it. In LIC, directors could make payment only for a purpose useful for attainment of company’s object. So it was held to be ultra-vires. 

Also laid down-

  1. Company’s fund cannot be diverted to any kind of charity even if there is an unrestricted power to that effect in the memorandum. 
  2. Objects must be distinguished from powers of the company. 
  3. Powers don’t become independent object themselves. 

Lee Behrens & Co Ltd Re (1932)

What kind of grants/charity extended by company would be considered valid? Laid down 3 pertinent questions-

  1. Is the transaction reasonably incidental to carrying on of company’s business?
  2. Is it a bona-fide transaction?
  3. Is it done for the benefit and to promote the prosperity of company?

Hutton v West Cork Railway Co 1883

The directors of the company proposed to distribute the money received on sale of assets to the employees of the company who had lost their jobs. Its ultra-vires because it doesn’t promote the prosperity of the company. 

E Hannibal & Co Ltd v Frost 1988

Directors of the company proposed to give 5 hundred pounds to widow of a former director 5 years. It was held to be ultra-vires.

Main Objects Rule of Construction: shows how we are to construe the main object of a company.

German Date Coffee Co. , in Re (1882)
German company manufactured coffee from dates, and their main objects were-

  1. Obtain a german patent for manufacturing coffee from alternative sources-dates. 
  2. Obtain other patents required for manufacturing and improving the product.
  3. To acquire/purchase any other invention for the similar purpose 

Company got a Swedish patent, established a manufacturing plant in Hamburg, and started selling coffee. Case was filed because the main object was that they should sell the coffee using a german patent, and they couldn’t bypass the main object through ancillary object and use a Swedish patent instead. 

Court recognised the main objects rule of construction and said that main object cannot be set aside. 

EFFECT OF DOCTRINE OF ULTRA VIRES

Every ultra vires contract would be null and void and cannot be ratified even later on and even 3rd party cannot be allowed to take benefit from it. There are certain consequences and exceptions to ultra vires contract.

REMEDIES OF ULTRA VIRES CONTRACT
  1. Any member of the co can get an exemption to the performance of the contract
  2. Personal liability on the directors can be imposed
  3. Breach of warranty of authority – when directors are transacting on behalf of the company then they are agents of the company and cannot go beyond the authorised mandate i.e., authorised transactions and in that case they can be made personally liable. So they have to act according to the memorandum of the company.

Injunction 

Personal Liability of Directors- 

Exchange Banking Co Re (1882)

Jehangir R Modi v Shamji Ladha 1886 Bom

Breach of Warranty of Authority 

Weeks v Propert 1873

The company was authorised (under its constitution) to issue debentures the the extent of 60K Pounds. It issued advertisement inviting people to give loans on these debentures even though it has already exhausted the limit. A person gave 5K loan. The director accepted that and issued the debenture to him. This was held to be ultra-vires. The director was personally liable. 

ULTRA-VIRES ACQUIRED PROPERTY 

If the company’s money has been spent in purchasing property but the transaction is ultra-vires. In such situation, the company has a right to acquire that property. Although the transaction is ultra vires even then the company would remain the owner of the property because company’s money has been spent on it.

ULTRA VIRES CONTRACTS-VOID-AB INITIO

They will be null and void and cannot be ratified by estoppel or by ratification. They cannot be consented or assented by lapse of time or by delay or by acquiesce. Because we are not talking about the legality of the contract but about the competency of the company to contract and it is beyond the capacity of the company to contract so it cannot be ratified. This was given by Lord Justice Salmond.  Ashbury case held that such contracts are void ab initio and hence cannot be made intra-vires by-

  1. Estoppel
  2. Lapse of time
  3. Acquiescence/verification of shareholders
  4. Delay 

ULTRA-VIRES TORTS

A Company can be held liable for tortious activity even when it arises out of ultra vires contracts. This doctrine says tat you should be aware of the objects of the company while entering into business of the company. Cases of tortious liability are different from the contracts and the person need not know about the objects of the company for holding the company liable. There is no application of doctrine of ultra vires in general.

Two things to be established for making the company liable for torts-

  1. That the activity falls within the scope of the memorandum of the company
  2. The servant committed the tort within the course of within the course of the employment. 

ALTERATION OF THE OBJECT CLAUSE

The object clause is necessary to protect the interest of shareholders.

Procedure of amendment is given in S.13(8) and Rule 32 of the Company Rules. It requires-

  1. Special Resolution
  2. Notice with adequate details
    1. Advertisement on website, etc
  3. RoC approval

S.13(8)-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 and-

  1. 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; 
  2. 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 Exchange Board. 

UK doesn’t have Doctrine of UV

Canada Trust v Lloyd 

Company Liability limited by Shares S.4(1)(d)

S.4(1)(d)-The memorandum of a company shall state the liability of members of the company, whether limited or unlimited, and also state,-

  1. in the case of a company limited by shares, that liability of its members is limited to the amount unpaid, if any, on the shares held by them; and 
  2. in the case of a company limited by guarantee, the amount up to which each member undertakes to contribute— 
    1. (A) to the assets of the company in the event of its being wound-up while he is a member or within one year after he ceases to be a member, for payment of the debts and liabilities of the company or of such debts and liabilities as may have been contracted before he ceases to be a member, as the case may be; and 
    2. (B) to the costs, charges and expenses of winding-up and for adjustment of the rights of the contributories among themselves;

Company will have to make a call within on year.

Company Liability limited by guarantee

This has no shareholders but members. At the time of subscription, members give the guarantee to make the payment towards the assets of the company as and when required 

Unlimited Liability Companies,

In case of unlimited liability companies, the MOA will have to mention that the liability is unlimited. 

How to change the liability clause? 

By converting itself into a different company as provided u/s 18

S.18-Conversion of companies already registered-

  1. A company of any class registered under this Act may convert itself as a company of other class under this Act by alteration of memorandum and articles of the company in accordance with the provisions of this Chapter. 
  2. Where the conversion is required to be done under this section, the Registrar shall on an application made by the company, after satisfying himself that the provisions of this Chapter applicable for registration of companies have been complied with, close the former registration of the companyand after registering the documents referred to in sub-section (1), issue a certificate of incorporation in the same manner as its first registration. 
  3. The registration of a company under this section shall not affect any debts, liabilities, obligations or contracts incurred or entered into, by or on behalf of the company before conversion and such debts, liabilities, obligations and contracts may be enforced in the manner as if such registration had not been done. 

If a limited liability company wants to convert itself into unlimited liability company, it requires re-registration. 

ARTICLE OF ASSOCIATION (AoA)

S.2(5)–Articles means the articles of association of a company as originally framed or as altered from time to time or applied in pursuance of any previous company law or of this Act; 

AoA comes next to memorandum.

AoAs are the internal rules, regulations and by-laws that govern the relationship bw company and the members and the members inter-say. 

It is drafted by the company and members.

It provides for organisational structure of the company, 

A company may have different directors with different powers. There are three types of directors in the company-

  1. Executive Directors (whole time employment), 
  2. Independent directors (part-time employment), 
  3. Non-Executive directors (may or may not be in whole time employment)]

It provides for the allocation of power to and between different organs of the company.

It prescribes procedure for decision making. 

It provides for additional power to shareholders. Shareholders get substantive power from the Company Act. But the detailed procedure is mentioned in the AoA. 

Entrenchment Provisions–

S.5(3)–The articles may contain provisions for entrenchment to the effect that specified provisions of the articles may be altered only if conditions or procedures as that are more restrictive than those applicable in the case of a special resolution, are met or complied with. 

S.5(4)–The provisions for entrenchment referred to in sub-section (3) shall only be made either on formation of a company, or by an amendment in the articles agreed to by all the members of the company in the case of a private company and by a special resolution in the case of a public company. 

S.5(5)–Where the articles contain provisions for entrenchment, whether made on formation or by amendment, the company shall give notice to the Registrar of such provisions in such form and manner as may be prescribed. 

In order to pass an agenda, AoA may provide for super-special majority. 

If it does not have an entrenchment clause, it may alter the AoA to include the entrenchment clause. 

AoA has to be drafted from scratch, Model AoA is given in Table F (Public company with shares), G, H, I, J. 

Requirements-

  1. Forms and Sign of AoA
  2. It should be printed
  3. Divided into para
  4. Numbered consecutively
  5. Each subscribers to the MoA has to sign the document-one witness

Content-

As per the UK Company Act, AoA is most important but in India, it is the memorandum because of the Object clause.

Content should be subject to the Company Act, MoA

Johnson v Football Club Ltd

Power of shareholders to proceed against the company comes from the Company Act. Any clause/provision of AoA restricting this power is void as its against public policy.

Noble v Layette Investment ltd 1978

Clauses were contrary to UK Corporations Act and hence held void.

S.123 provides that no dividend can be paid out except out of profit.

S.123-Declaration of dividend-

  1. No dividend shall be declared or paid by a company for any financial year except-
    1. out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub-section (2), or out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with the provisions of that sub-section and remaining undistributed, or out of both; or 
    2. out of money provided by the Central Government or a State Government for the payment of dividend by the company in pursuance of a guarantee given by that Government: 

Two companies with different objects cannot merge.

Relationship b/w MoA and AoA is governed by S.6

S.6-Act to override memorandum, articles, etc

Save as otherwise expressly provided in this Act-

  1. the provisions of this Act shall have effect notwithstanding anything to the contrary contained in the memorandum or articles of a company, or in any agreement executed by it, or in any resolution passed by the company in general meeting or by its Board of Directors, whether the same be registered, executed or passed, as the case may be, before or after the commencement of this Act; and 
  2. any provision contained in the memorandum, articles, agreement or resolution shall, to the extent to which it is repugnant to the provisions of this Act, become or be void, as the case may be. 

Ashbury v Watson laid down that-

  1. AoA is subordinate to MoA. 
  2. AoA governs procedural aspect of company. Members have control over it and can change it by special resolution.
  3. MoA cannot be controlled by the members. 
  4. MoA is more fundamental document and can be altered only under some circumstances. For altering MoA, permission of shareholders, creditors, central govt is required
  5. Internal procedures provided in AoA do not exceed the power of the company laid down in the MoA. 

Allen v Cold Reefs of West Africa Ltd (1900)

In India, companies have power to amend the articles. 

S.10 provides for the binding force of MoA and AoA

S.10-Effect of memorandum and articles-

  1. Subject to the provisions of this Act, the memorandum and articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by the company and by each member, and contained covenants on its and his part to observe all the provisions of the memorandum and of the articles. 
  2. All monies payable by any member to the company under the memorandum or articles shall be a debt due from him to the company. 

No companies can be incorporated without drafting them. MoA sets relationship bw the company and outsiders while AoA sets relationship bw the company and insiders. 

1. That the company is bound to members and members are bound to company

2. Whether and to what extent the company is bound to outsiders (creditors, etc)

3. To what extent members are bound inter-say? 

Peveril Gold Mine Ltd Re 1898

Wood v Odessa Waterwork Co 1889

Barland’s Trustee v Steel Bros and Co Ltd 1901

When one of the shareholder became bankrupt-

Held that members are bound by every clause of the AoA. Contracts contained in the AoA of the company is the original intent of the company and members are bound by it.

Whether and to what extent the company is bound to outsiders (creditors, etc)

They are bound as it is mentioned in the MoA. No unlimited liability 

Two doctrines (IMP)

  1. Constructive Notice (favours the company over outsiders)
  2. Indoor Management (favours outsiders over the company)

AoA of the company does not bind the company to outsiders. 

Even a member can be outsider. (As a shareholder) He will work in dual capacity.

S.2(55)-Subscriber to MoA, shareholder

Eley v Positive Govt. Security Life Assurance Co 1876

AoA contained that plaintiff should be solicitor to the company and should not be removed unless there is misconduct by him. He was also a member. In the capacity of solicitor, he becomes an outsider. He was removed later as solicitor. In filed a case, that company violated the provisions of AoA. His petition was dismissed as he filed in the capacity of solicitor and AoA does not govern relationship bw company and outsiders.

Whether members are bound to members?

A company has members A, B, C and D. A stays in Delhi. B stays in Chennai. Per say they are not bound to each other but that is a contested issue. But if a member wants to file a case against another member for breach of his membership right, he can do so through the company. 

Rayfield v Hands 1960

Rayfield was shareholders of the company. AoA provided that shareholders can sell it to members. 

Court held that directors are members and Rayfield can enforce his right against him.

Hill Properties ltd v UBI 2014

The co allotted flat to its members on full payment. P took loan from the bank to get the flat and to get the loan he has to mortgage to flat itself. When he became defaulter, the bank took away the flat.  Irrespective of what is written in the AoA, Bank is governed by its own statute. Any statute will prevail over AoA as AoA does not have the force of the statute. 

ALTERATION OF ARTICLES

S.14-Alteration of Articles-

  1. Subject to the provisions of this Act and the conditions contained in its memorandum, if any, a company may, by a special resolution, alter its articles including alterations having the effect of conversion of— 
    1. (a) a private company into a public company; or 
    2. (b) a public company into a private company: 
    3. Provided that where a company being a private company alters its articles in such a manner that they no longer include the restrictions and limitations which are required to be included in the articles of a private company under this Act, the company shall, as from the date of such alteration, cease to be a private company: 
    4. Provided further that any alteration having the effect of conversion of a public company into a private company shall not take effect except with the approval of the Tribunal which shall make such order as it may deem fit. 
  2. Every alteration of the articles under this section and a copy of the order of the Tribunal approving the alteration as per sub-section (1) shall be filed with the Registrar, together with a printed copy of the altered articles, within a period of fifteen days in such manner as may be prescribed, who shall register the same. 
  3. Any alteration of the articles registered under sub-section (2) shall, subject to the provisions of this Act, be valid as if it were originally in the articles. 

The AoA cannot have a clause which can takeaway the right of shareholders to alter to AoA by special resolution. 

It shouldn’t be against the Act and MoA. 

Hutton v Scarborough Cliff Hotel Co Ltd 1865

A resolution was passed which altered the articles by inserting the power to issue new shares with preferential dividend. This is invalid as share capital is the domain of MoA. 

Conversion of Private Co into Public Co

Alteration to AoA can lead to conversion of Pvt co into Public Co. If that happens it would be deemed to be public co since the date of alteration certification is issued.

But to convert Public co into pvt co, approval of tribunal is required as per S.14. 

Inconsistency bw ‘Shareholders Agreement’ and AoA (IMP)

In such case, AoA will prevail. 

VB Rangaraj Case v VB Gopal Krishnan and Ors 1992 SC (IMP)

Held that  shareholder agreement if contrary to AoA will not be binding either on the company or on shareholders. 

World Phone India Pvt Ltd v WPI Group Inc USA 2013

When the affirmative rights granted to shareholders are inconsistent to AoA and AoA is silent on this issue, its an indication of inconsistency. Affirmative rights are a kind of consent, veto right that has to be exercised collectively.  

Vodafone Intl Holdings Ltd v UOI 2012

Restrictions imposed under shareholder agreement provisions although may be in compliance with other laws, but they become enforceable only when they are incorporated in the AoA

Umesh Kumar Bareja v IL&FS Transportation Network Ltd 2014 Delhi HC

Two companies Rahi and IL&FS collaborated to form an airport company and for that purpose made a SPV. As per the shareholder agreement Rahi was to make investment of 30 crore and acquire 60% stake and the ILFS was to make 20 crore investment and acquire 40% stakes. When shares were not allotted to ILFS, the matter was referred to Arbitration as per shareholder agreement. But this provision was not inserted in the AoA. Therefore they could not do arbitration.

S.10A-It provides that a company that has been incorporated after this ordinance cannot commence the business unless a declaration is filed by the director within 180 days of the incorporation that every subscriber to MoA has paid the value of the shares taken by him. This is applicable to companies having share capital (public or private)

Before this provision was inserted, companies were not required to obtain certificate of commencement of business. 

If RoC so believes, he may remove the company’s name for non-compliance. 

RELATIONSHIP B/W EMPLOYMENT CONTRACT AND AOA

If you are in the employment and your Employment Contract is based on AoA.  If AoA fixes remuneration as 1 lac. 1 year later the company alters the AoA and reduces the salary to 75K. Automatically the salary would reduce as it was based on AoA. But that would not be the case, were  the EC was independent. He could sue for breach of contract. 

Two common law doctrines-

  1. Doctrine of Constructive Notice
    1. There is presumed notice that any person entering into contract with company has read the notice
  2. Doctrine of Indoor management

CASES ON CONSTRUCTIVE NOTICE

Kotla Venkataswamy v Chinta Rama Murti Mad HC (IMP)

Plaintiff accepted mortgage deed signed only by Working Director and Secy. During the currency of the mortgage, the company sold the property to the defendant. Plaintiff sued. Court said, there was presumed notice and plaintiff should have read and signed. He is also presumed to have understood the terms in the proper meaning. That he should understand companies powers and powers of his officers. READ

All those clauses which deal with the powers of the company, constructive notice doctrine will apply to them.

In some cases it has been held to be unreal doctrine. 

In India too, this doctrine is not applicable in all cases. 

Dehradun Mussoorie Electric Tramway Co v Jagmandar Das 1932 Allahabad HC

AoA of this company provided that director could delegate all his/her powers except the power to borrow. They used to have managing agents of company who borrowed a sum of money from defendant in the form of overdraft without the approval of director. Question was of recovery of this amount. Court said that since this was a temporary loan which was taken during the operation of business so constructive notice shall not apply. 

DOCTRINE OF INDOOR MANAGEMENT

This is exactly opposite to constructive notice. In the latter company was protected against outsiders. But here outsiders are protected against the company. 

Rationale-People can know external positions of the company but they cannot be supposed to know the internal positions of the company.

Royal British Bank v Turquand 1856

Directors of a company borrowed money from plaintiff and AoA provided that directors can borrow money from time to time after due approval of shareholders in a general meeting. Bank read those articles and gave money when asked by directors. When the bank asked for repayment of loan, the company refused saying it did not pass any resolution sanctioning the loan. Bank was held entitled to recover the loan.

Exceptions to doctrine of indoor management-

Over a period of time, this doctrine has not been expanded but exceptions has been created

  1. Knowledge of irregularity
  2. Suspicion of irregularity
  3. Forgery
  4. Representation through Articles/Cases of Negligence 
  5. Act outside apparent authority 
  6. No knowledge of AoA

Knowledge of Irregularity 

That the outsider had knowledge of irregularity. 

Suspicion of irregularity

It is quite similar to knowledge of irregularity 

Forgery

Void/illegal. Absence of Consent of company. 

Ruben v Great Fingal Consolidated 1906

South London Greyhound Racecourse Ltd v Wake 1931

Representation through Articles

That a person who contracts with a director of the company knowing that the board has power to delegate its authority to this director then that person may presume that this power has been exercised. If director makes such representation, then the person should not assume that he has the delegated power but should verify it. If he fails to verify, its his negligence and he will not get the benefit of indoor management. 

X contracts with director of a company knowing that the board has power to delegate its authority to this director then X may presume that this power has been exercised. If there is no express delegation in AoA, he has to verify it.

Houghton & Co v Nothard Lowe and Wills Ltd 1927

The outsider takes a reasoned decision after reading the AoA. 

If delegation clause is expressly mentioned, he can act on it but if there is unusual condition, he should verify the delegation. 

Anything ultra-vires of authority of director is voidable at the instance of shareholders. 

Act outside Apparent Authority 

An outsider accepted the property of the company given to him by the company’s accountant. It was outside the apparent authority of accountant. Such power rests with board of directors.

Anand Bihari lal v Dinshaw & Co (1942)

This person received the property of the company by the accountant and it was held 

No knowledge of AoA

Ignorance of Law is not an excuse/bliss. AoA is a public document available on company’s website and at office.

PRE-INCORPORATION CONTRACTS 

Are the valid? To what extent?

Validity 

  1. The period before 1963
    1. The settled rule was that a company comes into existence after incorporation.
    2. Before incorporation, its not a person and therefore cannot enter into contract. 
    3. Common Law Rule
    4. Keler v Baxter 1866
      1. Held that in order to enter into contract, two or more legal entities are required and a company in its pre-incorporation stage is not a legal entity.
    5. Shares cannot be acquired/issued before incorporation
    6. It has no taxable income before incorporation
    7. AP Tourism Development Corp v Pumpa Hotel Ltd 2010
      1. An Arb Agreement was held to be invalid as it was entered into when the company with which it was made was non-existent. 
    8. Two principles-
      1. It cannot sue before incorporation 
      2. It cannot be sued before incorporation

Natal Land and Colonisation Co v Pauline Colliery Syndicate  1904

A company cannot avail the benefit of contract in its pre-incorporation phase by any means.

Period after 1963 (Specific Relief Act came into being)-

S.15(h)-Where a promotor enters into a contract before incorporation for the purpose of company and if the contract is warranted by terms of incorporation, the company may adopt and enforce the contract.

S.19(e)-It allows the outsiders to enforce the contract against the company in two situations-

  1. If the company had adopted it after its incorporation.
  2. The contract is within the scope of the terms of incorporation

If that (relief) is not granted, the remedy- 

Whether there is a personal liability of contracting agent?

General Principle – Where the contract is made and both parties know that the company is a non-entity before incorporation, the promoter can be made personally liable. 

But if he drafts the contract in such way mentioning that he is merely the agent if the non-existing company, it can save him from personal liability. But this is not an absolute remedy. 

Kelner v Baxter 1860

P intended to sell wine to a company yet to be formed. He agreed to sell it to the proposed directors. They intended to buy the wine on behalf of the company but because company was non-existent, they personally took the delivery by putting their signatures. Had the company been in existence, it would have accepted the delivery by stamping its seal. Later they were held personally liable because they signed on delivery. 

Newborne v Sensolid (Great Britain Ltd) 1954

P was a promoter and a prospective director of a limited company yet to come into existence (Leopold Newborne London Ltd) This company was to supply some goods to D. In the contract it the name of the prospective company Leopold Newborne London Ltd was mentioned and below it was the signature of the P. 

It was held that contract was made not with the plaintiff but with the company. Therefore the plaintiff cannot claim relief.  

FORMATION OF COMPANIES

S.3-Formation of a Company-

  1. A company may be formed for any lawful purpose by— 
    1. (a) seven or more persons, where the company to be formed is to be a public company; 
    2. (b) two or more persons, where the company to be formed is to be a private company; or 
    3. (c) one person, where the company to be formed is to be One Person Company that is to say, a private company, by subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration: 
      1. Provided that the memorandum of One Person Company shall indicate the name of the other person, with his prior written consent in the prescribed form, who shall, in the event of the subscriber‘s death or his incapacity to contract become the member of the company and the written consent of such person shall also be filed with the Registrar at the time of incorporation of the One Person Company along with its memorandum and articles: 
      2. Provided further that such other person may withdraw his consent in such manner as may be prescribed: 
      3. Provided also that the member of One Person Company may at any time change the name of such other person by giving notice in such manner as may be prescribed: 
      4. Provided also that it shall be the duty of the member of One Person Company to intimate the company the change, if any, in the name of the other person nominated by him by indicating in the memorandum or otherwise within such time and in such manner as may be prescribed, and the company shall intimate the Registrar any such change within such time and in such manner as may be prescribed: 
      5. Provided also that any such change in the name of the person shall not be deemed to be an alteration of the memorandum. 
  2. A company formed under sub-section (1) may be either— 
    1. (a) a company limited by shares; or
    2. (b) a company limited by guarantee; or
    3. (c) an unlimited company. 

