CONTENTS
Pg. no.
Chapter 1 –
COMPANY
Chapter II –
PROMOTION AND INCORPORATION OF COMPANIES
Chapter III –
MEMORANDUM AND ARTICLES OF ASSOCIATION
Chapter IV –
SHARE CAPITAL AND MEMBERSHIP
Chapter V –
MANAGEMENT OF COMPANY
Chapter VI –
MEETINGS AND RESOLUTIONS
Chapter VII –
WINDING UP OF COMPANIES
Chapter VIII –
COMPANY SECRETARY AND SECRETARIAL PRACTICES
APPENDIX –
PRACTICAL PROBLEMS
Chapter I – COMPANY
LEARNING OBJECTIVES
1. To bring awareness among students of the concept of a company.
2. To bring an understanding of the outstanding features of companies.
3. To obtain understanding of the different types of companies existing in India.
4. To enable students to draw a distinction between incorporated and unincorporated companies and focus on the benefits of incorporated companies in the context of modern economies.
5. To distinguish between private and public limited companies and the major privileges available to private companies.
The Companies Act, 1956
The Companies Act is based on the recommendations of the company law committee (Bhabha Committee). It is based on the English Companies Act, 1948, with changes suiting to Indian conditions. The Act contains 658 sections and 15 schedules.
Objectives and Policies of the Companies Act, 1956
The Companies Act, 1956 regulates the formation, financing, functioning and winding up of companies. The Act prescribes regulatory mechanisms regarding all relevant aspects including organisational, financial and managerial aspects of companies. The winding up matters, presently are largely within the domain of the jurisdiction of High Courts. Regulation of the financial and management aspects constitutes the main focus of the Act.
In the functioning of the corporate sector, although freedom of companies is important, the protection of investors and shareholders, on whose funds they flourish, is equally important. The Companies Act plays the balancing role between these two competing factors, namely, management autonomy and investor protection. The main objects of the Act are as under:
a. To protect the interests of large number of shareholders, as there exists separation of ownership from management in a company;
b. To safeguard the interests of creditors;
c. To help the development of companies in India on healthy lines, because corporate sector constitutes a very important segment of the economy;
d. To help the attainment of the ultimate ends of the social and economic policy of the Government;
e. To equip the Government with adequate powers to intervene in the affairs of a company in the public interest and as per the procedure prescribed by law so that the interest of all the stake-holders may be protected from unscrupulous management.
There were various amendments to the Companies Act. The more important amendments are discussed below.
The Companies (Amendment) Act, 2000
The amendment act includes important changes aimed at better corporate governance and investor protection. The following were the major changes:
a. Private and public companies to have a minimum paid up capital of Rs. 1 lakh and 5 lakhs respectively.
b. Change of place of registered office from jurisdiction of one Registrar of Companies to another Registrar within the same state to require confirmation from Regional Director.
c. SEBI is entrusted with powers with regard to issue and transfer of securities and non-payment of dividend by listed public companies.
d. Certain measures proposed to protect the interests of small deposit holders of a company.
e. A preferential offer of securities to more that 50 persons shall be treated as public issue.
f. Every listed company making an initial public offer of any security for a sum of Rs. 10 crores or more will have to issue the same only in dematerialized form.
g. Voting through postal ballot for important items has been allowed in order to ensure good corporate governance.
h. The period for disbursing dividend including interim dividend has been reduced to 30 days from the date of dividend declaration. The amount of dividend declared should be deposited in a separate bank account within 5 days from the date of dividend declaration.
i. Private companies shall be excluded in reckoning the number of companies which an auditor can audit.
j. A holder of security which carries voting rights in a company is disqualified for appointment as an auditor in the same company.
k. No person can hold office of director in more than 15 companies (excluding private companies) at a time.
l. A public company having a paid up capital of Rs. 5 crore or more and 1000 or more small shareholders may appoint at least one director elected by small shareholders on the board of the company (small shareholders mean those holding shares of nominal value of Rs 20,000 or less).
m. Every public company having a paid up capital of not less that Rs. 5 crores shall constitute an ‘Audit Committee’ of the board.
n. Companies with a paid up capital of Rs. 10 lakhs or more and which are not required to have a whole time secretary will have to submit a Secretarial Compliance certificate from the company secretary in whole time practice. A copy of the certificate shall be attached with the directors’ report.
The Companies (Amendment) Act, 2002
The amendments were regarding the dissolution of the Company Law Board and formation of the National Company Law Tribunal and the National Company Law Appellate Tribunal, to ensure better jurisdiction. It also included transfer of the powers of the court to wind up companies into the hands of the Tribunal, transfer of the powers of the Board for Industrial Finance and Reconstruction (BIFR) to the Tribunal.
The Companies (Amendment) Act, 2006
The amendments brought about were:
1. Persons intending to become directors of a company and all those directors who have been holding the office of director before the commencement of the Amendment Act, 2006, must obtain a Director Identification Number from the Central Government.
2. Provisions relating to filing of applications, documents inspection etc. through electronic form, i.e., all balance sheets, applications, prospectus, returns, memorandum and articles of association, etc. of the company shall also be submitted through the electronic form.
Application of the Companies Act
The act applies to the following companies:
1. The companies formed or registered under the act.
2. Existing companies.
3. Companies registered but not formed under any previous companies act.
4. Unlimited companies registered as limited companies according to a previous act.
5. Unregistered companies for the purpose of winding up under the act.
6. Foreign companies.
7. Insurance companies.
8. Banking companies.
9. Companies engaged in the generation or supply of electricity.
10. Any body corporates incorporated by any act for the time being in force as the central government may notify.
11. Government companies.
12. Mutual benefit societies.
The Act does not apply to
1. Companies established under special acts of parliament such as RBI, LIC, STC.
2. Partnership firms.
3. Corporate societies.
4. Societies governed by the Societies Registration Act, 1860.
5. Trusts governed by the Indian Trusts Act, 1882.
Administrative authorities under the Companies Act
1. Central government.
2. National Company Law Tribunal.
3. National Company Law Appellate Tribunal.
4. The Zonal Offices headed by Regional Directors.
5. Field Offices headed by the Registrar of Companies for each state.
Meaning of Company
A ‘company’ is any group or association of persons who come together, for the purposes of attaining common goals and objectives, which can be social, political or economical. Thus, it can represent any form of association, whether business or otherwise. The law relating to companies in India is contained in the Indian Companies Act, 1956, which was recently amended in 2006.
Definition of Company
According to Section 3(1) (i) of the Companies Act, 1956 a company means, “a company formed and registered under this Act or an existing company formed and registered under any of the previous companies laws”.
Lord Justice Lindley defines a company as “associations of many persons who contribute money or money’s worth to a common stock, and employs it in some common trade or business and who share the profit or loss arising therefrom. The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute it, or to whom it belongs, are members. The proportion of capital to which each member is entitled is his share. Shares are always transferable although the right to transfer them is often more or less restricted.”
Another definition of company has been given by Chief Justice Marshall of USA, “a company is a person, artificial, invisible, intangible, and existing only in the contemplation of the law. Being a mere creature of law, it possesses only those properties which the charter of its creation confers upon it either expressly or as incidental to its very existence.”
A company may thus be defined as an incorporated association, which is an artificial person, having an independent legal entity, with a perpetual succession, a common seal, a common capital comprised of transferable shares and carrying limited liability.
Characteristics of a Company
1. Incorporated Association: A company must be registered under the Companies Act. The minimum number of persons needed to register a public company is seven and in case of a private company two (Sec. 12). A banking business shall not have more than ten persons, and any other business shall not have more than twenty persons, unless it is registered as a company under the Companies Act, or under any other law in force (Sec.11).
2. Artificial person: the law considers persons as of two types: (a) natural human persons and (b) artificial legal persons. Legal or artificial persons are created by law and these can act only through natural persons. Since the law has created a company through legal processes, it is called artificial and since it has certain rights and obligations, it is called person. Thus, a company is an artificial person.
3. Separate legal entity: Any company formed and registered under the Companies Act has a distinct legal entity. It is a fiction of law having no natural or physical existence. Though devoid of any physical existence, it enjoys many attributes of a natural person. It has the power to use its own name, can own and sell property and can enter into contracts in its own name. Its personality and property is different and separate from that of its owners, and it can also enter into contracts with its own members.
The principle that a company is a legal entity distinct from its members is illustrated in the leading case of Saloman vs. Saloman & Co. Ltd., (1897) A.C.22
Saloman had a boot business. He sold the business to a company named Saloman & Company Ltd., which he formed. There were seven members – his wife, daughter and four sons who took 1 share each and Saloman himself who took 20,000 shares. The price paid by the company to Saloman was £ 30,000; but instead of paying him cash, the company gave him 20,000 fully paid shares of £ 1 each and £ 10,000 in debentures. Owing to strike in the boot trade the company was wound up. The assets of the company amounted to £ 6,000 only. Debts amounted to £ 10,000 due to Saloman and secured by debentures and a further £ 7,000 due to unsecured creditors. The unsecured creditors claimed that as Saloman & Company Ltd., was really the same person as Saloman, he could not owe money to himself and that they should be paid their £ 7,000 firs. It was held by the House of Lords that Saloman was entitled to £ 6,000 as the company was an entirely separate person from Saloman. The unsecured creditors got nothing.
Thus the case of Saloman vs. Saloman Company Ltd. established beyond a doubt that in law a registered company is an entity distinct from its members, even if one person holds all the shares in the company. There is no difference in principle between a company consisting of only two shareholders and a company consisting of two hundred shareholders. In each case, the company is a separate legal entity.
Implications of separate legal entity:
i. The member has no insurable interest in the property of the company.
ii. Even when members die, the company continues to exist.
iii. The nationality of the company does not depend on the nationality of its members.
iv. The company can sue and be sued in its own name.
In fact, there is no difference between a company consisting of only two shareholders and a company consisting of two hundred shareholders. In every case, the company is a separate legal entity.
Example: Of the 3,000 shares in a company L held 2,999. He voted himself as the governing director and chief pilot at a salary. L was killed in an air crash while working for the company. His widow claimed compensation for personal injuries to her husband while in the course of his employment. It was argued that no compensation was due because L and Lee’s Air Farming Ltd. were the same person. The Privy Council applied Saloman’s case and said that L was a separate person from the company he formed and compensation was payable. (Lee vs. Lee’s Air Farming Co., Ltd., 1960)
4. Separate property: A company is capable of owning, enjoying and disposing of property in its own name. This arises because of the fact that it is a legal person. The property of the company will not be considered as property of the members and thus the members do not have insurable interest in the company’s property.
M was the holder of nearly all the shares except one of a timber company. He was also a substantial creditor of the company. He insured the company’s timber in his own name. The timber was destroyed by fire and M claimed the loss from the insurance company. It was held that the insurance company was not liable to him. [Macaura vs. Northern Assurance Co. Ltd. (1925) AC 619]
5. Perpetual succession: Quite unlike a natural person, a company does not die. It is an entity with a perpetual succession, i.e., it is an entity that is separate and distinct form its shareholders, and its life is not affected by the life of its members. It is not affected by the death, lunacy or insolvency of its members. Even if all the members were to die, the company will still remain in existence, until is brought to an end by an act of law.
In the book ‘The Principles of Modern Company Law’ by LCB Grower, he says, ‘during the war all the members of one private company, while in a general meeting, were killed by a hydrogen bomb. But the company survived, not even a hydrogen bomb could have destroyed it.’
6. Limited liability: This is one of the most important and attractive features of a company. In case of companies limited by shares, the liability of members is limited to the face value of shares subscribed to by them. In situations where the assets of the company are insufficient to meet the claims of creditors, the members cannot be asked to pay up more than what is due on the shares of the company held by them. In the case of companies limited by guarantee, the liability of members is limited to the extent guaranteed to be paid up at the time of winding up.
However, in the following cases, a shareholder or member may lose the privilege of limited liability:
i. Where members of a company are reduced below the statutory minimum – two in case of private companies and seven in case of public companies – and the company carries on business for more than 6 months while the members are so reduced, then every person who is a member of the company during the time that it carries on business after those six months and is aware of the fact that it is carrying on business with fewer than two members or seven members, shall be personally liable for the payment of the whole debts of the company contracted during that time, and may be personally sued (Section 45).
ii. If in the course of the winding up of a company, it appears that any business of the company has been carried on, with intent to defraud creditors, or for any fraudulent purpose, the Court may declare that any persons who were knowingly parties to the transaction shall be personally responsible, without any limit, for all the debts or liabilities of the company (Section 542).
7. Common seal: Since a company is an artificial person, it cannot sign its name on a contract. Therefore, it functions with the help of a seal. A common seal is used as a substitute to its signature. Since a rubber stamp does not serve the purpose, every company must have a seal with its name engraved on it. Anything done under an agreement between the company and the third party requires recognition of the company in the form of an official seal unless exempted by the Act. A document not bearing the common seal of the company is not authentic and as such is not binding on the company.
8. Transferability of shares: One of the most important reason as to why people prefer to invest in a company rather than a partnership is because shares of a company can be freely sold or purchased in the share market. However, this applies to public companies limited by shares, and in the case of private companies, certain restrictions have been placed on free transfer of shares.
9. Capacity to sue and be sued: A company acquires a separate and independent legal personality on incorporation. As a legal person it can sue and be sued in its own name. A company may be sued for contempt of court, for malicious prosecution, infringement of copyrights and negligence. It may sue for an injury done to its business reputation by defamation.
10. Company is not a citizen: Although a company is a legal person that can hold property and sue and be sued in its own name, it cannot acquire citizenship. However, it can have nationality, domicile and residence. The nationality of the company is decided by the place of its incorporation. Similarly, the domicile of the company is the place of its registration and will remain so throughout the company’s existence. A company can have only one nationality and one domicile, but may have several residences at the same time. For example, a company incorporated in Bangalore, India will be an Indian company (though not an Indian citizen), even though its members are all foreign, its domicile in Bangalore and if it has trading offices in Malaysia, London and Hong Kong, its residences will be all these three foreign cities as well. The residence of the company is important for taxation purposes.
11. Company’s actions limited: No company can go beyond the powers laid down in its Memorandum of Association. Therefore, its actions are limited. So as to enable a company to carry out its activities without hindrances, sufficient powers are granted in the Memorandum of Association. Once these powers are laid down, it cannot go beyond the memorandum, unless the memorandum itself is altered before doing so.
Advantages of a company
a. Financial strength: Public limited companies can issue various types of securities to attract investors. The capital is divided into shares and there is no limit to the number of members. This enables public limited companies to raise huge capital. At the same time, these companies also enjoy a good credit standing among creditors and financial institutions.
b. Economies of scale: Having huge financial access and because of the type of ownership, companies find it easier to grow and expand, thus enjoying the full benefits of large scale operations.
c. Limited liability: A major attraction of investing in limited companies is that it provides the benefit of limited liability to investors. They become liable only to the extent of amounts unpaid on the shares held by them.
d. Efficient management: Professional and efficient managers are appointed to manage the business and evolve long term policies. Balanced and rational decision making ensures long term success of the organisation.
e. Stability: Changes in ownership and management do not affect the existence of the company. Perpetual succession ensures that the company is not threatened by instability and the fear of coming to an end after a period of time.
f. Transferability of interest: Since shares of a company are freely transferable on a stock exchange, it encourages even timid investors to invest their capital. This encourages formation of capital within an economy and also generation of economic activities. Moreover, since the prices of shares are listed on a stock exchange, investors get to know of the value of their holdings.
g. Diffused risk: The risk of loss is spread over a large number of shareholders.
h. Tax relief: Companies pay income tax at a flat rate. Hence, at higher levels of income, the tax liability is lower. Moreover, companies enjoy tax sops on export promotion, development of under developed areas, etc.
i. Goodwill: Due to transparency of company affairs, filing of financial statements with the Registrar of Companies, the need to comply with statutory provisions, etc. public limited companies enjoy reputation and prestige in society. Holding of Annual General Meetings and the exercise of voting rights by shareholders, present a picture of a democratic set-up.
Disadvantages of a company
1. Legal formalities: The procedure involved in setting up a limited company is highly complex and time consuming, involving a lot of legal provisions, documents and hurdles. This acts as a deterrent to individuals who are interested in forming body corporations.
2. Lack of personal interest: Since there is a divorce between ownership and management and as managers and directors run the affairs of the company, for which they are paid pre-determined salaries, they may not take a personal interest in the affairs of the company, nor may they give importance to creating a personal relationship between employees and customers.
3. Corrupt management: Companies with huge financial investments having managers with very little professional ethics and values can swindle investors of their hard-earned money. Malpractices and scams in many corporates are glaring examples of corrupt management.
4. Oligarchy: A small group of directors elected by the shareholders rule the company. They can misuse their powers to the detriment of the shareholders’ interests.
5. Excessive statutory control: At every stage in the day-to-day functioning of the company, a lot of statutory rules and regulations have to be complied with. Non-compliance can invite penalties. These controls tend to waste a lot of time and effort.
6. Delay in decisions: No decision in a company can be made without conducting a meeting and passing a resolution. This quells individuality, creative and quick decision making. The fear of penalties prompts managers and officers to shift responsibility.
7. Conflict of interest: There can be conflict of interest among the stakeholders such as employees, investors, directors, financial institutions, etc. These conflicts can delay decision making and its implementation. At the same time it brings down employee morale and management efficiency. Frequent changes in the board of directors can also be reason for conflict of interest among various stakeholders.
8. Unhealthy speculation: The greed for personal gains and the desire to paint a more than healthy picture of the company in the outside world can induce officers and directors of the company to manipulate share prices and show artificial profits and losses. This can inadvertently affect the goodwill of the company.
9. Social evils: Huge companies can lead to concentration of power in the hands of a few. In order to navigate around the statutory provisions, directors and officers may be encouraged to indulge in political and financial corruption.
However, the advantages of a company organisation outweigh its disadvantages. This form of an organisation structure is best suited for those businesses which require large amounts of capital investments, highly professional management and are dealing in areas that are of a high-risk nature.
Distinction between a partnership and company
Points of difference Partnership Firm Joint Stock Company
Act Indian Partnership Act, 1932 Indian Companies Act, 1956
Registration Not compulsory Compulsory
Number of members Minimum 2; maximum 10 for banking and 20 for others. Minimum 2 and maximum 50 for private limited; minimum 7 and maximum unlimited for public limited.
Legal status No individuality Separate legal existence
Property Property of firm is property of partners Company property does not belong to members
Contracts Partner cannot contract with firm Members can contract with company
Management Vests in the hands of active partners Vests in the hands of Board of Directors elected by shareholders
Life Firm has no perpetual existence Long and continued perpetual existence
Liability Partners face unlimited liability Shareholders face limited liability
Creditors Creditors of firm also creditors of partners individually Creditors of company not creditors of shareholders
Transfer of interest Partner cannot transfer his interest in the firm without consent of other partners Shares are freely and easily transferable
Statutory obligations Less statutory obligations Strict statutory obligations and regulations
Types of companies
There are various kinds of companies in existence in India. They are as follows:
I. Unincorporated Companies
Those companies which are not incorporated under the Companies Act or any Special Act or Charter are called ‘Unincorporated Companies’. They are in fact, large partnerships. If the number of members exceeds 10 in case of a banking company and 20 in case of other business companies, then these companies become illegal unless they are registered under the Companies Act.
II. Incorporated Companies
Those companies established by means of incorporation under the Companies Act or under a Special Act or a Charter, are called Incorporated Companies.