KIND OF COMPANIES

UNLIMITED LIABILITY COMPANIES

  1. Both public and private companies can be unlimited liability companies
  2. There is no limit on liability of members of company-
  3. These sections are not applicable in case of unlimited companies-
    1. S.66-provides that reduction of share capital cannot be done without approval of tribunal
    2. S.67-Restriction on purchase by company or giving of loans by it for purchase of its shares 
  4. Can this company register as limited liability company? 
    1. Yes by altering its MoA and AoA, S.18
    2. But debt, liabilities, obligations and contracts will remain same. 

LIMITED LIABILITY COMPANIES

  1. They are of two types-
    1. Company limited by shares
    2. Company limited by guarantee
  2. Company limited by guarantee
    1. MoA will have to state the no of members and the amount they have guaranteed.
    2. As far as S.66 and S.67 are concerned, the latter is not applicable. S.66 will apply. 
    3. A limited co which does not have share capital, can it give right to outsiders to have shares in the divisible profit (by resolution, etc) ?
      1. No. S.4 prohibits that. Outsiders don’t have any right in divisible profit. 
    4. Can we transfer the membership of a guaranteed company?
      1. Yes. But court will see whether it is in the interest of the company if the so reaches it. Otherwise the board will decide.

Narendra Kr Agarwal v Saroj Maloo 1995

The co was running a stock exchange through membership. There was contest on the manner of transfer of membership. Court said that the criteria and procedure cannot be same as in case of transfer of membership. 

PRIVATE COMPANY

S.2(68)-Private company means a company having a minimum paid-up share capital as may be prescribed, and which by its articles,

  1. restricts the right to transfer its shares;
  2. except in case of One Person Company, limits the number of its members to 200: 
    1. Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member: Provided further that-
      1. persons who are in the employment of the company; and 
      2. persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and
  3. prohibits any invitation to the public to subscribe for any securities of the company; 
  1. S.3(1)(b)-A company may be formed for any lawful purpose by two or more persons, where the company to be formed is to be a private company by subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration.
  2. There is no limit on shares-
  3. Transferability of shares-
  4. Restriction on no of members–
    1. Max-200 members. 
  5. Prohibition on issuance of Prospectus 
    1. A pvt co cannot go for public issue 
  6. Benefits of private company–
    1. Since no prospectus, no worry about minimum subscriptions (in public co, 90% of issues issued subscriptions)
    2. Only 2 directors (can be permanent) 
    3. No control on amount of remuneration of directors
    4. Disclosure of interests- 

Conversion of Pvt Company to Public Company 

Two ways-

  1. Conversion by Default-
    1. Companies get 6 months to fix their non-compliance otherwise they will be delisted. 
  2. Conversion by Choice-
    1. S.14 procedure
    2. Pass a special resolution
    3. Delete the restriction from AOA (S.2(68)

Sahaara Company Case

They were a private company but issued shares to millions of people. 

Can a private co be incorporated by 2 members, one of them being a preference shareholder?

No, Because Preference Shareholders don’t have voting rights.

Preference Shareholders don’t have voting rights or other equity rights but get preference on company’s winding up. Their dividend is fix.

Bradford Investment Pvt Ltd 1990

PUBLIC COMPANY

S.2(71)-Public company means a company which-

  1. is not a private company;
  2. has a minimum paid-up share capital as may be prescribed: 

Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles; 

S.3(1)(a)-A company may be formed for any lawful purpose by seven or more persons, where the company to be formed is to be a public company by subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration.

Earlier there was a requirement of minimum share capital of 5 lac

  1. No restriction on transferability of shares
  2. No restriction on transferability of shares
  3. Invites public to see prospectus

Company X is a pvt subsidiary co of Y-a public company. For purposes of the Co Act, X is deemed to be a public co but can be a pvt co in its AoA. 

ONE PERSON COMPANY 

S.2(62)-One Person Company means a company which has only one person as a member;

S.3(1)(c)-A company may be formed for any lawful purpose by one person, where the company to be formed is to be One Person Company that is to say, a private company, by subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration: 

  1. Provided that the memorandum of One Person Company shall indicate the name of the other person, with his prior written consent in the prescribed form, who shall, in the event of the subscriber‘s death or his incapacity to contract become the member of the company and the written consent of such person shall also be filed with the Registrar at the time of incorporation of the One Person Company along with its memorandum and articles: 
  2. Provided further that such other person may withdraw his consent in such manner as may be prescribed: 
  3. Provided also that the member of One Person Company may at any time change the name of such other person by giving notice in such manner as may be prescribed: 
  4. Provided also that it shall be the duty of the member of One Person Company to intimate the company the change, if any, in the name of the other person nominated by him by indicating in the memorandum or otherwise within such time and in such manner as may be prescribed, and the company shall intimate the Registrar any such change within such time and in such manner as may be prescribed: 
  5. Provided also that any such change in the name of the person shall not be deemed to be an alteration of the memorandum. 

Process of incorporation of a OPC-

  1. By subscribing names to the MoA in the prescribed manner and by complying the requirements of the act wrt registration.
    1. Name of the nominee-with his prior written consent 
    2. He can withdraw his consent by giving 30 days notice 
    3. OPC member can change the nominee at any time
    4. Nominee should be natural person, India citizen
    5. Body corporate cannot form OPC

S.193-Contracts by OPC

  1. Where One Person Company limited by shares or by guarantee enters into a contract with the sole member of the company who is also the director of the company, the company shall, unless the contract is in writing, ensure that the terms of the contract or offer are contained in a memorandum or are recorded in the minutes of the first meeting of the Board of Directors of the company held next after entering into contract: 
    1. Provided that nothing in this sub-section shall apply to contracts entered into by the company in the ordinary course of its business. 
  2. The company shall inform the Registrar about every contract entered into by the company and recorded in the minutes of the meeting of its Board of Directors under sub-section (1) within a period of fifteen days of the date of approval by the Board of Directors. 

Rationale of this section-To distinguish it from the situation that arose in Solomon v Solomon 

Process-

  1. Obtain Director identification number (DIN)
  2. Name of the company
  3. Get the consent of the nominee
  4. File the consent doc, MoA, AoA and other docs with RoC
  5. Obtain certificate of incorporation 

An OPC cannot be converted into Public co and S.8 company (non for profit associations). 

But it can be converted to pvt co by adding suffix pvt ltd. 

SMALL COMPANY

 S.2(85)-Small company means a company, other than a public company,—

  1. paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may  be prescribed which shall not be more than five crore rupees; or 
  2. turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees: 
    1. Provided that nothing in this clause shall apply to-
      (A) a holding company or a subsidiary company;
      (B) a company registered under section 8; or
      (C) a company or body corporate governed by any special Act      ; 

A co other than a public co. whose paid up capital does not exceed 50 lac at a time or such higher amount as prescribed by the govt not exceeding 10 crore. Whose turnover of immediate preceding year does not exceed 2 crore or higher amount as prescribed by the govt not exceeding 100 crore.

HOLDING COMPANY (HC)

2(46)-Holding company, in relation to one or more other companies, means a company of which such companies are subsidiary companies; 

HC is a parent co of subsidiary companies. 

SUBSIDIARY COMPANIES 

S.2(87)-Subsidiary company or subsidiary,in relation to any other company (that is to say the holding company), means a company in which the holding company-

  1. controls the composition of the Board of Directors; or
  2. exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies: 
    1. Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed. 
    2. Explanation-For the purposes of this clause,
      1. (a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company; 
      2. (b) the composition of a company‘s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors; 
      3. (c) the expression ‘company’ includes any body corporate; 
      4. (d) layer in relation to a holding company means its subsidiary or subsidiaries; 

This is a company where the Holding Company (HC) controls the composition of board of directors Subsidiary Companies. Ability to appoint or remove BoD.

Where HC controls more than one half of total voting power of SC either at its own or together with one or more subsidiary companies. 

Control S.2(27) shall include-

  1. Right to appoint majority of directors 
  2. Right to control the management of the SC or policy decisions exercisable by a person either individually or in concert, either directly or indirectly
  3. By virtue of their shareholdings or management rights or shareholder agreements or voting agreements or in any other manner. 

Total Voting Power

S2(89)-Total voting power, in relation to any matter, means the total number of votes which may be cast in regard to that matter on a poll at a meeting of a company if all the members thereof or their proxies having a right to vote on that matter are present at the meeting and cast their votes; 

ASSOCIATE COMPANY 

2(6)-Associate company, in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company. 

Explanation-For the purposes of this clause, significant influence‖ means control of at least twenty per cent. of total share capital, or of business decisions under an agreement; 

This is a new category of company introduced by the 2013 Act

One company A in relation to other company B can be associate company B if-

  1. Company ‘A’ has significant influence on B
  2. It is not a subsidiary co. 
  3. Includes joint venture companies

Significant Influence-at least 20% voting power or control of or participation in business decision under an agreement. 

JV means a joint agreement where the parties that have joint control over the arrangement that their rights over the net assets of the arrangement. Such JVs are known as associate of each other. 

Co ‘A’ and B jointly formed co C. ‘A’ and B would be associate co of co C. 

GOVERNMENT COMPANIES 

S.2(45)–Government company‖ means any company in which not less than fifty-one per cent. 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, and includes a company which is a subsidiary company of such a Government company; 

Companies where govt holds not less than 51% either individually by state govt or central govt or by both. 

Its legal status is same as any other co. This was held in numerous cases-

Heavy Engineering Mazdoor Co

In Re River Steam Navigation 

AP State Road Transport Corp v ITO

It was held that no common assumption that its state.

That its State under Art 12 of constitution is no absolute rule.

Only in certain cases they can be considered instrumentalists of state

RD Shetty v IAAI 1979

If the functions of the corporation are of public importance and closely related to governmental functions, it would be a relevant factor in classifying the corporation as an instrumentality or agency of govt.

Ajay Hasia v Khalid Mohammad Majeed 1981

6 indicative factors-

  1. Whether the entire capital is owned by State
  2. So much financial assistance by State
  3. Whether State confers or protects the monopoly state of the entity
  4. Whether “Deep and pervasive control” over management
    1. Govt appoints majority of stakeholders 
  5. Whether Performs Important public function
  6. Earlier it would be done by State department but later transferred to this entity.

Mysore Paper Mills Ltd v Mysore Paper Mills Officers Association 2002

Corporate veil can be lifted to determine the ‘TRUE NATURE’ of the company

MOA is checked to determine the object. 

Govt co cannot seek privilege or claim any exemption from tax. 

Balco Employees Union v Union of India 2002

Yes, Balco was a corporation and has power to sell its share. If it changes its character from State to Private entity, it can do so.

Centre for PIL v UOI 2003

Whether govt co can shell its shares?

Yes, but if wants to continue functioning as govt co, it will have to retain at least 51% shares. 

Public Sector Undertakings

They are generally govt owned enterprises. They generally come into being by statute. In Foreign countries they are known as ‘State owned enterprises’ SOEs 

Difference between Co and Corporation-A co when incorporated by an act or parliament or statute, it is corporations. 

FOREIGN COMPANIES 

2(42)-Foreign company means any company or body corporate incorporated outside India which-

  1. has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
  2. conducts any business activity in India in any other manner. 

A foreign co is any co or body corporate incorporated outside India which has a place of business in India whether by itself or through agent, either physically or through electronic mode and it conducts any business activity in India in any other manner. 

Place of business-includes having share transfer office

Companies registration of Foreign co Rules 2014

Defines-

Electronic mode-

  1. All B2B, B2C transaction and data interchange and other digital supply transaction
  2. Offering to accept deposits or invite deposits or subscriptions in India or citizens of India through IDR (Indian Depository Regime)
  3. If there are financial settlements or web based marketing or advisory and transactional services, data base services, products and supply chain managements. 
  4. Online services through telemarketing, telecommunication, etc
  5. All related data communication services. 
S.8 COMPANIES

They are non for profit associations.

Central govt has power to grant or licence to those person or association of person who intends to form S.8 companies.

They are formed by obtaining a licence from govt (RoC on MCA Website)

Main constituents-

  1. That such a co has as its object the promotion of art, culture, sports, science, education, religion, etc.
  2. It intends to apply its profit or other income to promote its objects. 
  3. It prohibits to payment of dividend to members.

Govt can also revoke the licence 

Benefits-

  1. Filing of annual returns but it will not be taxable. Format is different

S.8-Formulation of companies with charitable objects, etc.— 

  1. Where it is proved to the satisfaction of the Central Government that a person or an association of persons proposed to be registered under this Act as a limited company— 
    1. (a) has in its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object; 
    2. (b) intends to apply its profits, if any, or other income in promoting its objects; and 
    3. (c) intends to prohibit the payment of any dividend to its members, 
    4. the Central Government may, by licence issued in such manner as may be prescribed, and on such conditions as it deems fit, allow that person or association of persons to be registered as a limited company under this section without the addition to its name of the word ―Limited‖, or as the case may be, the words ―Private Limited‖ , and thereupon the Registrar shall, on application, in the prescribed form, register such person or association of persons as a company under this section. 
  2. The company registered under this section shall enjoy all the privileges and be subject to all the obligations of limited companies. 
  3. A firm may be a member of the company registered under this section.
  4. (i) A company registered under this section shall not alter the provisions of its memorandum or articles except with the previous approval of the Central Government. 
    1. (ii) A company registered under this section may convert itself into company of any other kind only after complying with such conditions as may be prescribed. 
  5. Where it is proved to the satisfaction of the Central Government that a limited company registered under this Act or under any previous company law has been formed with any of the objects specified in clause (a) of sub-section (1) and with the restrictions and prohibitions as mentioned respectively in clauses (b) and (c) of that sub-section, it may, by licence, allow the company to be registered under this section subject to such conditions as the Central Government deems fit and to change its name by omitting the word ―Limited‖, or as the case may be, the words ―Private Limited‖ from its name and thereupon the Registrar shall, on application, in the prescribed form, register such company under this section and all the provisions of this section shall apply to that company. 
  6. The Central Government may, by order, revoke the licence granted to a company registered under this section if the company contravenes any of the requirements of this section or any of the conditions subject to which a licence is issued or the affairs of the company are conducted fraudulently or in a manner violative of the objects of the company or prejudicial to public interest, and without prejudice to any other action against the company under this Act, direct the company to convert its status and change its name to add the word ―Limited or the words ―Private Limited, as the case may be, to its name and thereupon the Registrar shall, without prejudice to any action that may be taken under sub-section (7), on application, in the prescribed form, register the company accordingly:
    1. Provided that no such order shall be made unless the company is given a reasonable opportunity of being heard: 
    2. Provided further that a copy of every such order shall be given to the Registrar. 
  7. Where a licence is revoked under sub-section (6), the Central Government may, by order, if it is satisfied that it is essential in the public interest, direct that the company be wound up under this Act or amalgamated with another company registered under this section: 
    1. Provided that no such order shall be made unless the company is given a reasonable opportunity of being heard. 
  8. Where a licence is revoked under sub-section (6) and where the Central Government is satisfied that it is essential in the public interest that the company registered under this section should be amalgamated with another company registered under this section and having similar objects, then, notwithstanding anything to the contrary contained in this Act, the Central Government may, by order, provide for such amalgamation to form a single company with such constitution, properties, powers, rights, interest, authorities and privileges and with such liabilities, duties and obligations as may be specified in the order. 
  9. If on the winding up or dissolution of a company registered under this section, there remains, after the satisfaction of its debts and liabilities, any asset, they may be transferred to another company registered under this section and having similar objects, subject to such conditions as the Tribunal may impose, or may be sold and proceeds thereof credited to the Rehabilitation and Insolvency Fund formed under section 269. 
  10. (10)A company registered under this section shall amalgamate only with another company registered under this section and having similar objects. 
  11. (11)If a company makes any default in complying with any of the requirements laid down in this section, the company shall, without prejudice to any other action under the provisions of this section, be punishable with fine which shall not be less than ten lakh rupees but which may extend to one crore rupees and the directors and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than twenty- five thousand rupees but which may extend to twenty-five lakh rupees, or with both: 
    1. Provided that when it is proved that the affairs of the company were conducted fraudulently, every officer in default shall be liable for action under section 447.

PROMOTERS S.2(69)

S.2(69)-Promoter means a person

  1. who has been named as such in a prospectus or is identified by the company in the annual  return referred to in section 92; or 
  2. who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or 
  3. in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act: 

Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity; 

Who are promoters?

1956 act did not define the term promoter but the act fixed liability on them many times.

A judge said that its a term of business.

Promoter is a person who incorporates a co, make arrangements, provides funds. 

A person doing this work in his professional capacity will not be a promotor (ie co secy) 

But in 2009, SEBI regulations defined promoter for the first time-

2013 Act for the first time under S.2(69)-promoter means a person—

  1. who has been named as such in a prospectus or is identified by the company in the annual  return referred to in section 92; or 
  2. who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or 
  3. in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act: 
  4. Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity; 

Whether promoter is involved only at the incorporation of the co?

No, Clause b says-who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; 

Duties and Liabilities of a Promotor-

He has a fiduciary position. 

Erlanger v New Sombrero Phosphates 1878

Erlanger purchased an island which had phosphate mines for 55K Pounds. He incorporated a co to work as a mining company. He arranged all members of the co. He had 5 directors all named by him. 2 were totally under the control of Erlanger. When the co was incorporated, a resolution was passed to acquire the island from Erlanger. 2 directors were abroad and out of remaining 3, 2 were under the control of Erlanger. Acquisition was for 1 lac 10K Pounds. The co then issued prospectus and many people took shares and co came to have sufficient funds to purchase the island. But the co proved to be unsuccessful. It turned to liquidation. At the time of liquidation, the liquidator sued Erlanger. Erlanger said that the board had knowledge of what happened. Question was whether the board was independent? No and in such case where the director are not independent, disclosure should be made to the shareholders. His dealing with the co has to fair and open. He must disclose his position in the co, his profit in the deal and also his interest in the property.

Some other Sections where the promoters can be held liable-

S.26 (now repealed)

S.35-Compensation for mis-statement

S.300-Power to order examination of promoters, directors, etc. 

CHAPTER III: PROSPECTUS AND ALLOTMENT OF SECURITIES


S.23-Public offer and private placement- 

  1. A public company may issue securities—
    1. to public through prospectus (herein referred to as “public offer”) by complying with the  provisions of this Part; or 
    2. through private placement by complying with the provisions of Part II of this Chapter; or 
    3. through a rights issue or a bonus issue in accordance with the provisions of this Act and in case of a listed company or a company which intends to get its securities listed also with the provisions of the Securities and Exchange Board of India Act, 1992 (15 of 1992) and the rules and regulations made thereunder. 
  2. A private company may issue securities—
    (a) by way of rights issue or bonus issue in accordance with the provisions of this Act; or (b) through private placement by complying with the provisions of Part II of this Chapter. 
  3. Explanation-For the purposes of this Chapter, “Public Offer” includes ‘initial public offer’ or ‘further public offer’ of securities to the public by a company, or an offer for sale of securities to the public by an existing shareholder, through issue of a prospectus. 

Explanation–

A public co may issue securities to public through-

  1. Prospectus and this is known as public offer
  2. Private Placements (select group of persons)
  3. Through rights issues (existing shareholders under their rights)
  4. Through Bonus issues (surplus in profits of company)
    1. This is beneficial for taxation purposes otherwise the surplus will be taxable

Eg-A co has profit of 100 crore and capital of 1K crore. It needs 10 crore. It has two options to raise this capital-by issuing shares or taking debt. Both takes time. So it can convert its profit surplus into shares by bonus issues where shareholders will not have to pay for the shares. This is known as capitalisation of profit. 

Private co may issue securities to public through-

  1. Private Placements (select group of persons)
  2. Through Rights issues (existing shareholders under their rights)

Public Offer-

Initial Public Offer (IPO)-A public after being listed. Its first public offer will be known as IPO

Further Public Offer (FPO)-further issue of shares. Subsequent public offers are known as FPO

Offer for Sale (OFS)-The existing SHOs, if they have extra shares, they can offer it to public. It is known as sale of existing shares of shareholders to public. 

S.24-Power of Securities and Exchange Board to regulate issue and transfer of securities, etc-

(1) The provisions contained in this Chapter, Chapter IV and in section 127 shall,— 

  1. in so far as they relate to-
    1. issue and transfer of securities; and 
    2. non-payment of dividend, by listed companies or those companies which intend to get their securities listed on any recognised stock exchange in India, except as provided under this Act, be administered by the SEBI by making regulations in this behalf; 
  2. in any other case, be administered by the Central Government. 
  3. Explanation-For the removal of doubts, it is hereby declared that all powers relating to all other matters relating to prospectus, return of allotment, redemption of preference shares and any other matter specifically provided in this Act, shall be exercised by the Central Government, the Tribunal or the Registrar, as the case may be. 
  4. The Securities and Exchange Board shall, in respect of matters specified in subsection (1) and the matters delegated to it under proviso to sub-section (1) of section 458, exercise the powers conferred upon it under sub-sections (1), (2A), (3) and (4) of section 11, sections 11A, 11B and 11D of the Securities and Exchange Board of India Act, 1992 (15 of 1992). 

S.24 gives power to SEBI to deal with certain securities-

Administered by Central Government-RoC, RD, NCLT

Prospectus S.2(70)

When co wants to go for public offer, it has to prepare a doc known as prospectus or offer document. 

S.2(70)-Prospectus means any document described or issued as a prospectus and includes a red herring prospectus referred to in section 32 or shelf prospectus referred to in section 31 or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of body corporate; 

Types of Prospectus

  1. Abridged Prospectus-
  2. Red Herring Prospectus-
  3. Shelf Prospectus-  

You subscribe to Shares and Purchase debentures.

ABRIDGED PROSPECTUS

S.2(1)-Abridged prospectus means a memorandum containing such salient features of a prospectus as may be specified by the Securities and Exchange Board by making regulations in this behalf; 

It is a memorandum that contains salient features of Prospectus as prescribed by SEBI is known as Abridged Prospectus. S.21 talks about this. 

S.26 talks about contents of Prospectus 

S.26 Matters to be stated in prospectus-IMP

  1. 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-
    1. (a) state the following information, namely:— 
      1. (i) names and addresses of the registered office of the company, company secretary, Chief Financial Officer, auditors, legal advisers, bankers, trustees, if any, underwriters and such other persons as may be prescribed; 
      2. (ii) dates of the opening and closing of the issue, and declaration about the issue of allotment letters and refunds within the prescribed time; 
      3. (iii) a statement by the Board of Directors about the separate bank account where all monies received out of the issue are to be transferred and disclosure of details of all monies including utilised and unutilised monies out of the previous issue in the prescribed manner; 
      4. (iv) details about underwriting of the issue;
      5. (v) consent of the directors, auditors, bankers to the issue, expert‘s opinion, if any, and of such other persons, as may be prescribed; 
      6. (vi) the authority for the issue and the details of the resolution passed therefor; 
      7. (vii) procedure and time schedule for allotment and issue of securities; 
      8. (viii) capital structure of the company in the prescribed manner; 
      9. (ix) main objects of public offer, terms of the present issue and such other particulars as may be prescribed; 
      10. (10)(x) main objects and present business of the company and its location, schedule of implementation of the project; 
      11. (xi) particulars relating to—
        1. (A) management perception of risk factors specific to the project; (B) gestation period of the project;
        2. (C) extent of progress made in the project;
        3. (D) deadlines for completion of the project; and 
        4. (E) any litigation or legal action pending or taken by a Government Department or a statutory body during the last five years immediately preceding the year of the issue of prospectus against the promoter of the company; 
      12. (12)(xii) minimum subscription, amount payable by way of premium, issue of shares otherwise than on cash; 
      13. (13)(xiii) details of directors including their appointments and remuneration, and such particulars of the nature and extent of their interests in the company as may be prescribed; and 
      14. (14)(xiv) disclosures in such manner as may be prescribed about sources of promoter‘s contribution; 
    2. (b) set out the following reports for the purposes of the financial information, namely:—
      1. (i) reports by the auditors of the company with respect to its profits and losses and assets and liabilities and such other matters as may be prescribed; 
      2. (ii) reports relating to profits and losses for each of the five financial years immediately preceding the financial year of the issue of prospectus including such reports of its subsidiaries and in such manner as may be prescribed: 
        1. Provided that in case of a company with respect to which a period of five years has not elapsed from the date of incorporation, the prospectus shall set out in such manner as may be prescribed, the reports relating to profits and losses for each of the financial years immediately preceding the financial year of the issue of prospectus including such reports of its subsidiaries; 
      3. (iii) reports made in the prescribed manner by the auditors upon the profits and losses of the business of the company for each of the five financial years immediately preceding issue and assets and liabilities of its business on the last date to which the accounts of the business were made up, being a date not more than one hundred and eighty days before the issue of the prospectus: 
        1. Provided that in case of a company with respect to which a period of five years has not elapsed from the date of incorporation, the prospectus shall set out in the prescribed manner, the reports made by the auditors upon the profits and losses of the business of the company for all financial years from the date of its incorporation, and assets and liabilities of its business on the last date before the issue of prospectus; and 
      4. (iv) reports about the business or transaction to which the proceeds of the securities are to be applied directly or indirectly; 
    3. (c) make a declaration about the compliance of the provisions of this Act and a statement to the effect that nothing in the prospectus is contrary to the provisions of this Act, the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and the Securities and Exchange Board of India Act, 1992 (15 of 1992) and the rules and regulations made thereunder; and 
    4. (d) State such other matters and set out such other reports, as may be prescribed. 
  2. (2) Nothing in sub-section (1) shall apply— 
    1. (a) to the issue to existing members or debenture-holders of a company, of a prospectus or form of application relating to shares in or debentures of the company, whether an applicant has a right to renounce the shares or not under sub-clause (ii) of clause (a) of sub-section (1) of section 62 in favour of any other person; or 
    2. (b) To the issue of a prospectus or form of application relating to shares or debentures which are, or are to be, in all respects uniform with shares or debentures previously issued and for the time being dealt in or quoted on a recognised stock exchange. 
  3. (3) Subject to sub-section (2), the provisions of sub-section (1) shall apply to a prospectus or a form of application, whether issued on or with reference to the formation of a company or subsequently. 
    1. Explanation-The date indicated in the prospectus shall be deemed to be the date of its publication. 
  4. (4) 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 authorised attorney. 
  5. (5) A prospectus issued under sub-section (1) shall not include a statement purporting to be made by an expert unless the expert is a person who is not, and has not been, engaged or interested in the formation or promotion or management, of the company and has given his written consent to the issue of the prospectus and has not withdrawn such consent before the delivery of a copy of the prospectus to the Registrar for registration and a statement to that effect shall be included in the prospectus. 
  6. (6) Every prospectus issued under sub-section (1) shall, on the face of it,—
    1. (a) state that a copy has been delivered for registration to the Registrar as required under sub-section (4); and
    2. (b) Specify any documents required by this section to be attached to the copy so delivered or refer to statements included in the prospectus which specify these documents.
  7. (7) The Registrar shall not register a prospectus unless the requirements of this section with respect to its registration are complied with and the prospectus is accompanied by the consent in writing of all the persons named in the prospectus. 
  8. (8) No prospectus shall be valid if it is issued more than ninety days after the date on which a copy thereof is delivered to the Registrar under sub-section (4). 
  9. (9) If a prospectus is issued in contravention of the provisions of this section, the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to three lakh rupees and every person who is knowingly a party to the issue of such prospectus shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to three lakh rupees, or with both. 

1956 act gave a list which had to be mentioned in the prospectus. 

But present section says- 

  1. 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 state the information, as directed by SEBI. 
  2. Nothing in sub-section (1) shall apply— 
    1. (a) to the issue to existing members or debenture-holders of a company, of a prospectus or form of application relating to shares in or debentures of the company, whether an applicant has a right to renounce the shares or not under sub-clause (ii) of clause (a) of sub-section (1) of section 62 in favour of any other person; or 
      1. S.62 gives right to existing shareholders, the right to first offer. They can accept or renounce this offer. In such cases sub-section 1 of S.26 is not applicable. 
    2. (b) to the issue of a prospectus or form of application relating to shares or debentures which are, or are to be, in all respects uniform with shares or debentures previously issued and for the time being dealt in or quoted on a recognised stock exchange.
  3. Subject to sub-section (2), the provisions of sub-section (1) shall apply to a prospectus or a form of application, whether issued on or with reference to the formation of a company or subsequently.
    1. Explanation-The date indicated in the prospectus shall be deemed to be the date of its publication.
  4. 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 authorised attorney. 
  5. A prospectus issued under sub-section (1) shall not include a statement purporting to be made by an expert unless the expert is a person who is not, and has not been, engaged or interested in the formation or promotion or management, of the company and has given his written consent to the issue of the prospectus and has not withdrawn such consent before the delivery of a copy of the prospectus to the Registrar for registration and a statement to that effect shall be included in the prospectus.
  6. Every prospectus issued under sub-section (1) shall, on the face of it,—
    1. state that a copy has been delivered for registration to the Registrar as required under sub-section (4); and
    2. Specify any documents required by this section to be attached to the copy so delivered or refer to statements included in the prospectus which specify these documents.
  7. The Registrar shall not register a prospectus unless the requirements of this section with respect to its registration are complied with and the prospectus is accompanied by the consent in writing of all the persons named in the prospectus. 
  8. No prospectus shall be valid if it is issued more than ninety days after the date on which a copy thereof is delivered to the Registrar under sub-section (4). 
  9. If a prospectus is issued in contravention of the provisions of this section, the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to three lakh rupees and every person who is knowingly a party to the issue of such prospectus shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to three lakh rupees, or with both.

P has to be filed with RoC and should contain consent in writing of all persons who are named as directors, promoters, etc has to be given.

Within 90 days of submission, the company has to come up with public issue. 

S.25 Document containing offer of securities for sale to be deemed prospectus.— 

  1. 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, any document by which the offer for sale to the public is made shall, for all purposes, be deemed to be a prospectus issued by the company; and all enactments and rules of law as to the contents of prospectus and as to liability in respect of mis-statements, in and omissions from, prospectus, or otherwise relating to prospectus, shall apply with the modifications specified in subsections (3) and (4) and shall have effect accordingly, as if the securities had been offered to the public for subscription and as if persons accepting the offer in respect of any securities were subscribers for those securities, but without prejudice to the liability, if any, of the persons by whom the offer is made in respect of mis-statements contained in the document or otherwise in respect thereof. 
  2. For the purposes of this Act, it shall, unless the contrary is proved, be evidence that an allotment of, or an agreement to allot, securities was made with a view to the securities being offered for sale to the public if it is shown— 
    1. that an offer of the securities or of any of them for sale to the public was made within six months after the allotment or agreement to allot; or 
    2. that at the date when the offer was made, the whole consideration to be received by the company in respect of the securities had not been received by it. 
  3. Section 26 as applied by this section shall have effect as if —
    1. it required a prospectus to state in addition to the matters required by that section to be stated in a prospectus— 
      1. the net amount of the consideration received or to be received by the company in respect of the securities to which the offer relates; and 
      2. the time and place at which the contract where under the said securities have been or are to be allotted may be inspected; 
    2. the persons making the offer were persons named in a prospectus as directors of a company. 
  4. Where a person making an offer to which this section relates is a company or a firm, it shall be sufficient if the document referred to in sub-section (1) is signed on behalf of the company or firm by two directors of the company or by not less than one-half of the partners in the firm, as the case may be. 

S.27 talks about variation in terms of contracts or objects in prospectus

S.27-Variation in terms of contract or objects in prospectus-

  1. A company shall not, at any time, vary the terms of a contract referred to in the prospectus or objects for which the prospectus was issued, except subject to the approval of, or except subject to an authority given by the company in general meeting by way of special resolution: 
    1. Provided that the details, as may be prescribed, of the notice in respect of such resolution to shareholders, shall also be published in the newspapers (one in English and one in vernacular language) in the city where the registered office of the company is situated indicating clearly the justification for such variation: 
    2. Provided further that such company shall not use any amount raised by it through prospectus for buying, trading or otherwise dealing in equity shares of any other listed company. 
  2. The dissenting shareholders being those shareholders who have not agreed to the proposal to vary the terms of contracts or objects referred to in the prospectus, shall be given an exit offer by promoters or controlling shareholders at such exit price, and in such manner and conditions as may be specified by the Securities and Exchange Board by making regulations in this behalf. 

Eg-A company issued P for raising funds for setting up a Mill. A company has to enter into a lot of contracts. Can co change those contracts?

S.27 says that no variation allowed except by approval of the company in general meeting by special resolution or by designated authority by special resolution. All that should also be published in the newspapers in two languages-english and local.

S.28-Offer of sale of shares by certain members of company-

  1. Where certain members of a company propose, in consultation with the Board of Directors to offer, in accordance with the provisions of any law for the time being in force, whole or part of their holding of shares to the public, they may do so in accordance with such procedure as may be prescribed. 
  2. Any document by which the offer of sale to the public is made shall, for all purposes, be deemed to be a prospectus issued by the company and all laws and rules made thereunder as to the contents of the prospectus and as to liability in respect of mis-statements in and omission from prospectus or otherwise relating to prospectus shall apply as if this is a prospectus issued by the company. 
  3. The members, whether individuals or bodies corporate or both, whose shares are proposed to be offered to the public, shall collectively authorise the company, whose shares are offered for sale to the public, to take all actions in respect of offer of sale for and on their behalf and they shall reimburse the company all expenses incurred by it on this matter. 

Offer of sale shall be deemed prospectus u/s 25

S.25-Document containing offer of securities for sale to be deemed prospectus.

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, any document by which the offer for sale to the public is made shall, for all purposes, be deemed to be a prospectus issued by the company; and all enactments and rules of law as to the contents of prospectus and as to liability in respect of mis-statements, in and omissions from, prospectus, or otherwise relating to prospectus, shall apply with the modifications specified in subsections (3) and (4) and shall have effect accordingly, as if the securities had been offered to the public for subscription and as if persons accepting the offer in respect of any securities were subscribers for those securities, but without prejudice to the liability, if any, of the persons by whom the offer is made in respect of mis-statements contained in the document or otherwise in respect thereof. 

S.29 provides that public offers has to be in dematerialised form (DMAT)

S.29-Public offer of securities to be in dematerialised form-

  1. Notwithstanding anything contained in any other provisions of this Act–
    1. (a) every company making public offer; and 
    2. (b) such other class or classes of public companies as may be prescribed,
      shall issue the securities only in dematerialised form by complying with the provisions of the Depositories Act, 1996 (22 of 1996) and the regulations made thereunder. 
  2. Any company, other than a company mentioned in sub-section (1), may convert its securities into dematerialised form or issue its securities in physical form in accordance with the provisions of this Act or in dematerialised form in accordance with the provisions of the Depositories Act, 1996 (22 of 1996) and the regulations made thereunder. 

Earlier we had shares in physical forms where trading was possible only delivery form. To encourage trading in the virtual/digital form, this section was inserted. 

Trading now has to be through DMAT account.

SHELF PROSPECTUS

S.31-Shelf Prospectus

  1. Any class or classes of companies, as the Securities and Exchange Board may provide by regulations in this behalf, may file a shelf prospectus with the Registrar at the stage of the first offer of securities included therein which shall indicate a period not exceeding one year as the period of validity of such prospectus which shall commence from the date of opening of the first offer of securities under that prospectus, and in respect of a second or subsequent offer of such securities issued during the period of validity of that prospectus, no further prospectus is required. 
  2. A company filing a shelf prospectus shall be required to file an information memorandum containing all material facts relating to new charges created, changes in the financial position of the company as have occurred between the first offer of securities or the previous offer of securities and the succeeding offer of securities and such other changes as may be prescribed, with the Registrar within the prescribed time, prior to the issue of a second or subsequent offer of securities under the shelf prospectus: 
    1. Provided that where a company or any other person has received applications for the allotment of securities along with advance payments of subscription before the making of any such change, the company or other person shall intimate the changes to such applicants and if they express a desire to withdraw their application, the company or other person shall refund all the monies received as subscription within fifteen days thereof. 
  3. Where an information memorandum is filed, every time an offer of securities is made under sub-section (2), such memorandum together with the shelf prospectus shall be deemed to be a prospectus. 
    1. Explanation-For the purposes of this section, the expression “shelf prospectus” means a prospectus in respect of which the securities or class of securities included therein are issued for subscription in one or more issues over a certain period without the issue of a further prospectus. 

A company which has filed self-prospectus is required to file an information memorandum to apprise the change between two consecutive prospectus. The information memorandum is deemed to a prospectus.

RED-HERRING PROSPECTUS (RHP) 

S.32 Red herring prospectus- 

  1. A company proposing to make an offer of securities may issue a red herring prospectus prior to the issue of a prospectus. 
  2. A company proposing to issue a red herring prospectus under sub-section (1) shall file it with the Registrar at least three days prior to the opening of the subscription list and the offer. 
  3. 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. 
  4. Upon the closing of the offer of securities under this section, the prospectus stating therein the total capital raised, whether by way of debt or share capital, and the closing price of the securities and any other details as are not included in the red herring prospectus shall be filed with the Registrar and the Securities and Exchange Board. 
    1. Explanation-For the purposes of this section, the expression “red herring prospectus” means a prospectus which does not include complete particulars of the quantum or price of the securities included therein. 

It is a prospectus which does not include complete info about quantum of securities and price of securities.

Rationale-To sense the public mood about the prospect of public offer. To understand the price at which public is willing to buy the shares.

Let’s say Co needs 1K crores but it does not know whether people would be willing to subscribe to its share. So a process of book building is used to understand the price at which public is willing to buy the shares. Through RHP, it will inform the public about the proposed public offer. 

REMEDIES FOR MIS-REPRESENTATION IN THE PROSPECTUS

Damages for Deceit

Derry v Peek 1889

A co was running tramways using animal power. Later it wanted to use steam. 

Two permissions were required–

  • Act of Parliamentary 
  • Board of Trade Approval

The co got the authorisation from Parliament. They were sure that they will get approval from BOT so they issued prospectus. Many subscribed to the shares. BOT later refused the approval. One of the shareholders filed a case against the co directors that they had given false statement in the prospectus. Court held that that was untrue statement made with honest belief. (99% is not 100%) and that BOT approval was mere formality. Lord Hershel said that if false representation is made knowingly or without belief in its truth or recklessly, carelessly whether it is false or true only then it would be fraud. 

Now this is no longer liable.

S.17 of the Contract Act

S.17-Fraud includes suggestions that a fact is true when it is not true. And the person making the suggestion does not believe it to be true.

S.35 of Companies Act provides for compensation for civil liabilities for mis-statement in prospectus. Even if there is an honest belief that the statements are true but the statement given were false, you will be liable.

S.35-Civil liability for mis-statements in prospectus-

  1. Where a person has subscribed for securities of a company acting on any statement included, or the inclusion or omission of any matter, in the prospectus which is misleading and has sustained any loss or damage as a consequence thereof, the company and every person who–
    1. (a) is a director of the company at the time of the issue of the prospectus;
    2. (b) has authorised himself to be named and is named in the prospectus as a director of the company, or has agreed to become such director, either immediately or after an interval of time; 
    3. (c) is a promoter of the company;
    4. (d) has authorised the issue of the prospectus; and
    5. (e) is an expert referred to in sub-section (5) of section 26, shall, without prejudice to any punishment to which any person may be liable under section 36, be liable to pay compensation to every person who has sustained such loss or damage. 
  2. No person shall be liable under sub-section (1), if he proves—
    1. (a) that, having consented to become a director of the company, he withdrew his consent before the issue of the prospectus, and that it was issued without his authority or consent; or 
    2. (b) that the prospectus was issued without his knowledge or consent, and that on becoming aware of its issue, he forthwith gave a reasonable public notice that it was issued without his knowledge or consent. 
  3. Notwithstanding anything contained in this section, where it is proved that a prospectus has been issued with intent 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 been incurred by any person who subscribed to the securities on the basis of such prospectus. 

List of liable persons-

  • Every Director at the time of the issue of prospectus
  • Every person who authorised the Prospectus
  • Every person who authorised to be named Prospectus
  • Every prompter 
  • Every expert

Defenses-

  • That he had withdrawn Consent
  • Without knowledge and consent and when he came to he gave a public notice
  • Wrt Expert Opinion, he can say that he was competent to make such statement

If the P was issued for fraudulent purpose, these persons can be held liable with personal unlimited liability.

Contract Act Remedies-

Rescission for Misrepresentation 

Any shareholder can sue the company for rescission of contracts. 

Requisites-

  • There should be a false representation in the prospectus
  • False representation should be of facts and not about law
  • Reliance and inducement
  • By or on behalf of company

When this right can get lost?

  • By Affirmation
  • Unreasonable Delay
  • By commencement of the winding up of the company

When any situation is deemed to be untrue?

  • If it is false in form or the context in which it is included
  • Omissions can also be misleading and make the prospectus false. 

R v Kylsant (IMP)

The company has been paying dividend from 1911-1927. It was said that 5-8% of dividend in this time period except for the year 1914 when no dividend was given and 1926 when 4% was given. The truth was that the company was suffering losses from 1921 onwards and dividend that was paid was from the accumulated profits of the company. False in the context

Derry v Peak 

Co issued Prospectus and shareholders applied for the shares. Prospectus should have led to the allotment of shares. 

Peek v Gurney 1873

A company came up with a prospectus. P read the Prospectus but did not buy any shares. Allotment process was over. After few months, he brought good number of shares from secondary market. Later he claimed mis-representation in Prospectus. Should he be allowed to fix civil/tortuous liability on directors?

The principle is that if you are buying shares on the basis of the prospectus and then you suffer loss or damage due to misrepresentation in the prospectus, you will be protected. But if you didn’t buy on the basis of the prospectus, then there will be no liability on the company. 

If the prospectus was meant to be valid for post-public issue as well, then liability can be attached. 

Mis-representation should be of facts and not law. 

CRIMINAL LIABILITY

S.34 Criminal liability for mis-statements in prospectus-

Where a prospectus, issued, circulated or distributed under this Chapter, includes any statement which is untrue or misleading in form or context in which it is included or where any inclusion or omission of any matter is likely to mislead, every person who authorises the issue of such prospectus shall be liable under section 447: 

Provided that nothing in this section shall apply to a person if he proves that such statement or omission was immaterial or that he had reasonable grounds to believe, and did up to the time of issue of the prospectus believe, that the statement was true or the inclusion or omission was necessary. 

Two defences-

  1. If he proves that such statement or omission was immaterial.
  2. He had reasonable grounds to believe that the statement was true. 

S.447 Punishment for fraud–

Without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten 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 three years. 

Explanation-For the purposes of this section–

  1. fraud in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss; 
  2. wrongful gain‖ means the gain by unlawful means of property to which the person gaining is not legally entitled; 
  3. wrongful loss‖ means the loss by unlawful means of property to which the person losing is legally entitled. 

S.36 Punishment for fraudulently inducing persons to invest money-

Any person who, either knowingly or recklessly makes any statement, promise or forecast which is false, deceptive or misleading, or deliberately conceals any material facts, to induce another person to enter into, or to offer to enter into,— 

  1. any agreement for, or with a view to, acquiring, disposing of, subscribing for, or underwriting securities; or 
  2. any agreement, the purpose or the pretended purpose of which is to secure a profit to any of the parties from the yield of securities or by reference to fluctuations in the value of securities; or 
  3. any agreement for, or with a view to obtaining credit facilities from any bank or financial institution, shall be liable for action under section 447. 

S.38 Punishment for personation for acquisition, etc., of securities-

  1. Any person who-
    1. (a) makes or abets making of an application in a fictitious name to a company for acquiring, or subscribing for, its securities; or 
    2. (b) makes or abets making of multiple applications to a company in different names or in different combinations of his name or surname for acquiring or subscribing for its securities; or 
    3. (c) Otherwise induces directly or indirectly a company to allot, or register any transfer of, securities to him, or to any other person in a fictitious name, shall be liable for action under section 447. 
  2. The provisions of sub-section (1) shall be prominently reproduced in every prospectus issued by a company and in every form of application for securities. 
  3. Where a person has been convicted under this section, the Court may also order disgorgement of gain, if any, made by, and seizure and disposal of the securities in possession of, such person. 
  4. The amount received through disgorgement or disposal of securities under subsection (3) shall be credited to the Investor Education and Protection Fund. 

Disgorgement–

Note-In case of offenses related to securities market, the court of first instance shall be SEBI and the provisions of SCERA will apply.

S.33 Issue of application forms for securities-

  1. No form of application for the purchase of any of the securities of a company shall be issued unless such form is accompanied by an abridged prospectus: 
    1. Provided that nothing in this sub-section shall apply if it is shown that the form of application was issued-
      1. (a) in connection with a bona fide invitation to a person to enter into an underwriting agreement with respect to such securities; or 
      2. (b) in relation to securities which were not offered to the public.
  2. A copy of the prospectus shall, on a request being made by any person before the closing of the subscription list and the offer, be furnished to him.

It provides how the application form has to be made-

Co comes up with the prospectus. It then provides the place of application form. One fills the form and submits it to companies registered office.

Public issue only when you achieve minimum subscription as per SEBI regulation. If minimum subscription is doubtful, then co may invite underwriters to buy that under underwriting agreement. Its a kind of insurance

Eg-A co achieves 80% subscriptions. For the remaining 10% companies may invite underwriters to buy them as per underwriting agreement. They are therefore not supposed to be provided the prospectus. But underwriting agreement has to be mentioned in the prospectus. Underwriters will get some commission per share for hedging/insuring/guaranteeing the public issue.  

Mid-Term Syllabus-Till Prospectus

SECURITIES (SHARES AND DEBENTURES)

S.33 Issue of application forms for securities-

  1. No form of application for the purchase of any of the securities of a company shall be issued unless such form is accompanied by an abridged prospectus: 
    1. Provided that nothing in this sub-section shall apply if it is shown that the form of application was issued-
      1. (a) in connection with a bona fide invitation to a person to enter into an underwriting agreement with respect to such securities; or 
      2. (b) in relation to securities which were not offered to the public.
  2. A copy of the prospectus shall, on a request being made by any person before the closing of the subscription list and the offer, be furnished to him.

It provides how the application form has to be made-

Co comes up with the prospectus. It then provides the place of application form. One fills the form and submits it to companies registered office.

Public issue only when you achieve minimum subscription (90%) as per SEBI regulation. If minimum subscription is doubtful, then co may invite underwriters to buy that under underwriting agreement. Its a kind of insurance

Eg-A co achieves 80% subscriptions. For the remaining 10% companies may invite underwriters to buy them as per underwriting agreement. They are therefore not supposed to be provided the prospectus. But underwriting agreement has to be mentioned in the prospectus. Underwriters will get some commission per share for hedging/insuring/guaranteeing the public issue.  

TYPES OF SECURITIES-
  1. Shares
  2. Debentures

SHARES S.2(84)

Defined under S.2(84)

S.2(84)-Share means a share in the share capital of a company and includes stock; 

Unite of the share-capital

Right to participate in the profit of the company

Stock-When the company maintains distinction bw shares and stocks (lump-sum). 

Its not necessary that co divides its capital into shares. 