CLASSIFICATION OF INCORPORATED COMPANIES
Incorporated companies can be classified into three kinds:
1. Chartered Companies: These are companies which are created by granting a royal charter to persons who desire to be incorporated and form a corporation. Companies created on the decree of a royal charter are known as chartered companies. The charter under which the company is incorporated defines the powers and nature of business of the company. Example: East India Company (1600) and Bank of England (1694).
2. Statutory Companies: When companies are incorporated by means of a special act of Parliament or any State Legislature, statutory companies are formed. These companies are formed to carry out public undertakings such as railways, power and gas generation, etc. These are enterprises of national importance. Example: the Life Insurance Corporation, the Food Corporation of India, the Reserve Bank of India.
3. Registered Companies: These are companies formed and registered under the Indian Companies Act, 1956 or under any of the earlier Companies Acts. These companies come into existence when they are granted a certificate of incorporation by the Registrar of Companies. According to Section 12(2), companies registered under the Act may be:
a. Companies limited by shares: These are companies where the liability of members is limited to the extent of unpaid value on shares held by them. The outstanding liability of the members can be enforced either during the existence of the company or during the winding up of the company. If the shares held are fully paid up, then usually no liability exists for the members, other than the exception laid down in Section 45.
b. Companies limited by guarantee: In these companies, the liability of members is limited the extent of amounts which they have undertaken by the memorandum to contribute to the assets of the company in the event of its being wound up. Companies limited by guarantee have a legal personality distinct from its members. The Articles of guarantee companies must state the number of members with which the company is to be registered. Usually companies limited by guarantee are formed for the promotion of art, science and culture and not for making profits, and they may or may not have a share capital.
c. Unlimited companies: Any seven or more persons, or where the company to be formed will be a private company, any two or more persons, may form an incorporated company, with or without limited liability. A company not having any limit on the liability of its members is termed "an unlimited company" (Section 12). In case of unlimited companies, every member is liable for all the debts of the company, contracted in the course of its business activities. Unlimited companies may or may not have share capital. If it has share capital, it can be a public or a private unlimited company. It must have its own Articles of Association.
PRIVATE AND PUBLIC COMPANIES
Private company
"Private company" means a company which, by its articles:
a. Restricts the right to transfer its shares, if any;
b. Limits the number of its members to fifty not including:
i. Members who are in the employment of the company, and
ii. Members who were former employees of the company.
c. Prohibits any invitation to the public to subscribe for any shares in, or debentures of the company. (Section 3(1)(iii))
Where two or more persons hold one or more shares in a company jointly, they shall be treated as a single member.
The minimum number of members required to form a private company is two and the maximum number of members shall not exceed 50.
A private limited company must add the words ‘private limited’ after its name.
Public company
"Public company" means a company which is not a private company. (Section 3(1) (iv))
Privileges of a private company
Certain provisions of the Companies Act which are applicable to public limited companies are not applicable to private limited companies. These may be considered as special privileges and exemptions available to private limited companies. They are:
1. A private company can be incorporated with a minimum of two members only.
2. A private company can commence business immediately after incorporation.
3. It may allot shares without issuing a prospectus or filing a statement in lieu of prospectus.
4. It can give financial assistance for purchase of its shares or of its holding company’s.
5. It is not required to hold a statutory meeting or file a statutory report with the Registrar. (Sec. 165 (10))
6. It can have a minimum of two directors.
7. The provisions of Section 81 with regard to further issue of capital do not apply to a private company.
8. A private company can issue both equity and preference shares as well as deferred shares and shares with disproportionate voting rights.
9. The public cannot inspect copies of Profit and Loss Account and Balance Sheet that a private company files with the Registrar.
10. Holding of qualification shares is not mandatory for the director of a private company.
11. Restrictions imposed by Section 309 with regard to managerial remuneration do not apply to these companies.
12. Any interested director can participate in a Board meeting and cast his vote.
13. All directors can be appointed by a single resolution.
14. Directors of a private company need not file their written consent to act as directors, nor do they need to take up qualification shares. (Sections 264 & 266)
15. Directors need not retire by rotation.
16. Provisions dealing with restrictions on appointment or advertisement of directors do not apply to private companies. (Sec. 266 (5) (b))
17. Unless a private company is a subsidiary of a public company, the requirement that a special notice of fourteen days is to be made on appointment of a new director, does not apply. (Sec. 257 (2))
18. It need not maintain an index of members. (Sec. 151 (1))
19. Unless the articles provide for a larger number, two members personally present at a meeting can form the quorum of the meeting. (Sec. 174 (1))
20. One member present in person or by proxy can demand a poll if not more than seven members are present. If more than seven members are present, then two members can demand poll. (Sec. 179 (1) (b))
21. Section 295 which prohibits loan to directors does not apply to private companies.
22. A private company can be registered with a paid-up capital of Rs. 1 lakh, whereas a public company needs to have a minimum paid-up capital of Rs. 5 lakh.
Conversion of Private Company into Public Company
A private company may become a public company under the following circumstances:
1. Conversion by default: According to Section 43, if a private company contravenes any of the provisions included in its Articles under Section 3(1) (iii) then the company shall cease to enjoy privileges and exemptions conferred on private companies. If the Company Law Board is satisfied that the failure to comply with the conditions was accidental or if it feels that it is just and equitable to grant relief may do so on the application of the company or any other interested.
2. Conversion by choice (Section 44): If a private company alters its articles to remove the provisions of Section 3(1) (iii) which make it a private company, the company -
a. Shall, as on the date of the alteration, cease to be a private company; and
b. Shall file with the Registrar either a prospectus or a statement in lieu of prospectus
The following requirements shall also be complied with if a private company chooses to be a public company:
a. If minimum number of members is less than seven, it must be raised to seven.
b. If number of directors is less than three, it must be raised to three.
c. Alter the regulations contained in the articles which are inconsistent with those of a public company.
d. The word ‘private’ shall be deleted before the word ‘limited’ in its name.
If default is made in complying with these provisions, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five hundred rupees for every day during which the default continues.
Where any prospectus or statement in lieu of prospectus filed under this section includes any untrue statement, any person who authorised the filing of such prospectus or statement shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to five thousand rupees, or with both.
Companies deemed to be public (Section 43A): Under certain conditions, a private company can be deemed to be a public company and all rules and regulations applicable to public companies regarding disclosure, etc. shall also be applicable to such companies. A private company is deemed to be public company where not less than twenty-five per cent of the paid-up share capital of a private company is held by one or more bodies corporate.
However, in the following cases, a private company will not be treated as a public company:
a. If the entire paid-up share capital is held by another single private company or by companies incorporated outside India.
b. If the shares are held by companies incorporated outside India, which if incorporated in India would have been a private company provided that the Central Government by order so directs.
c. Where the shareholding company is itself a private company or all the shareholding companies are private companies and no other company holds shares in any such company and the total number of members in all these companies including the private company does not exceed fifty.
Within three months from the date on which a private company becomes a public company by virtue of this section, the company shall inform the Registrar that it has become a public company and the Registrar shall delete the word "Private" before the word "Limited" in the name of the company upon the register and shall also make the necessary alterations in the certificate of incorporation issued to the company and in its memorandum of association.
If a company makes default in complying with the above clause, the company and every officer of the company who is in default shall be punishable with fine which may extend to five hundred rupees for every day during which the default continues.
Conversion of Public Company into Private Company
A public company may be converted into a private company by altering the articles incorporating the restrictions of Section 3(1) (iii). To alter the articles a special resolution has to be passed and the approval of the Central Government has to be obtained. A copy of the special resolution has to be filed with the Registrar within 30 days of passing the resolution. Once the approval of the Central Government has been obtained, a copy of the approval shall be filed with the Registrar within one month. An altered copy of the articles shall be filed within the Registrar within one month of the date of receipt of the order of approval. The word ‘private’ shall be added before the word ‘limited’ in its name.
HOLDING COMPANY AND SUBSIDIARY COMPANY
A company which controls another company is termed as a ‘holding company’ and the other company so controlled is termed as a ‘subsidiary company’.
According to Section 4, a holding company is one which:
a. Controls the compositions of the Board of directors of another company; or
b. Holds more than half in nominal value of the equity share capital of another company; or
c. The company is a subsidiary of any company which is in turn a subsidiary of another company.
For example, Beta Company is a subsidiary of Alpha Company, and Gamma Company is a subsidiary of Beta Company. Gamma Company is a subsidiary of Alpha Company.
d. Controls more than half of the total voting power of the other company.
The requirement as to the control over the composition of a company's Board of directors is satisfied if the member company has independent powers to appoint or remove all or a majority of the directors. Such power is deemed to exist where:
a. A person cannot be appointed without the exercise in his favour of the power of appointment held by the holding company;
b. A person's appointment to directorship follows necessarily from his appointment as director, managing agent, secretaries and treasurers, or manager of, or to any other office or employment in, the holding company; or
c. The directorship is held by an individual nominated by the holding company itself or by a subsidiary of it.
A subsidiary company cannot hold shares or be a member of its holding company except as a legal representative of a deceased member of the holding company or as a trustee.
GOVERNMENT COMPANY
According to Section 617, a Government company means any company in which not less than fifty-one per cent of the paid-up share capital is held by:
a. The Central Government, or
b. By any State Government or Governments, or
c. Partly by the Central Government and partly by one or more State Governments and includes a company which is a subsidiary of a Government company.
In the case of a Government company, the following provisions, as laid down in Section 619 shall apply:
a. The auditor of a Government company shall be appointed or re-appointed by the Central Government on the advice of the Comptroller and Auditor-General of India.
b. The Comptroller and Auditor-General of India shall have the power:
i. To direct the manner in which the company's accounts shall be audited by the auditor
ii. To conduct a supplementary or test audit of the company's accounts by an auditor he authorises.
c. The auditor shall submit a copy of his audit report to the Comptroller and Auditor General of India who shall have the right to comment upon it.
d. The comments of the C&AG shall be placed before the annual general meeting of the company along with the audit report.
e. Where the Central Government is a member of a Government company, the Central Government will ensure that an audit report with the C&AG’s comments and the annual report on the working and affairs of the company is prepared and laid before both Houses of Parliament within three months of its annual general meeting.
f. If any State Government is also a member of a Government company, then the annual report shall also be laid before the State Legislature.
g. If the Central Government is not a member of a Government company, then the State Government will ensure that the annual report is laid before the Houses of Parliament and the State Legislature.
h. The provisions of Section 619 shall apply to a company (as if it were a Government company), in which at least fifty-one per cent of the paid-up share capital is held by one or more of the following:
i. The Central Government and one or more Government companies;
ii. Any State Government or Governments and one or more Government companies;
iii. The Central Government, one or more State Governments and one or more Government companies;
iv. the Central Government and one or more corporations owned or controlled by the Central Government;
v. The Central Government, one or more State Governments and one or more corporations owned or controlled by the Central Government;
vi. One or more corporations owned or controlled by the Central Government or the State Government;
vii. More than one Government company.
i. Government companies will have to seek the approval of the Department of Company Affairs for the appointment of managing or whole-time directors and payment of remuneration to them. Any proposals for reduction of capital and amalgamation of two or more government companies will have to be sanctioned by the Central Government in the Department of Company Affairs instead of by the High Court.
FOREIGN COMPANIES
These are companies which are incorporated outside India and have a place of business in India. However, those companies which are incorporated outside India, does not have a place of business in India, but employs agents in India, are not foreign companies.
Thus, according to Section 591, a foreign company is one incorporated outside India, which:
a. Established a place of business within India after the commencement of this Act, or
b. Had a place of business within India before the commencement of this Act and continues to have the same at the commencement of this Act.
According to the Companies Amendment Act 1974, if at least 50% of the paid-up share capital is held by Indian citizens or by companies incorporated in India, then such a company will be treated as though it were a company incorporated in India.
1. Documents: Every foreign company shall, within thirty days of the establishment of the place of business, deliver to the Registrar for registration:
a. A certified copy of the charter, statutes, or memorandum and articles, of the company and a translation in English if the documents are in a foreign language.
b. The full address of the registered or principal office of the company.
c. A list of the directors and secretary of the company.
d. The name and address of one or more persons resident in India authorised to accept notices and documents on behalf of the company.
e. The full address of the office of the company in India which is deemed as its principal place of business in India. (Section 592)
2. Accounts: Once in every year, all foreign companies have to prepare a balance sheet and profit and loss account and deliver three copies of this to the Registrar. However, the Central Government may, by notification in the Official Gazette, exempt a foreign company from preparing and filing the balance sheet and profit and loss account with the Registrar.
If any of these documents are in a foreign language, they shall be translated before being filed with the Registrar. (Section 594)
3. Name: Every foreign company shall state in every prospectus inviting subscriptions for its shares or debentures in India, the name of the company and the country in which the company is incorporated. It will also exhibit on the outside of every office it carries on business in India, the name of the company and the country in which it is incorporated, in English, and also in a local language. It will also ensure that the name of the company and the country in which it is incorporated is stated in English on all business letters, bill-heads and letter paper, and in all notices, and other official publications of the company. If the liability of the members of the company is limited, then this fact must be stated in every prospectus, documents and exhibited on the outside of every office it has in India. (Section 595)
4. Service on foreign company: Any process, notice, documents that have to be served on a foreign company shall be considered as delivered to the company if it has been addressed to any authorised person of the company. (Section 596)
5. Delivery of documents: All documents which a foreign company is required to file, shall be delivered to the Registrar at New Delhi, and also to the Registrar of the State in which the business of the company is situated. (Section 597)
6. Penalties: If any foreign company fails to comply with any of the provisions laid down in Sections 591 to 597 the company, and every officer or agent of the company who is in default, shall be punishable with fine which may extend to ten thousand rupees, and in the case of a continuing offence, with an additional fine which may extend to one thousand rupees for every day during which the default continues. (Section 598)
Any failure by a foreign company to comply with any of the provisions shall not affect the validity of any contract, dealing or transaction entered into by the company or its liability to be sued. However, the company shall not be entitled to bring any suit, claim any set off, make any counter-claim or institute any legal proceeding in respect of any such contract, dealing or transaction, until it has complied with the provisions of this Act.
7. Registration of charges: All provisions relating to registration of charges on property in India apply to foreign companies. Provisions relating to annual returns, inspection of books of account, special audit, investigations, etc. shall apply to foreign companies in respect of Indian businesses as they apply to companies incorporated in India. (Section 600)
8. Requirements as to the prospectus: According to Section 603, the prospectus of a foreign company that is being circulated and distributed in India shall contain the following information:
a. The instrument constituting or defining the constitution of the company.
b. The enactments or provisions under which the company was incorporated.
c. An address in India where the enactments or provisions can be inspected.
d. The date on which and the country in which the company was incorporated.
An application form for shares or debentures in a foreign company cannot be issued to the public without a copy of the prospectus except in the case of an issue to existing shareholders or debenture holders of the company. (Section 603)
If the prospectus includes a statement authorised to be made by an expert, a statement that he has given and has not withdrawn his consent shall be included in the prospectus (Section 604). Such a prospectus shall be registered with the Registrar (Section 605).
The provisions regarding civil liability for mis-statement in the prospectus and criminal liability for contravention of relevant provisions shall apply in the same manner as they apply to Indian companies (Section 607).
Any person who knowingly contravenes any of the provisions of sections 603, 604 and 605 shall be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to fifty thousand rupees, or with both (Section 606).
9. Winding up: Foreign companies carrying on business in India may be wound up by a court order as an unregistered company. It can also be wound up as an unregistered company even if it had already been dissolved or otherwise had ceased to exist as per the laws of the country under which it was incorporated (Section 584).
ONE MAN COMPANY
Companies where one person holds almost all the share capital with a few others (usually relatives and nominees) holding the few remaining shares, is termed as a one man company.
A one man company, like any other incorporated company, has a separate legal entity distinct from its members.
ILLEGAL ASSOCIATIONS
The law restricts the number of persons that can legally constitute an association or partnership. Sole proprietorships and partnerships are unincorporated businesses and if they consist of a large number of persons then they can be declared illegal.
According to Section 11, banking businesses shall not have more than ten persons as its members, and partnerships shall not have more than twenty persons as members. If it has more than ten persons, or twenty persons, respectively, as members, then it should be registered as a company under the Indian Companies Act. If these are not registered, then they can be declared as illegal associations.
However, the activities carried out by these illegal associations may be entirely legal. They have only become illegal because of the increase in the number of their members, and their failure to register as a company.
Consequences of illegal associations
a. Every member of such an illegal association shall be personally liable for all liabilities incurred in such a business and shall also be liable to a fine of up to Rs. 10,000.
b. An illegal association cannot sue to recover any debt or property. However, it can make claims after becoming legal.
c. These illegal associations cannot be dissolved under the Act either on demand by a creditor, member, or the association itself.
ASSOCIATIONS NOT FOR PROFIT
According to Section 25, the Central Government may grant a licence which orders that an association may be registered as a company with limited liability, without the addition of the word "Limited" or the words "Private Limited" to its name, if the Central Government is satisfied that an association is about to be formed as a limited company for:
a. Promoting commerce, art, science, religion, charity or any other useful object;
b. It intends to apply its profits or other income in promoting its objects; and
c. To prohibit the payment of any dividend to its members,
PRODUCER COMPANY
Until recently, there were only three main types of companies, namely, companies limited by shares – public and private, companies limited by guarantee and unlimited companies. With the Companies Amendment Act 2002, a fourth type, ‘Producer Company’, has come into existence.
Only certain categories of persons can participate in the ownership of such companies. These have to be individuals who are engaged in ‘primary produce’ activities.
Primary produce means products arising out of agricultural activities and includes animal husbandry, horticulture, floriculture, pisciculture, viticulture, forestry, bee raising, plantation, handicrafts, etc.
Producer companies can be formed by a minimum of 10 or more individuals, who are producers, or two or more institutions that are producer companies or any other institution having only producers or producer companies as its members. Also, a combination of ten or more individuals and producer institutions can get a producer company incorporated under the Act.
The companies shall be termed private limited and the liability of its members will be limited to the extent of sums unpaid on the shares. However, unlike a private company, the provision of a minimum paid-up capital of Rs. 1akh does not apply and the maximum number of members can exceed 50.
The members’ shareholding cannot be traded on the securities market, but they can be transferred.
LIMITED LIABILITY PARTNERSHIP
A limited liability partnership is a body corporate formed and incorporated under the Indian Companies Act and it is considered as a legal entity that is considered separate from that of the partners. Just like a company, an LLP shall have perpetual succession, and any changes in the partners will not affect the existence, the rights or liabilities of an LLP.
References
1. Kapoor, N.D., ‘Elements of Mercantile Law’, Sultan Chand & Sons, 13th revised edition, 2008.
2. Saravanavel, P. & Sumathi, S., ‘Company Law’, Himalaya Publishing House, 2006.
3. Garg, K.C. & Gupta, Vijay, ‘Company Law and Secretarial Practice, Kalyani Publishers, 2nd revised edition, 2006.
4. www.vakilno1.com
5. www.sebi.gov.in
6. Companies Act 1956, Companies Amendment Act 2006, Gazettes released by Government of India and the Ministry of Corporate Affairs.