Types of Movable properties-

  1. Chose in Action
    1. No immediate possession but has a right to it 
    2. This right can be enforced by a legal action 
    3. Has to be evidenced by certain documents 
  2. Chose in Possession
    1. Immediate physical possession of the property

Shares are movable property falling under ‘Chose in Action’ One gets share certificate informing you credentials and no of shares you own. Now its in the form of DMAT

Shares are regarded as goods under Sale of Goods Act

S.44 Nature of shares or debentures–The shares or debentures or other interest of any member in a company shall be movable property transferable in the manner provided by the articles of the company. 

As per Sale of Goods Act 1930, goods include shares.

Are shareholders part or owners of the Company?

No, They are subscribers to the shares of the company. Company is a separate legal entity. They can have a control over the management of the affairs of the company. 

Allotment of Shares

Acceptant of application means allotment of shares. A valid allotment has to comply with the pre-requisites of the companies act and the contract act. 

Minimum Subscription Details-

S.39-Allotment of securities by company

  1. No allotment of any securities of a company offered to the public for subscription shall be made unless the amount stated in the prospectus as the minimum amount has been subscribed and the sums payable on application for the amount so stated have been paid to and received by the company by cheque or other instrument. 
  2. The amount payable on application on every security shall not be less than five per cent. of the nominal amount of the security or such other percentage or amount, as may be specified by the Securities and Exchange Board by making regulations in this behalf. 
  3. If the stated minimum amount has not been subscribed and the sum payable on application is not received within a period of thirty days from the date of issue of the prospectus, or such other period as may be specified by the Securities and Exchange Board, the amount received under sub-section (1) shall be returned to applicants within such time and manner as may be prescribed. 
  4. Whenever a company having a share capital makes any allotment of securities, it shall file with the Registrar a return of allotment in such manner as may be prescribed. 
  5. In case of any default under sub-section (3) or sub-section (4), the company and its officer who is in default shall be liable to a penalty, for each default, of one thousand rupees for each day during which such default continues or one lakh rupees, whichever is less. 

Application money can be given by cheque or other instruments. If the above conditions are not followed, it will be invalid allotment. 

Can the co adjust the application money towards any claim it has against the applicant? 

No

If any allotment of securities is made without receiving application money, it is invalid. 

Dhananjay Pandey v Surgical Bias

Once the allotment process is over, a return of allotment has to be filed with RoC. 

 The co cannot adjust the application money towards any claim it has against the applicant.

S.40 Securities to be dealt with in stock exchanges-

  1. Every company making public offer shall, before making such offer, make an application to one or more recognised stock exchange or exchanges and obtain permission for the securities to be dealt with in such stock exchange or exchanges. 
  2. Where a prospectus states that an application under sub-section (1) has been made, such prospectus shall also state the name or names of the stock exchange in which the securities shall be dealt with. 
  3. All monies received on application from the public for subscription to the securities shall be kept in a separate bank account (SPA) in a scheduled bank and shall not be utilised for any purpose other than— 
    1. (a) for adjustment against allotment of securities where the securities have been permitted to be dealt with in the stock exchange or stock exchanges specified in the prospectus; or 
    2. (b) for the repayment of monies within the time specified by the Securities and Exchange Board, received from applicants in pursuance of the prospectus, where the company is for any other reason unable to allot securities. 
  4. Any condition purporting to require or bind any applicant for securities to waive compliance with any of the requirements of this section shall be void. 

All listed companies are public companies but vice-versa is not true. 

Listing agreement comes from SCRA. 

They have to also fulfill the condition of S.70 of the Companies Act.

Unlisted company means its securities have not been listed on any recognised stock exchange. 

Listing is not required for private placements. But funds raised by pvt placements can be listed. 

It is not necessary for a public co to raise funding only through listing. 

Listing gives an advantage of liquidity (option of conversion and exit). 

A public co can go for a public issue but it can also raise funds by private placements. 

Listing is mandatory for public issue and not for other issues. 

A pvt co that cannot raise funds by public issue but it can list the funds raised by pvt placement. They are traded over the counters. 

Advantage of Listing-

  1. Liquidity
  2. SEBI compliance 

There is a condition precedent for listing-

  1. Amounts raised by co through public issue has to be kept in a separate Bank Account (SBA) and shall not be utilised for any purpose other than for adjustment against allotment of securities and for the repayment of monies received from applicants where the company is for any other reason unable to allot securities (failed to raise 90% subscriptions). 
  2. In case of oversubscription, the amount has to be returned. Oversubscription is defined by ICBR regulations. 

General Principles of Allotment 

  1. Allotment should be made by appropriate authorities ie board of directors. This power can be delegated of permissible by AoA
  2. Allotment should be made within reasonable time
  3. Allotment should be properly communicated.
    1. If by letters, they have to be properly stamped.
  4. Allotments should be absolute and unconditional. IMP
    1. Total no of shares referred in the application form should be allotted. 
    2. Exceptions–
      1. Conditions precedent to Allotment
        1. Eg if the investor says that he will subscribe to the shares only if he is made a clerk in the company. 
      2. Conditions subsequent to the Allotment. They will not affect the validity of the allotment. 

Private Placements-

Entire procedure of Pvt Placement has been changed by the 2019 amendment.

S.42 deals with it. 

It means the offer of securities or invitation to subscribe securities to a select group of persons other than by way of public offer through Pvt Placement cum application which satisfies the condition of S.42.  

Application is offer

Prospectus is invitation

Select group of persons are those identified by the board whose numbers shall not exceed 50 or other prescribed number (200) excluding-

  1. Qualified Institutional Buyers (QIBs) 
  2. Employees of the Company
    1. Offered under Employees Stock Option (ESOP) u/s 62(1)(b).

Contained in the Companies Prospectus and Allotment of Securities Rules 2014. 

Qualified Institutional Buyers (QIBs) are defined in the ICDR regulations. 

Pvt Placement shall not carry the option of renunciation. Otherwise it will no longer be a pvt placement. 

S.42-Offer or invitation for subscription of securities on PRIVATE PLACEMENT

  1. Without prejudice to the provisions of section 26, a company may, subject to the provisions of this section, make private placement through issue of a private placement offer letter. 
  2. Subject to sub-section (1), the offer of securities or invitation to subscribe securities, shall be made to such number of persons not exceeding fifty or such higher number as may be prescribed, [excluding qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option as per provisions of clause (b) of sub-section (1) of section 62], in a financial year and on such conditions (including the form and manner of private placement) as may be prescribed. 
    1. Explanation I—If a company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than the prescribed number of persons, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognised stock exchange in or outside India, the same shall be deemed to be an offer to the public and shall accordingly be governed by the provisions of Part I of this Chapter. 
    2. Explanation II—For the purposes of this section, the expression— 
      1. (i) “qualified institutional buyer‘‘ means the qualified institutional buyer as defined in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 as amended from time to time. 
      2. (ii) “private placement” means any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in this section. 
  3. No fresh offer or invitation under this section shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company. 
  4. Any offer or invitation not in compliance with the provisions of this section shall be treated as a public offer and all provisions of this Act, and the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and the Securities and Exchange Board of India Act, 1992 (15 of 1992) shall be required to be complied with. 
  5. All monies payable towards subscription of securities under this section shall be paid through cheque or demand draft or other banking channels but not by cash. 
  6. A company making an offer or invitation under this section shall allot its securities within sixty days from the date of receipt of the application money for such securities and if the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within fifteen days from the date of completion of sixty days and if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of twelve per cent. per annum from the expiry of the sixtieth day: 
    1. Provided that monies received on application under this section shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than— 
      1. (a) for adjustment against allotment of securities; or 
      2. (b) for the repayment of monies where the company is unable to allot securities. 
  7. All offers covered under this section shall be made only to such persons whose names are recorded by the company prior to the invitation to subscribe, and that such persons shall receive the offer by name, and that a complete record of such offers shall be kept by the company in such manner as may be prescribed and complete information about such offer shall be filed with the Registrar within a period of thirty days of circulation of relevant private placement offer letter. 
  8. No company offering securities under this section shall release any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an offer. 
  9. Whenever a company makes any allotment of securities under this section, it shall file with the Registrar a return of allotment in such manner as may be prescribed, including the complete list of all security-holders, with their full names, addresses, number of securities allotted and such other relevant information as may be prescribed. 
  10. (10)If a company makes an offer or accepts monies in contravention of this section, the company, its promoters and directors shall be liable for a penalty which may extend to the amount involved in the offer or invitation or two crore rupees, whichever is higher, and the company shall also refund all monies to subscribers within a period of thirty days of the order imposing the penalty. 

Shri Gopal Paper Mills Ltd v CIT 1967 Cal HC 

The court interpreted the word shares–

It has 3 meanings or phases-

  1. When it is still the part of the share capital in the unissued form. Lying in the shell of the share capital
  2. When it is exploited by the company by issuing it to a shareholder. 
  3. When it is converted to stock.
    1. Only fully paid up share capital can be converted to stock
DIFFERENT KINDS OF SHARES (S.43)

KINDS OF SHARE CAPITALS

S.43-Kinds of share capital-The share capital of a company limited by shares shall be of two kinds, namely:- 

  1. Equity Share capital-
    1. (i) with voting rights; or 
    2. (ii) with differential rights as to dividend, voting or otherwise in accordance with such rules as may be prescribed; and 
  2. Preference Share Capital:
    Provided that nothing contained in this Act shall affect the rights of the preference shareholders who are entitled to participate in the proceeds of winding up before the commencement of this Act. 
  3. Explanation-For the purposes of this section,-
    1. (i) equity share capital‘‘, with reference to any company limited by shares, means all share capital which is not preference share capital; 
    2. (ii) preference share capital‘‘, with reference to any company limited by shares, means that part of the issued share capital of the company which carries or would carry a preferential right with respect to-
      1. payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either be free of or subject to income-tax; and 
      2. repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid-up or deemed to have been paid-up, whether or not, there is a preferential right to the payment of any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company; 
    3. (iii) capital shall be deemed to be preference capital, notwithstanding that it is entitled to either or both of the following rights, namely:—
      1. that in respect of dividends, in addition to the preferential rights to the amounts specified in sub-clause (a) of clause (ii), it has a right to participate, whether fully or to a limited extent, with capital not entitled to the preferential right aforesaid; 
      2. that in respect of capital, in addition to the preferential right to the repayment, on a winding up, of the amounts specified in sub-clause (b) of clause (ii), it has a right to participate, whether fully or to a limited extent, with capital not entitled to that preferential right in any surplus which may remain after the entire capital has been repaid.

Equity and Preference Share Capital 

Equity Share means the share that is not the preference share capital. All shareholders of equity shares have equal shares ie people having same no of shares have equal rights. 

A co may issue equity shares with voting rights or with differential rights. The differential rights may be wrt to dividend they receive, voting or otherwise. 

Preference Shares-

  1. These shareholders must be assured of preferential dividend during the life of the company
  2. On winding up, it must carry a preferential right to be paid. 

Different kind of PS

  1. Participating and Non-participating 
    1. Those who have right to participate in the additional/surplus profits of the co are participating preferential shareholders. This has to mentioned in the AoA
  2. Cumulative and Non-Cumulative 
    1. The unpaid profits gets accumulated and gets carried forward to next year. This is cumulative. 

REDEEMABLE AND IR-REDEEMABLE SHARES (S.55)

Redeemable means the company can take back. 

Equity shares are irredeemable. 

No co is allowed to issue irredeemable preference shares. 

Time period is 20 years. Rule 10 of the Companies (Share Capital and Debenture) Rules 2014. 

Conditions for redeeming shares-

  1. No such shares shall be redeemed except out of the profits of the company which would otherwise be available for dividend
  2. No such shares shall be redeemed unless they are fully paid
  3. It has to create a reserve, to be called the Capital Redemption Reserve Account (CRRA), and out of the profits of company, that part of the profit through it wants to redeem shares, should be transferred to this account.
  4. Premium, if any, payable on redemption of any preference shares shall be provided for out of the profits of the company. 
  5. If not in a position to redeem preferential share, it may, with the consent of the holders of three-fourths in value (not in number of shareholders) of such preference shares and with the approval of the Tribunal on a petition made by it in this behalf, issue further redeemable preference shares equal to the amount due including the dividend thereon, in respect of the unredeemed preference shares. 

S.55-Issue and redemption of preference shares.

  1. No company limited by shares shall, after the commencement of this Act, issue any preference shares which are irredeemable. 
  2. A company limited by shares may, if so authorised by its articles, issue preference shares which are liable to be redeemed within a period not exceeding 20 years from the date of their issuesubject to such conditions as may be prescribed: 
    1. Provided that a company may issue preference shares for a period exceeding twenty years for infrastructure projects, subject to the redemption of such percentage of shares as may be prescribed on an annual basis at the option of such preferential shareholders: 
    2. Provided further that— 
      1. (a) no such shares shall be redeemed except out of the profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of such redemption; 
      2. (b) no such shares shall be redeemed unless they are fully paid; 
      3. (c) where such shares are proposed to be redeemed out of the profits of the company, there shall, out of such profits, be transferred, a sum equal to the nominal amount of the shares to be redeemed, to a reserve, to be called the Capital Redemption Reserve Account (CRRA), and the provisions of this Act relating to reduction of share capital of a company shall, except as provided in this section, apply as if the Capital Redemption Reserve Account were paid-up share capital of the company; and 
      4. (d) (i) in case of such class of companies, as may be prescribed and whose financial statement comply with the accounting standards prescribed for such class of companies under section 133, the premium, if any, payable on redemption shall be provided for out of the profits of the company, before the shares are redeemed: 
        1. Provided also that premium, if any, payable on redemption of any preference shares issued on or before the commencement of this Act by any such company shall be provided for out of the profits of the company or out of the company‘s securities premium account (SPA), before such shares are redeemed. 
        2. (ii) in a case not falling under sub-clause (i) above, the premium, if any, payable on redemption shall be provided for out of the profits of the company or out of the company‘s securities premium account, before such shares are redeemed. 
  3. Where a company is not in a position to redeem any preference shares or to pay dividend, if any, on such shares in accordance with the terms of issue (such shares hereinafter referred to as unredeemed preference shares), it may, with the consent of the holders of three-fourths in value of such preference shares and with the approval of the Tribunal on a petition made by it in this behalf, issue further redeemable preference shares equal to the amount due, including the dividend thereon, in respect of the unredeemed preference shares, and on the issue of such further redeemable preference shares, the unredeemed preference shares shall be deemed to have been redeemed: 
    1. Provided that the Tribunal shall, while giving approval under this sub-section, order the redemption forthwith of preference shares held by such persons who have not consented to the issue of further redeemable preference shares. 
    2. Explanation–For the removal of doubts, it is hereby declared that the issue of further redeemable preference shares or the redemption of preference shares under this section shall not be deemed to be an increase or, as the case may be, a reduction, in the share capital of the company. 
  4. The capital redemption reserve account may, notwithstanding anything in this section, be applied by the company, in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares. 
    1. Explanation–For the purposes of sub-section (2), the term infrastructure projects‘‘ means the infrastructure projects specified in Schedule VI.

TYPES OF PREFERENCE SHARE-CAPITALS?

  1. Convertible and Non-Convertible Preference Shares
    1. These shares possess an option or right whereby they can be converted into an ordinary equity share at some agreed terms and conditions. 
  2. Redeemable and Irredeemable Preference Shares
    1. A redeemable preference share is very commonly seen preference share which has a maturity date on which date the company will repay the capital amount to the preference shareholders and discontinue the dividend payment thereon. 
    2. In India we cannot have irredeemable preference shares
  3. Participating and Non-Participating Preference Shares
    1. Participating preference shares are a unique type of preference shares which has an additional benefit of participating in profits of the company apart from the fixed dividend.
  4. Cumulative and Non-Cumulative Preference Shares
    1. If the shares are cumulative preference shares, the dividends are accumulated and therefore paid before anything paid to equity shareholders.
  5. Preference Shares with Callable Options
    1. In that company has a right to redeem preference share in between. Such preference shares will be redeemed at a premium if redeemed in between because the investor will have a loss in that case. The company will exercise such an option if the rate of preference dividend is falling in the market.

A company cannot issue irredeemable preference share.

Whether preference shares are cumulative? Yes, and they are generally non-participative. 

Why amount to be kept separately in CRR event after paying for redemption out of the profits? 

To make up the deficiency of reduced share capital after redemption. 

Share capital cannot be reduced except as otherwise provided u/s 66. 

If it is not in a position to redeem, it can issue fresh preference shares u/s 55(3) and that will be deemed as redemption. 

Some fundamental points-

A person is given certificate for the shares. It acts as an evidence. Certificate gives the person a title to the person holding the shares. It mentions-

  1. The name of the person
  2. The no of shares 
  3. The amount paid on these shares. If fully paid, then fully paid share capital

Principle of Estoppel applies as to title and payment. (IMP)

Company can’t later say that it was issued by mistake, etc. It cannot deny the liability. 

In case the shares are in DMAT form, no certificate is issue and in such cases the registry of depository will be the primary evidence. 

CALLS ON SHARES

A company comes up with the public issue (Primary Market) of shares. Suppose that the Nominal value of share is 10 and the Premium value is set at 100. Legally speaking Nominal value is inclusive of the Face Value (Value of per unit shares) and the Premium Value. Current Market Value will vary (Secondary Market). The company can give call for the partial amount or fully paid share capital. If not full amount then it can call for in instalments. Call is only made by the board of the directors. 

Rationale–

Say they start a project. They initially want only 25% of the whole amount to begin the project. So they will give call accordingly. 

Co will be able to save extra amount in partial call as it will have to pay dividend only on the called amount. 

All this mentioned in Table F of Schedule 1 which deals with AoA of the company (Regulations 13 to 81)

The amount of call and time of payment should be mentioned on a uniform bases for a particular type of shares. If not then it will invalid calls.

Note: Only nominal value goes for share capital. Premium Value goes to Securities Premium Account (SPA). SPA is usually a profit but not a distributable profit. 

CONSEQUENCES IF THE SHs DOES NOT PAY ON THE CALLS DUE

Forfeiture of Shares

Co can go for Forfeiture if the AOA of the Co so allows

If the co gets this power from resolution of board of directors, then co has to serve a notice to the concerned SH. 

The FF shares become the property of the co and can be re-issued. The concerned shareholders will be repaid back his partial amount only if the company makes surplus in re-issue.

FF should be in good faith for the benefit the co. it cannot be used as a device to compel a SH to give up shares nor to relieve him of his obligation. 

Surrender of Shares

Since FF is a lengthy process, Co can take back the shares by asking them to surrender it.

Can Shares be pledged and mortgaged?

Yes.

In case of pledge, there will be no transfer of rights. Pledge is just a security

In case of mortgage, there can be transfer of some interest. As per the contract, that person exercise the voting rights as well. 

VOTING RIGHTS (S.47)

Every equity shareholder shall have voting rights. 

Philosophy-1 share 1 vote in case of one kind of shares

If the co issues shares with differential voting rights, then it can be so. 

In case of show of hands, 1 share, 1 vote will apply. 

In case of polling, the voting rights will be proportional to no of shares a SH hold. 

SHs have voting rights on matters concerning them. Voting Rights will be in proportion to their shareholdings. 

Changes Made by S.47

If for a period of 2 years or more the dividend is not paid to preferred shareholders, they will have voting rights over all matters. 

VARIATION OF SHAREHOLDERS RIGHTS (IMP)

SHs have a contractual relationship with the Co. Can the terms of the contract be changed by the Co?

Yes, if 3/4 SHs of that particular class of shares agree to such a change or a special resolution is passed by that class of SH in separate meeting of that class of SHs. 

It should not be prohibited by the terms of the issue of shares. These terms will prevail over MoA and AoA? 

If the variation of rights of one class of shares affects the rights of other class of shares, then consent of 3/4 of other class of SHs have to be obtained or a separate meeting of that class of SH has to be called and pass a special resolution. 

Dissenting SHs will have to be given the option of exit. If they hold more than 10% shares, then they can move to NCLT. It can be a matter of class action as well. 

SWEAT EQUITY SHARES (S.2(88) r/w S.54 r)

S.2(88)-Sweat Equity Shares means such equity shares as are issued by a company to its directors or employees at a discount or for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called; 

S.54–Issue of sweat equity shares-

  1. Notwithstanding anything contained in section 53, a company may issue sweat equity shares of a class of shares already issued, if the following conditions are fulfilled, namely:-
    1. (a) the issue is authorised by a special resolution passed by the company;
    2. (b) the resolution specifies the number of shares, the current market price, consideration, if any, and the class or classes of directors or employees to whom such equity shares are to be issued; 
    3. (c) not less than one year has, at the date of such issue, elapsed since the date on which the company had commenced business; and 
    4. (d) where the equity shares of the company are listed on a recognised stock exchange, the sweat equity shares are issued in accordance with the regulations made by the Securities and Exchange Board in this behalf and if they are not so listed, the sweat equity shares are issued in accordance with such rules as may be prescribed. 
  2. The rights, limitations, restrictions and provisions as are for the time being applicable to equity shares shall be applicable to the sweat equity shares issued under this section and the holders of such shares shall rankpari passuwith other equity shareholders. 

The purpose of issuing these shares is different.

Issued by the Company to its directors or employees at a discount or for consideration other than cash for providing technical know-how or any rights in the nature of IPRs or value addition.

Note:-S.53 prohibits issuing shares at discount rate but S.54 is an exception. 

General principles is that shares are issued for cash but this is an exception. 

They are not for all employees but for those who have done something specific. 

Conditions-

  1. They will be already issued shares and not new shares.
  2. Special Resolution
  3. It species the number and particulars of shares
  4. It mentions class of employees 
  5. Issued as per SEBI regulations
  6. Rights, liabilities, restrictions, limitations, will remain same as other equity shares and these SH shall rank pari passu with other equity shareholders. 

PROHIBITION ON ISSUE OF SHARES AT DISCOUNT (S.53)

S.53-Prohibition on issue of shares at discount

  1. Except as provided in section 54, a company shall not issue shares at a discount. 
  2. Any share issued by a company at a discounted price shall be void. 
  3. Where a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees and every officer who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both. 

S.53(2A)-A company may issue shares at discount to its creditors when the debt is converted into shares in pursuance of any statutory resolution, plan, guidelines, directions or regulations which are specified by RBI under RBI Act 1934 or Banking Regulation Act 1949. 

ISSUE OF SHARES AT A PREMIUM (S.52)

S.52-Application of premiums received on issue of shares-

  1. Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount of the premium received on those shares shall be transferred to a securities premium account (SPA) and the provisions of this Act relating to reduction of share capital of a company shall, except as provided in this section, apply as if the securities premium account were the paid-up share capital of the company. 
  2. Notwithstanding anything contained in sub-section (1), the securities premium account may be applied by the company-
    1. (a) towards the issue of unissued shares of the company to the members of the company as fully paid bonus shares; 
    2. (b) in writing off the preliminary expenses of the company;
    3. (c) in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company; 
    4. (d) in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company; or 
    5. (e) for the purchase of its own shares or other securities under section 68. 
  3. The securities premium account may, notwithstanding anything contained in sub-sections (1) and (2), be applied by such class of companies, as may be prescribed and whose financial statement comply with the accounting standards prescribed for such class of companies under section 133,-
    1. (a) in paying up unissued equity shares of the company to be issued to members of the company as fully paid bonus shares; or 
    2. (b) in writing off the expenses of or the commission paid or discount allowed on any issue of equity shares of the company; or 
    3. (c) for the purchase of its own shares or other securities under section 68.

Explanation-

Securities Premium Account is treated as paid-up share capital and can be reduced only u/s 62. 

It can used for-

  1. Payment of bonus shares (issue of unissued shares of the company) They are given to the members of the company and fully paid up
  2. In writing preliminary expenses
  3. In writing of expenses of discount or commissions which is allowed in shares or debentures of the company.
  4. For payment of premium on redemption of redeemable preference shares or debentures.
  5. It can be used for purchasing its own shares or other securities under the provision of S.68 (buy back of securities)

Note-Bonus shares are given free of cost. This is Unused profit converted in shares. This increases the share capital of the company. 

TRANSFER AND TRANSMISSION OF SECURITIES (S.56 r/w S.44) 

Most litigation arise out of this

S.56-Transfer and transmission of securities

  1. A company shall not register a transfer of securities of the company, or the interest of a member in the company in the case of a company having no share capital, other than the transfer between persons both of whose names are entered as holders of beneficial interest in the records of a depository, unless a proper instrument of transfer, in such form as may be prescribed, duly stamped, dated and executed by or on behalf of the transferor and the transferee and specifying the name, address and occupation, if any, of the transferee has been delivered to the company by the transferor or the transferee within a period of sixty days from the date of execution, along with the certificate relating to the securities, or if no such certificate is in existence, along with the letter of allotment of securities: 
    1. Provided that where the instrument of transfer has been lost or the instrument of transfer has not been delivered within the prescribed period, the company may register the transfer on such terms as to indemnity as the Board may think fit. 
  2. Nothing in sub-section (1) shall prejudice the power of the company to register, on receipt of an intimation of transmission of any right to securities by operation of law from any person to whom such right has been transmitted. 
  3. Where an application is made by the transferor alone and relates to partly paid shares, the transfer shall not be registered, unless the company gives the notice of the application, in such manner as may be prescribed, to the transferee and the transferee gives no objection to the transfer within two weeks from the receipt of notice. 
  4. Every company shall, unless prohibited by any provision of law or any order of Court, Tribunal or other authority, deliver the certificates of all securities allotted, transferred or transmitted
    1. (a) within a period of two months from the date of incorporation, in the case of subscribers to the memorandum; 
    2. (b) within a period of two months from the date of allotment, in the case of any allotment of any of its shares; 
    3. (c) within a period of one month from the date of receipt by the company of the instrument of transfer under sub-section (1) or, as the case may be, of the intimation of transmission under sub- section (2), in the case of a transfer or transmission of securities; 
    4. (d) within a period of six months from the date of allotment in the case of any allotment of debenture: 
    5. Provided that where the securities are dealt with in a depository, the company shall intimate the details of allotment of securities to depository immediately on allotment of such securities. 
  5. The transfer of any security or other interest of a deceased person in a company made by his legal representative shall, even if the legal representative is not a holder thereof, be valid as if he had been the holder at the time of the execution of the instrument of transfer. 
  6. Where any default is made in complying with the provisions of sub-sections (1) to (5), the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with fine which shall not be less than ten thousand rupees but which may extend to one lakh rupees. 
  7. Without prejudice to any liability under the Depositories Act, 1996 (22 of 1996), where any depository or depository participant, with an intention to defraud a person, has transferred shares, it shall be liable under section 447. 

Explanation-

Shares and Debentures are movable property and are transferable (S.44)

Shares of Pvt Co are freely transferrable but for public Co there are certain restrictions. 

Free transferability does not mean absolute transfer. 

Restrictions should be on justified grounds. 

If there is a refusal, it becomes a ground for appeal u/s 58. Appeal lies to NCLT

For Private Companies-

Eg-Transfer is register on 1 Jan. Within 30 days the co has to accept or reject it. In case, company does nothing. Then within 60 days of the date of registration of transfer and within 30 days of notice of refusal, he can appeal to NCLT.

For Public Companies-

For Public companies appeal can be made in 60 days of notice. If there is no intimation, then 90 days for appeal. 

Tribunal can either dismiss the appeal or can give certain directions for transfer or transmission. It can give direction for rectification of register of Members u/s

TRANSMISSION OF SHARES

Only the intimation has to given to the company that SH has died therefore the shares be transmitted to them.

ALTERATION OF SHARE CAPITAL

Sahre capital is part of MoA. It is amendable if authorised by AoA.

Method of Alternation-

Increase in the Share Capital 

Consolidate and Divide Share Capital

It can divide all or any part of the SC into shares of a larger amount than the exisiting ones. 

Shares are distributed in lots. 

Convert all or any part of its fully paid SC into Stock and reconvert that into fully paid shares of any denomination

Sub-Divide its SC into shares of Smaller amount than is fixed by MoA

Cancel those shares

S.66-Reduction of Share capital:

(1) Subject to confirmation by the Tribunal on an application by the company, a company limited by shares or limited by guarantee and having a share capital may, by a special resolution, reduce the share capital in any manner and in particular, may— 

(a) extinguish or reduce the liability on any of its shares in respect of the share capital not paid-up; or 

(b) either with or without extinguishing or reducing liability on any of its shares,
(i) cancel any paid-up share capital which is lost or is unrepresented by available assets; or (ii) pay off any paid-up share capital which is in excess of the wants of the company, alter its memorandum by reducing the amount of its share capital and of its shares accordingly: 

Provided that no such reduction shall be made if the company is in arrears in the repayment of any deposits accepted by it, either before or after the commencement of this Act, or the interest payable thereon. 

(2) The Tribunal shall give notice of every application made to it under sub-section (1) 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: 

Provided that where no representation has been received from the Central Government, Registrar, the Securities and Exchange Board or the creditors within the said period, it shall be presumed that they have no objection to the reduction. 

(3) 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: 

Provided that no application for reduction of share capital shall be sanctioned by the Tribunal unless the accounting treatment, proposed by the company for such reduction is in conformity with the accounting standards specified in section 133 or any other provision of this Act and a certificate to that effect by the company‘s auditor has been filed with the Tribunal. 

(4) The order of confirmation of the reduction of share capital by the Tribunal under sub-section (3) 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 under sub-section (3) and of a minute approved by the Tribunal showing-

(a) the amount of share capital;
(b) the number of shares into which it is to be divided;
(c) the amount of each share; and
(d) 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. 

(6) Nothing in this section shall apply to buy-back of its own securities by a company under section 68. 

(7) A member of the company, past or present, shall not be liable to any call or contribution in respect of any share held by him exceeding the amount of difference, if any, between the amount paid on the share, or reduced amount, if any, which is to be deemed to have been paid thereon, as the case may be, and the amount of the share as fixed by the order of reduction. 

(8) Where the name of any creditor entitled to object to the reduction of share capital under this section is, by reason of his ignorance of the proceedings for reduction or of their nature and effect with respect to his debt or claim, not entered on the list of creditors, and after such reduction, the company is unable, within the meaning of sub-section (2) of section 271, to pay the amount of his debt or claim,— 

(a) every person, who was a member of the company on the date of the registration of the order for reduction by the Registrar, shall be liable to contribute to the payment of that debt or claim, an amount not exceeding the amount which he would have been liable to contribute if the company had commenced winding up on the day immediately before the said date; and 

(b) if the company is wound up, the Tribunal may, on the application of any such creditor and proof of his ignorance as aforesaid, if it thinks fit, settle a list of persons so liable to contribute, and make and enforce calls and orders on the contributories settled on the list, as if they were ordinary contributories in a winding up. 

(9) Nothing in sub-section (8) shall affect the rights of the contributories among themselves. (10) If any officer of the company— 

(a) knowingly conceals the name of any creditor entitled to object to the reduction;
(b) knowingly misrepresents the nature or amount of the debt or claim of any creditor; or (c) abets or is privy to any such concealment or misrepresentation as aforesaid, he shall be liable under section 447. 

(11) If a company fails to comply with the provisions of sub-section (4), it shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees. 

LIABILITIES OF MEMBERS AFTER REDUCTION

Liability only to extent of the remaining shares after reduction. 

FURTHER ISSUE OF CAPITAL (S.62)

When a company goes for further public offer to increase its share capital, the section prescribes the list to whom it has to be offered-

First to the existing equity SH on the date of issue in proportion in proportion to the shareholding that they have.

Right of Renouncement-Existing ESH can deny/reject the offer or they can renounce that to some other person. 

If 30 days pass and there is no response from EESH, BoD shall have rights to dispose off the shares in way that is not disadvantageous to the ESH or the Company. 

Second category is the Employees of the Company (ESOP-Employees Stock Option)

Third category-Any person if authorised by special resolution either for cash or for considerations other than cash. The price is determined by Valuation Expert. 

S.62(3)-That this section will not apply to any conversion of any debentures or loans taken by SH.

Let’s say the co has issued debentures. It becomes debtor. Later the creditors may decide that they want their debt they gave to co to be converted into shares and they become shareholders. But in such cases, S.62 will not be applicable. 

BACK-DOOR NATIONALISATION

Notwithstanding whatever is written in S.62(3), if any debenture is issued by co to govt or of any loan is taken by the co from any govt, the govt in public interest may direct that the debentures be converted into shares of the co on specific terms and conditions. This is kind of back-door Nationalisation. 

Such decision has to be taken keeping in mind-

  1. The financial position of the co
  2. Terms and conditions of issue of debentures
  3. Rate of interest on the debentures

The co is allowed representation. It can appeal to NCLT which may accept or reject. 

ISSUE OF BONUS OF SHARES (S.63)

A company may issue fully paid-up bonus shares to its members in any manner from its free reserves, securities premium account and Capital Redemption Reserves. (all created out of the profits of the co)

If there is revaluation of assets, and the assets value is increased, increased value cannot be capitalised for the issue of fully paid-up bonus shares. 

Conditions-

  1. There should be authorisation by AoA
  2. Recommendation of BoD in general meeting 
  3. Co should not have defaulted in the payment of principle amount/interests on fixed deposits accepted by the company.
  4. It should not have defaulted in payment of statutory dues to the employees of the company (Gratuity, EPF)
  5. If there are partly paid shares, co cannot for go bonus shares
  6. Certain other conditions.  

Can bonus shares be issues in leu of Dividend?

No. 

RESTRICTIONS ON COMPANIES (S.67)

No public company shall give any financial assistance (directly or indirectly) to any person for the purchase of any share. Shares may be the shares of the company itself or its holding company.

Such assistance cannot be given by any means like loan, guarantee or any other means. 

It does not apply to 3 circumstances-

If a Banking Company in ordinary course of its business giving loans. (take care of buyback thing)

If the company is providing assistances for the purchase of fully paid shares which are kept by the company as trustee of the employees. 

Where the company is giving loans to employees to buy shares, the amount of loan should not be more than 6 months salary of that employee. The beneficial ownership goes to the employees but the interest remains with the co till the loan has been completely paid-off by the employees.  

BUYBACK 

S.68-Power of Companies to purchase its own securities 

The co can do so from the amount shall be kept in the SPA or the proceeds of the earlier issue or any other specified security. 

Ratio of the total secured and unsecured debt is not more than twice the capital and free reserve 

All brought back securities should be fully paid up.

SEBI buyback regulations should be followed

If not listed co, then prescriptive rules by MCA should be followed

The gap bw two buybacks should be minimum 1 year

Buyback should give explanatory note

Should be competed in one year of the general resolution

From whom buyback?

Exisiting shareholders

They can be brought from open market, 

Shares under ESOP or sweat equity shares

A declaration of solvency has to be filed before RoC by 2 directors ie that it will be fully solvent to payback its debts. If listed co then declaration has to be filed with SEBI as well. 

They have to be extinguished, physically destroyed within 7 days of the buyback.

After completion of buyback, can it go again for fresh issue?

No, waiting period of 6 months will be applicable. 

Why the Company goes for buyback?

  1. To consolidate its shares. 
  2. If the company want to go for restructuring 
  3. To utilise its surplus money. 

PROHIBITION ON BUYBACK IN CERTAIN CIRCUMSTANCES? 

S.70, S.92, S.123, S.127 and S.129

S.70-Prohibition for buy-back in certain circumstances-

(1) No company shall directly or indirectly purchase its own shares or other specified securities— 

(a) through any subsidiary company including its own subsidiary companies; 

(b) through any investment company or group of investment companies; or 

(c) if a default, is made by the company, in the repayment of deposits accepted either before or after the commencement of this Act, interest payment thereon, redemption of debentures or preference shares or payment of dividend to any shareholder, or repayment of any term loan or interest payable thereon to any financial institution or banking company: 

Provided that the buy-back is not prohibited, if the default is remedied and a period of three years has lapsed after such default ceased to subsist. 

(2) No company shall, directly or indirectly, purchase its own shares or other specified securities in case such company has not complied with the provisions of sections 92, 123, 127 and section 129. 

S.92-Annual Return:-

(1) Every company shall prepare a return (hereinafter referred to as the annual return) in the prescribed form containing the particulars as they stood on the close of the financial year regarding-

(a) its registered office, principal business activities, particulars of its holding, subsidiary and associate companies; 

(b) its shares, debentures and other securities and shareholding pattern; 

(c) its indebtedness; 

(d) its members and debenture-holders along with changes therein since the close of the previous financial year; 

(e) its promoters, directors, key managerial personnel along with changes therein since the close of the previous financial year; 

(f) meetings of members or a class thereof, Board and its various committees along with attendance details; 

(g) remuneration of directors and key managerial personnel;
(h) penalty or punishment imposed on the company, its directors or officers and details of 

compounding of offences and appeals made against such penalty or punishment; 

(i) matters relating to certification of compliances, disclosures as may be prescribed; 

(j) details, as may be prescribed, in respect of shares held by or on behalf of the Foreign Institutional Investors indicating their names, addresses, countries of incorporation, registration and percentage of shareholding held by them; and 

(k) such other matters as may be prescribed,
and signed by a director and the company secretary, or where there is no company secretary, by a 

company secretary in practice: 

Provided that in relation to One Person Company and small company, the annual return shall be signed by the company secretary, or where there is no company secretary, by the director of the company. 

(2) The annual return, filed by a listed company or, by a company having such paid-up capital and turnover as may be prescribed, shall be certified by a company secretary in practice in the prescribed form, stating that the annual return discloses the facts correctly and adequately and that the company has complied with all the provisions of this Act. 

(3) An extract of the annual return in such form as may be prescribed shall form part of the Board‘s report. 

(4) Every company shall file with the Registrar a copy of the annual return, within sixty days from the date on which the annual general meeting is held or where no annual general meeting is held in any year within sixty days from the date on which the annual general meeting should have been held together with the statement specifying the reasons for not holding the annual general meeting, with such fees or additional fees as may be prescribed, within the time as specified, under section 403. 

(5) If a company fails to file its annual return under sub-section (4), before the expiry of the period specified under section 403 with additional fees, the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to five lakhs rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both. 

(6) If a company secretary in practice certifies the annual return otherwise than in conformity with the requirements of this section or the rules made thereunder, he shall be punishable with fine which shall not be less than fifty-thousand rupees but which may extend to five lakh rupees. 

DIVIDENDS (S.123)

S.123-Declaration of dividend—

(1) No dividend shall be declared or paid by a company for any financial year except— 

(a) out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub-section (2), or out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with the provisions of that sub-section and remaining undistributed, or out of both; or 

(b) out of money provided by the Central Government or a State Government for the payment of dividend by the company in pursuance of a guarantee given by that Government: 

Provided that a company may, before the declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year as it may consider appropriate to the reserves of the company: 

Provided further that where, owing to inadequacy or absence of profits in any financial year, any company proposes to declare dividend out of the accumulated profits earned by it in previous years and transferred by the company to the reserves, such declaration of dividend shall not be made except in accordance with such rules as may be prescribed in this behalf: 

Provided also that no dividend shall be declared or paid by a company from its reserves other than free reserves: 

Provided also that no company shall declare dividend unless carried over previous losses and depreciation not provided in previous year or years are set off against profit of the company for the current year. 

(2) For the purposes of clause (a) of sub-section (1), depreciation shall be provided in accordance with the provisions of Schedule II. 

(3) The Board of Directors of a company may declare interim dividend during any financial year out of the surplus in the profit and loss account and out of profits of the financial year in which such interim dividend is sought to be declared: 

Provided that in case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years. 

(4) The amount of the dividend, including interim dividend, shall be deposited in a scheduled bank in a separate account within five days from the date of declaration of such dividend. 

(5) No dividend shall be paid by a company in respect of any share therein except to the registered shareholder of such share or to his order or to his banker and shall not be payable except in cash: 

Provided that nothing in this sub-section shall be deemed to prohibit the capitalization of profits or reserves of a company for the purpose of issuing fully paid-up bonus shares or paying up any amount for the time being unpaid on any shares held by the members of the company: 

Provided further that any dividend payable in cash may be paid by cheque or warrant or in any electronic mode to the shareholder entitled to the payment of the dividend. 

(6) A company which fails to comply with the provisions of sections 73 and 74 shall not, so long as such failure continues, declare any dividend on its equity shares. 

S.127-Punishment for failure to distribute dividends-

Where a dividend has been declared by a company but has not been paid or the warrant in respect thereof has not been posted within thirty days from the date of declaration to any shareholder entitled to the payment of the dividend, every director of the company shall, if he is knowingly a party to the default, be punishable with imprisonment which may extend to two years and with fine which shall not be less than one thousand rupees for every day during which such default continues and the company shall be liable to pay simple interest at the rate of eighteen per cent. per annum during the period for which such default continues: 

Provided that no offence under this section shall be deemed to have been committed:— 

(a) where the dividend could not be paid by reason of the operation of any law; 

(b) where a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be complied with and the same has been communicated to him; 

(c) where there is a dispute regarding the right to receive the dividend;
(d) where the dividend has been lawfully adjusted by the company against any sum due to it from 

the shareholder; or 

(e) where, for any other reason, the failure to pay the dividend or to post the warrant within the period under this section was not due to any default on the part of the company. 

S.129-Financial statement-

(1) The financial statements shall give a true and fair view of the state of affairs of the company or companies, comply with the accounting standards notified under section 133 and shall be in the form or forms as may be provided for different class or classes of companies in Schedule III: 

Provided that the items contained in such financial statements shall be in accordance with the accounting standards: 

Provided further that nothing contained in this sub-section shall apply to any insurance or banking company or any company engaged in the generation or supply of electricity, or to any other class of company for which a form of financial statement has been specified in or under the Act governing such class of company: 

Provided also that the financial statements shall not be treated as not disclosing a true and fair view of the state of affairs of the company, merely by reason of the fact that they do not disclose— 

(a) in the case of an insurance company, any matters which are not required to be disclosed by the Insurance Act, 1938 (4 of 1938), or the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999); 

(b) in the case of a banking company, any matters which are not required to be disclosed by the Banking Regulation Act, 1949 (10 of 1949); 

(c) in the case of a company engaged in the generation or supply of electricity, any matters which are not required to be disclosed by the Electricity Act, 2003 (36 of 2003); 

(d) in the case of a company governed by any other law for the time being in force, any matters which are not required to be disclosed by that law. 

(2) At every annual general meeting of a company, the Board of Directors of the company shall lay before such meeting financial statements for the financial year. 

(3) Where a company has one or more subsidiaries, it shall, in addition to financial statements provided under sub-section (2), prepare a consolidated financial statement of the company and of all the subsidiaries in the same form and manner as that of its own which shall also be laid before the annual general meeting of the company along with the laying of its financial statement under sub-section (2): 

Provided that the company shall also attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary or subsidiaries in such form as may be prescribed: 

Provided further that the Central Government may provide for the consolidation of accounts of companies in such manner as may be prescribed. 

Explanation.—For the purposes of this sub-section, the word ―subsidiary‖ shall include associate company and joint venture. 

(4) The provisions of this Act applicable to the preparation, adoption and audit of the financial statements of a holding company shall, mutatis mutandis, apply to the consolidated financial statements referred to in sub-section (3). 

(5) Without prejudice to sub-section (1), where the financial statements of a company do not comply with the accounting standards referred to in sub-section (1), the company shall disclose in its financial statements, the deviation from the accounting standards, the reasons for such deviation and the financial effects, if any, arising out of such deviation. 

(6) The Central Government may, on its own or on an application by a class or classes of companies, by notification, exempt any class or classes of companies from complying with any of the requirements of this section or the rules made thereunder, if it is considered necessary to grant such exemption in the public interest and any such exemption may be granted either unconditionally or subject to such conditions as may be specified in the notification. 

(7) If a company contravenes the provisions of this section, the managing director, the whole-time director in charge of finance, the Chief Financial Officer or any other person charged by the Board with the duty of complying with the requirements of this section and in the absence of any of the officers mentioned above, all the directors shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both. 

Explanation.—For the purposes of this section, except where the context otherwise requires, any reference to the financial statement shall include any notes annexed to or forming part of such financial statement, giving information required to be given and allowed to be given in the form of such notes under this Act. 

CHAPTER V: ACCEPTANCE OF DEPOSITS BY COMPANY

S.73-Deals with company accepting deposits from its members. 

Prohibition on acceptance of deposits from Public unless provisions of Chapter 5 are complied with. 

Other conditions-

Pass a resolution

Confirm with rules of RBI

Subject to terms and conditions of the issue.

Credit Rating

Company has to deposit 20% by 30 April of each year of deposits which are maturing for repayment in the following financial year. Creation of Deposit Redemption Reserve (DRR Account) This amount can be used only for repayment of deposit.

76. Acceptance of deposits from public by certain companies-

(1) Notwithstanding anything contained in section 73, a public company, having such net worth or turnover as may be prescribed, may accept deposits from persons other than its members subject to compliance with the requirements provided in sub-section (2) of section 73 and subject to such rules as the Central Government may, in consultation with the Reserve Bank of India, prescribe: 

Provided that such a company shall be required to obtain the rating (including its net-worth, liquidity and ability to pay its deposits on due date) from a recognised credit rating agency for informing the public the rating given to the company at the time of invitation of deposits from the public which ensures adequate safety and the rating shall be obtained for every year during the tenure of deposits: 

Provided further that every company accepting secured deposits from the public shall within thirty days of such acceptance, create a charge on its assets of an amount not less than the amount of deposits accepted in favour of the deposit holders in accordance with such rules as may be prescribed. 

(2) The provisions of this Chapter shall, mutatis mutandis, apply to the acceptance of deposits from public under this section. 

DIRECTOR OF THE COMPANY

His powers, duties and liabilities. He is the captain of the Ship. Good directors make the company successful. 

Defined u/s 2(34) of the Company Act as a director appointed to the Board of a company; 

A co must have a Board. 

He is an officer of the company

He provides his professional services to the company

He is not an employee of the company. The co is not a master to the company. He only provides his professional service to the co. He can work in a dual capacity. (Lee v Lee case) 

S.149-Every public co must have minimum 3 and maximum 15 directors. For more than 15 directors, it has to pass a special resolution. 

Women Director-Govt may prescribe a class of co which will have to appoint at least 1 women director.

At least one director must have stayed in India for at least 182 days during the financial year. 

Co should have at least 1/3 of total directors as independent directors. 

S.2(10)-The BoD in relationship to a co means a collective body of directors. 

Imperial Hydropathic Hotel Co Blackpool v Hampson 1882

Justice Bowen described director as agents, trustees, managing partners. 

DIRECTORS AS AGENTS OF THE COMPANY 

Ferguson v Wilson 1866

The co is an artificial person which cannot act on its own so the director acts on its behalf. The director allotted certain shares to the P. Because the shares were exhausted, the co could not allot it in reality. Company was held to be liable and not the director. Principle is liable for the agent. 

Elkington & Co v Hurter 1892

The P supplied goods to the co through its chairman. The chairman promised to issue debentures to the P in lieu of the goods supplied. He never did so and the co went into liquidation. Company was held liable and not the chairman. 

PERSONAL LIABILITY OF THE DIRECTOR IN CERTAIN CASES

When he contract in his own name

When he uses the name of the co incorrectly in the contract

When the contract is signed in such a way that it is not clear whether it is signed by the co or the agent. 