Section A
1. Define the term ‘Company’.
2. Is company a citizen?
3. What is meant by perpetual succession and common seal?
4. Discuss the principles laid down in the case Saloman vs. Saloman & Company Ltd.
5. What is corporate veil?
6. What is unlimited liability?
7. Define a company limited by guarantee.
8. When is a company not a private company?
9. What are the three important characteristics of a private company?
10. Give three examples of statutory companies functioning in India.
11. What is a holding company?
12. Define a Government Company.
13. What is a one man company?
14. Mention five privileges of a private company.
15. What is a foreign company?
16. How can a private company be converted into a public company?
17. A private company issues debentures to public. Does the private company become a public company?
18. Can a company with ‘unlimited liability’ be formed under the Companies Act, 1956?
19. A private company need not issue a prospectus. Why?
20. Is it necessary to add the word ‘limited’ after the name of a company?
21. What are Chartered companies?
22. What is a statutory company? Give two examples.
23. What do you mean by a producer company?
24. What is an LLP?
Section B
1. State in brief the various kinds of companies which can be registered under the Companies Act, 1956.
2. Define a private company and state the special “privileges which it enjoys under the Companies Act, 1956.”
3. Explain why many of the provisions of the Companies Act, 1956, have been made inapplicable to private companies or have been made rigorous in their application to private companies.
4. What are the privileges and exemptions enjoyed by a private company when compared with a public company? Mention eight such items.
5. Distinguish between a private and a public company.
6. What is the procedure for converting a private limited company into a public limited company?
7. Narrate the full procedure for conversion of a public company into a private company.
8. What is the effect of the failure by a private company to observe the limitations and restrictions placed upon it by the Companies Act?
9. State the consequences which follow where a private company infringes the special conditions contained in its articles of association constituting it a private company.
10. Distinguish between a holding company and a subsidiary company. Explain under what circumstances and conditions a company may become the holding company or a subsidiary of another when the latter is incorporated as a body corporate (a) in India (b) in a country outside India.
11. Give the circumstances in which a company may be incorporated without having the words ‘Limited’ as part of the name.
Section C
1. Explain briefly the various kinds of companies which can be registered under the Companies Act 1956.
2. Define a private company and state the privileges which it enjoys, under the Companies Act 1956.
3. Under what circumstances does a private company become a ‘deemed public company’?
4. What is a public company? Distinguish it from a private company.
12. Define a government company. Summarise the special provisions of the Companies Act relating to government companies. Can the Central Government modify or exempt the provisions of the Companies Act in their application to government companies?
13. What is a foreign company? How far is it governed by the Companies Act, 1956?
14. State and discuss the obligations of a foreign company under the Companies Act, 1956.
15. What is an illegal association? What are its effects?
16. Write notes on:
(a) Holding company (b) One man company
(c) Statutory companies (d) Producer companies
(e) Illegal associations (f) Unlimited companies
Chapter II – PROMOTION AND INCORPORATION OF COMPANIES
LEARNING OBJECTIVES
1. To enable students to understand the legal procedures involved in the formation of incorporated companies and the importance of these legal procedures.
2. To obtain an understanding of who a promoter is, his duties and liabilities.
3. To provide an understanding of the various documents involved in the process of registration of companies.
4. To acquire an understanding of the term ‘corporate veil’, its importance to companies and the situations in which this privilege may be taken away from a company.
The entire process of formation of a company can be divided into three parts:
a. Promotion
b. Incorporation
c. Floatation
PROMOTION OF A COMPANY
Promoter: When a number of persons come together and explore all available opportunities and thereby bring a company into existence, then these persons are known as promoters. Promoters are the individuals who conceive the idea of the company, plan on its formation and actually bring it into existence. They decide the scope of business activities, negotiate for the purchase of assets, instruct solicitors, provide registration fees, arrange for advertising, raising capital and circulating the prospectus.
The promoters have to take the following preliminary steps in incorporating a company:
a. Confirm with the Registrar of Companies that the name proposed for a company is available. For this the promoter will have to make an application in the prescribed form with a prescribed fee and also send to the Registrar at least 3 or 4 names in the order of preference.
b. If the proposed company falls within a category of industries that needs a licence under the Industries (Development & Regulation) Act, 1951, then the promoters have to apply with the concerned ministry of the Central Government.
c. If the company intends to raise capital from the public through the issue of shares and debentures, then a draft prospectus must be submitted to the Securities and Exchange Board of India (SEBI). This draft prospectus must be certified as complying with all legal formalities by a merchant banker who acts as a lead banker to the issue.
d. The promoter will then have to prepare and print the company’s Memorandum and Articles of Association.
e. Finally, the promoter should decide on the underwriters, brokers, solicitors, auditors, etc.
Kinds of Promoters
i. Professional promoters: These promoters carry out the job of promoting companies. Once they bring a company into existence, they hand it over to whoever is interested in running the company. These kinds of promoters are rarely found in India.
ii. Occasional promoters: These promoters undertake the task of promoting a company once in a while. Once they have promoted a company, they hand it over to its new owners, and then go back to their own business or occupation.
iii. Financial promoters: These are financial institutions like ICICI, IDBI, etc. which undertake the task of promoting a company. Examples of companies promoted by financial institutions are mutual funds and insurance companies.
iv. Entrepreneurial promoters: These promoters conceive a business idea, take all the necessary steps that are required for bringing a company into existence and then really bring it into existence. They then continue to manage and control the company promoted by them. Most of the promoters in India are of this type.
Functions of a promoter
i. Conceive the idea of stating a business and explore all the possibilities of starting this business.
ii. Take the help of experts, if necessary, to conduct negotiations for purchasing a business if it is intended to purchase an already existing business.
iii. Collect the necessary number of persons who are needed to sign the memorandum and articles of the company and also agree to act as the first directors of the company (two in case of private and seven in case of public).
iv. Decide on the name and location of the registered office of the company, the amount and form of capital to be raised, the underwriters to the capital issue, the bankers, auditors and legal advisors.
v. Get the memorandum and articles drafted and printed.
vi. Enter into preliminary contracts with vendors and underwriters.
vii. Arrange for the preparation of the prospectus, its filing, advertisement and issue of capital.
viii. Pay the preliminary expenses.
ix. Arrange for loans and other types of financial assistance from financial institutions.
Legal position of a promoter
The promoter cannot act as an agent of the company, because a company cannot have an agent before it comes into existence. Similarly, he cannot also be treated as a trustee either. The legal position of a promoter is that of a fiduciary position. This means that from the moment a promoter acts with the company and its requirements and future success in mind, he stands in a fiduciary position towards the company. This is because they have the power create, mould and define a company and decide as to when, in what shape and under whose supervision the company shall come into existence and start trading activities.
Duties of a promoter
1. Duty not to make secret profit at the cost of the company: No promoter can make any secret profits directly or indirectly at the cost of the company, and without the knowledge and consent of the company, and if he does so, then the company can force him to account for it, and pay it back to the company.
For example: The Olempia Company was in difficulties and the debentures were worth very little. A syndicate consisting of X, Y and Z purchased a great number of debentures very cheaply. Then they purchased Olempia for 1, 40,000 pounds and sold it to a new company which they promoted for 1, 80,000 pounds. Consequently, the debentures were paid in full out of 1, 40,000 pounds and the syndicate made a profit of 20,000 pounds on the debentures. X, Y and Z became directors of the new company. They disclosed their profit of 40,000 pounds but not their profit of 20,000 pounds. It was held that there was not sufficient disclosure and X, Y and Z must pay 20,000 pounds to the company. (Gluckstein vs. Barnes (1900))
2. Duty to disclose all material facts: A promoter cannot make profits by selling his own property to the company, unless and until all material facts relating to the property are fully disclosed. If the company realizes that all material facts relating to the property have not been disclosed by the promoter and the promoter has made secret profits through the deal, then the company has two options – either the company can repudiate the sale, or else, can affirm the sale and recover the secret profits from the promoter. In this way it is ensured that the promoter does not take advantage of the company by his dishonesty.
A leading case on this point is given below:
A syndicate of which E was the head purchased an island containing mines of phosphate for 55,000 pounds. E then formed a company to buy this island. A contract was made between X a nominee of the syndicate and the company for its purchase at 1, 10,000 pounds. The details of the sale were not disclosed to the shareholders or to an independent Board of Directors. The company now sought to rescind the contract of sale. It was held that as there had been no disclosure by the promoters of the profit they were making, the company was entitled to rescind the contract. (Erlanger vs. New Sombrero Phosphate Co. (1878))
If a promoter desires to sell his property to the company then he must make a full disclosure to the company regarding his interest in the transaction. He can make his disclosure to:
a. an independent board of directors, or
b. in the articles of association of the company, or
c. in the prospectus, or
d. to the existing and intended shareholders directly.
Liabilities of a promoter
1. Liable for false statement, omission of facts, etc.:
a. A promoter may be held liable for not stating matters and setting out reports in the prospectus (Section 56).
b. A person, who has subscribed to any shares or debentures of the company on the faith of any untrue statements in the prospectus, can sue the promoter for compensation for any loss or damage suffered by him (Section 62).
c. If any promoter has made any untrue and deceptive statements in the prospectus for raising capital, then they are held criminally liable and can face severe penalty (Section 68).
d. If a liquidators report alleges that fraud was committed during promotion or formation of the company, then the promoters can be publicly examined by a court of law (Section 478).
e. If a promoter has misapplied or retained the property of the company or if he has been held guilty of misfeasance or breach of trust of the company, then the company may proceed against a promoter for deceit or breach of duty (Section 543).
If there is more than one promoter then the promoters are jointly and severally liable and if any one of them is sued and has to pay for damages, then he can claim contribution from the other promoters.
If a promoter dies, his estate is not relieved from the liability that arises out of his abuse of his fiduciary position.
2. Liability of promoters for preliminary contracts: The contracts which promoters enter into with third parties, on behalf of the company, before its incorporation, are termed as preliminary contracts.
These preliminary contracts are not legally binding upon the company, and cannot be ratified by the company even after its incorporation, nor can it sue the vendors on the contracts. The company cannot adopt these preliminary contracts even by passing a special resolution, or by adopting it as an object in its memorandum of association.
Difference between preliminary contracts and provisional contracts
PRELIMINARY CONTRACTS PROVISIONAL CONTRACTS
Contracts entered into before a company comes into existence Contracts entered into after incorporation but before commencement
No effect Not binding until commencement and ratification of contract
Enforced against company only if supported by terms and conditions of incorporation Cannot be enforced if the company goes into liquidation immediately after commencement
Therefore, a company has no capacity to enter into contracts until it comes into legal existence through incorporation.
Example: Newborne, a director, entered into a contract in the name of the company before its incorporation. He signed his name underneath the name of the company, ‘Leopold Newborne (London) Ltd.’. It was held that there was no contract as the company was not in existence. (Newborne vs. Sensolid (Great Britain) Ltd. (1954))
The company is also not bound by the preliminary contracts that were entered into, once it is registered.
Example: A solicitor prepared the memorandum and articles of association and paid the necessary registration fees on the instructions of persons who later became directors. He claimed his fees and expenses on the liquidation of the company. The Court of Appeal held that the company was not liable to pay the solicitor’s costs though it had been taken the benefit of his work. (English & Colonial Produce Co. Ltd. (1906))
Remuneration of promoters
The remuneration for promoters must be disclosed in the prospectus if it is paid within the preceding two years or if the company intends to pay it at any time. Since, being a promoter requires considerable skill, the company will have to provide adequate remuneration. Unless there is a contract to the effect of providing remuneration, between the company and the promoter, the promoter cannot claim remuneration. The remuneration to promoters may be paid in any of the following ways:
i. A promoter can purchase the business or any other property of the business and sell the same to the company at a higher price or he may sell his own business to the company at a profit.
ii. If the company has acquired any business or property through a promoter, then the company may pay a commission to the promoter on the purchase price of the property.
iii. The promoter may be paid a lump sum as remuneration for services rendered by him.
iv. The promoter may be given fully or partly paid shares as remuneration.
v. The promoter may be paid commission on shares sold.
vi. The promoter can be provided with the option to subscribe at par to the unissued shares of the company.
Example: A syndicate promoted a company and paid 416.25 pounds in respect of registration fees and stamp duty. The company shortly afterwards went into liquidation. It was held that the syndicate could not recover the payments it has made. (Clinton’s Claim (1908))
The company cannot also sue any persons who had, before incorporation,b contracted to buy its shares.
Example: N company agreed with Mrs. C an agent of a syndicate before its incorporation that N company would grant a mining lease to the syndicate. The syndicate was incorporated as P Company. P Company discovered coal whereupon N company refused to grant the lease. The Privy Council held that there was no binding contract between N Company and P Company, as the latter was not in existence when the contract was signed. (Natal Land and Colonisation Company vs. Pauline Colliery and Development Syndicate Ltd. (1904))
However, if a preliminary contract entered into by a company before incorporation, has been accepted aft\]r its incorporation and communication of its acceptance has been sent to the other party or company, then the company is bound by the terms of incorporation and will have to specifically perform the contract.
Example: The promoters of an ice manufacturing company entered into a contract with M for the purchase of the manufacturing machinery for the company. The company on its incorporation adopted the contract and sent the communication of acceptance to M. It was held that the contract was for the purpose of the company and as such the company could sue and be sued upon it. (Imperial Ice Manufacturing Co. Ltd. vs. Manchershaw I.L.R (1889)
INCORPORATION OF A COMPANY
According to Section 12, at least 7 or more persons must come together and incorporate a company by subscribing their names to the memorandum of association and complying with other requirements of registration. Subscribing to the memorandum means putting the names and signatures of the members in the memorandum, which has to be stamped and filed with the Registrar of Companies.
The persons who are subscribers to the memorandum must not be minors, an undischarged insolvent, a person disqualified by law from entering into contracts, a lunatic and an alien enemy. If a person’s name appears in all the documents of the company, but if his signature has not appeared in the declaration in the memorandum as signatory, he will not be considered as a subscriber to the memorandum, and hence not treated as an original member of the company.
The objectives of the company must be to carry out legal activities, i.e., activities that are not against public interests and policies. Even if the company were to obtain a certificate of incorporation, in spite of having been set up to carry out unlawful activities, it will not be considered that the company has been set up to carry out lawful business.
The promoters of the company will have to find suitable name for the company, in consultation with the Registrar. They will have to submit at least four alternative names, and ensure the suitability and availability of the name. The Registrar will inform the company in 14 days of the application, whether the name submitted by them is available and acceptable.
Once the promoter has taken steps to promote the company, he will have to take the following steps to get the company incorporated:
i. Filing of the necessary documents
ii. Payment of the necessary fees
iii. Obtaining certificate of incorporation
Filing of documents with the Registrar
The application for registering the company should be filed with the Registrar of the state in which the company is to be situated. The application shall be submitted along with the following documents and fees:
a. The Memorandum of Association with its objectives, the extent of capital it can raise during its lifetime, the name address and place of its registered office, the nature of liability of members, the names, addresses and agreements of the persons who have agreed to be members and hence incorporate the company.
b. The Articles of Association signed by the signatories to the Memorandum. However, a public company limited by shares can adopt Table A of Schedule I of the Act.
c. A draft of the memorandum and articles of the company will have to be submitted to the Registrar for vetting and once the draft is approved of it will be printed, stamped and signed by the signatories to the documents.
d. The memorandum and articles should be printed in the manner prescribed and laid down in Section 15.
e. The documents have to be stamped according to the stamp laws applicable in the state where the registered office of the company is to be situated.
f. Each subscriber or his attorney will have to sign the memorandum and articles, adding his address, occupation, etc. A company can also be a signatory to the memorandum, by appointing an agent to act on its behalf. Each subscriber will have to take up at least one share and state clearly the number and type of share that he has taken up. Every signature in the memorandum and articles will be attested by witnesses, who will write their names, occupations, addresses, etc.
g. The memorandum and articles will be dated and the date will be either the date of stamping or a date later to it, but not before the actual date of stamping.
h. A statement of the authorised capital, which is to be provided with the memorandum.
i. A notice of the registered office of the company, to be filed at least within 30 days of registration, or from the first day it begins to carry on business, whichever is earlier.
j. A List of Directors, signed by them, giving their consent to act as such (not applicable to private companies).
k. An Undertaking by each of the directors promising to take up and pay for qualification shares (not applicable to private companies).
l. The Agreement, which the company proposes to enter into with any individual for appointment as managing or whole time director or manager.
m. A Declaration that all terms and conditions of the Act have been complied with. This declaration may be signed by an advocate of the Supreme or High Court, an attorney of the High Court, a Chartered Accountant practicing in India who was engaged in the formation of the company, or by any person whose name has been mentioned in the articles as director, manager or secretary of the company.
n. All the documents, once they are checked for their order and completeness will be filed with the Registrar of Companies of the state in which the company is proposed to be registered, along with the requisite fee which is non-refundable.
Registration of documents
If the Registrar is satisfied with the order of all the documents delivered to him, he shall register the Memorandum and Articles of the company and place the company’s name in the register of companies. However, he should be satisfied with the following points:
a. The relevant provisions of the Act have been complied with.
b. The objects of the company are lawful.
c. The number of persons required under the Act have subscribed and duly signed.
d. The Memorandum and Articles comply with all provisions of the Act.
e. The name selected by the company is acceptable.
f. The statutory declaration has been properly made.
Once all these documents have been found to be complete and in proper order, the Registrar can do nothing other than register the company and bring it into existence by issuing it with a certificate of incorporation. If there are any minor defects in any of the documents, the Registrar can ask for its rectification. However, if there are major or material defects, he can refuse to register the company.
CERTIFICATE OF INCORPORATION
Upon registration of the company, the Registrar will issue a certificate of incorporation certifying that the company is incorporated and if it is a limited company, that the company is limited. From the date of its incorporation, the company becomes a legal person separate from its shareholders.
Legal effects of incorporation
a. The company gains a legality that makes it distinct from its members. Therefore, even if all members die, the company will still continue.
b. The company gets a perpetual succession and a common seal and becomes an immortal being.
c. A company can sue and be sued in its own name.
d. The property of the company belongs to itself and does not belong to the members.
e. The company’s liabilities are the company’s alone and not the liability of its members.
The certificate of incorporation is the conclusive evidence of a company’s existence. It is the birth certificate of a company and it is proof that the company has followed all the conditions leading to registration. Therefore, even if all the seven signatures to a memorandum were forged by one individual or if all signatories were infants, but the Registrar being unaware of these facts issued a certificate of incorporation, the certificate will still be conclusive.
Example: A proposed memorandum of association after signatures had been obtained and before registration, had been materially altered without the authority of the subscribers. The company was subsequently registered and the registrar issued the certificate of incorporation. It was objected on the grounds that the memorandum of association had not been signed by seven or indeed by any subscriber and that the provisions of the Act had not been complied with. To that Lord Cairns replied, “When once the certificate of incorporation is given, nothing is to be enquired into as to the regularity of the prior proceedings. (Peel’s case (1867))
Another leading case on this point is also given below:
The memorandum of a company was signed by two adult persons and by a guardian of the other five, who were minors at that time, the guardian making a separate signature for each of the minors. The Registrar registered the company and issued under his hand a certificate of incorporation. The plaintiff contended that this certificate of incorporation should be declared void. The Privy Council held that the certificate of incorporation was conclusive. The memorandum shall be deemed to have been properly signed, registered and presented to the Registrar and no evidence can be admitted to the contrary, even a plea of fraud would be shut out. Hence, the certificate of incorporation is conclusive evidence that the company came into existence on the date the certificate was issued and it denotes the existence of the company during the whole day. (Moosa Goolam Ariff vs. Ebrahim Goolam Arif (1913))
CAPITAL SUBSCRIPTION
Once the company has been registered and has received its certificate of registration, then it is ready for floatation, that is, it can raise capital that is necessary to commence business activities. A private company can commence business immediately after receiving the certificate of incorporation, whereas a public company can commence business only after receiving the certificate of commencement of business from the registrar.
The capital necessary for a private company is raised from friends and relatives, whereas capital for public companies can be raised from the general public. However, a public company is also free to raise capital from promoters and owners, rather than from the general public.
Section 70 makes it compulsory for public companies to take either of the following two steps:
i. Issue a prospectus in case the public is to be invited to subscribe to its capital, or
ii. Submit a ‘statement in lieu of prospectus’ in case capital has been arranged privately, which must be done at least 3 days before allotment.
According to SEBI Guidelines 2000, new companies cannot make a public issue unless its project has been appraised by a public financial institution or by a commercial bank; and, the financial institution is financing at least 10% of the project cost.
It must be ensured that the minimum paid-up capital of the company is Rs. 5 lakhs in case of public companies and Rs. 1 lakh in case of private companies.
COMMENCEMENT OF BUSINESS
A private company can commence business immediately after receiving the certificate of incorporation, but a public company cannot commence business until it has received the certificate of commencement of business (Trading Certificate) from the Registrar of Companies.
In case of a company which has issued a prospectus inviting public subscription to its shares or debentures, then the company cannot commence business until:
a. Minimum subscription has been received on shares allotted.
b. Directors have paid in cash the application and allotment money on shares taken by them.
c. There exists no liability on the part of the company to repay application money for failure on the part of the company to get permission for shares or debentures to be dealt with on a stock exchange.
d. A statutory declaration verified by any director or secretary that all conditions have been complied with have to be filed with the Registrar.
In case of companies which has not issued a prospectus to the public, then it cannot commence business unless:
a. A statement in lieu of prospectus has been filed with the Registrar.
b. Directors have paid in cash the application and allotment money on shares taken by them.
c. A statutory declaration verified by any director or secretary that all conditions have been complied with have to be filed with the Registrar.
A company must start business within a year of its incorporation, failing which it can be wound up by the court (Section 433(c))
LIFTING THE CORPORATE VEIL
A company is a separate legal person distinct from its members. This was laid down in Saloman vs. Saloman & Co. Ltd. The courts consider themselves bound by this principle. The effect of the principle laid down in this case is that there is a veil between the company and its members and the courts do not lift the veil to look at the economic reality. This principle of separate entity is regarded as a curtain, a veil or shield between the company and its members, thus protecting the members from the liability of the company.
The fact, however, is that a company is an association of persons who are the beneficial owners of all the corporate property. And, sometimes it may become necessary to break through the corporate veil of façade and to look at the persons behind the company. In such a case, the court may in its discretion disregard the corporate fiction, to pay regard to economic realities behind the legal façade. Here the court may look behind the artificial person – the company – and take account of the personalities of natural persons – the cooperators.
Exceptions to the principle of separate legal entity in Saloman vs. Saloman & Company Ltd.
The circumstances under which the courts may lift the corporate veil may be discussed under the following two heads:
A. Common Law Exceptions (Judicial interpretations)
B. Statutory Exceptions
A. Common Law Exceptions
In these exceptional cases the law either goes behind the corporate personality tot eh individual members or ignores the separate personality of each company in favour of the economic reality constituted by a group of associated concerns. When this protection is taken away, the veil is said to have been lifted or pierced. The corporate veil is lifted by the courts in the following cases:
1. Determination of the character: during times of war, the court will lift the corporate veil to see whether a company is being controlled by aliens or enemies. Thus, a company registered in India may be an ‘alien enemy’ if its agents or the persons at its helm controlling the affairs of the company are alien enemies. This point was made clear in a leading case in England – Daimler Co. Ltd. vs. Continental Tyre and Rubber Co. Ltd. (1916).
C, a private company was incorporated in England for the purpose of selling the motor tyres manufactured in Germany by a German company. The German company held the bulk of the shares in company C and all the directors were German residents in Germany. During the First World War, C Company commenced an action to recover a trade debt. The House of Lords held that the company C was an enemy company for the purposes of trading because its effective control was in enemy hands. Accordingly the company was debarred from maintaining the action. It would be against public policy to allow alien enemies to trade under the corporate façade.
/The point decided in this case was that a company may assume an enemy character when persons in de facto control of its affairs are residents in any enemy country or wherever residents are acting under the control of enemies.
2. Where company is a sham: Where the court feels that incorporation is being used for some illegal or improper purposes and where the company is a mere cover or sham to carry out illegal activities, then the corporate veil can be lifted.
In the case of P.N.B. Finance vs. Shital Prasad (1983), a person borrowed money from a company and invested it in three different companies in all of which he and his son were the only members, the lending company was permitted to attach the assets of all the three companies as they were created to hoodwink the lending company.
3. Fraud or improper conduct: where a company has been formed for promoting fraudulent purposes or in order to avoid legal obligations, then the court will refuse to uphold the separate existence of the company.
Horne was appointed as a managing director of the plaintiff company on the condition that he shall not at any time solicit or entice away customers of the company. He, however, formed a new company to carry on the same business. The new company solicited the plaintiff’s customers. An injunction was granted against both Horne and the company. The court held the company was a mere cloak for the purpose of enabling the defendant to commit a breach of his agreement against solicitation. [Gilford Motor Co. Ltd. vs. Horne (1933) Chp. 935]
4. Where the company is acting as the agent of the shareholders: The shareholders will be held liable for the acts of the company, if the company is acting as an agent for its shareholders. Whether it is acting as an agent of its shareholders is a question of fact in each case. However, the government company is not an agent of the state unless it is performing in substance governmental or sovereign functions.
An English company was formed with a capital of £ 100 in £ 1 shares, and 90t of which were held by an American the director of the United States Film Company, and 10 were held by another director, a British subject. The company produced a film called ‘Monsoon’, the production of which was financed by the company. The court refused to agree that the film was made by the British company, as the company was merely the nominee or agent of the United States Film Company. [Re: F.G. Films Limited (1953)]
5. Protection of revenue: The corporate entity of a company may be disregarded by the courts where the corporate veil is used as a means to evade tax. In order to establish the residential status or character of a company for tax purposes, the court may lift the veil and find out where its central management is and the case determines its residence.
D was a wealthy man getting huge dividend and interest income. In order to avoid super tax, he formed four private companies and agreed to hold a block of investments as an agent for them. Dividends received were credited in the account of the company and the amount was handed back to him as loan. Thus, he divided his income in four parts to avoid tax liability. The court held that as the companies did no business, the four companies were nothing more than he himself. (Sir Dinashaw Mancekjee Petit, 1927)
6. Avoidance of and welfare legislation: Avoidance of welfare legislation is as common as avoidance of taxation. Where the sole purpose of forming a company is to avoid paying welfare legislations, or to reduce such amounts, the courts can pierce the corporate veil to look at the real transactions.
A subsidiary was formed to split the profits of the company so that the incidence of bonus in the hands of the parent company will be reduced. The Supreme Court disregarded the existence of a separate company for the purpose of working out bonus for its employees. (Workmen of Associated Rubber Industry vs. Associated Rubber Co. 1986)
7. Protecting public policy: The corporate veil can be lifted by the courts in order to protect public policy and to prevent transactions which are against or in conflict of public policy.
8. Company avoiding legal obligations: where the use of an incorporated company is being made to avoid legal obligations the court may disregard the legal personality of the company and proceed on the assumption as if no company existed.
B. Statutory Exceptions
The Companies Act, 1956 disregards the separate existence of the company in certain cases to check the misuse of the corporate personality by directors for members of the company, i.e., the benefit of separate entity and limited liability may not be allowed to be enjoyed in certain circumstances. Such cases are as follows:-
1. Number of members below statutory minimum: If at any time the number of members of a company is reduced, in the case of public company, below seven, or in the case of private company, below two, and the company carries on business for more than six months while the number is so reduced, every person who is a member of the company during the time that it so carries on business after those six months and is aware of the fact that it is carrying on business with fewer than seven members or two members, as the case may be, shall be severally liable for the payment of the whole debts of the company contracted during that time, and may be severally sued. (Section 45)
2. Failure to refund application money: All moneys received by the company from applicants for shares shall be returned if minimum subscription has not been received by the company within 120 days from the first issue of prospectus. If the amount is not returned within 130 days the directors shall be jointly and severally liable to repay the money with interest at the rate of 6% per annum. (SEBI guidelines @ 15% p.a.)
3. Where prospectus includes a fraudulent mis representation: if a prospectus contains a fraudulent mis representation as to the material fact, Sections 62 and 63 make the promoters, directors etc. personally liable not only to damages, but they can be prosecuted with a fine of up to Rs. 50,000 or imprisonment up to two years or both.
4. Company name not mentioned on a Bill of exchange: If an officer of a company or any person signs on behalf of the company any bill of exchange, promissory note, endorsement, cheque or order for money or goods wherein its name is not mentioned such officer or person shall be personally liable unless it is duly paid by the company. (Section 147)
5. Group accounts: if a company has subsidiaries and group accounts have to be laid before the company in the general meeting when the company’s own profit and loss account and balance sheet have to be presented, the principle of separate legal entity may be disregarded. (Section 212)
6. Investigation into related companies: An inspector appointed under Section 239 by the Central Government may lift the veil of incorporation if he thinks it necessary for the purpose of investigation into the affairs of its subsidiary or holding company.
7. Fraudulent trading: If in the course of the winding up of a company, it appears that any business of the company has been carried on, with intent to defraud creditors of the company or any other persons, or for any fraudulent purpose, the Court may declare that any persons who were knowingly parties to the carrying on of such business shall be personally responsible for all the debts and other liabilities of the company. (Section 212)
8. For investigation of ownership of a company: An inspector appointed by the Central Government, under the authority of Section 247 of the Indian Companies Act, may lift the veil of incorporation to investigate and report on the membership of any company for the purpose of determining the true persons who are financially interested in the company and who control or materially influence its policy.
References
7. Kapoor, N.D., ‘Elements of Mercantile Law’, Sultan Chand & Sons, 13th revised edition, 2008.
8. Saravanavel, P. & Sumathi, S., ‘Company Law’, Himalaya Publishing House, 2006.
9. Garg, K.C. & Gupta, Vijay, ‘Company Law and Secretarial Practice, Kalyani Publishers, 2nd revised edition, 2006.
10. www.majmudarindia.com
11. www.wikipedia.org
12. www.wiziq.com
Section A
1. What do you understand by separate legal personality of a company?
2. What do you understand by ‘perpetual succession’ of a company?
3. State whether a company is a natural person, a legal person or an artificial person.
4. What is meant by limited liability? Explain with the help of an example.
5. A shareholder of a company cannot claim to be the owner of its property during its existence. Why?
6. A company continues to exist even if there is a death of all its members. Why?
7. Define corporate veil.
8. Who is a promoter?
9. What is a certificate of incorporation?
Section B
1. Define the term ‘company’. What are its characteristics?
2. “A company is an artificial person, created by law with a perpetual succession and a common seal.” Explain this statement.
3. “The fundamental attribute of corporate personality is that the corporation is a legal entity distinct from its members.” Discuss fully.
4. What is a corporate veil? When can it be lifted?
5. “A company is a legal person distinct from its members taken individually or collectively.” Discuss. Are there any circumstances in which the law would disregard the legal personality of a company?
6. “A joint stock company is a legal person with perpetual succession and common seal.” Examine this statement.
7. Distinguish between a company and partnership.
8. Explain in brief the legal position of a promoter and their functions.
9. What are the provisions of the Companies Act regarding commencement of a new business?
10. Explain briefly as to how promoters may be compensated for their services.
Section C
1. Explain in detail the exceptions to the rule of separate legal entity.
2. Write notes on: (a) Pre-incorporation contracts (b) Certificate of incorporation (c) Commencement of business.
3. Discuss the various stages in the formation of a company.
Chapter III – MEMORANDUM AND ARTICLES OF ASSOCIATION
LEARNING OBJECTIVES
1. To understand the meaning and importance of the memorandum and articles of association of companies and its relevance.
2. To understand the various clauses of the memorandum and the articles and the modes of altering the clauses and contents.
3. To be aware of the doctrine of ultra vires and its effects.
4. To be aware of the doctrine of indoor management and its legal effects.
MEMORANDUM OF ASSOCIATION
Meaning
The memorandum of association is one of the most important external documents of a company that has to be filed with the Registrar of Companies at the time of incorporation of a company. It is a foundation on which the structure of the company is formed and it lays out the constitution of the company. It states the fundamental conditions upon which the company can be incorporated. The company can only follow those objects and exercise only those powers that are incorporated in the memorandum of association. No company can depart from the provisions laid down in its memorandum, whatever the cause may be; and if it does so, then such acts of the company become ultra vires or beyond the powers of the memorandum, and therefore, entirely void. The memorandum defines the relationship of the company with the outside world, and the scope of its activities. The main purpose of the memorandum is to enable stakeholders such as investors, creditors, etc., to know what the permitted range of the enterprise is.
Definition
Section 2 (28) defines a memorandum as, “the memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous company law or of this Act.”
Lord Cairns, in Ashbury Railway Carriage Co. vs. Riche pointed out, “the memorandum is at where, the area beyond which the action of the company cannot go; inside that area the shareholders may make such regulations for their own government as they think fit.” (1875).
Thus, the memorandum not only defines and confines the powers of the company, and lays down its objects, but it also defines the scope of the company beyond which it cannot exceed. Moreover, since it is an external and public document that is kept available for inspection by the general public, it is assumed that all those who deal with a company have thorough knowledge of the contents of the memorandum.
Purpose of the memorandum
The purpose of the memorandum is two-fold:
a. Provides stakeholders with sufficient information as to the extent of risk involved when dealing with the company and as to whether contracts are within its corporate objectives.
b. Prospective investors can gauge the extent of risk involved when investing their funds with the company and the area in which his money is to be put at risk.
Signing and printing of memorandum
In case of a public company at least seven persons and two in case of a private company must subscribe to the memorandum (Section 12).
Both artificial and natural persons can be subscribers to a memorandum. However, only a person capable of entering into a contract on his own can be a subscriber to the memorandum.
An individual who is illiterate can subscribe to the memorandum using his thumb impression or a mark that is duly attested by the person writing for him.
The memorandum shall be printed, divided into consecutively numbered paragraphs, and shall be signed by each subscriber, with his address, description and occupation added, in the presence of at least one witness who will attest the same (Section 15).
CONTENTS OF MEMORANDUM
According to Section 13 the memorandum of every company must contain the following clauses:
1. The name of the company with ‘limited’ as the last word of the name in the case of a public limited company and ‘private limited’ as the last word in the case of a private limited company.
2. The state in which the registered office of the company is to be situated.
3. the objects of the company to be classified as:
a. The main objects of the company to be pursued by the company on its incorporation and objects incidental to the attainment of main objects, and
b. Other objects not included in a. above.
4. The liability of members is limited if the company is limited by shares or by guarantee.
5. In the case of a company having a share capital, the amount of share capital with which the company proposes to be registered and its division into shares of a fixed amount.
A limited company need not include items 4 and 5 in its memorandum.
The clauses in the memorandum of association are discussed below:
Name Clause
A company can be registered under any name that it desires. However, it shall not be registered with a name that the in the opinion of the Central Government is undesirable and is identical or has close resemblance to the name of an existing company (Section 20)
Example: The plaintiff was carrying on business under the trade name of Buttercup Dairy Company. Another company was registered under the name of Buttercup Margarine Company Limited. It was held that the plaintiff was entitled to restrain the newly registered company from carrying on business on the ground that the public might reasonably think that the registered company was connected with his business. (Ewing vs. Buttercup Margarine Company Ltd. (1917))
A company cannot adopt any name which violates the provisions of the Emblems and Names (Prevention of Improper Use) Act, 1950. This Act prohibits the use of names and emblems of the United Nations and World Health Organisation, the official seals and emblems of the Central and State government, the Indian National Flag, the name and pictorial representation of Mahatma Gandhi and the Prime Minister of India.
Every public company must write the word ‘limited’ after its name and every private company must write the word ‘private limited’ after its name. The use of the word ‘company’ is not compulsory. Companies whose liabilities are not limited cannot use the word ‘limited’.
In case of companies that have been set up for charitable purposes, for promoting arts, science, culture, religion, etc. can be registered without the word ‘limited’ under a licence granted by the Central Government (Section 25).
Every company is required to publish or display its name outside its registered office, and outside every place where it carries on business, to have its name engraved on its seal and to have its name on all business letters, bill heads, notices and other official publications of the company (Section 147).
In case of default in painting or affixing its name, the company and its officers in default shall be liable to a fine up to Rs. 50 for each day of default.
If the company fails to engrave its name on its seal or fails to put its name on its business letters, notices, etc., then the company is liable to a fine up to Rs. 500.
Registered Office Clause
This clause is also known as the domicile clause or the situation clause and it states the name of the State where the registered office of the company is to situate. This clause is important for three major reasons. First, it ascertains the domicile and nationality of the company. Second, it is the place to which all letters, notices and communication are to be sent and also the place where various registers and statutory books relating to the company are kept. Third, the domicile of the registered office helps to determine jurisdiction of courts. However, it is not necessary that a company should carry out its daily business from its registered office.
A company shall have its registered office either within 30 days after incorporation or from the date on which the company begins to carry on business, whichever is earlier. Notice of situation of the registered office and every change must be given within 30 days from the date of incorporation of the company or after the date of the change, as the case may be (Section 146).
Default in complying with the above requirements can make the company and its defaulting officers liable to be punished with a fine of up to Rs. 50 for every day the default continues.
Objects Clause
This is the most important clause in the Memorandum of Association of a company.
a. It gives an idea to prospective shareholders the purposes for which their money will be used.
b. It will enable all persons dealing with the company to ascertain the extent of its powers.
The objects clause must state the main objects and the other objects of the company. The objects chosen for the company by the subscribers to the memorandum should neither be against the constitution of India, should not be illegal or against public policy, nor should it be against the Companies Act.
Thus, any activity which is not important and aiding in the attainment of the main objectives of the company cannot be pursued by the company.
Example: One of the objects of the company was to acquire gold mines in Mysore and elsewhere. The company wanted to work gold mines in the gold Coast in Ghana. It was held that the company could not do so because ‘elsewhere’ could not be taken to mean any other place outside India. (Stephens vs. Mysore Reefs Mining Co. Ltd. (1902))
Liability Clause
This clause states that the liability of the company’s members is limited. In case of companies limited by shares, this clause will limit the liability of members to the extent unpaid on shares, for companies limited by guarantee, liability is limited to amount guaranteed to be paid on winding up and in the case of unlimited companies this clause is omitted entirely. The liability clause cannot be altered to increase the liability of members.
Capital Clause
A company limited by shares must state in its memorandum the nominal or registered share capital, the different kinds of shares, the nominal value of each share. This clause helps a company to know what are the funds needed to start the business and keep it running and what would be the sources from which these funds may be raised.
Subscription clause
This clause is also known as the association clause and it provides that the signatories to the memorandum must give their consent to associate and form a company. Each subscriber to the memorandum must take up at least one share in the company.
ALTERATION OF MEMORANDUM
The memorandum of association, being the charter of the company, cannot be changed always, other than in exceptional cases and in a manner laid down in the Companies Act.