When the director exceeds his authority (Ultra-vires)

Certain other points-

They have to disclose their personal interest. 

DIRECTORS AS A TRUSTEES OF THE COMPANY

Company being an artificial person does not have brain of its own. It has to depend on a natural person-Director. TF he has to act in utmost good faith in the interest of the co and not his personal interest. He is in a fiduciary relationship with the company in dealing with the affairs of the co.

Because he is an insider, he knows things that others do not know. 

Ramaswamy Iyer v Brahamayya & Co 1966

Court explained the meaning of Director working as a trustee of a co. Directors are trustees of the co wrt to application of the funds of the co. 

Percival v Wright 1902

The directors of the company purchased shares from the selling shareholders (Plaintiffs) without telling them that they were in the process of selling the company. The SH wanted to repudiate the contract for violation of fiduciary relationship. Held that directors only owe duties of loyalty to the company, and not to individual shareholders.

However, it has been distinguished in at least two subsequent cases. In Coleman v Myers  and Peskin v Anderson the court described this as being the general rule, but one which may be subject to exceptions where the circumstances are such that a director may owe a greater duty to an individual shareholder, such as when that shareholder is known to be relying upon the director for guidance, or where the shareholder is a vulnerable person.

Peskin v Anderson

Directors do not owe individual fiduciary relationship with all SH. 

Coleman v Myers 1977

Case of pvt held company which had large no of assets and shares. Shares were undervalued in the books of account which showed its values as 4.10 Dollars per shares. True value in realty was 7.75 Dollars. Some dominant SH incorporated another co and wanted to buy the shares of this company at $4.80/-per shares. The offered value was more than the book value but lesser than true value. This inside info was not disclosed to existing/dissenting SH and they were made part of the acquisition process. Later when they got to know they asked for repudiation of the acquisition. It was allowed as there was breach of fiduciary relationship. 

Going Concern-That the company after paying all its debts and liabilities is still able to function properly. 

DIRECTORS AS ORGANS OF THE COMPANY-

Directors are organs of the company. 

Panorama Dev Guildford Ltd v Fidelis Furnishing Fabric Ltd 1972

For certain purposes secy (employees) are also organs of the company. The secy booked certain taxis while in office but for his personal use. 

If a director commits tort during the course of employment, will he be personally liable or company liable?

Depends on circumstances. To what degree he was personally involved.

Fairline Shipping Corporation v Adamson 1974

Certain goods perished from the Godown of the co. The director had signed the transactions with his personal letterhead. Yes, there will be personal liability. 

Trevor Ivory Ltd v Anderson

A one person co had a director. He gave an advice to a client through the co to spray insecticides in his field. Everything perished. He would not be liable.

Directors as Managing Partners

This holds true in case of Pvt Cos

INDEPENDENT DIRECTORS S.149(6)

He doesn’t have any material or pecuniary interest in the company. He does not get anything from the company. 

In the 1956, this was not mandatory. But now all public listed co are required to have 1/3 directors as independent directors. They are there as a watchdogs. 

S.149(6)-Two page definition 

  1. An ID in relation to co means a director who is not a managing director, a whole time director or nominee director and who in the opinion of the board, a person of integrity and possess expertise and experience.
  2. Who is/was not promotor of this company, holding co, subsidiary co or associate company
    1. Who is not related to promotor or director of the company or its holding subsidiary associate. 
    2. He has no pecuniary relationship with the co (including its holding, subsidiary) except as permitted under the law
    3. None of his relative is holding any security or interest in the co in which he is to be appointed as independent director preceding 2 years.
      1. Provided the relative may hold security of face value not exceeding 50lac rupees of 2% of the paid capital of the company. 
      2. None of whose relative is indebted to this co (including its holding, subsidiary or associate co) or their promotor in excess of certain amount.
    4. IDs are not entitled to get stock options.

Clause 12-Liability of IDs and Executive Directors

  1. Only wrt such act of omission/commission which has occurred with his knowledge attributable by the board process and with his consent or connivance or where he has not acted diligently. 

New Amendment: Exam for Independent Directors, Minimum 60% score 

S.152

Shareholders have an imp control over the affairs of the company.

Every director has to be appointed in the general meeting

First Directors

S.152 Appointment of directors 

(1) Where no provision is made in the articles of a company for the appointment of the first director, the subscribers to the memorandum who are individuals shall be deemed to be the first directors of the company until the directors are duly appointed and in case of a One Person Company 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 this section. 

(2) Save as otherwise expressly provided in this Act, every director shall be appointed by the company in general meeting. 

(3) No person shall be appointed as a director of a company unless he has been allotted the Director Identification Number under section 154. 

(4) Every person proposed to be appointed as a director by the company in general meeting or otherwise, shall furnish his Director Identification Number and a declaration that he is not disqualified to become a director under this Act. 

(5) A person appointed as a director shall not act as a director unless he gives his consent to hold the office as director and such consent has been filed with the Registrar within thirty days of his appointment in such manner as may be prescribed: 

Provided that in the case of appointment of an independent director in the general meeting, an explanatory statement for such appointment, annexed to the notice for the general meeting, shall include a statement that in the opinion of the Board, he fulfils the conditions specified in this Act for such an appointment. 

(6) (a) Unless the articles provide for the retirement of all directors at every annual general meeting, not less than two-thirds of the total number of directors of a public company shall— 

(i) be persons whose period of office is liable to determination by retirement of directors by rotation; and 

(ii) save as otherwise expressly provided in this Act, be appointed by the company in general meeting. 

(b) The remaining directors in the case of any such company shall, in default of, and subject to any regulations in the articles of the company, also be appointed by the company in general meeting. 

(c) At the first annual general meeting of a public company held next after the date of the general meeting at which the first directors are appointed in accordance with clauses (a) and (b) and at every subsequent annual general meeting, one-third of such of the directors for the time being as are liable 

to retire by rotation, or if their number is neither three nor a multiple of three, then, the number nearest to one-third, shall retire from office. 

(d) 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 who became 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. 

(e) At the annual general meeting at which a director retires as aforesaid, the company may fill up the vacancy by appointing the retiring director or some other person thereto. 

Explanation: For the purposes of this sub-section, total number of directors‖ shall not include independent directors, whether appointed under this Act or any other law for the time being in force, on the Board of a company. 

(7) (a) If the vacancy of the retiring director is not so filled-up and the meeting has not expressly resolved not to fill the vacancy, the meeting shall stand adjourned till the same day in the next week, at the same time and place, or if that day is a national holiday, till the next succeeding day which is not a holiday, at the same time and place. 

(b) If at the adjourned meeting also, the vacancy of the retiring director is not filled up and that meeting also has not expressly resolved not to fill the vacancy, the retiring director shall be deemed to have been re-appointed at the adjourned meeting, unless— 

(i) at that meeting or at the previous meeting a resolution for the re-appointment of such director has been put to the meeting and lost; 

(ii) the retiring director has, by a notice in writing addressed to the company or its Board of directors, expressed his unwillingness to be so re-appointed; 

(iii) he is not qualified or is disqualified for appointment;
(iv) a resolution, whether special or ordinary, is required for his appointment or re-appointment 

by virtue of any provisions of this Act; or (v) section 162 is applicable to the case. 

Explanation: For the purposes of this section and section 160, the expression ―retiring director‖ means a director retiring by rotation. 

In case of OPC, the person incorporating the co becomes the First Directors 

Requirements u/s 152-

  1. Anyone wanting to become Dr has to obtain DIN (Dr Identification Number) from MCA
  2. Furnish a declaration that he is not disqualified to become a dir under the Act
  3. His written consent with RoC 

Annual Rotation 

S.153-The Directors have to make an application for DIN

S.154-Within one month MCA will allot DIN

One director can have only one DIN

S.156-He has to indicate his DIN to the CO which will inform it to ROC. It has to be mentioned at all platforms of the Co

S.157-Company to inform Director Identification Number to Registrar-

(1) Every company shall, within fifteen days of the receipt of intimation under section 156, furnish the Director Identification Number of all its directors to the Registrar or any other officer or authority as may be specified by the Central Government with such fees as may be prescribed or with such additional fees as may be prescribed within the time specified under section 403 and every such intimation shall be furnished in such form and manner as may be prescribed. 

(2) If a company fails to furnish Director Identification Number under sub-section (1), before the expiry of the period specified under section 403 with additional fee, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees and every officer of the company who is in default shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees. 

S.161-Appointment of additional director, Alternate director and nominee director- 

(1) The articles of a company may 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. 

(2) The Board of Directors of a company may, if so authorised 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 three months from India: 

Provided that no person shall be appointed as an alternate director for an independent director unless he is qualified to be appointed as an independent director under the provisions of this Act: 

Provided further that 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: 

Provided also that if the term of office of the original director is determined before he so returns to India, any provision for the automatic re-appointment of retiring directors in default of another appointment shall apply to the original, and not to the alternate director. 

(3) 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. 

(4) 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 may, in default of and subject to any regulations in the articles of the company, be filled by the Board of Directors at a meeting of the Board: 

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. 

S.165-Number of directorships 

(1) No person, after the commencement of this Act, shall hold office as a director, including any alternate directorship, in more than 10 companies at the same time: 

Provided that the maximum number of public companies in which a person can be appointed as a director shall not exceed ten. 

Explanation:-For reckoning the limit of public companies in which a person can be appointed as director, directorship in private companies that are either holding or subsidiary company of a public company shall be included. 

(2) Subject to the provisions of sub-section (1), the members of a company may, by special resolution, specify any lesser number of companies in which a director of the company may act as directors. 

(3) Any person holding office as director in companies more than the limits as specified in sub-section (1), immediately before the commencement of this Act shall, within a period of one year from such commencement,- 

(a) choose not more than the specified limit of those companies, as companies in which he wishes to continue to hold the office of director; 

(b) resign his office as director in the other remaining companies; and 

(c) intimate the choice made by him under clause (a), to each of the companies in which he was holding the office of director before such commencement and to the Registrar having jurisdiction in respect of each such company. 

(4) Any resignation made in pursuance of clause (b) of sub-section (3) shall become effective immediately on the despatch thereof to the company concerned. 

(5) No such person shall act as director in more than the specified number of companies,-
(a) after despatching the resignation of his office as director or non-executive director thereof, in 

pursuance of clause (b) of sub-section (3); or
(b) after the expiry of one year from the commencement of this Act, 

whichever is earlier. 

(6) If a person accepts an appointment as a director in contravention of sub-section (1), he shall be punishable with fine which shall not be less than five thousand rupees but which may extend to twenty-five thousand rupees for every day after the first during which the contravention continues. 

At a given time a person cannot be director for more than 10 companies. This includes alternate directorship. 

DUTIES OF DIRECTOR (S.166)

  1. He shall act in accordance with AoA
  2. Act in good faith in order to promote the objects of the co for the benefit of the members as a whole and in the best interest of company, employees, shareholders, community and for the protection of the environment. 
  3. Due and reasonable care, skill, diligence and shall exercise independent judgement 
  4. Shall not involve in a situation in which he has direct or indirect interest which conflict with the interest of the company. 
  5. Should not achieve nor attempt to achieve any undue gain either to himself or his relatives, partners, associates, etc
  6. Not Assign his office 
  7. Fine for non-compliance 

S.166 Duties of directors

(1) Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of the company. 

(2) A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment. 

(3) A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment. 

(4) A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company. 

(5) A director of a company shall not achieve or attempt to 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. 

(6) A director of a company shall not assign his office and any assignment so made shall be void. 

(7) If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees. 

Aviliny Barford Ltd v Perion Ltd.

The companies assets were sold for 350000 Pounds. Director let that sale happen even though he was aware that its value its 650000 Pounds.That was held to be beach of fiduciary relationship

Intl Sales Agency Ltd v Marcus 

Dr agreed to give property of co to outsiders without any considerations and without consent of shareholders. Was held to be a breach.

DOCTRINE OF CONSTRUCTIVE TRUSTEE

This is applicable to Buyers. 

If the buyers are aware of the companies position, they become constructive trustees and they also become liable together with the directors. 

Bracken Partners Ltd v Gutteridge 

Funds of the co were used to buy house for the wife of the director. 

British Midland Tool v Midland International Tooling Ltd 2003

MD and 3 other executive directors devised a secret plan to open a rival company. MD resigned and incorporated the rival co and started luring away the clients of the co. Only executive directors will be liable. Held to be breach of fiduciary relationship. 

DIRECTORS PERSONAL PROFIT

Albian Steel and Wire Co v Martin 1875

Director of a co sold certain goods to his own co at the market prices. He made profits as he had obtained the stocks at a lower rate. Was held to be liable because it was a secret profit. He didn’t disclose the price at which he had brought the goods. 

Diversion of Business

DOCTRINE OF CORPORATE OPPORTUNITY

In case any opportunity comes to the company which is in the interest of co but the directors using his powers utilise the opportunity for his personal gain by taking away that opportunity from the company, this would be considered breach of fiduciary duty. 

Cook v Deeks 1916

Dr of the co diverted a contract opportunity of co to themselves. By their 3/4 voting rights in the co they resolved that co had no interest in that. 

Burland v Earle 1902

Burland was director of the plaintiff co and was also a shareholder and creditor of another co Burland Lithographic Co.  The latter co was being wound up. During Liquidation process public sale was initiated. Burland purchased all assets in 4 lots and the price paid by him was 21564 pounds. Immediately thereafter he sold them to the plaintiff co of which he was director at 60000 Pounds. He was held to be liable. 

WHEN DIRECTORS ARE ALLOWED TO MAKE PROFITS?

  1. Where the corp is insolvent and defunct
  2. If the undertaking is ultra-vires the co
  3. When the opportunity is outside the scope of the co business/objective 
  4. When the corp has shown no interest in the offer. 
  5. Where a new venture is offered to the co and its director bonafide conclude that it is not an investment that the co ought to make.

Peso Silver Mines v Cropper 

All above circumstances were listed in this case.

REGAL TEST OF HONESTY

Guliver v Regal Ltd

Gulliver owned Regal cinema in Hastings. The Directors wanted to acquire two more cinema houses and then sell the whole property as a going concern and make profit. For acquisition they formed a subsidiary company with a authorised capital of 5K Pounds. They were offered the lease with the condition of fixed rent unless the subsidiary raises the 5K Pounds. The company has intended to first buy the cinemas and then raise 5K through them. The co however could raise only 2K. Therefore in order to make it 5K, 500 was contributed by each directors, 500 was contributed by the solicitor of the co and the remaining amount was contributed by certain other persons who were identified by the chairman of the Regal cinemas. Later when the cinemas were acquired, the co sold the entire concern in profit. Directors were accused of making Profits. 

Wrt to the directors, court held that since they were in a fiduciary relationship with the co they have to return the profits. Had they really been honest, they would have returned the profit to the company

Wrt solicitors, it held that they were employees and hence not in a fiduciary relationship with the co.

Another duty of director is to exercise due care skill and diligence which essentially means not to be negligent. Mere fidelity and good faith is not enough.

Justice Cardozo-The diligent directors are one who exhibit in the performance of their trust, with the same degree of care and prudence that men prompted by self interest generally exercise in their own  affairs. 

DUTY OF NON-EXECUTIVE DIRECTORS IN DUE CARE AND DILIGENCE-

Non-Executive directors are not responsible for day to day affairs of the company. 

All independent directors are non-executive directors. 

They have to exercise same level of due care skill and diligence. Eg-They sign a blank cheque and someone misappropriates that. They will be responsible.

They have to attend the board meetings whenever they can do so. If he is absent for more than one year without notice, that will be a ground for removal. (S.167)

INDEPENDENT DIRECTORS 

An interest director is defined u/s 2(49)-The director who in any way whether by himself or by his relatives or through his firm or body corporates or any other association of firm in which he or any of his relative is partner or a director or a member interested in a contract or arrangement entered into behalf of the company. 

Duty to disclose interest (S.184)

S.184 Disclosure of Interest by director

  1. Every director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the disclosures already made, then at the first Board meeting held after such change, disclose his concern or interest in any company or companies or bodies corporate, firms, or other association of individuals which shall include the shareholding, in such manner as may be prescribed. 

(2) Every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into— 

(a) with a body corporate in which such director or such director in association with any other director, holds more than two per cent. shareholding of that body corporate, or is a promoter, manager, Chief Executive Officer of that body corporate; or 

(b) with a firm or other entity in which, such director is a partner, owner or member, as the case may be, 

shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed and shall not participate in such meeting: 

Provided that where any director who is not so concerned or interested at the time of entering into such contract or arrangement, he shall, if he becomes concerned or interested after the contract or arrangement is entered into, disclose his concern or interest forthwith when he becomes concerned or interested or at the first meeting of the Board held after he becomes so concerned or interested. 

(3) A contract or arrangement entered into by the company without disclosure under sub-section (2) or with participation by a director who is concerned or interested in any way, directly or indirectly, in the contract or arrangement, shall be voidable at the option of the company. 

(4) If a director of the company contravenes the provisions of sub-section (1) or subsection (2), such director shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to one lakh rupees, or with both. 

(5) Nothing in this section—
(a) shall be taken to prejudice the operation of any rule of law restricting a director of a company 

from having any concern or interest in any contract or arrangement with the company; 

(b) shall apply to any contract or arrangement entered into or to be entered into between two companies where any of the directors of the one company or two or more of them together holds or hold not more than two per cent. of the paid-up share capital in the other company. 

CHAPTER XVI-OPPRESSION AND MISMANAGEMENT 

PROTECTION OF MINORITY SHAREHOLDERS

Majority Rule-Majority in the co have supremacy 

Common law Rule

Foss v Hard-bottle 1843

Few shareholders wanted to file a case against the majority shareholders for illegal and fraudulent transactions done by them. They were not allowed to bring this case on two grounds-

  1. If there is any wrong done to the co either by the directors or by outsiders, the proper plaintiff will be the co itself.
  2. If the alleged transaction is such a transaction which a majority of shareholders can approve, why should the court interfere in that.

In the affairs if the admin of the co, the court will not interfere at the instance of shareholders. 

Derivative Actions in US-Power derived by SH to file case-

Over a period of time this was felt to be problematic. So exceptions were created-

  1. Acts ultra-vires
  2. Fraud on Minority
  3. Acts requiring special majority 
  4. Wrong doers in control
  5. Individual memberships rights
  6. In the form of mismanagement and oppression

FRAUD ON MINORITY

Fraud on minority has evolved a lot-

Menier v Coopers Telegraph Work 1874

Majority SH in co ‘A’ were also the majority SH in Co B. There were some disputes b/w ‘A’ and ‘B’. A filed a case against B. They wanted to enter into compromise. MSH insisted that compromise should be in favor of B. The Minority SH of A accused them of fraud on minority. Court didn’t allow the compromise. 

General Principles-

Majority cannot appropriate the property of the co in their favor 

Cooks v Deeks

Dr of the co had 3/4 shareholdings. They took a contract of the co in their name excluding the co. Court objected as they were benefiting at the expense of the company and its shareholders. 

Majority can expropriate the interests of the minority SH

Brown v British Abrasive Wheel Co 1871

Majority SH had 98% shares. They wanted to amend the AoA to allow them to compulsorily purchase the minority shareholding of the co. Court analysed whether it was for the benefit of the co. In this case it was not found to be in the benefit of the co. 

Side-bottom v Kershaw Lease and Co 1920

The minority SH was running a competing business. The co passed a resolution to give power to the directors to compulsorily transfer shares of competing businesses to the nominees of the directors. There is no restriction on directors to run competing business. It was for the benefit of the co to get rid of the competing business. 

Question-Benefit of the co or benefit of every corporation?

Dafem Tinplate Co v Llanelly Steel Co 1907 Ltd 1920

When the P and D co were incorporated who had cross-SH, it was decided that all SH of both co will purchase tinplates from D co. P co refused to buy tinplates from D. A resolution was passed allowing D co that shares of any member can be offered for sale by the directors to such persons at such and such price. This was not allowed. 

Jhajharia Bros Ltd v Sholapur Spinning Mills Co Ltd 1941

Any breach of duty which causes loss to the company should be treated as fraud on minority. 

WRONGDOER IN CONTROL

In such a case the MSH can approach the court. 

Where individual rights are infringed, MSHs can approach court

In case of oppression and mis-management, one can approach court (S.241)

S.241-Application to Tribunal for relief in cases of oppression, etc-

  1. Any member of a company who complains that-
    1. (a) the affairs of the company have been or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial to the interests of the company; or 
    2. (b) the material change, not being a change brought about by, or in the interests of, any creditors, including debenture holders or any class of shareholders of the company, has taken place in the management or control of the company, whether by an alteration in the Board of Directors, or manager, or in the ownership of the company‘s shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to its interests or its members or any class of members, 
    3. may apply to the Tribunal, provided such member has a right to apply under section 244, for an order under this Chapter. 
  2. The Central Government, if it is of the opinion that the affairs of the company are being conducted in a manner prejudicial to public interest, it may itself apply to the Tribunal for an order under this Chapter. 

Shanti Prasad Jain v Kalinga Tubes Ltd 1965

3 Group of SH

A Ravishankar Prasad v Prasad Productions Private Ltd 2007

2 decisions of directors were challenged as oppressive. Directors decision to write off a bad debt and to remove a director. Court said that these are business decisions. If they do not lead to loss for the co, they cannot be challenged. 

If there is an allegation of diversion of Funds of Co, but there was no evidence, hence it was not held to be fraud on companies.

2014 case-

Ishita Ghosh v JDS Technologies Pvt Ltd 2014

Co allotted shares leading to reduction of percentage petitioners shares. This was held to be not oppressive. 

Needle Industries (India) Ltd v Needle Industries Newey India Holding Ltd 1981

There was a pvt co whose AoA provided that when directors decide to increase capital by new shares, it has to be first offered to exisiting shareholders and if they refuse, then to outsiders for the benefit of the co. This was a wholly owned subsidiary of an English Co. GOI in the meanwhile, issued a guideline that foreign holdings must be diluted. Co passed a resolution that it will issue new shares to the existing SH and their relatives. S.43A of 1956 act provided that if any co’s more than 25% shares with a body corporate, it will be deemed to be a public co. Further govt directive said govt. foreign shareholding be reduced to 40%. The foreign holding co said that they want to sell their shares to a co in which they already had shares. Indian SH did not agree to this and demanded that the co issue new shares. And they passed a resolution for this purpose the notice of which reach the holding co so late. Court said it was not oppression because if they had got the notice, they would anyway had to reduce the shareholding. 

News wrt Controlling Shareholders

S.244-Right to apply under section 241

  1. The following members of a company shall have the right to apply under section 241, namely
    1. (a) in the case of a company having a share capital, not less than one hundred members of the company or not less than one-tenth of the total number of its members, whichever is less, or any member or members holding not less than one-tenth of the issued share capital of the company, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares; 
    2. (b) in the case of a company not having a share capital, not less than one-fifth of the total number of its members: 
    3. Provided that the Tribunal may, on an application made to it in this behalf, waive all or any of the requirements specified in clause (a) or clause (b) so as to enable the members to apply under section 241. 
    4. Explanation.—For the purposes of this sub-section, where any share or shares are held by two or more persons jointly, they shall be counted only as one member. 
  2. Where any members of a company are entitled to make an application under subsection (1), any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them. 

Sindhri Iron Foundry Pvt Ltd, Re 1963

There were 2 group of SHs. Both were separately trying to run the co with 2 board of directors and 2 registered offices. The group with minority SH was very aggressive and constituted another BoD and Office. Court asked the minority to buy the majority SH and they did. 