Alteration of Name Clause
The name of the company can be changed at any time. To change the name of the company, it must pass a special resolution and get a written approval from the central government. A copy of the resolution must be filed with the Registrar within 30 days of its passing. The following points are to be noted:
a. Central government permission is not required to include or delete the word ‘private’ on conversion of public company into private or vice versa.
b. Only an ordinary resolution need be passed to change the name of a company if the central government feels that its present name closely resembles an existing company’s name.
c. On changing the company’s name, the central government will ensure that the new name resembles the objects of the company, that the change is necessary and will ensure that the new name is not undesirable.
d. The central government may also order a company to change its name within 12 months of its registration. The company will have to make the change within 3 months of the order by passing an ordinary resolution.
e. Once changes have been notified, the Registrar will enter the new name of the company in the Register of Companies and shall issue a fresh certificate of incorporation, and make changes in the memorandum of association.
Alteration of Registered Office Clause
A company can change its registered office from one place to another within the same city, town or village; from one town to another town in the same state; or from one state to another state.
If the company intends to change its registered office from one place to another within the same city, town or village, it can do so by passing a resolution of the Board of Directors and giving a notice of the change to the Registrar within 30 days of making the change.
If the company intends to change its registered office from one town to another town but within the same state, it can do so by passing a special resolution and giving a notice of the change to the Registrar within 30 days of making the change.
If the company intends to change its registered office from one state to another state, then it must change the provisions of its memorandum and may do so only for certain purposes. (These purposes have been discussed under the head ‘alteration of the objects clause). The company must pass a special resolution in a duly convened meeting and a copy of the resolution must be filed with the Registrar within 30 days of passing the resolution. The alteration of the provisions of the memorandum shall take effect only when it is confirmed by the Central Government on a petition.
Before confirming the change, the Central government will consider the interests of shareholders, the company, employees, creditors, the State and the Registrar and ensure that the change is not against public interest. The State from which the company is shifting its registered office cannot object to the change on the grounds of loss of revenue, but it can object as a creditor who may stand a chance to lose the arrears of revenue due to it.
Once the Central Government order has been obtained, the company must file a copy of the order within 3 months from date of order, along with a copy of the altered memorandum. The Registrar will certify these documents and issue a certificate of registration.
However, no company can change its registered office from India to any other country.
Alteration of Object Clause
A company cannot alter its objects clause as and when it requires, no matter how urgent or beneficial the alteration may be. Section 17 of the Companies Act provides only a limited right to companies to alter their objects clause. The limits are both substantive and procedural.
Substantive limits
A company may, by special resolution, alter the provisions of its memorandum so as to change the place of its registered office from one State to another, or change the objects of the company to enable it—
a. To carry on its business more economically or more efficiently;
b. To attain its main purpose by new or improved means;
c. To enlarge or change the local area of its operations;
d. To carry on some business, which under existing circumstances may conveniently or advantageously be combined with the business of the company;
e. To restrict or abandon any of the objects specified in the memorandum;
f. To sell or dispose of the whole or part, of the under taking of the company; or
g. To amalgamate with any other company or body of persons.
However, the company cannot take on any business which is not related to its existing operations.
In the leading case of Re Cyclists Touring Club (1907), the Company’s business was to promote, assist and protect cyclists on the public roads. The Company by altering the objects clause desired to include among the persons to be assisted, all tourists, including motorists.
It was held by the Courts that it was impossible to combine the two businesses, as one of the objects of the company was to protect cyclists from motorists.
Procedural limits
a. Before altering its objects clause, the company will pass a special resolution sanctioning the alteration.
b. A copy of the special resolution will be filed with the Registrar within 30 days of passing it.
c. The alteration shall take effect when it has been confirmed by the Central Government.
The Central Government, before confirming the alteration, will ensure that the alteration is fair and sufficient notice has been given to shareholders, debenture holders, and other stakeholders in the company such as employees and creditors.
A certified copy of the order confirming the alteration and a printed copy of the altered memorandum will be filed by the company with the Registrar, within three months from the date of the order. The Registrar shall register the same and issue a certificate of registration within one month.
Any lapse on the part of the company in the above proceedings will make the order become void and inoperative.
Alteration of Liability Clause
Companies cannot alter the liability clause so as to increase or make unlimited the liability of its members. Such alteration will be considered void. However, if the members agree in writing to be bound by the alteration of the liability clause, then this provision will not apply (Section 38).
Increase in liability may be in the form of subscribing to additional shares.
In case of clubs or similar associations, any alteration made to the liability clause to increase the periodical subscription charges shall be binding on the member, even though the member has not agreed in writing to be bound by the alteration.
In case of unlimited liability companies, the liability of members may be made limited by re-registering the company. This alteration will not affect the debts, liabilities or obligations contracted by the company before re-registration.
Alteration of Capital Clause
A limited company can change its capital clause, subject to the provisions of its Articles, by passing a resolution in the general meeting. Court confirmation is not required if the alteration in the capital clause is made for the following purposes:
a. to increase its share capital
b. to consolidate and divide its capital into shares of a larger amount
c. to convert its fully paid shares into stock and reconvert the stock into fully paid shares
d. to sub-divide its shares into shares of a smaller amount
e. to cancel its shares
However, a special resolution and court confirmation is necessary if the company wants to reduce its share capital.
DOCTRINE OF ULTRA VIRES
Any action carried out by the company, though within legal limits, but beyond the powers of, or is not authorised by the objects clause of its memorandum of association is termed as ultra vires. An ultra vires act is considered void and cannot be ratified even by a unanimous resolution of all the shareholders.
There are two purposes of the doctrine of ultra vires:
a. It protects the shareholders, in that their money is not invested in activities which they were not aware of when they invested in the company.
b. It protects the interests of creditors as the property of the company cannot be diverted to unauthorised objects.
The doctrine of ultra vires was shown in its modern form in the leading case of Ashbury Railway Carriage and Iron Co. Ltd. vs. Riche (1875)
The memorandum gave the company power to make and sell, or lend on hire railway carriages and wagons and to carry on the business of mechanical engineers and general contractors. The company entered into a contract with Riche for the financing of the construction of a railway line in Belgium and there was evidence that the contract had been ratified by all the members. The company repudiated the contract. The other party brought an action for damages for breach of contract. His contentions were: (1) that the contract in question came well within the meaning of the words general contractors and was, therefore, within the powers of the company, and (2) that the contract was ratified by the majority of the shareholders.
It was held that the contract was entirely beyond the objects of the memorandum of association and hence void.
Thus the following points have to be noted with regard to the doctrine of ultra vires:
a. Though an act is legal, but if it is beyond the scope of the company’s object clause, then the act is considered ultra vires the company.
b. Ultra vires transactions are not binding on the company and third parties cannot sue the company for enforcement of ultra vires contracts.
c. Ultra vires transactions cannot be ratified even by a resolution passed by all the shareholders of the company.
d. If an individual lends money to the company for transactions which are ultra vires, he cannot recover the money from the company; however, he may recover goods bought out of these monies, if he can properly identify the goods.
e. If an act is ultra vires the directors, but intra vires the company, then the act can be ratified by all the shareholders of the company.
f. If an act is ultra vires the articles, then it can be ratified by passing a special resolution to alter the articles.
Effects of ultra vires acts
1. Contract void: Ultra vires contracts are null and void, and are not legally binding.
2. Injunction: A company can be prevented from doing ultra vires acts by an injunction.
3. Personal liability of directors: If any money is used unlawfully, the directors will be personally liable to restore the amount of money spent.
4. Breach of warranty on authority: If any director or officer of the company persuades a third person to enter into a contract which is ultra vires the company, then an action may be brought against them for breach of warranty on authority.
5. Ultra vires contracts: Those contracts which are ultra vires cannot be enforced nor can it become intra vires by reason of estoppel, lapse of time, ratification or delay.
6. Ultra vires acquired property: Even though property has been acquired by an ultra vires payment, the company has the power to protect such property and recover damages on such property.
7. Restitution and Subrogation: If the company has acquired property by an ultra vires transaction, but the property exists in specie or it can be traced, then the person who handed it over can recover it from the company.
8. Ultra vires borrowing: If a person has lend money to a company and the company has no borrowing powers or if it has exceeded its borrowing powers or if the money is being borrowed for an ultra vires transaction, then the contract for loan is void and the lender cannot take any action to recover the loan amount.
9. Ultra vires torts: If the company has committed torts or crimes in the pursuit of its stated objects, then it can be held liable. However, if torts were committed in the pursuit of objects which are ultra vires, then the company is not held liable, but the officer or agent can be held personally liable.
ARTICLES OF ASSOCIATION
Meaning
According to Section 2(2) of the Companies Act, "articles" means the articles of association of a company as originally framed or as altered from time to time in pursuance of any previous companies’ law or of this Act.
The articles of association of a company are rules and regulations framed for the purpose of internal management of its affairs. The articles define the powers of its officers; establish a contract between the company and members and between the members (members interse). The articles enable the company to carry out the objects of the memorandum.
The articles are subordinate to the memorandum and shall not contain anything that contradicts or goes beyond the memorandum. It can be used to explain and make clear anything that is contained in the memorandum.
Model form of memorandum and articles
Section 14 requires that the memorandum and articles of a company shall be in one of the Forms in Tables B, C, D and E as given in Schedule I to the Companies Act, 1956 as may be applicable in the case of the company.
Table B is a form for memorandum of association of a company limited by shares.
Table C is a form for memorandum and articles of association of a company limited by guarantee and not having a share capital.
Table D is a form for memorandum and articles of association of a company limited by guarantee and having a share capital.
Table E is a form for memorandum and articles of association of an unlimited company.
Table A is the model set of articles for a public limited company.
Companies which must have their own articles
The following companies shall have their own articles:
a. Private companies limited by shares
b. Companies limited by guarantee
c. Unlimited companies
The articles of all these companies shall be signed by the signatories to the memorandum and registered with the memorandum.
Form and signature of the Articles
Section 30 requires that the articles shall:
a. Be printed;
b. Be divided into paragraph numbered consecutively;
c. Be signed by each subscriber to the memorandum.
Contents of Articles of Association
The articles contain the following matters:
1. Exclusion, either wholly or partly, of Table A
2. Adoption of preliminary contracts
3. Number and value of shares
4. Allotment of shares
5. Calls on shares
6. Lien on shares
7. Transfer and transmission of shares
8. Forfeiture of shares
9. Alteration of capital
10. Share certificates
11. Conversion of shares into stock
12. Voting rights and proxies
13. Meetings
14. Directors, their appointment, etc.
15. Borrowing powers
16. Accounts and audit
17. Issue of share warrants
18. Issue of bonus shares
19. Dividends and reserves
20. Winding up
Regulations framed in the articles of association should not be beyond the scope of the memorandum and the Companies Act; else the clauses will be considered ultra vires the memorandum and the Act.
ALTERATION OF ARTICLES OF ASSOCIATION
Companies can alter their articles any time and any restriction placed on such alteration is invalid. To alter the articles, the company needs to pass a special resolution, and a copy of this resolution must be filed with the Registrar within one month of its passing.
However, there are certain conditions or limitations placed on companies exercising their freedom of altering articles. These conditions are:
1. The alteration must not go beyond the provisions of the Memorandum.
2. The alteration must not oppose the provisions of the Companies Act.
3. The alteration must be for the benefit of the company as a whole and in good faith. However, an alteration cannot be considered invalid just because it causes hardship to one individual shareholder.
4. The alteration must not oppose or suppress the rights of minority shareholders, nor must it amount to committing a fraud on the minority.
5. The alteration must not in any way increase the liability of any member, that is, the alteration should not cause a shareholder to take up more shares than what he subscribed to, unless and until he has given in writing, either before or after alteration, his willingness to take on more liability.
6. The alteration cannot enable conversion of a public company into a private company unless such alteration is approved by the Central Government.
7. The alteration cannot sanction anything that will lead to a breach of contract entered into with an outsider.
8. The alteration must not sanction anything illegal.
9. The alteration must not oppose public interests and policies.
10. If the court has amended the Memorandum or Articles in cases of oppression and mismanagement, the company cannot, at a later date, alter its articles and make it inconsistent with the court orders.
11. Alteration must not negatively affect the activities carried out by the company in the past.
12. The alteration must not make the articles unalterable.
According to Section 39, if a member requires, the company shall send to him within seven days of the requirement and on paying a fee of one rupee, a copy each of the following documents as in force for the time being -
a. The memorandum;
b. The articles, if any;
If the company makes default in complying with the requirement of this section, the company, and every officer of the company who is in default, shall be punishable, for each offence, with a fine which may extend to fifty rupees.
LEGAL EFFECT OF MEMORANDUM AND ARTICLES
When the memorandum and articles are registered, it shall bind the company and each member and they shall be bound to observe all the provisions of the memorandum and the articles.
The memorandum and articles bind:
a. The members to the company
b. The company to the members
c. The members inter se
d. The company to the outsiders.
Members bound to the company: Every member is bound to observe the various provisions of the memorandum and articles as though he were a signatory to the same. Each member is bound not only to the originally framed memorandum and articles, but also to any alterations that have taken place. The shareholders themselves cannot enter into any agreement that is inconsistent with the articles.
Company bound to the members: A company can exercise it rights against any member of the company only in accordance to the provisions laid down in its memorandum and articles. However, if the company has taken an action that will prevent a member from exercising his right as a member, then he can sue the company for breach of the articles. For example, chairman of a company meeting trying to deprive a member his right to vote.
Members inter se: Though the memorandum and articles do not constitute an express agreement between the members, yet each member is bound to one another on the basis of an implied contract. The articles regulate the rights of members inter se, but these rights can be enforced only through the company. For example, if any member brings a complaint for breach of terms of articles by another member, a law suit can be filed against the offending member, not by the grieved member, but by the company.
Company bound to outsiders: Outsiders are persons who are not members of the company. Members who are solicitors or directors are also treated as outsiders under certain circumstances. The articles do not constitute a contract between the company and outsiders and they cannot enforce any provision of the articles against the company.
CONSTRUCTIVE NOTICE OF MEMORANDUM AND ARTICLES
Since every company is required to register its memorandum and articles with the Registrar of Companies, whose office is a public office, these documents are also considered as public documents, which are made available for public reading on payment of a nominal fee. Thus, every member and outsider is considered to have read the two documents and have knowledge of its contents. This deemed knowledge of the contents of the memorandum and articles of a company by a member or outsider dealing with the company is termed as constructive notice of memorandum and articles. These persons are expected to have not only read the documents but to also have understood the meaning.
Thus, if a person enters into a contract with the company and the transaction is ultra vires the memorandum or articles or beyond the powers of the company itself, such person will have to suffer the consequences of the transactions.
DOCTRINE OF INDOOR MANAGEMENT
The doctrine of indoor management is an exception to the rule of constructive notice. Normally, a person dealing with the company is expected to have a knowledge of the memorandum and articles of the company and cannot hold the company liable and bound for transactions entered into which are ultra vires the company and its documents. However, if the transactions appear to be proper when compared with its memorandum and articles, it would be grossly unfair if the company is allowed to escape its obligation to the other party, on the grounds that there was some irregularity in the conduct of the company’s affairs leading to the transaction. In other words, the outsider is not expected to assume that there were irregularities in the conduct of the company’s internal affairs. Therefore, the doctrine of indoor management assumes that the company’s internal management is in order and the outsider has the right to presume that internal affairs are regularly and properly done and he does not lose his rights in a transaction for irregularities he was not aware of and had no means of discovering.
This doctrine has its origin in the leading case of Royal British Bank vs. Turquand (1856)
The directors of the bank issued a bond to Mr. Turquand. The articles provided that the directors had the power to issue bonds if authorised by a proper resolution of the company. No such resolution was passed.
It was held that Turquand could sue on the bond as he was entitled to assume that the resolution must have been passed. It was observed that persons dealing with the company are bound to read the registered documents and to see that the proposed dealing is not inconsistent. But they are not bound to do any more than that; they need not inquire into the regularity of internal proceedings.
EXCEPTIONS TO THE DOCTRINE OF INDOOR MANAGEMENT
1. If any person dealing with the company has knowledge of irregularities in its internal management, then such person cannot claim ignorance of internal proceedings, and obtain the benefit of the doctrine of indoor management.
2. If the person dealing with the company could have exercised proper care and diligence and made inquiries to find irregularities in internal management, he too cannot claim the benefits of the Turquand case.
3. This doctrine will also not apply if the document used in the transaction is forged, or if signatures and seals are forged or if an agent signs in a document where he has no authority to do so.
4. A person who has entered in a contract with an official of a company who does not have any authority from the company to do so, then such person will not be protected by the doctrine of indoor management.
5. A person who has not read the memorandum or articles of the company, and has no idea of its contents, and enters into contract with a company cannot claim ignorance of the documents and avail of protection.
Distinction between memorandum and articles of association
Contents and scope Memorandum is the charter of the company and defines the scope of its activities. Articles regulate the internal management and aids in carrying out the objectives laid out in the memorandum.
Relationship between company, members and outsiders Memorandum defines the relationship of the company with the outside world. Articles deal with the relation of members inter se and establish the relationship of the company with its members.
Alteration Memorandum cannot be altered other than in the manner and to the extent provided in the Act. Articles can be altered by passing a special resolution.
Supremacy Memorandum is the supreme document of the company. Articles are subordinate to the memorandum.
Adoption Every company needs to have its own memorandum. Companies limited by shares can adopt Table A, and need not register its own articles.
Ultra-vires Acts Any activity done beyond the powers of the memorandum is considered ultra vires the company and hence invalid. Anything done against the provisions of the articles, but which is within the powers of the memorandum, can be ratified by altering the articles.
References
13. Kapoor, N.D., ‘Elements of Mercantile Law’, Sultan Chand & Sons, 13th revised edition, 2008.
14. Saravanavel, P. & Sumathi, S., ‘Company Law’, Himalaya Publishing House, 2006.
15. Garg, K.C. & Gupta, Vijay, ‘Company Law and Secretarial Practice, Kalyani Publishers, 2nd revised edition, 2006.
16. Companies Act 1956, Gazettes released by Government of India and the Ministry of Corporate Affairs.
17. www.wiziq.com
REVIEW QUESTIONS
Section A
1. What is a memorandum of association?
2. Briefly explain the requisites of the memorandum.
3. List out the principles for selecting the name of the company.
4. State the clauses of the memorandum of association.
5. What does the term ‘ultra vires’ mean?
6. Can an ultra vires act be ratified?
7. Define articles.
8. List out the contents of the articles of association.
9. Describe the doctrine of constructive notice.
10. What do you understand by the doctrine of indoor management?
11. What is the legal effect of articles of association between the members and company?
12. Is it necessary for every company to have and articles of association of its own?
13. Can the articles of association be made unalterable?
14. Can the articles be altered to go beyond the powers of the memorandum?
Section B
1. Briefly explain the various types of ultra vires acts.
2. What are the purposes of the memorandum of association?
3. Briefly explain the contents of the memorandum.
4. Explain briefly the alteration of the objects clause of the memorandum.
5. Explain briefly the alteration of the registered office clause of the memorandum.
6. ‘The objects clause is the most important clause in the memorandum of association of a company.’ Why?
7. Define articles of association and give the contents thereof. Is it necessary for every company to have articles of association of its own?
8. ‘The power of altering the articles is wide, yet it is subject to a large number of limitations.’ Explain.