S.242-Powers of Tribunal (NCLT)

  1. If, on any application made under section 241, the Tribunal is of the opinion-
    1. (a) that the company‘s affairs have been or are being conducted in a manner prejudicial or oppressive to any member or members or prejudicial to public interest or in a manner prejudicial to the interests of the company; and 
    2. (b) that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound up, 
    3. the Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit. 
  2. Without prejudice to the generality of the powers under sub-section (1), an order under that sub-section may provide for-
    1. (a) the regulation of the conduct of affairs of the company in future;
    2. (b) the purchase of shares or interests of any members of the company by other members thereof or by the company; 
    3. (c) in the case of a purchase of its shares by the company as aforesaid, the consequent reduction of its share capital; 
    4. (d) restrictions on the transfer or allotment of the shares of the company; 
    5. (e) the termination, setting aside or modification, of any agreement, howsoever arrived at, between the company and the managing director, any other director or manager, upon such terms and conditions as may, in the opinion of the Tribunal, be just and equitable in the circumstances of the case; 
    6. (f) The termination, setting aside or modification of any agreement between the company and any person other than those referred to in clause (e):
      1. Provided that no such agreement shall be terminated, set aside or modified except after due notice and after obtaining the consent of the party concerned; 
    7. (g) the setting aside of any transfer, delivery of goods, payment, execution or other act relating to property made or done by or against the company within three months before the date of the application under this section, which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference; 
    8. (h) removal of the managing director, manager or any of the directors of the company; 
    9. (i) recovery of undue gains made by any managing director, manager or director during the period of his appointment as such and the manner of utilisation of the recovery including transfer to Investor Education and Protection Fund or repayment to identifiable victims; 
    10. (10)(j) the manner in which the managing director or manager of the company may be appointed subsequent to an order removing the existing managing director or manager of the company made under clause (h); 
    11. (k) appointment of such number of persons as directors, who may be required by the Tribunal to report to the Tribunal on such matters as the Tribunal may direct; 
    12. (12)(l) imposition of costs as may be deemed fit by the Tribunal; 
    13. (13)(m) Any other matter for which, in the opinion of the Tribunal, it is just and equitable that provision should be made. 
  3. A certified copy of the order of the Tribunal under sub-section (1) shall be filed by the company with the Registrar within thirty days of the order of the Tribunal. 
  4. The Tribunal may, on the application of any party to the proceeding, make any interim order which it thinks fit for regulating the conduct of the company‘s affairs upon such terms and conditions as appear to it to be just and equitable. 
  5. Where an order of the Tribunal under sub-section (1) makes any alteration in the memorandum or articles of a company, then, notwithstanding any other provision of this Act, the company shall not have power, except to the extent, if any, permitted in the order, to make, without the leave of the Tribunal, any alteration whatsoever which is inconsistent with the order, either in the memorandum or in the AoA. 
  6. Subject to the provisions of sub-section (1), the alterations made by the order in the memorandum or articles of a company shall, in all respects, have the same effect as if they had been duly made by the company in accordance with the provisions of this Act and the said provisions shall apply accordingly to the memorandum or articles so altered. 
  7. A certified copy of every order altering, or giving leave to alter, a company‘s memorandum or articles, shall within thirty days after the making thereof, be filed by the company with the Registrar who shall register the same. 
  8. If a company contravenes the provisions of sub-section (5), the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees or with both

OPPRESSION QUA MEMBER

Oppression should have been suffered through other member.

Oppression should be continuing nature. 

One single act of oppression may not be an oppression 

Fairness of Petitioners conduct is also very important 

Rajahmundry Electric Supply Corp Ltd v A Nageswar Rao 1956

Some SH petitioned that affairs of the co were mismanaged by the directors. Court found that chairman was actually mismanaged the co and there were large dues to the govt. Court appointed an administrators to take care of the management of the co for 6 months.

S.245-Class Action Suit

CHAPTER VIII: DECLARATION & PAYMENT OF DIVIDENDS 

Share of Profits distributed to the SHs. 

Do we have powers to declare dividends under MoA or AoA? 

Dividend must never be paid out of capital. Dividend shall be paid only out of Profits

S.123-Declaration of dividend

(1) No dividend shall be declared or paid by a company for any financial year except— 

(a) out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub-section (2), or out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with the provisions of that sub-section and remaining undistributed, or out of both; or 

(b) out of money provided by the Central Government or a State Government for the payment of dividend by the company in pursuance of a guarantee given by that Government: 

Provided that a company may, before the declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year as it may consider appropriate to the reserves of the company: 

Provided further that where, owing to inadequacy or absence of profits in any financial year, any company proposes to declare dividend out of the accumulated profits earned by it in previous years and transferred by the company to the reserves, such declaration of dividend shall not be made except in accordance with such rules as may be prescribed in this behalf: 

Provided also that no dividend shall be declared or paid by a company from its reserves other than free reserves: 

Provided also that no company shall declare dividend unless carried over previous losses and depreciation not provided in previous year or years are set off against profit of the company for the current year.

(2) For the purposes of clause (a) of sub-section (1), depreciation shall be provided in accordance with the provisions of Schedule II. 

(3) The Board of Directors of a company may declare interim dividend during any financial year out of the surplus in the profit and loss account and out of profits of the financial year in which such interim dividend is sought to be declared: 

Provided that in case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years. 

(4) The amount of the dividend, including interim dividend, shall be deposited in a scheduled bank in a separate account within five days from the date of declaration of such dividend. 

(5) No dividend shall be paid by a company in respect of any share therein except to the registered shareholder of such share or to his order or to his banker and shall not be payable except in cash: 

Provided that nothing in this sub-section shall be deemed to prohibit the capitalisation of profits or reserves of a company for the purpose of issuing fully paid-up bonus shares or paying up any amount for the time being unpaid on any shares held by the members of the company: 

Provided further that any dividend payable in cash may be paid by cheque or warrant or in any electronic mode to the shareholder entitled to the payment of the dividend. 

(6) A company which fails to comply with the provisions of sections 73 and 74 shall not, so long as such failure continues, declare any dividend on its equity shares. 

If dividend is paid out of ‘Capitals’ of the co, there will be personal liability on directors for ‘Breach of Trust’ 

Dovey v Covey 1901

The question was how a court should know if there was real profit. 

Court said it will depend on the circumstances of each case

NOTE: Dividend is required to be declared annually. Once declared, it cannot be withdrawn as it becomes a debt against the co. But interim dividend can be withdrawn. 

WHAT IS INTERIM DIVIDEND?

Interim is extra profit and is not statutorily mandated. 

A Quorum is required for every approval/resolution 

If the co does not have sufficient profit in current financial offer and co wants to pay out of the profit out of the profits of previous year, it can do so. But such profits should have been transferred to the free reserves of the co.  Such reserves can be created only out of the profit of the co.

PROVISION OF DEPRECIATION

It is compulsary for co to provide depreciation as well as arrears. 

Depreciation is the normal wear and tear. 

A co had a ship which was of the value 3 lac pounds. The life was supposed to be 10 years as there was annual depreciation of 10%. Should co provide for this depreciation? 

Lee v Newchatel Asphalt Co 1889

D was a mining co and every year there is depletion of Asphalt reserves. It declared dividend and put and amount of depreciation. One SH objected to this. That when you know that assets of the co are of wasting nature, why provide for depreciation? 

Bolton Case

Co act do not require capital to be made up if lost. If there decline in the value of land it cannot be made up by reduction in dividend.

Verner v General & Commercial Investment Trust 1894

A co had investment in land costing 6 lac pound. After some years it became 2 lac. During calculation of dividend it wanted to decrease depreciation of land. It was held it cannot do so. He said that fixed capital could be sunk but not circulating capital. Fixed capital will be maintained during the life of the co. They include buildings, land, ships, mills, etc. Circulating capital include, raw material, wages, etc. 

If you cannot recover depreciating assets, there is no point of deduction. If circulating capital is 1 crore, it has to be maintained. If there is extra, it has to be distributed as dividend.

CHAPTER IX: ACCOUNTS OF THE COMPANY

S.128-Books of account, etc., to be kept by company.—

(1) Every company shall prepare and keep at its registered office books of account and other relevant books and papers and financial statement for every financial year which give a true and fair view of the state of the affairs of the company, including that of its branch office or offices, if any, and explain the transactions effected both at the registered office and its branches and such books shall be kept on accrual basis and according to the double entry system of accounting: 

Provided that all or any of the books of account aforesaid and other relevant papers may be kept at such other place in India as the Board of Directors may decide and where such a decision is taken, the company shall, within seven days thereof, file with the Registrar a notice in writing giving the full address of that other place: 

Provided further that the company may keep such books of account or other relevant papers in electronic mode in such manner as may be prescribed. 

(2) Where a company has a branch office in India or outside India, it shall be deemed to have complied with the provisions of sub-section (1), if proper books of account relating to the transactions effected at the branch office are kept at that office and proper summarized returns periodically are sent by the branch office to the company at its registered office or the other place referred to in sub-section (1). 

(3) The books of account and other books and papers maintained by the company within India shall be open for inspection at the registered office of the company or at such other place in India by any director during business hours, and in the case of financial information, if any, maintained outside the country, copies of such financial information shall be maintained and produced for inspection by any director subject to such conditions as may be prescribed: 

Provided that the inspection in respect of any subsidiary of the company shall be done only by the person authorised in this behalf by a resolution of the Board of Directors. 

(4) Where an inspection is made under sub-section (3), the officers and other employees of the company shall give to the person making such inspection all assistance in connection with the inspection which the company may reasonably be expected to give. 

(5) The books of account of every company relating to a period of not less than eight financial years immediately preceding a financial year, or where the company had been in existence for a period less than eight years, in respect of all the preceding years together with the vouchers relevant to any entry in such books of account shall be kept in good order: 

Provided that where an investigation has been ordered in respect of the company under Chapter XIV, the Central Government may direct that the books of account may be kept for such longer period as it may deem fit. 

(6) If the managing director, the whole-time director in charge of finance, the Chief Financial Officer or any other person of a company charged by the Board with the duty of complying with the provisions of this section, contravenes such provisions, such managing director, whole-time director in charge of finance, Chief Financial officer or such other person of the company shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees or with both. 

S.129-Financial Statement 

True and fair view of the state of affairs of the co. Should comply with the accounting standards u/s 133 as provided by the central govt.

Balance sheet not be mere inventory. 

S.132-National Financial Reporting Authority-Lays down accounting and auditing policies. 

S.134-Board Report 

CHAPTER X: AUDITS AND AUDITORS

S.138-Internal Audits 

(1) Such class or classes of companies as may be prescribed shall be required to appoint an internal auditor, who shall either be a chartered accountant or a cost accountant, or such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the company. 

(2) The Central Government may, by rules, prescribe the manner and the intervals in which the internal audit shall be conducted and reported to the Board. 

S.139-Appointment of Auditors 

(1) Subject to the provisions of this Chapter, every company shall, at the first annual general meeting, appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting and the manner and procedure of selection of auditors by the members of the company at such meeting shall be such as may be prescribed: 

Provided that the company shall place the matter relating to such appointment for ratification by members at every annual general meeting: 

Provided further that before such appointment is made, the written consent of the auditor to such appointment, and a certificate from him or it that the appointment, if made, shall be in accordance with the conditions as may be prescribed, shall be obtained from the auditor: 

Provided also that the certificate shall also indicate whether the auditor satisfies the criteria provided in section 141: 

Provided also that the company shall inform the auditor concerned of his or its appointment, and also file a notice of such appointment with the Registrar within fifteen days of the meeting in which the auditor is appointed. 

Explanation For the purposes of this Chapter, appointment‖ includes re-appointment.
(2) No listed company or a company belonging to such class or classes of companies as may be 

prescribed, shall appoint or re-appoint—
(a) an individual as auditor for more than one term of five consecutive years; and (b) an audit firm as auditor for more than two terms of five consecutive years: 

Provided that-

(i) an individual auditor who has completed his term under clause (a) shall not be eligible for re-appointment as auditor in the same company for five years from the completion of his term; 

(ii) an audit firm which has completed its term under clause (b), shall not be eligible for re- appointment as auditor in the same company for five years from the completion of such term: 

Provided further that as on the date of appointment no audit firm having a common partner or partners to the other audit firm, whose tenure has expired in a company immediately preceding the financial year, shall be appointed as auditor of the same company for a period of five years: 

Provided also that every company, existing on or before the commencement of this Act which is required to comply with provisions of this sub-section, shall comply with the requirements of this sub-section within three years from the date of commencement of this Act: 

Provided also that, nothing contained in this sub-section shall prejudice the right of the company to remove an auditor or the right of the auditor to resign from such office of the company. 

(3) Subject to the provisions of this Act, members of a company may resolve to provide that—
(a) in the audit firm appointed by it, the auditing partner and his team shall be rotated at such 

intervals as may be resolved by members; or
(b) the audit shall be conducted by more than one auditor. 

(4) The Central Government may, by rules, prescribe the manner in which the companies shall rotate their auditors in pursuance of sub-section (2). 

Explanation.—For the purposes of this Chapter, the word ―firm‖ shall include a limited liability partnership incorporated under the Limited Liability Partnership Act, 2008 (6 of 2009). 

(5) Notwithstanding anything contained in sub-section (1), in the case of a Government company or any other company owned or controlled, directly or indirectly, 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, the Comptroller and Auditor-General of India shall, in respect of a financial year, appoint an auditor duly qualified to be appointed as an auditor of companies under this Act, within a period of one hundred and eighty days from the commencement of the financial year, who shall hold office till the conclusion of the annual general meeting. 

(6) Notwithstanding anything contained in sub-section (1), the first auditor of a company, other than a Government company, shall be appointed by the Board of Directors within thirty days from the date of registration of the company and in the case of failure of the Board to appoint such auditor, it shall inform the members of the company, who shall within ninety days at an extraordinary general meeting appoint such auditor and such auditor shall hold office till the conclusion of the first annual general meeting. 

(7) Notwithstanding anything contained in sub-section (1) or sub-section (5), in the case of a Government company or any other company owned or controlled, directly or indirectly, 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, the first auditor shall be appointed by the Comptroller and Auditor-General of India within sixty days from the date of registration of the company and in case the Comptroller and Auditor-General of India does not appoint such auditor within the said period, the Board of Directors of the company shall appoint such auditor within the next thirty days; and in the case of failure of the Board to appoint such auditor within the next thirty days, it shall inform the members of the company who shall appoint such auditor within the sixty days at an extraordinary general meeting, who shall hold office till the conclusion of the first annual general meeting. 

(8) Any casual vacancy in the office of an auditor shall— 

(i) in the case of a company other than a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled by the Board of Directors within thirty days, but if such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be approved by the company at a general meeting convened within three months of the recommendation of the Board and he shall hold the office till the conclusion of the next annual general meeting; 

(ii) in the case of a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled by the Comptroller and Auditor-General of India within thirty days: 

Provided that in case the Comptroller and Auditor-General of India does not fill the vacancy within the said period, the Board of Directors shall fill the vacancy within next thirty days. 

(9) Subject to the provisions of sub-section (1) and the rules made thereunder, a retiring auditor may be re-appointed at an annual general meeting, if— 

(a) he is not disqualified for re-appointment; 

(b) he has not given the company a notice in writing of his unwillingness to be re-appointed; and 

(c) a special resolution has not been passed at that meeting appointing some other auditor or providing expressly that he shall not be re-appointed. 

(10) Where at any annual general meeting, no auditor is appointed or re-appointed, the existing auditor shall continue to be the auditor of the company. 

(11) Where a company is required to constitute an Audit Committee under section 177, all appointments, including the filling of a casual vacancy of an auditor under this section shall be made after taking into account the recommendations of such committee. 

Every co has to maintain a team of internal auditors

At first AGM a co has to appoint an individual or firm as an auditor. On 6th AGM they will be retiring. 

Auditors are as important as directors 

First auditors have to be appointed with 30 days of incorporation by the Board. If not done, then this has to be informed to the members who can conduct EGM (extraordinary GM) and appoint the auditor. They will hold office till first AGM. 

Appointment will be for 5 consecutive years till the conclusion of 6th AGM. This applies to both individual as well as firms as auditors. They have to give written consent and statement that their appointment was according to the statute. 

For individual, there can only be one term. There should be a gap of 5 years between two terms. 

For firm of auditors, should be a gap of 5 years between two terms.

Rationale-So that they do not generate vested interest in the firm. 

Fraudulent conduct by Auditors, 

S.140(5)-Without prejudice to any action under the provisions of this Act or any other law for the time being in force, the Tribunal either suo motu or on an application made to it by the Central Government or by any person concerned, if it is satisfied that the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it may, by order, direct the company to change its auditors: 

Provided that if the application is made by the Central Government and the Tribunal is satisfied that any change of the auditor is required, it shall within fifteen days of receipt of such application, make an order that he shall not function as an auditor and the Central Government may appoint another auditor in his place: 

Application can be made to NCLT by any concerned person or centre. The tribunal can suo-motto take cognizance as well. 

There is also a provision for rotation of auditors. 

Reappointment is possible if-

Ff

  1. F
  2. f
  1. S.143-Powers and duties of auditors and auditing standards

(1) Every auditor of a company shall have a right of access at all times to the books of account and vouchers of the company, whether kept at the registered office of the company or at any other place and shall be entitled to require from the officers of the company such information and explanation as he may consider necessary for the performance of his duties as auditor and amongst other matters inquire into the following matters, namely:— 

(a) whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are prejudicial to the interests of the company or its members; 

(b) whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the company; 

(c) where the company not being an investment company or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company; 

(d) whether loans and advances made by the company have been shown as deposits; 

(e) whether personal expenses have been charged to revenue account; 

(f) where it is stated in the books and documents of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance sheet is correct, regular and not misleading: 

Provided that the auditor of a company which is a holding company shall also have the right of access to the records of all its subsidiaries in so far as it relates to the consolidation of its financial statements with that of its subsidiaries. 

(2) The auditor shall make a report to the members of the company on the accounts examined by him and on every financial statements which are required by or under this Act to be laid before the company in general meeting and the report shall after taking into account the provisions of this Act, the accounting and auditing standards and matters which are required to be included in the audit report under the provisions of this Act or any rules made thereunder or under any order made under sub-section (11) and to the best of his information and knowledge, the said accounts, financial statements give a true and fair view of the state of the company‘s affairs as at the end of its financial year and profit or loss and cash flow for the year and such other matters as may be prescribed. 

(3) The auditor‘s report shall also state— 

(a) whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit and if not, the details thereof and the effect of such information on the financial statements; 

(b) whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books and proper returns adequate for the purposes of his audit have been received from branches not visited by him; 

(c) whether the report on the accounts of any branch office of the company audited under sub- section (8) by a person other than the company‘s auditor has been sent to him under the proviso to that sub-section and the manner in which he has dealt with it in preparing his report; 

(d) whether the company‘s balance sheet and profit and loss account dealt with in the report are in agreement with the books of account and returns; 

(e) whether, in his opinion, the financial statements comply with the accounting standards;
(f) the observations or comments of the auditors on financial transactions or matters which have 

any adverse effect on the functioning of the company; 

(g) whether any director is disqualified from being appointed as a director under sub-section (2) of section 164; 

(h) any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith; 

(i) whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls; 

(j) such other matters as may be prescribed.
(4) Where any of the matters required to be included in the audit report under this section is answered 

in the negative or with a qualification, the report shall state the reasons therefor. 

(5) In the case of a Government company, the Comptroller and Auditor-General of India shall appoint the auditor under sub-section (5) or sub-section (7) of section 139 and direct such auditor the manner in which the accounts of the Government company are required to be audited and thereupon the auditor so appointed shall submit a copy of the audit report to the Comptroller and Auditor-General of India which, among other things, include the directions, if any, issued by the Comptroller and Auditor-General of India, the action taken thereon and its impact on the accounts and financial statement of the company. 

(6) The Comptroller and Auditor-General of India shall within sixty days from the date of receipt of the audit report under sub-section (5) have a right to,— 

(a) conduct a supplementary audit of the financial statement of the company by such person or persons as he may authorise in this behalf; and for the purposes of such audit, require information or additional information to be furnished to any person or persons, so authorised, on such matters, by such person or persons, and in such form, as the Comptroller and Auditor-General of India may direct; and 

(b) comment upon or supplement such audit report: 

Provided that any comments given by the Comptroller and Auditor-General of India upon, or supplement to, the audit report shall be sent by the company to every person entitled to copies of audited financial statements under sub section (1) of section 136 and also be placed before the annual general meeting of the company at the same time and in the same manner as the audit report. 

(7) Without prejudice to the provisions of this Chapter, the Comptroller and Auditor-General of India may, in case of any company covered under sub-section (5) or sub-section (7) of section 139, if he considers necessary, by an order, cause test audit to be conducted of the accounts of such company and the provisions of section 19A of the Comptroller and Auditor-General‘s (Duties, Powers and Conditions of Service) Act, 1971 (56 of 1971), shall apply to the report of such test audit. 

(8) Where a company has a branch office, the accounts of that office shall be audited either by the auditor appointed for the company (herein referred to as the company‘s auditor) under this Act or by any other person qualified for appointment as an auditor of the company under this Act and appointed as such under section 139, or where the branch office is situated in a country outside India, the accounts of the branch office shall be audited either by the company‘s auditor or by an accountant or by any other person duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country and the duties and powers of the company‘s auditor with reference to the audit of the branch and the branch auditor, if any, shall be such as may be prescribed: 

Provided that the branch auditor shall prepare a report on the accounts of the branch examined by him and send it to the auditor of the company who shall deal with it in his report in such manner as he considers necessary. 

(9) Every auditor shall comply with the auditing standards. 

(10) The Central Government may prescribe the standards of auditing or any addendum thereto, as recommended by the Institute of Chartered Accountants of India, constituted under section 3 of the Chartered Accountants Act, 1949 (38 of 1949), in consultation with and after examination of the recommendations made by the National Financial Reporting Authority: 

Provided that until any auditing standards are notified, any standard or standards of auditing specified by the Institute of Chartered Accountants of India shall be deemed to be the auditing standards. 

(11) The Central Government may, in consultation with the National Financial Reporting Authority, by general or special order, direct, in respect of such class or description of companies, as may be specified in the order, that the auditor‘s report shall also include a statement on such matters as may be specified therein. 

(12) Notwithstanding anything contained in this section, if an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government within such time and in such manner as may be prescribed.] 

(13) No duty to which an auditor of a company may be subject to shall be regarded as having been contravened by reason of his reporting the matter referred to in sub-section (12) if it is done in good faith. 

(14) The provisions of this section shall mutatis-mutandis apply to-
(a) the cost accountant in practice conducting cost audit under section 148; or
(b) the company secretary in practice conducting secretarial audit under section 204. 

(15) If any auditor, cost accountant or company secretary in practice do not comply with the provisions of sub-section (12), he shall be punishable with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees. 

S.144-Duty not to render certain services 

An auditor appointed under this Act shall provide to the company only such other services as are approved by the Board of Directors or the audit committee, as the case may be, but which shall not include any of the following services (whether such services are rendered directly or indirectly to the company), or its holding company or subsidiary company, namely:-

  1. accounting and book keeping services;
    (    b) internal audit;
    (    c) design and implementation of any financial information system; (d) actuarial services;
    (    e) investment advisory services;
    (    f) investment banking services; 
  2. (g) rendering of outsourced financial services;
    (    h) management services; and
    (    i) any other kind of services as may be prescribed: 

Provided that an auditor or audit firm who or which has been performing any non-audit services on or before the commencement of this Act shall comply with the provisions of this section before the closure of the first financial year after the date of such commencement. 