9. Explain the doctrine of indoor management and state the exceptions to the doctrine.
10. Discuss the effect of registering the memorandum and articles with the Registrar of Companies.
11. ‘The doctrine of indoor management is a silver lining to strangers dealing with the company.’ Comment.
Section C
1. What is a memorandum of association? Describe its contents. Discuss the importance of the objects clause.
2. Discuss the doctrine of ultra vires.
3. Explain the necessity of setting out clearly the objects in the memorandum. To what extent may a company lawfully undertake business and perform acts not expressly mentioned in its objects clause?
4. When and how does a company alter its capital clause?
5. Write a note on the alteration of the registered office clause of a company.
6. ‘The power of altering the articles is wide, yet it is subject to a large number of limitations.’ Explain.
7. Distinguish articles from memorandum.
Chapter IV – SHARE CAPITAL AND MEMBERSHIP
LEARNING OBJECTIVES
1. To have a thorough knowledge of the manner in which share capital can be raised by companies, and the legal framework within which it can be raised.
2. To be aware of statutory provisions and SEBI rules with regard to raising of capital.
3. To have a knowledge of the concepts of transfer and transmission of shares and how it is affected.
4. To enable students to know the importance of a prospectus in a public issue, the types of prospectus and the statutory norms to be followed in the issue of a prospectus.
5. To know of the liabilities of officers of a company with reference to omission and misstatements in the prospectus.
6. To know who a member is and to distinguish between shareholders and members and to be aware of the rights, duties and liabilities of members.
Meaning
Share capital is the capital raised by a company by the issue of shares. Share capital can be raised either at the time of starting a business, or at a later date for the purposes of expansion and diversification of a business. Share capital becomes the permanent liability of a company and cannot be returned or repaid except at the time of winding up of companies. However, this does not apply to redeemable preference shares.
CLASSIFICATION OF SHARE CAPITAL
The memorandum of every company limited by shares must state the amount of share capital with which it is registered and the division of shares.
1. Nominal Capital: Companies which are limited by shares or limited by guarantee and having a share capital, need to have a nominal capital with which it is registered. This nominal capital is also known as registered or authorised capital and this is the capital the company is authorised to issue during its lifetime. Nominal capital is divided into shares of a fixed amount that has to be clearly mentioned in the memorandum. The nominal capital can be increased or decreased according to the requirements of the company.
2. Issued Capital: It is that part of the nominal capital which is issued for public subscription. The entire nominal capital is not issued to the public for subscription, but only a part of it is issued as and when required. The difference between the nominal capital and issued capital is termed as unissued capital.
3. Subscribed Capital: It is that part of the issued capital which is actually taken up by the public. If all of the issued capital has been subscribed for, then the issued capital and subscribed capital is the same.
4. Called-up Capital: It is the amount of the nominal value of shares subscribed for and which the company has asked its shareholders to pay by means of calls.
5. Paid-up Capital: The amount of money received by the company on each share as a result of calls is termed as paid-up capital. The paid-up capital cannot exceed the issued share capital.
6. Uncalled Capital: This is the amount which remains unpaid on shares. The company can call upon the shareholders to pay the uncalled capital at any time that it desires.
7. Reserve Capital: A company can, by passing a special resolution, decide that either a part or whole of its uncalled capital will not be called up, except at the time of winding up. This amount is called reserve capital or reserve liability. The reserve capital cannot be converted into ordinary capital without direction of the court, nor can it be dealt with by the directors. This capital is made available to the creditors at the time of winding up.
Publication of authorised, subscribed and paid-up share capital
According to Section 148, if any notice, advertisement, official publication, or any business letter of a company contains a statement of the amount of the authorised capital of the company, then such notice, advertisement, official publication, or such letter shall also contain a clear and visible statement of the amount of the capital which has been subscribed and the amount paid up.
If any default is made in complying with the above requirements of, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to one thousand rupees.
Definition of a share
Section 2(46) defines a share as ‘a share in the share capital of a company and includes stock except where a distinction between stock and shares is expressed or implied.’
A share is the interest of a shareholder in a portion of the company’s capital. Holding shares make a shareholder enjoy ownership rights in the company, though he does not own the assets of the company.
The shareholder becomes entitled to a share of profits of the company while it is a going concern, and at the time of winding up, if any assets remain after distribution to creditors, the shareholders can have a stake in these assets. Shares are movable property and can be sold, mortgaged or pledged. Shares issued by a company are numbered to distinguish one share from another, and share certificates are prima facie evidence of the title of the member to these shares. Though shares are movable property, share certificates are non-negotiable instruments.
CLASSES OF SHARE CAPITAL
The share capital of a company limited by shares shall be of two types:
1. Equity share capital
a. with voting rights
b. with differential rights to voting and dividend
2. Preference share capital
Preference Shares: These shares have a preferential right as to payment of dividend at a fixed rate, and at the time of winding up preference shareholders enjoy preferential right to the repayment of paid up capital. Preference shareholders may or may not enjoy other preferential rights such as receipt of arrears dividend, additional dividend from surplus profits, and share in surplus assets at the time of winding up, etc.
Equity Shares: All those shares which are not preference shares are called equity shares. Equity shareholders enjoy residual rights in the company, i.e., they enjoy greater dividend than preference shareholders if the company has been successful in any year, and nothing in years when the company does not do well. Also, at the time of winding up, they are entitled to the surplus assets remaining after paying off liabilities.
Hence, equity shareholders are residual claimants to the assets and income of the company. Since the risk also is great, equity share capital is known as ‘risk capital’.
KINDS OF PREFERENCE SHARES
1. Cumulative and non-cumulative Preference Shares: In the case of cumulative preference shares, if in a particular year, there does not exist sufficient profits for distribution of dividend to preference shareholders, this deficiency must be made up for by the company in the subsequent years when there are sufficient profits. Whereas, in the case of non-cumulative preference shares, this provision is not applicable and the shareholders cannot claim dividend from the profits of the subsequent years for a deficiency in dividend that they suffered in any financial year.
2. Participative and non-participative Preference Shares: Shareholders holding participative preference shares enjoy the right to participate in the surplus profits of the company along with the equity shareholders, in addition to their fixed rate of preference dividend. These shareholders also get to enjoy the right to share in the surplus assets that remain after meeting the liability of creditors at the time of winding up. Whereas, non-participative preference shareholders do not enjoy any of these benefits. They are entitled to only the fixed rate of preference dividend.
3. Convertible and nonconvertible Preference Shares: Convertible preference shares are those shares which enjoy the benefit of being converted into equity shares after a period of time. Non-convertible preference shares cannot be converted into equity shares.
4. Redeemable Preference Shares: These are shares which may be redeemed after a fixed period or earlier at the option of the company. The conditions for redeeming preference shares are that they must be fully paid-up, they will be redeemed either out of the distributable profits of the company or out of a fresh issue, any premium to be paid on redemption shall be paid either out of profits or out of the share premium account and if these shares are redeemed out of profits, then an amount equivalent to the nominal value of the redeemed shares shall be transferred to the Capital Redemption Reserve Account.
5. Guaranteed Preference Shares: When a private company is converted into a public limited company or when an amalgamation or absorption takes place, the seller of preference shares guarantees a particular rate of dividend on preference shares for a period of time. These type of shares on which such guarantee is made is termed as guaranteed preference shares.
6. Cumulative Convertible Preference Shares: These types of preference shares can be issued by companies for raising capital to set up new projects, for purposes of diversification and expansion of existing projects, for purposes of modernization and for meeting working capital requirements.
Deferred or Founder’s shares
A private company can issue shares other than those mentioned above, i.e., deferred shares. These shares are issued to promoters and directors and hence are also known as founder’s shares. These shares are of a smaller denomination than ordinary shares, example a face value of Re 1. They carry voting rights similar to equity shares and dividends are a fixed percentage of profits that remain after declaration of dividends to preference and equity shareholders. Therefore, higher the profits, higher are the dividends on these shares.
STOCK
Stock is the total or aggregate of fully paid up shares that have been legally consolidated. Fully paid up shares can be consolidated and broken into fractions, if needed, and converted into stock. Partly paid up shares cannot be converted into stock. Stock of shares simply means that the company has recognised the fact that the shares have been fully paid up. Companies are permitted to reconvert their stock into fully paid up shares of any denomination.
When shares are converted into stock, the Register of Members and the company’s Annual Return must show the amount of stock held by each member. Stocks are freely transferable and the stockholders enjoy the same rights and privileges as ordinary shareholders.
Differences between shares and stocks
Differences Share Stock
Fully paid up Shares may or may not be fully paid up. Stock must always be fully paid up.
Nominal value Shares have a fixed nominal value. Stocks do not have a fixed nominal value.
Division into fraction Shares are individual units which cannot be divided into fractions. Stocks are consolidations of fully paid up shares and can be divided into fractions.
Issue to public Shares can be issued directly and originally to the public. Stocks cannot be issued directly to the public; however they can be reconverted into fully paid shares.
Formality for issue The Board of directors can make the decision for issue of shares. Stocks can be issued only if the Articles permit and by passing an ordinary resolution to the effect.
Numbering Shares are numbered. Stock need not be numbered.
Registration It is necessary to get the shares registered with the Registrar, before issuing them to the public. Stocks can be issued only after passing an ordinary resolution and if the articles permit. If the articles do not permit, then a special resolution should be passed to alter the articles. Moreover, a notice of conversion has to be filed with the Registrar.
Member A share certificate is a prima facie evidence that a shareholder is a member. A stockholder need not necessarily be a member.
ISSUE OF SHARES AT PAR, AT PREMIUM AND AT A DISCOUNT
Issue at par
Shares are considered to have been issued at par when the subscribers are expected to pay only the face value or nominal value of the shares issued. For example, if the face value of one share is Rs. 10, the buyer needs to pay only Rs. 10, and he will be holder of shares issued at par. Companies with demat shares can issue shares at par values of their own choice.
Issue of shares at a premium (Section 78)
A company may issue shares at a premium, i.e., at a value above its par value. The following conditions must be satisfied in connection with the issue of shares at a premium:-
1. The amount of premium must be transferred to an account called ‘share premium account’.
2. Share premium account can be used only for the following purposes :-
a. In issuing fully paid bonus shares to members.
b. In writing off preliminary expenses of the company.
c. In writing off public issue expenses such as underwriting commission, advertisement expenses, etc.
d. In providing for the premium payable paid on redemption of any redeemable preference shares or debentures.
e. In buying back its shares
Issue of shares at a discount (Section 79)
A company may issue shares at a discount, i.e., at a value below its par value. The following conditions must be satisfied in connection with the issue of shares at a discount:-
1. The shares must be of a class already issued.
2. Issue of the shares at a discount must be authorised by a resolution passed in the general meeting of the company and sanctioned by the National Company Law Tribunal.
3. The resolution must specify the maximum rate of discount at which the shares are to be issued.
4. Not less than one year must have elapsed from the date on which the company was entitled to commence the business.
5. The shares to be issued at discount must be issued within 2 months from the date on which the issue is sanctioned by the National Company Law Tribunal.
6. The discount must not exceed 10 percent unless the National Company Law Tribunal is of the opinion that the higher percentage of discount may be allowed in special circumstances.
BUY BACK OF SHARES
Buy back of its own shares by a company is nothing other than the reduction of share capital. After the recent amendments in the Companies Act, 1956 buy back of its own shares by a company is allowed without sanction of the Court. It is a process which enables a company to go back to the holders of its shares and offers to purchase from them the shares that they hold.
There are three main reasons why a company would opt for buy back:-
1. To improve shareholder value, since with fewer shares earning per share of the remaining shares will increase.
2. As a defense mechanism against hostile take-overs since there are fewer shares available for the hostile acquirer to acquire.
3. Public signaling of the management’s policy.
A company may purchase its own shares or other specified securities out of:-
i. Its free reserves; or
ii. The securities premium account; or
iii. The proceeds of any shares or other specified securities.
No buy-back of any kind of shares or other specified securities can be made out of the earlier proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.
No company can purchase its own shares or other specified securities unless:-
a. The buy-back is authorized by its articles;
b. A special resolution has been passed in general meeting of the company authorizing the buy-back;
c. The buy-back is of less than twenty five per cent of the total paid-up capital and free reserves of the company;
d. The buy-back of equity shares in any financial year shall not exceed twenty five per cent of its total paid-up equity capital in that financial year;
e. The ratio of the debt owned by the company is not more than twice the capital and its free reserves after such buy-back;
f. All the shares or other specified securities for buy-back are fully paid-up;
g. The buy-back of the shares or other specified securities listed on any recognized stock exchange is in accordance with the regulations made by the Securities and Exchange Board of India;
The notice of the meeting at which special resolution is proposed to be passed shall be accompanied by an explanatory statement stating:-
a. A full and complete disclosure of all material facts;
b. The necessity for the buy-back;
c. The class of security intended to be purchased under the buy-back;
d. The amount to be invested under the buy-back; and
e. The time limit for completion of buy-back.
Every buy-back must be completed within twelve months from the date of passing the special resolution.
The buy-back may be:-
a. From the existing security holders on a proportionate basis;
b. From the open market; or
c. From odd lots, that is, where the lot of securities of a listed public company whose shares are listed on a recognized stock exchange is smaller than such marketable lot as may be specified by the stock exchange;
d. By purchasing the securities issued to employees of the company pursuant to a scheme of stock option.
DEMATERIALISATION OF SHARES
Dematerialisation is the process of converting physical share certificates into electronic form i.e. crediting of equivalent number of shares to a depository account electronically.
Depository Account
For dematerialisation of shares the share applicant will have to open a depository account with a Depository Participant (DP) having connectivity with National Securities Depository Ltd (NSDL) / Central Depository Services (I) Ltd (CSDL).
Benefits of Dematerialisation
1. No risk of loss / misplacement / theft / damage of share certificates
2. No risk of bad deliveries
3. No stamp duty on transfer of shares
4. Faster transfer of shares
SEBI GUIDELINES (with regard to public issues (w.e.f. 27.1.2000))
Companies can make any issue of capital in any form they like, at any price and subject to terms and conditions they decide, provided they follow the SEBI guidelines called the ‘Guidelines for Disclosure and Investor Protection’. The guidelines are:
1. Appointment of Category-I Merchant Banker to manage an issue shall be compulsory.
2. Registrar to Issue must be appointed.
3. Partly paid shares must either be made fully paid or forfeited.
4. The company shall not make public issue where it has been prohibited by SEBI.
5. Draft prospectus shall be filed with SEBI at least 21 days before filing of the prospectus with the Registrar of Companies.
6. The company shall carry out the changes suggested by SEBI before filing of prospectus with the Registrar of Companies.
7. Public unlisted companies (other than banking companies) are allowed to make a public issue subject to the following conditions:
a. Track record of ability to pay dividend for at least 3 out of immediately preceding 5 years.
b. Minimum pre-issue net worth of the company should not be less than Rs.1 crore in the last 3 out of 5 years and also in the immediately preceding 2 years.
Unlisted or new companies which do not satisfy the above conditions may still make a public issue if it satisfies the following conditions:
a. Project has been appraised by a Public Financial Institution or a Scheduled commercial bank.
b. The Public Financial Institution or Scheduled bank is part financing the project to the extent of at least:
* 10% of project cost
* 5% of project cost in case of infrastructural companies.
c. The Public Financial Institution or Scheduled bank brings money at least 1 day before the opening of issue.
8. The company shall enter into an agreement with a depository. The members are given the option to choose between depository mode or share certificates.
9. If shares are allotted to promoters or management within 6 months prior to Public Issue, at a price less than offer price, then these shares are subject to a lock-in period of 6 months. (SEBI and Corporate Laws, 27 March, 2007).
10. A banking company shall be allowed to make a Public Issue at a price approved by the RBI.
11. Companies are free to decide on the pricing of their issue, that is, they can issue at par or at premium.
12. Listed companies are free to make a public issue. However, if net worth is greater than 5 times the net worth prior to issue, conditions applicable to unlisted companies apply.
13. Promoter’s contribution
a. In case of unlisted companies at least 20% of post issue capital.
b. In case of listed companies:
i. At least 20% of proposed issue, or
ii. At least 20% of post issue capital
In case of listed as well as unlisted companies:
i. Promoters must bring in full amount of contribution, including premium, at least one day before issue opens.
ii. Where contribution exceeds Rs. 100 crores, then Rs. 100 crores shall be brought before opening issue and the balance on pro-rata before calls are made to the public.
iii. Promoters are not allowed to acquire shares through private placement either directly or through intermediaries.
iv. Following are ineligible for computation of promoter’s contribution:
a. Shares acquired against revaluation of assets or capitalisation of intangible assets during 3 years before filing the offer document.
b. Shares acquired by way of bonus out of revaluation of reserves or reserves without accrual of cash reserves.
c. In case of unlisted companies shares acquired during preceding 6 months at a price lower than the price at which shares are offered to the public.
14. The promoters’ contribution shall be subject to a lock-in period of 3 years.
15. Reservations for allotment on firm or preferential basis for various categories, including promoters’ contribution should not exceed 75% of total issue amount.
Reservations in favour of employees should not exceed 10% of issue subject further to 5% of the paid-up capital of the company in any one year.
Reservations in favour of shareholders and merchant bankers should not exceed 10% & 5%, respectively.
Provision for buy-back of shares shall not exist for persons for whom securities ae reserved for allotment on firm basis. If any shares so allotted have been rejected, then these should be taken up by promoters.
Promoters cannot sell or transfer such shares acquired, for a period of 3 years.
16. Underwriting shall be optional.
17. Minimum number of shares for which application is allowed to be made is 200 shares @ Rs. 10 each. For issue at premium, minimum amount payable on application, allotment & calls to be not less than Rs. 2000.
18. As per Section 69, a minimum of 5% of nominal value is to be called as application money. As per SEBI guidelines application money cannot be less than 25% of issue price. Even 100% can be called as application money.
19. Issue must be kept open for at least 3 working days and not more than 10 working days. In case of infrastructure companies, public issue can be kept open for a maximum of 21 working days.
20. If 90% of issue is not received from public subscription along with accepted devolvement from underwriters or other sources (if issue is undersubscribed) is not received within 60 days of closure of issue, then the company must make full refund of subscription money to share applicants.
This clause is not applicable in case of offer for sale of securities, where the management is offering their shareholdings through public offer in order to convert a closely held company into a widely held company.
21. No retention of over-subscription shall be allowed except to the extent of maximum 10% necessitated by approximation while making proportionate allotment.
22. In case of over-subscription, allotment shall be made on proportionate basis subject to 50% of net public offer to be reserved for allotment to individuals applying for 1000 shares or less.
23. Issue must be fully paid up within 12 months except where total issue size exceeds Rs. 500 crores.
SHARE CERTIFICATE
A share certificate is a prima facie evidence that a shareholder is a member.
Differences between share certificates and share warrants.
Differences Share certificates Share warrants
Who can issue? Both public & private companies can issue share certificates. Only public companies can issue share warrants.
Original issue Can be issued in original. Cannot be issued originally.
Type of shares issued on Issued for fully or partly paid shares Issued only on fully paid shares.
Position of holder Holder is member. Holder not member unless Articles of Association provides so.
Negotiability Not a negotiable instrument. Negotiable instrument.
Registration of transfer Transfer requires ‘registration of transfer’ with company. Transfer complete through delivery; no registration is required.
Entitlement to shares Entitles ‘person named in the Certificate’ to number of shares specified. Entitles ‘bearer’ to specified number of shares.
Dividend Dividend paid through ‘Dividend warrants’. Dividend paid through ‘Bearer dividend coupons’
Qualification Share certificate can hold evidence of ‘qualification shares’ of directors. Shares included in Share warrants cannot include qualification shares of directors.
Approval Articles of Association and Central Government approval are not necessary for issue of share certificates. Approval of Articles and Central Government is necessary for issue of share warrants.
Petitioning right of holder Holder can petition for winding up of company. Holder cannot petition for winding up.
TRANSFER OF SHARES (Section 82)
The shares of a company can be transferred in a manner that is prescribed by the Articles of the company. Shares are personal property of shareholders and thus transfer is the willful act of transferring shares between the parties involved.
Certificate of transfer: When a shareholder, holding a large number of shares, desires to sell only a part of his shareholding, he hands over to the company his original share certificate consisting of the entire amount of his holding, along with a transfer form mentioning the number of shares that he intends to sell. The company stamps the transfer, along with his original shareholding. This is called ‘certification of transfer’ and the transfer is called a ‘certified transfer’.
Forged transfer: An instrument of transfer where the signature of the transferor is forged is called a ‘forged instrument’ and any transfer of shares using this forged instrument is termed as a ‘forged transfer’. A forged transfer is a nullity and legal title to the shares does not pass to the transferee.
Blank transfer: It is a transfer executed without the name of the transferee appearing in the transfer deed, i.e., the transferor hands over to the purchaser or pledgee his original share certificate along with the transfer instrument or form, but without the name of the transferee. The transferor only fills in his name and signs on the transfer deed. The benefit of a blank transfer is that the buyer can sell the shares later, and subsequent buyers can avoid stamp duty and transfer fees. In such a situation, the first seller is the transferor (the shareholder who originally held the shares) and the last buyer is the shareholder recognised by the company.
Transmission of shares: This is different from a transfer. Transfer of shares take place by a mutual act of the parties, whereas, transmission takes place by operation of law, for instance:
i. On insolvency of a shareholder, where the property in shares pass to his Official Receiver, who will become entitled to the shares.
ii. On death of the shareholder, where the property in shares pass to his legal representatives.
iii. On lunacy of the shareholder, where the property in shares pass to the administrator appointed by the court.
Differences between share transfer and share transmission
Differences Transfer Transmission
Nature of act Transfer is a deliberate act of the shareholder. Transmission occurs due to the operation of law.
Instrument of transfer Requires an execution of instrument of transfer. Requires only an evidence showing entitlement to shares.
Consideration Valid consideration in return for shares is needed. No need of consideration.
Stamp duty Stamp duty is payable. Stamp duty is not payable.
Registration of charges Company levies charges for registering a transfer. No charges for registration of a transmission.
Liability of the transferor Liability of transferor ceases as soon as transfer is complete. Liability on shares does not cease with transmission.
Lien on shares: It is the right to retain possession of something until satisfaction of a claim, i.e., a company can prevent a shareholder from transferring his shares until he pays his debts to the company (amounts outstanding on the shares he owns). This right of lien of the company can extend not only to partly paid shares, but also to fully paid shares and dividends payable on shares. Death of a shareholder does not destroy the lien.
Surrender of shares: When a shareholder gives up his shares voluntarily to the company, it is termed as a surrender of shares. The Articles of the company have to authorise the directors to accept a surrender of shares. Surrender of shares can be accepted by the company if it will avoid the company going through the formalities of forfeiture. Surrender of shares is voluntary, whereas, forfeiture is forced upon the shareholder by the company. Both takes place because the shareholder is not able to pay off his liabilities. However, surrender should not amount to a wilful purchase of shares from the shareholder, by the company, so as to help the shareholder overcome his liability.
PROSPECTUS
A prospectus is a legal document that is issued by a company wishing to list itself on the stock exchange. It provides the background, financial and management status of the company so that investors are able to make an informed decision about whether to invest or not. In most cases, a prospectus is a requirement to list on the stock exchange. In India, a copy of the prospectus must be filed with the Securities and Exchange Board of India (SEBI).
A prospectus is required to contain all information that investors and their advisers would require to make an informed assessment of:
• The assets, liabilities, financial position, profits and losses, and prospects of the organisation; and
• The rights attaching to the shares
According to Section 2(36) "prospectus" means any prospectus, notice, circular, advertisement or other document inviting offers from the public for the subscription on purchase of any shares in, or debentures of, a body corporate.
Thus, it is a circular or advertisement which is published by the promoters after the formation of the company, as a means to induce the public to subscribe to shares and debentures of the company.
Conditions for a prospectus
The following are the requirements to consider a document as a prospectus:
1. Invitation to the public: The prospectus is an invitation the general public at large to subscribe to the company’s shares and debentures. If the invitation is meant only for a small group of persons, it is not a prospectus at all.
2. Issued to the public: To be considered a prospectus, it has to be issued to the public. Thus, a document meant for private circulation is not a prospectus.
3. Issued as a prospectus: To be considered as a prospectus under the Act, the document should be described as a prospectus.
When prospectus is not required to be issued
Issue of a prospectus is not necessary in the following cases:
a. A private company is not required to issue a prospectus.
b. A public company whose promoters and directors feel that they can raise the required capital from private sources need not issue a prospectus, but needs to file a statement in lieu of prospectus with the Registrar of Companies.
c. Companies can issue application forms for shares or debentures, accompanied by a memorandum containing the salient features of a prospectus. However, a copy of the prospectus should be made available to any person who requests such.
d. If an offer is made to individuals to enter into an underwriting agreement with the company, then the invitation need not contain a prospectus.
e. When the application form is issued for shares or debentures not being offered to the public, it is not necessary to issue a prospectus.
f. Where the offer is being made to existing holders of shares and debentures.
g. Where the shares or debentures being offered are similar to shares or debentures already issued and dealt with on a recognised stock exchange, a prospectus is not compulsory.
h. Where an invitation has been made to the public for subscribing to shares or debentures in the form of an advertisement known as a ‘prospectus announcement’ a prospectus need not be issued.
Legal requirements for issue of prospectus
The following are the formalities and requirements involved in issuing a valid prospectus:
1. A prospectus can be issued only after incorporation of the company. However, a prospectus can be issued for companies which are intended to be set up.
2. If a company intends to raise capital from the general public by the issue of shares or debentures, then a draft prospectus has to be submitted to SEBI for approval, through a merchant banker, at least 21 days prior to filing the prospectus with the Registrar of Companies. If SEBI suggests any changes, then such changes will have to be made by the companies before filing the prospectus.
3. Every prospectus issued by a company shall be dated and that date shall be regarded as the date of publication of prospectus.
4. Before the draft prospectus is filed with the Registrar, it has to be approved by various agencies, such as lead managers, stock exchanges wherever the securities are listed and the underwriters to the issue.
5. A copy of the prospectus, signed by all the directors, or their agents, must be delivered to the Registrar on or before the date of publication. The prospectus issued to the public must clearly mention the fact that a copy of the prospectus along with required documents have been filed with the Registrar. The prospectus must be accompanied by the written consent of the auditor, attorney, banker, legal advisor, etc. who have agreed to act as such for the company.
6. The draft prospectus which is filed with SEBI has to be made public. Lead bankers and stock exchanges where the securities are listed can make copies of the prospectus available to the public, for a nominal fee.
7. Once 90 days pass from the date of registration of prospectus, then such prospectus must not be issued to the public. If even after 90 days of registration the prospectus is issued, then it will be considered as a prospectus which has not been delivered to the Registrar for registration.
8. Every application form for subscription to shares and debentures must be accompanied by a copy of the prospectus. However, this condition is not applicable only in cases which have already been discussed earlier.
9. If the prospectus contains statements made by experts, then these experts must in no way be connected either with the formation or management of the company. An expert includes an engineer, a valuer, an accountant or any person whose profession gives authority to the statements made by him.
10. If the prospectus contains statements made by experts, then the prospectus can only be issued if the expert has given his written consent to the statement and its appearance in the prospectus. This is necessary so as to protect prospective investors from the dangers of untrue statements.
11. Companies are not allowed to make any alterations to any contracts which are referred to in the prospectus or statement in lieu of prospectus. If at all any changes are to be made to these contracts, then the company must ensure that a resolution is passed to the effect at a general meeting of shareholders.
12. The share application form should be part of a memorandum containing the salient features of a prospectus. This memorandum is also termed as an ‘abridged prospectus’. This will enable the investor to understand the contents of the abridged prospectus, before submitting his application for shares.
13. Every application form and prospectus issued to the public must be accompanied by the provision of the Companies Act that details the consequences of acquiring shares in a fictitious name. Persons who try to acquire or induces others to acquire shares in a fictitious name are liable to be punished with imprisonment that may exceed to 5 years.
14. Every prospectus must disclose the matter as required under Schedule II of the Act.
CONTENTS OF PROSPECTUS
In order to protect the interests of investors, the Companies Act requires that companies follow certain rules and regulations that will ensure complete disclosure of material and essential facts in the prospectus. Every prospectus issued by the company must state the matters specified in Part I of the II Schedule of the Act and contain information and reports specified in Part II of the Schedule and that Parts I and II shall have effect subject to provisions contained in Part III of the Schedule. The main contents are given below:
PART I OF SCHEDULE II
1. General information
a. Name and address of registered office of the company.
b. Names of regional stock exchange and other stock exchanges where application made for listing of present issue.
c. Statement/declaration about refund of the issue if minimum subscription of 90% is not received within 90 days from closure of the issue.
d. Declaration about the issue of allotment letters/refunds within a period of 10 weeks and interest in case of any delay in refund at the prescribed rate.
e. Date of opening of the issue and date of closing of the issue.
f. Name and address of auditors and lead managers.
g. Name and address of trustee under debenture trust deed (in case of debenture issue).
h. Whether rating from CRISIL or any rating agency has been obtained for the proposed debenture/preference shares issue.
Names and addresses of the underwriters and the amount underwritten by them
2. Capital structure of the company
a. Authorised, issued, subscribed and paid-up capital.
b. Size of present issue giving separate reservation for preferential allotment to promoters and others.
c. Paid-up capital:
i. After the present issue
ii. After conversion of debentures
3. Terms of the present issue
a. Terms of payments.
b. Rights of the instrument holders.
c. How to apply - availability of forms, prospectus and mode of payment.
d. Any special tax benefits for company and its shareholders.
4. Particulars of the issue
a. Objects.
b. Project cost.
c. Means of financing (including contribution of promoters)
5. Company, management and project
a. History and main objects and present business of the company.
b. Subsidiaries of the company, if any.
c. Promoters and their background.
d. Names, addresses and occupation of manager, managing director and other directors including nominee- directors, whole-time directors (giving their directorships in other companies).
e. Location of project.
f. Plant and machinery, technology, process, etc.
g. Collaboration, any performance guarantee or assistance in marketing by the collaborators.
h. Infrastructure facilities for raw materials and utilities like water, electricity, etc.
i. Schedule of implementation of the project and progress made so far, giving details of land acquisition, civil works, installation of plant and machinery, trial production, date of commercial production, etc.
j. The products:
i. Nature of the product - consumer /industrial and end-users.
ii. Approach to marketing and proposed marketing set up.
iii. Export possibilities and export obligations, if any.
k. Future prospects - expected capacity utilisation during the first 3 years from the date of commencement of production, and the expected year when the company would be able to earn cash profits and net profits.
6. Particulars with regard to the company and other listed companies under the same management, which made any capital issue during the last 3 years:
a. Name of the company
b. Year of issue
c. Type of issue (Public/rights/composite)
d. Amount of issue
e. Date of closure of issue
f. Date of completion of delivery of share/debenture certificates.
g. Date of completion of the project, where object of the issue was financing of a project
h. Rate of dividend paid
7. Outstanding litigation pertaining to:
a. Matters likely to affect operation and finances of the company including disputed tax liabilities of any nature; and
b. Criminal prosecution launched against the company and the directors for alleged offences under the Companies Act, Indian Stamps Act, Central Excise Act, Foreign Exchange Management Act, etc.
c. Particulars of default, if any, in meeting statutory dues, institutional dues, and towards instrument holders like debentures, fixed deposits and arrears on cumulative preference shares, etc.
d. Any material development after the date of the latest balance sheet and its impact on performance and prospects of the company.
8. Management perception of risk factors:
These include the manner in which the management perceives risk, such as, sensitivity to foreign exchange rate fluctuations, difficulty in availability of raw materials or in marketing of products, cost/time overrun, etc.
PART II OF SCHEDULE II
A. General information
1. Consent of directors, auditors, solicitors/ advocates, managers to the issue, Registrar of issue, bankers to the company, bankers to the issue and experts.
2. Expert opinion obtained, if any.
3. Change, if any, in directors and auditors during the last three years, and reasons thereof.
4. Authority for the issue and details of resolution passed for the issue.
5. Procedure and time schedule for allotment and issue of certificates.
6. Names and addresses of the company secretary, legal adviser, lead managers, co-managers, auditors, bankers to the company, bankers to the issue and brokers to the issue.
B. Financial Information Reports: The financial reports that have to be set out:
1. A report by the auditors of the company with respect to:
a. Profits and losses, assets and liabilities and the rates of dividends paid and not paid by the company in respect of each class of shares for each of the five financial years immediately preceding the issue of the prospectus. If no accounts have been made for any part of the period of five years a statement of that fact along with a certificate from the auditors that such accounts have been examined and found correct by them. The same shall also apply with regard to assets and liabilities and accounts of its subsidiaries.
b. If the proceeds of the issue of shares or debentures are to be applied in the purchase of any business a report made by a Chartered Accountant of the profits or losses and assets and liabilities of the business for the previous five financial years immediately preceding the issue of the prospectus.
c. Principal terms of loan and assets charged as security.
C. Statutory and other information
1. Minimum subscription
2. Expenses of the issue giving separately fee payable to:
a. Advisors.
b. Registrars to the issue.
c. Managers to the issue.
d. Trustees for the debenture holders.
3. Underwriting commission and brokerage
4. Previous issue for cash
5. Previous public or rights issue (if any during last five years)
a. Date of allotment
b. Closing date
c. Date of refunds
d. Date of listing on the stock exchange
e. If the issue was at premium or discount and the amount thereof.
6. Commission or brokerage on previous issue
7. Issue of shares otherwise than for cash.
8. Debentures and redeemable preference shares and other instruments issued by the company outstanding as on the date of prospectus and terms of issue
9. Option to subscribe
10. The details of option to subscribe for securities to be dealt with in a depository
11. Where the proceeds of the issue is to be used in whole or part payment for purchase of property, the following particulars have to be given:
a. The names, addresses, descriptions and occupations of the vendors;
b. The amount paid or payable in cash, shares or debentures to the vendor(s), specifying separately the amount, if any, paid or payable for goodwill;
c. The nature of the title or interest in such property acquired or to be acquired by the company;
d. Short particulars of every transaction relating to the property completed within the two preceding years, in which any vendor, promoter or director had any direct or indirect interest.
12. The following information with regard to managerial personnel have to be provided:
a. Details of directors, proposed directors, whole-time directors, managing directors, their remuneration, appointment, interest, borrowing powers and qualification shares.
b. Any amount or benefit paid within the two preceding years to any promoter or officer.
c. The dates, parties to, and general nature of:
i. Every contract appointing or fixing the remuneration of a managing director or manager entered into within two years before the date of the prospectus;
ii. Every other material contract, not being a contract entered into in the ordinary course of the business.
A reasonable time and place at which any such contract or a copy thereof may be inspected shall be clearly specified.
d. Full particulars of the nature and extent of the interest, if any, of every director or promoter:
i. In the promotion of the company; or
ii. In any property acquired or proposed to be acquired by the company within two years of the date of the prospectus.
Where the interest of such a director or promoter consists in being a member of a company, the nature and extent of the interest of the company, with a statement of all sums paid or agreed to be paid to him or to the company in cash or shares by any person either to induce him to become, or to qualify him as, a director, or for services rendered by him or the company, in connection with the promotion or formation of the company.
13. Rights of members regarding voting, dividend, lien on shares and the process for modification of such rights and forfeiture of shares.
14. Restrictions, if any, on transfer and transmission of shares/ debentures and on their consolidation/ splitting.
15. Revaluation of assets, if any (during last five years).
16. Material contracts and inspection of documents and the time and place at which the contracts and documents will be available for inspection from the date of prospectus until the date of closing of the subscription list.
PART III OF SCHEDULE II
The provisions of this part apply to Parts I and II of Schedule II given above. A summarization of these provisions is given below:
1. Every person shall be deemed to be a vendor who has entered into any contract for the sale or purchase of any property to be acquired by the company, in cases where:
a. The purchase money is not fully paid at the date of the issue of the prospectus;
b. The purchase money is to be paid, wholly or in part, out of the proceeds of the issue offered for subscription by the prospectus;
c. The contract depends for its fulfilment on the result of that issue.
2. Where any property to be acquired by the company is to be taken on lease, "vendor" shall be the lessor, "purchase money" shall be the consideration for the lease, and "sub-purchaser" shall be the sub-lessee.
3. In the case of a company which has been carrying on business for less than 5 financial years, the accounts of the company shall be only for those years in which business was carried out, even if less than 5 years.
4. Any report by accountants shall be made by accountants qualified under the Companies Act for appointment as auditors of the company and not by any accountant who is an officer or servant, or a partner of the company or the company's subsidiary or holding company.
5. Inspection of documents must be in a reasonable time and place at which copies of all balance sheets and profit and loss accounts on which the report of the auditors is based.
6. The prospectus must state that all the relevant provisions of the Companies Act, 1956, and the guidelines issued by the Government have been complied with and no statement made in the prospectus is contrary to the provisions of Companies Act, 1956, and its rules.
Shelf prospectus (Section 60 A)
"Shelf prospectus" means a prospectus issued by any financial institution or bank for one or more issues of the securities or class of securities specified in that prospectus. An information memorandum shall be issued to the public along with shelf prospectus filed at the stage of the first offer of securities
Information Memorandum
According to the Amendment Act, Section 2(19) the term ‘information memorandum’ is a process undertaken (before the filing of a prospectus) to determine the demand, price and terms of issue for securities proposed to be issued by a company by means of a notice, circular, advertisement or document circulated to the public.
Book-building
Book building is basically the process of generating a book of investor demand for the shares during an Initial Public Offer for efficient price discovery. Usually, the issuer appoints a major investment bank to act as a book runner. The entire book building process is done on-line.
During the fixed period of time for which the subscription is open, the book runner collects bids from investors at various prices, between the floor price and the cap price. The investor bids for these shares within the price bands. Bids can be revised by the bidder before the book closes. The process aims at tapping both wholesale and retail investors. The final issue price is not determined until the end of the process when the book has closed. After the close of the book building period, the book runner evaluates the collected bids on the basis of certain evaluation criteria and sets the final issue price.
If demand is high enough, the book can be oversubscribed.
Red-herring prospectus
"Red Herring Prospectus" is a prospectus which does not have details of either price or number of shares being offered or the amount of issue. This means that in case the price is not disclosed, the number of shares and the upper and lower price bands are disclosed. On the other hand, an issuer can state the issue size and the number of shares are determined later.
Thus, a Red Herring Prospectus can be filed with the Registrar of Companies without the price band. Only on completion of the bidding process, the details of the final price are included in the offer document. The offer document filed thereafter with ROC is called a prospectus.