Explanation–For the purposes of this sub-section, the term-directly or indirectly‖ shall include rendering of services by the auditor,-

(i) in case of auditor being an individual, either himself or through his relative or any other person connected or associated with such individual or through any other entity, whatsoever, in which such individual has significant influence or control, or whose name or trade mark or brand is used by such individual; 

(ii) in case of auditor being a firm, either itself or through any of its partners or through its parent, subsidiary or associate entity or through any other entity, whatsoever, in which the firm or any partner of the firm has significant influence or control, or whose name or trade mark or brand is used by the firm or any of its partners. 

What is audit?

Check the books of account. True and fair view and not arithmetical precision 

POWERS AND DUTIES OF AUDITOR 

S.143 and S.144

S.143-Powers and duties of auditors and auditing standards-

(1) Every auditor of a company shall have a right of access at all times to the books of account and vouchers of the company, whether kept at the registered office of the company or at any other place and shall be entitled to require from the officers of the company such information and explanation as he may consider necessary for the performance of his duties as auditor and amongst other matters inquire into the following matters, namely:— 

(a) whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are prejudicial to the interests of the company or its members; 

(b) whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the company; 

(c) where the company not being an investment company or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company; 

(d) whether loans and advances made by the company have been shown as deposits; 

(e) whether personal expenses have been charged to revenue account; 

(f) where it is stated in the books and documents of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance sheet is correct, regular and not misleading: 

Provided that the auditor of a company which is a holding company shall also have the right of access to the records of all its subsidiaries in so far as it relates to the consolidation of its financial statements with that of its subsidiaries. 

(2) The auditor shall make a report to the members of the company on the accounts examined by him and on every financial statements which are required by or under this Act to be laid before the company in general meeting and the report shall after taking into account the provisions of this Act, the accounting and auditing standards and matters which are required to be included in the audit report under the provisions of this Act or any rules made thereunder or under any order made under sub-section (11) and to the best of his information and knowledge, the said accounts, financial statements give a true and fair view of the state of the company‘s affairs as at the end of its financial year and profit or loss and cash flow for the year and such other matters as may be prescribed. 

(3) The auditor‘s report shall also state— 

(a) whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit and if not, the details thereof and the effect of such information on the financial statements; 

(b) whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books and proper returns adequate for the purposes of his audit have been received from branches not visited by him; 

(c) whether the report on the accounts of any branch office of the company audited under sub- section (8) by a person other than the company‘s auditor has been sent to him under the proviso to that sub-section and the manner in which he has dealt with it in preparing his report; 

(d) whether the company‘s balance sheet and profit and loss account dealt with in the report are in agreement with the books of account and returns; 

(e) whether, in his opinion, the financial statements comply with the accounting standards;
(f) the observations or comments of the auditors on financial transactions or matters which have 

any adverse effect on the functioning of the company; 

(g) whether any director is disqualified from being appointed as a director under sub-section (2) of section 164; 

(h) any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith; 

(i) whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls; 

(j) such other matters as may be prescribed.
(4) Where any of the matters required to be included in the audit report under this section is answered 

in the negative or with a qualification, the report shall state the reasons therefor. 

(5) In the case of a Government company, the Comptroller and Auditor-General of India shall appoint the auditor under sub-section (5) or sub-section (7) of section 139 and direct such auditor the manner in which the accounts of the Government company are required to be audited and thereupon the auditor so appointed shall submit a copy of the audit report to the Comptroller and Auditor-General of India which, among other things, include the directions, if any, issued by the Comptroller and Auditor-General of India, the action taken thereon and its impact on the accounts and financial statement of the company. 

(6) The Comptroller and Auditor-General of India shall within sixty days from the date of receipt of the audit report under sub-section (5) have a right to,— 

(a) conduct a supplementary audit of the financial statement of the company by such person or persons as he may authorise in this behalf; and for the purposes of such audit, require information or additional information to be furnished to any person or persons, so authorised, on such matters, by such person or persons, and in such form, as the Comptroller and Auditor-General of India may direct; and 

(b) comment upon or supplement such audit report: 

Provided that any comments given by the Comptroller and Auditor-General of India upon, or supplement to, the audit report shall be sent by the company to every person entitled to copies of audited financial statements under sub section (1) of section 136 and also be placed before the annual general meeting of the company at the same time and in the same manner as the audit report. 

(7) Without prejudice to the provisions of this Chapter, the Comptroller and Auditor-General of India may, in case of any company covered under sub-section (5) or sub-section (7) of section 139, if he considers necessary, by an order, cause test audit to be conducted of the accounts of such company and the provisions of section 19A of the Comptroller and Auditor-General‘s (Duties, Powers and Conditions of Service) Act, 1971 (56 of 1971), shall apply to the report of such test audit. 

(8) Where a company has a branch office, the accounts of that office shall be audited either by the auditor appointed for the company (herein referred to as the company‘s auditor) under this Act or by any other person qualified for appointment as an auditor of the company under this Act and appointed as such under section 139, or where the branch office is situated in a country outside India, the accounts of the branch office shall be audited either by the company‘s auditor or by an accountant or by any other person duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country and the duties and powers of the company‘s auditor with reference to the audit of the branch and the branch auditor, if any, shall be such as may be prescribed: 

Provided that the branch auditor shall prepare a report on the accounts of the branch examined by him and send it to the auditor of the company who shall deal with it in his report in such manner as he considers necessary. 

(9) Every auditor shall comply with the auditing standards. 

(10) The Central Government may prescribe the standards of auditing or any addendum thereto, as recommended by the Institute of Chartered Accountants of India, constituted under section 3 of the Chartered Accountants Act, 1949 (38 of 1949), in consultation with and after examination of the recommendations made by the National Financial Reporting Authority: 

Provided that until any auditing standards are notified, any standard or standards of auditing specified by the Institute of Chartered Accountants of India shall be deemed to be the auditing standards. 

(11) The Central Government may, in consultation with the National Financial Reporting Authority, by general or special order, direct, in respect of such class or description of companies, as may be specified in the order, that the auditor‘s report shall also include a statement on such matters as may be specified therein. 

(12) Notwithstanding anything contained in this section, if an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government within such time and in such manner as may be prescribed.

(13) No duty to which an auditor of a company may be subject to shall be regarded as having been contravened by reason of his reporting the matter referred to in sub-section (12) if it is done in good faith. 

(14) The provisions of this section shall mutatis mutandis apply to—
(a) the cost accountant in practice conducting cost audit under section 148; or
(b) the company secretary in practice conducting secretarial audit under section 204. 

(15) If any auditor, cost accountant or company secretary in practice do not comply with the provisions of sub-section (12), he shall be punishable with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees. 

Auditor is a watchdog and not bloodhound

Duty of reasonable Care and skill 

Re: City Equitable Fire Insurance Co 1925

It is no longer good law, as it stipulated that a “subjective” standard of competence applied. Now under UK Companies Act 2006 section 174, and given the development of the common law in Re D’Jan of London Ltd, directors owe an objective standard of care based on what should reasonably be expected from someone in their position.

DO AUDITORS OWE ANY DUTY TO SHAREHOLDERS? IMP

Ultramares Corp v Touche 2932

A firm of public accountant was hired by a co for preparing and verifying balance sheet of the co. as the company wanted a loan. Auditors knew that company already had lot of debts. They also knew that the balance sheet would be shown to outsiders for borrowing money. Later co suffered loss and the creditor wanted to sue the auditors. Held that there is no contractual or fiduciary relationship between auditors and outsiders.

Candler v Crane Christmas & Co 1954

Manager introduced him to the Auditors who gave them negligent, mistaken and false statements.  P invested 2000. Later co went bankrupt. Auditors were not held to be not liable. Court said that test laid down in Derry v Peak will decide the liability of auditors. Any negligent mis-statement is not the same thing as fraud. But Denning J dissented. 

Hedly Byre v Heller & Partners Ltd 1964

There was a firm of advertisement agents which lost a lot of money by placing certain orders in another co. Before placing orders they had asked their bankers to inquire about the health of the co. They asked the bankers of other co who gave positive response but with the disclaimer of non-liability. They were not liable because of the disclaimer.

Hague v Bamford 1972

Auditors issued a certificate without verification. The person who was misled sued and was successful. 

TAKEOVER ADVICES BY AUDITORS

Caparo Industries Plc v Dickman 

One co was taking over the other co. To know the financial position of the target, they looked into audited accounts, and financial statements and took over the target co. They suffered loss. Since SHs also relied on the audited account, auditors were held liable.

Test-

It should be foreseeable that the person relying would suffer loss.

The auditor and user of such accounts stood in proximate in relationship.

There are circumstances which make it just and reasonable to make auditors liable.

WINDING UP OF COMPANY

Two ways

Striking off-Removal of company’s name from the register of companies

Winding Up-through an elaborate procedure

Striking Off

Power lies with the RoC u/s 248

S.248 Power of Registrar to remove name of company from register of companies.— 

(1) Where the Registrar has reasonable cause to believe that— 

  1. a company has failed to commence its business within one year of its incorporation; 

(c) a company is not carrying on any business or operation for a period of two immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company under section 455, 

he shall send a notice to the company and all the directors of the company, of his intention to remove the name of the company from the register of companies and requesting them to send their representations along with copies of the relevant documents, if any, within a period of thirty days from the date of the notice. 

(2) Without prejudice to the provisions of sub-section (1), a company may, after extinguishing all its liabilities, by a special resolution or consent of seventy-five per cent. members in terms of paid-up share capital, file an application in the prescribed manner to the Registrar for removing the name of the company from the register of companies on all or any of the grounds specified in sub-section (1) and the Registrar shall, on receipt of such application, cause a public notice to be issued in the prescribed manner: 

Provided that in the case of a company regulated under a special Act, approval of the regulatory body constituted or established under that Act shall also be obtained and enclosed with the application. 

(3) Nothing in sub-section (2) shall apply to a company registered under section 8.
(4) A notice issued under sub-section (1) or sub-section (2) shall be published in the prescribed 

manner and also in the Official Gazette for the information of the general public. 

(5) At the expiry of the time mentioned in the notice, the Registrar may, unless cause to the contrary is shown by the company, strike off its name from the register of companies, and shall publish notice thereof in the Official Gazette, and on the publication in the Official Gazette of this notice, the company shall stand dissolved. 

(6) The Registrar, before passing an order under sub-section (5), shall satisfy himself that sufficient provision has been made for the realisation of all amount due to the company and for the payment or discharge of its liabilities and obligations by the company within a reasonable time and, if necessary, obtain necessary undertakings from the managing director, director or other persons in charge of the management of the company: 

Provided that notwithstanding the undertakings referred to in this sub-section, the assets of the company shall be made available for the payment or discharge of all its liabilities and obligations even after the date of the order removing the name of the company from the register of companies. 

(7) The liability, if any, of every director, manager or other officer who was exercising any power of management, and of every member of the company dissolved under sub-section (5), shall continue and may be enforced as if the company had not been dissolved. 

(8) Nothing in this section shall affect the power of the Tribunal to wind up a company the name of which has been struck off from the register of companies. 

There should be a reasonable cause to believe

That a co has failed to commence its business within one year of its incorporation

That the co is not carrying its business for 2 immediately preceding financial years and has not applied u/s 455 for obtaining the status of a dormant of co u/s 455 or RoC will send a notice to co and all its directors that he has intention to remove the name of the co from the register and they are required to send their representation within 30 days of the date of the notice.

Subscribers to MoA, they have not paid the subscription amount which they undertook to pay at the time of incorporation and a declaration to this effect has not been filed within 180 days of incorporation u/s 10(a)(1)

That co is carrying on any business as revealed by fiscal verification carried out u/s 12(9)

Can co apply for removal?

Yes u/s 248

Requirements-

It has to extinguish all its liabilities and pass a special resolution or obtain consent of 75% members in terms of paid-up share capital.

Application can be filed and then RoC will issue a public notice and wait for 15-30 days. 

After that notice is published publicly and the co stands dissolved.

Dormant Companies

S.455 Exclusion of certain time in computing period of limitation

Notwithstanding anything contained in the Limitation Act, 1963 (36 of 1963) or in any other law for the time being in force, in computing the period of limitation specified for any suit or application in the name and on behalf of a company for which an application has been made to the Tribunal under sub-section (1) of section 253, for a determination to be declared as a sick company or at any stage thereafter, the period during which the stay order as provided under sub-section (3) of section 253, was applicable shall be excluded. 

POWERS OF BOARD OF DIRECTORS 

S.179-Powers of the Board 

(1) The Board of Directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do: 

Provided that in exercising such power or doing such act or thing, the Board shall be subject to the provisions contained in that behalf in this Act, or in the memorandum or articles, or in any regulations not inconsistent therewith and duly made thereunder, including regulations made by the company in general meeting: 

Provided further that the Board shall not exercise any power or do any act or thing which is directed or required, whether under this Act or by the memorandum or articles of the company or otherwise, to be exercised or done by the company in general meeting. 

(2) No regulation made by the company in general meeting shall invalidate any prior act of the Board which would have been valid if that regulation had not been made. 

(3) The Board of Directors of a company shall exercise the following powers on behalf of the company by means of resolutions passed at meetings of the Board, namely:— 

(a) to make calls on shareholders in respect of money unpaid on their shares; (b) to authorise buy-back of securities under section 68;
(c) to issue securities, including debentures, whether in or outside India;
(d) to borrow monies; 

(e) to invest the funds of the company;
(f) to grant loans or give guarantee or provide security in respect of loans;
(g) to approve financial statement and the Board‘s report;
(h) to diversify the business of the company;
(i) to approve amalgamation, merger or reconstruction;
(j) to take over a company or acquire a controlling or substantial stake in another company; (k) any other matter which may be prescribed: 

Provided that the Board may, by a resolution passed at a meeting, delegate to any committee of directors, the managing director, the manager or any other principal officer of the company or in the case of a branch office of the company, the principal officer of the branch office, the powers specified in clauses (d) to (f) on such conditions as it may specify: 

Provided further that the acceptance by a banking company in the ordinary course of its business of deposits of money from the public repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise, or the placing of monies on deposit by a banking company with another banking company on such conditions as the Board may prescribe, shall not be deemed to be a borrowing of monies or, as the case may be, a making of loans by a banking company within the meaning of this section. 

Explanation I Nothing in clause (d) shall apply to borrowings by a banking company from other banking companies or from the Reserve Bank of India, the State Bank of India or any other banks established by or under any Act. 

Explanation II In respect of dealings between a company and its bankers, the exercise by the company of the power specified in clause (d) shall mean the arrangement made by the company with its bankers for the borrowing of money by way of overdraft or cash credit or otherwise and not the actual day-to-day operation on overdraft, cash credit or other accounts by means of which the arrangement so made is actually availed of. 

(4) Nothing in this section shall be deemed to affect the right of the company in general meeting to impose restrictions and conditions on the exercise by the Board of any of the powers specified in this section. 

Automatic Self Cleaning Filter Syndicate v Cunningham 

This co had powers through its MoA to sell its undertaking to another co with similar objects. The AoA vested the general power to the Board. Once clause authorised the BoD to sell the undertaking or assets on such terms as it may deem think fit subject to such regulation as might be made from time to time by extraordinary resolutions. Shareholders passed a resolution to sell the undertaking and wanted the board to execute that. 

John Shore and Shaw v Shaw

Scott v Scott

MK Srinivasan v WS Subramanian 

RE-STRUCTURING OF COMPANIES 

Involves re-arrangement and reconstruction

Even if this power is not mentioned in MoA, company still undergo that as it derives this power form the Companies Act. 

MERGER, 

When two entities merge to form a bigger entity. 

REVERSE MERGER 

A+B either results into A or B depending upon which one is the bigger and healthier company. In case reverse merger, the opposite happens. This is done to get taxation benefits u/s 72A of the IT Act. It is generally a mechanism for private co into public co and raise money from public.

SEGREGATION 

Segregation can also involve the separation of items from a larger group.

HIVING OFF

If a company cut it off its underperforming undertaking. 

DEMERGER 

A demerger is a form of corporate restructuring in which the entity’s business operations are segregated into one or more components. It is the converse of a merger or acquisition. Demerger is the business strategy wherein company transfers one or more of its business undertakings to another company.

DIVESTITURE 

A divestiture is the partial or full disposal of a business unit through sale, exchange, closure, or bankruptcy. A divestiture most commonly results from a management decision to cease operating a business unit because it is not part of a core competency. A divestiture may also occur if a business unit is deemed to be redundant after a merger or acquisition, if the disposal of a unit increases the resale value of the firm, or if a court requires the sale of a business unit to improve market competition.[1]

Example-The most common form is the sale of a business unit to improve financial performance. For example, Thomson Reuters, a multinational mass media and information company based in Canada, sold its intellectual property and sciences (IP&S) division in July 2016. The company initiated the divestiture because it wanted to reduce the amount of leverage on its balance sheet.

SPIN OFF

It is the divestiture strategy wherein the company’s division or undertaking is separated as an independent company. Once the undertakings are spun-off, both the parent company and the resulting company act as a separate corporate entities.

Generally, the spin-off strategy is adopted when the company wants to dispose of the non-core assets or feels that the potential of the business unit can be well explored when operating under the independent management structure and possibly attracting more outside investments.

Wipro’s information technology division is the best example of spin-off, which got separated from its parent company long back in 1980. [2]

SPLIT OFF

A business strategy wherein a company splits-up into one or more independent companies, such that the parent company ceases to exist. Once the company is split into separate entities, the shares of the parent company is exchanged for the shares in the new company and are distributed in the same proportion as held in the original company, depending on the situation.In other words, when a company splits off its existing business activities into several components, with the intent to form a new company that operates on its own or sell or dissolve the unit so separated, is called a demerger.

SELLS OFF 

Sell–off is simple form of divestiture, a process of selling or divesting an asset, which is not performing well, which is not vital to the company’s core business, or which, is worth more to a potential buyer or as a separate entity than as part of the company.(Research-gate)

WINDING UP 

Means life of a co company comes to an end

From the date of the filing of application, the process begins

But the power of co continues to bring to an end to itself. 

Ones all liabilities are discharged, the co is dissolved and the co ceases to exist as a corporate entity. 

Winding up precedes the dissolution 

Earlier one of the HC used to be designated as company court. 

Before 2013 amendment, a co could be wound up-

Voluntary (members and creditors)

Compulsary by Order of Court 

After 2016 IBC Act, Voluntary winding up done away with 

Now only with order of NCLT

Grounds

S.271-Circumstances in which company may be wound up by Tribunal-

(1) A company may, on a petition under section 272, be wound up by the Tribunal,

(a) if the company is unable to pay its debts; 

(b) if the company has, by special resolution, resolved that the company be wound up by the Tribunal; 

(c) if the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality; 

(d) if the Tribunal has ordered the winding up of the company under Chapter XIX; 

(e) if on an application made by the Registrar or any other person authorised by the Central Government by notification under this Act, the Tribunal is of the opinion that the affairs of the company have been conducted in a fraudulent manner or the company was formed for fraudulent and unlawful purpose or the persons concerned in the formation or management of its affairs have been guilty of fraud, misfeasance or misconduct in connection therewith and that it is proper that the company be wound up; 

(f) if the company has made a default in filing with the Registrar its financial statements or annual returns for immediately preceding five consecutive financial years; or 

(g) if the Tribunal is of the opinion that it is just and equitable that the company should be wound up. 

(2) A company shall be deemed to be unable to pay its debts,— 

(a) if a creditor, by assignment or otherwise, to whom the company is indebted for an amount exceeding one lakh rupees then due, has served on the company, by causing it to be delivered at its registered office, by registered post or otherwise, a demand requiring the company to pay the amount so due and the company has failed to pay the sum within twenty-one days after the receipt of such demand or to provide adequate security or re-structure or compound the debt to the reasonable satisfaction of the creditor; 

(b) if any execution or other process issued on a decree or order of any court or tribunal in favour of a creditor of the company is returned unsatisfied in whole or in part; or 

(c) if it is proved to the satisfaction of the Tribunal that the company is unable to pay its debts, and, in determining whether a company is unable to pay its debts, the Tribunal shall take into account the contingent and prospective liabilities of the company. 

NOTE: Winding up is a remedy of last resort 

WHO CAN APPLY FOR WINDING UP?

S.272-Petition for winding-Up- 

(1) Subject to the provisions of this section, a petition to the Tribunal for the winding up of a company shall be presented by-

(a) the company; 

(b) any creditor or creditors, including any contingent or prospective creditor or creditors; 

(c) any contributory or contributories; 

(d) all or any of the persons specified in clauses (a), (b) and (c) together; 

(e) the Registrar; 

(f) any person authorised by the Central Government in that behalf; or 

(g) in a case falling under clause (c) of sub-section (1) of section 271, by the Central Government or a State Government. 

(2) A secured creditor, the holder of any debentures, whether or not any trustee or trustees have been appointed in respect of such and other like debentures, and the trustee for the holders of debentures shall be deemed to be creditors within the meaning of clause (b) of sub-section (1). 

(3) A contributory shall be entitled to present a petition for the winding up of a company, notwithstanding that he may be the holder of fully paid-up shares, or that the company may have no assets at all or may have no surplus assets left for distribution among the shareholders after the satisfaction of its liabilities, and shares in respect of which he is a contributory or some of them were either originally allotted to him or have been held by him, and registered in his name, for at least six months during the eighteen months immediately before the commencement of the winding up or have devolved on him through the death of a former holder. 

(4) The Registrar shall be entitled to present a petition for winding up under subsection (1) on any of the grounds specified in sub-section (1) of section 271, except on the grounds specified in clause (b), clause (d) or clause (g) of that sub-section: 

Provided that the Registrar shall not present a petition on the ground that the company is unable to pay its debts unless it appears to him either from the financial condition of the company as disclosed in its balance sheet or from the report of an inspector appointed under section 210 that the company is unable to pay its debts: 

Provided further that the Registrar shall obtain the previous sanction of the Central Government to the presentation of a petition: 

Provided also that the Central Government shall not accord its sanction unless the company has been given a reasonable opportunity of making representations. 

(5) A petition presented by the company for winding up before the Tribunal shall be admitted only if accompanied by a statement of affairs in such form and in such manner as may be prescribed. 

(6) Before a petition for winding up of a company presented by a contingent or prospective creditor is admitted, the leave of the Tribunal shall be obtained for the admission of the petition and such leave shall not be granted, unless in the opinion of the Tribunal there is a prima facie case for the winding up of the company and until such security for costs has been given as the Tribunal thinks reasonable. 

(7) A copy of the petition made under this section shall also be filed with the Registrar and the Registrar shall, without prejudice to any other provisions, submit his views to the Tribunal within sixty days of receipt of such petition. 

POWERS OF NCLT 

S.273-Powers of Tribunal-

(1) The Tribunal may, on receipt of a petition for winding up under section 272 pass any of the following orders, namely:— 

(a) dismiss it, with or without costs;
(b) make any interim order as it thinks fit;
(c) appoint a provisional liquidator of the company till the making of a winding up order; (d) make an order for the winding up of the company with or without costs; or
(e) any other order as it thinks fit: 

Provided that an order under this sub-section shall be made within ninety days from the date of presentation of the petition: 

Provided further that before appointing a provisional liquidator under clause (c), the Tribunal shall give notice to the company and afford a reasonable opportunity to it to make its representations, if any, unless for special reasons to be recorded in writing, the Tribunal thinks fit to dispense with such notice: 

Provided also that the Tribunal shall not refuse to make a winding up order on the ground only that the assets of the company have been mortgaged for an amount equal to or in excess of those assets, or that the company has no assets. 

(2) Where a petition is presented on the ground that it is just and equitable that the company should be wound up, the Tribunal may refuse to make an order of winding up, if it is of the opinion that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing the other remedy. 

Bibliography

The Companies Act 2013

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