Statement in Lieu of Prospectus (Section 70)
A public limited company which intends to raise capital from private sources such as owners and promoters, it must file a statement in lieu of prospectus. It gives the same information as a prospectus and is signed by directors and proposed directors. If a company has not filed its statement in lieu of prospectus with the Registrar, it cannot allot its shares or debentures. It contains information such as name of the company, statement of capital, description of the business, names, addresses and occupation of directors, initial expenses, and names of vendors, details of property, directors’ interest, material contracts and minimum subscription.
Prospectus by implication (Section 64)
If a company allots or agrees to allot any shares or debentures of the company with a view to offering these for sale to the public, then, any document by which the offer is made shall be deemed, by implication of law, to be a prospectus issued by the company.
Abridged Prospectus
"Abridged Prospectus" means a prospectus which contains all the salient features of a prospectus. It accompanies the application form of public issues.
Prospectus in terms of newspaper advertisement (Section 66)
Where any prospectus is published as a newspaper advertisement, it shall not be necessary in the advertisement to specify the contents of the memorandum or the signatories or the number of shares subscribed for by them
LIABILITY FOR MIS-STATEMENTS OR OMISSION IN A PROSPECTUS (Golden rule for framing prospectus Section 62-63)
What is an untrue statement?
According to Sec. 65(1), a statement included in the prospectus is untrue:
• If statement is misleading in the form and context in which it is included (material fact); and
• If omission of any matter (material fact) is calculated to mislead.
The leading case on this point is Greenwood vs. Leather Shod Wheel Co. (1900)
A company manufacturing leather tyre wheels for trolleys issued a prospectus stating in large type, ‘Orders have already been received from the House of Commons, to be followed by large orders later.’ In fact, the person who supplied refreshments to the House of Commons had one trolley with these wheels and no customer had yet expressed any intention to buy on a large scale.
It was held that the prospectus was misleading as it contained a mis-statement to a material fact, i.e., the mis-statement that orders have been received from the House of Commons would induce the general public to subscribe to shares of the company.
Liability for mis-statements in prospectus can be categorized as follows:
CIVIL LIABILITY
A person who has subscribed for shares in a company, on the strength of a mis-stated prospectus, has the following remedies.
Remedies against the company:
a. Rescission of contract
Rescission of a contract takes place where the investor returns back to the company the shares allotted and gets back the purchase money he paid for the shares, with interest. He also has his name removed from the register of members.
Rescission is available only to first-time subscribers who subscribed to shares and debentures after trusting the misleading statements given in the prospectus. The shareholder will have to exercise this right within a reasonable time of subscribing to shares and before the company goes into liquidation. This facility of rescission of contract is not available to subsequent subscribers.
Conditions to exercise the right to rescind a contract:
a. The prospectus must contain untrue or misleading statement of a material fact, which need not necessarily be fraudulent in nature. It can also be an innocent misrepresentation of facts, but it should be untrue and misleading.
Example: A prospectus of a company said that a company had paid a dividend every year between 1921 and 1927 – years of depression, thus giving the impression of a financially stable company. However, the company had in each of those years incurred considerable financial losses on trading account and was only able to pay a dividend out of reserves accumulated in previous years. This fact was suppressed. The court held that the prospectus was false in a material particular and conveyed a false impression. (Rex vs. Kylsant (1932)).
b. The statement must be a mis-statement of a material fact, that is, it should not be an opinion or expectation or misrepresentation of law. For example, in the case given above, if it was mentioned that orders may come in from public and private enterprises, for trolleys, in the near future, it would not be misrepresentation of a material fact, but where it was clearly mentioned that orders have already been received from the House of Commons, when it was not so, it was a material misrepresentation – material to the forming of decision-making by investors.
Example: A prospectus of a company stated that the directors and their friends have subscribed a large portion of the capital and they now offer to the public remaining shares. In reality, the directors had subscribed only ten shares each. It was held that the subscriber could rescind the contract, because the prospectus contained a false statement. (Henderson vs. Lacon (1857))
c. The mis-statement induced the shareholder to take shares, i.e., he relied on the mis-statement to invest, in the hope that he is investing in a company that will make good returns.
d. Rescission can be granted only to an investor buying shares directly from the company on a fresh issue (as he is under no compulsion to verify the authenticity of statements, but subsequent buyers buy at their own risk).
This was proved in the leading case of Peek vs. Gurney (1873). The facts of the case are as follows:
A prospectus containing false statements was issued by the defendants on behalf of a company. No shares were allotted to the plaintiff at that time. Several months afterwards the plaintiff bought 2000 shares on the stock exchange. The company went into liquidation and the plaintiff had to pay nearly £ 1, 00,000 as a contributory.
His action against the directors for deceit was rejected.
e. The omission of a material fact must be misleading before rescission is granted, i.e., if a statement which is untrue at the time of issuing the prospectus becomes true by the time of application for shares, then rescission need not be granted.
Example: There was a statement in the prospectus to the effect that more than half of the shares had already been subscribed for and that the list would remain open only for a few days. This statement at the time of the issue of the prospectus was untrue but before the plaintiff had applied for shares the whole issue had been applied for. Nobody could say that the plaintiff had been deceived. (Ship vs. Crosskill (1870))
f. The proceedings for rescission should start immediately as the shareholder becomes aware of the misrepresentation.
Loss of right to rescind
1. If the shareholder, knowingly fully well of the misrepresentation in the prospectus, affirms his contract for purchase of shares, either expressly or impliedly, he cannot rescind the contract. Affirmation takes place in the following manner:
(i) The shareholder attempts to sell his shares;
(ii) He executes a transfer deed;
(iii) Pays calls or receives dividends;
(iv) Attends or votes in general meetings personally or by proxy.
2. Where the shareholder, even after becoming aware of the misrepresentation, exercises his right to rescind after an unreasonable delay, the shareholder loses his right to rescind the contract for purchase of shares.
Example: An allottee became fully aware of misrepresentation in the company’s prospectus in the month of July. However, he moved to have his name removed from the register of members in December. It was held that the un-explained delay of five months precluded him form obtaining relief. (Re Christineville Rubber Estates Ltd. (1911))
3. Where the parties cannot be put back to their original positions, rescission cannot take place. Ex: right to rescind exercised after procedure for winding up has started.
b. Claim for damages
In situations where a mis-statement in the prospectus is of a fraudulent nature, the shareholder can claim for damages for deceit, provided that he has rescinded his contract immediately on becoming aware of the misrepresentation. The shareholder will have to prove that the mis-statement or omission was:
(a) One of fact and not of law, nor an expression of opinion;
(b) Material;
(c) Acted upon by him in good faith;
(d) Those acting on behalf of the company were aware of the fraudulent misrepresentation;
(e) Those acting on behalf of the company were authorised to issue the prospectus with the fraudulent misrepresentation; and
(f) The shareholder suffered loss / damages.
ii. Against the directors, promoters & experts
Where a person has subscribed for shares or debentures on the faith of a mis-stated prospectus, and he has suffered any loss or damage, the following persons can be sued and shall be held liable to pay compensation:
a. Every person who is a director of the company at the time of the issue of the prospectus;
b. Every person who has authorised himself to be named in the prospectus as a director (proposed director);
c. Every person who is a promoter of the company;
d. Every person who has authorised the issue of the prospectus; and
e. The company.
a. Compensation for untrue statement (sec. 62)
Every director, promoter and others who induced an investor to subscribe to shares on debentures on the faith of a misrepresented prospectus, whose issue they have authorised, will have to compensate the subscriber for damages sustained by him. Compensation payable is the difference between the price paid for the shares or debentures and their value at the date they were allotted to the subscriber.
However, Section 62(2) provides certain defenses available to directors, by which they can plead for escape from damages:
i. If the director or promoter can prove that he had withdrawn his consent to act as such before the prospectus was issued and that the prospectus was issued without his consent, then he can escape liability.
ii. If the director can prove that he was ignorant of the misrepresentation and that after issue of the prospectus, but before allotment, on becoming aware of the misrepresentation, he withdrew his consent and gave a public notice of his withdrawal and reasons for it, he can escape liability.
iii. If the director can prove that the prospectus was issued without his consent or knowledge and on becoming aware of the same, he issued a public notice to the effect, he can escape liability.
iv. If the director can prove that until the time of allotment he had reasonable grounds to put his belief in the fraudulent statement, he can escape liability.
v. If the director can prove that he made his statement based on the authority and report of an expert, which he had reasonable grounds to believe, he can be relieved of his liability.
vi. The director will be relieved of his liability if he can prove that the statement was a true and correct copy of an official document.
The expert will not be held liable if he can prove that:
a. He withdrew his consent to the prospectus before it was submitted to the registrar for registration.
b. After delivery of prospectus to registrar, but before allotment of shares, on being aware of the misrepresentation, he withdrew his consent and gave a public notice of the same.
c. He was competent to make the statement and up to the date of allotment of shares he firmly believed in the validity of the statement.
b. Damages for non-compliance with sec. 56
Section 56 requires that a prospectus shall state the matters specified in Part I of Schedule II. If this has not been complied with and an omission takes place, any shareholder can claim for damages, even though such omission does not make the prospectus misleading or false. However, the director, promoter or such other person will not be liable if he can prove that:
i. He had no knowledge of the matter not disclosed in the prospectus;
ii. The non-compliance arose from honest mistake of fact on the part of the directors or experts; and
iii. The non-compliance was not material and the court also feels so.
c. Damages for fraudulent misrepresentation under general law
Directors and other officers of the company can be held liable under the common law if it is proved that they made a false statement with absolute knowledge of its false nature, or that they acted recklessly or without adequate care. However, they can be exempted if the officer acted in good faith and believed that they had acted honestly and had sufficient and reasonable grounds to believe that the statement they were making was true.
B. CRIMINAL LIABILITY
Every person who authorised the issue of a prospectus with an untrue statement shall be punishable with penalty for fraudulently inducing persons to invest money. This penalty may be in the form of 2 years’ imprisonment or a fine of Rs. 50,000, or both.
The accused person may not be liable, if he is able to prove that:
a. The statement was immaterial; or
b. He had reasonable ground to believe and did believe up to the time of the issue of the prospectus that the statement was true.
If any officer of the company is party to an issue and allotment of shares under a fictitious name, the penalty shall amount to an imprisonment for 5 years or a fine of Rs. 1,00,000, or both.
MEMBERSHIP IN A COMPANY
Definition
• Section 41 of the Companies Act of 1956, defines a member as a person who has signed the Memorandum of Association and every other person who agrees in writing to become a member and whose name is entered in the Register of Members.
• According to the Depositories Act, 1996, a member is every person holding equity share capital of a company and whose name is entered as beneficial owner in the records of the depository.
Share holders not being members
The following are not members, though they may be shareholders:
• Holder of a share warrant
• Transferee or the Legal Representative of a deceased shareholder.
Members not being Shareholders
The following are members though they are not shareholders:
a. A company limited by Guarantee, not having share capital can have only members and not shareholders.
b. A transferor of shares continues to be a member until his name is replaced in the Register of Members with the name of the transferee.
c. Signatories to the Memorandum become members just because they have signed the memorandum. Their names are entered in the Register of Members even before allotment of shares.
d. A person misrepresenting himself to others, by acting as though he were a member, when he is actually not one, is stopped from denying his position later on and is held liable as a member, though he is not a shareholder. This is termed as ‘membership by Acquiescence or estoppel’.
e. Persons, who cease to be members 12 months before winding up, are held liable as List B contributories to pay the unpaid portion of the share capital on default by present transferee shareholders.
f. A person may become a member, though he does not hold shares, by an order or decree of a court of law.
Modes of Acquiring Membership
1. Every person by subscribing to the Memorandum of Association of a company registered under the Indian Companies Act, 1956, is decreed to be a member and his name is placed in the Register of Members, even before shares are allotted.
2. Every director of the company who gives his agreement in writing to the Registrar of Companies, agreeing to take up qualification shares and pay for them, become members on registration of the company.
3. When members of the public make an application for shares, which is accepted by the company when it makes a subsequent allotment, the subscriber’s name is entered in the Register of Members after the shares are registered in his name.
4. A person may purchase shares and apply to the company to register him as a member. Thus, a transferee of shares can also acquire membership in a company.
5. On the death of a shareholder, his legal representatives can become shareholders, though not members. They have the power to dispose off the shares. They can become members, if they choose to, by registering the shares acquired in their name. On the insolvency of a shareholder member, the Court may appoint an Official Assignee, who acquires membership by operation of law.
6. If a person allows his name to appear in the Register of Members without any agreement to the same between him and the company, or if he acts as though he were a member, when he actually is not, it is termed as acquiring of membership by holding out / Estoppel. At the time of winding up, he too will be held liable as a contributory.
Who may become a member?
1. A minor cannot become a member, because every contract entered into with a minor is a nullity and hence void. If by any mistake, a minor’s name has been entered in the Register of Members, then the company can remove his name on becoming aware of this fact. The minor can also repudiate the contract of share allotment any time during his minority. However, if on attaining majority, he is aware of the fact that he is a member of a company, and this happened when he was a minor, then he must repudiate the contract immediately on obtaining knowledge of the same. But, if he does not repudiate the contract on attaining majority, and receives dividend or pays calls, etc., the company can stop him from denying that he is a shareholder.
The above rules do not apply if the minor has acquired shares by transmission, as the legal heir of a shareholder member.
2. A company can become the member of another company, if its articles allow it to do so.
3. A subsidiary cannot be the member of its holding company. However, it can be a member if shares have been transferred to it in the position of a legal representative.
4. A partnership firm, since it does not have a separate legal identity, cannot own shares in its own name in a company. However, partners can own shares either individually or jointly.
5. Foreigners can be members of an Indian company and own shares, subject to the FEMA Act, 1999 and approval of the RBI.
6. A person who takes shares under a fictitious person is liable as a member, but can be punished for impersonation.
7. A Hindu Undivided Family can own shares in the name of its ‘karta’.
8. An insolvent can be a member of a company, but all beneficial interest in the shares will lie with the Official Assignee.
9. A trustee cannot be a member.
10. A registered society can hold shares in its own name.
11. Shares in a company can be held jointly. In a public company each joint holder will be treated as a separate member. Generally, not more than 4 persons at a time can be joint holders. The provisions relating to joint shareholding are as follows:
Only one share certificate will be issued;
All the shareholders are jointly as well as individually liable to make payments on shares;
Each joint holder of a public limited company is treated as a separate member.
In case of a private company, joint holders are treated as a single member.
The joint holder whose name appears first in the Register of Members shall receive company circulars and notices.
The joint holder whose name appears first in the Register of Members shall be entitled to vote.
The names of the joint holders may be entered in the Register of Members in the order that they appear in the application form or in the share transfer form.
Payment of divided can be made by the company to the joint holder whose name appears first in the Register of Members, unless there is a joint instruction to the contrary.
In order to calculate the number of members required for signing a requisition, the signature of any one joint holder shall be treated as the signatures of all of them.
Joint shareholding for director, with another person, will be considered as sufficient for qualification shares, unless the Articles provide otherwise.
All the holders will have to jointly appoint a proxy.
In order to transfer shares, all the joint holders will have to individually sign the transfer deed, without which the transfer will not be considered valid.
On transmission of shares, the legal heir becomes liable along with the surviving joint holders.
Any one joint holder can represent the other holders at a general meeting. If voting is by show of hands, one person’s vote will be counted as all the other joint holders. However, in a vote by poll, all the joint holders will have to be personally present to vote.
For purposes of a quorum, joint holders will be counted as one member.
TERMINATION OF MEMBERSHIP
A person ceases to be a member of a company when his name is removed from the Register of Members and this can come about either because of some act of the member himself, which is voluntary, or because of an operation of law, which is involuntary.
Cessation of membership by act of parties
A person can lose his privilege of membership in a company when he transfers his shares and the transferee registers himself with the company, or when his shares are forfeited by the company, or when he surrenders his shares to the company or when the company exercises its right of lien over his shares and sells them.
Cessation by operation of law
The law comes into force to put an end to a person’s membership in a company under various circumstances such as death of the member shareholder, on insolvency of the member, where the court orders that his shares be bought by the company or another person, on the winding up of the company, on repudiation of allotment contract because of mis-statements in the prospectus, on redemption of redeemable preference shares, or when share warrants are issued to him on his fully paid shares.
Expulsion of a member
Certain members, who cause trouble either to the company or to the interests of the minority shareholders, can be expelled. They can be expelled if there is a malafide exercise of powers by majority shareholders that inhibit the rights of minority shareholders or affect the management and running of the company. At the same time this right to expulsion can be exercised bona fide to protect the interests of the company.
Rights of a member
Rights of members are conferred on them either by the Companies Act or by the Articles of Association and the Memorandum of Association.
1. Members enjoy certain statutory rights which are conferred on them by the Companies Act.
2. They enjoy documentary rights through provisions of the Articles and the Memorandum.
3. Members also enjoy legal rights under the General Law.
(i) Individual rights: These are rights enjoyed by members in their individual capacity, conferred on them by the Companies act, and are hence statutory rights. These rights can be enforced by them in their own names. A few of these rights are as follows:
Sec 113: right to receive a share certificate
Sec 155: right to have name in Register of Members as well as to have the register rectified.
Sec 82: right to transfer shares
Sec 171: To attend meetings, receive notice and vote
Right to participate in declaration of dividends
Sec 16: To inspect company’s registers, indexes, etc
Sec 39: to request and obtain copies of Memorandum and Articles of Association.
Sec 81: to have first option on new & further issue
Sec 165 (1)&(2): to obtain copy of statutory meeting
Sec 196(2): right to receive notice of resolution requiring special notice
Sec 191(2): right to obtain minutes of proceedings at general meeting
Sec 284: right to remove directors
Sec 210, 219: right to obtain copies of P&L a/c, Balance Sheet, auditor’s report, etc.
Sec 235, 237: right to make an application for appointment of Government inspectors
Sec 224: right to appoint auditors at Annual General Meeting
Sec 230: right to receive auditor’s report at Annual General Meeting
Sec 399: right to petition court for prevention of mismanagement and oppression
Right to petition court for order of injunction restraining directors
Right to share in company’s capital and surplus assets at the time of liquidation
Sec 433, 484(1)(b): right to participate in passing special resolution for winding up of company
Sec 490, 492: right to participate in the appointment and remuneration of liquidators
(ii) Corporate membership rights: These are rights exercised by majority shareholders. The majority shareholders, as a group exercises their rights and these rights are usually exercised with regard to framing company policy and exercising control over management affairs. However, if misuse of these powers by the majority shareholders, in the form of oppression of minority shareholders or creating company policies that are against law and the Act, action can be taken by the minority shareholders.
In case of oppression by majority, an application for relief can be made by at least 100 members or not less than 1/10th of total members, whichever is less; or any member or members holding not less than 1/10th of issued share capital of the company. In the case of a company not having share capital, application can be made by not less than 1/5th of total members.
In case of oppression and mismanagement by majority shareholders, an extraordinary general meeting can be requisitioned by members holding not less than 1/10th of paid up share capital. In companies not having share capital, members having not less than 1/10th of total voting power can make requisition.
Liabilities, obligations and duties of a member
The liabilities of members depend upon the nature of the company. In case of companies with unlimited liability, the members are liable for all the debts incurred by the company, incurred during the period of membership. In the case of companies limited by guarantee, the member’s liability is limited to the extent of amount guaranteed, and in the case of companies limited by shares the member’s liability is restricted to the amount remaining unpaid on the shares held by him. An individual can also be a B List contributory, where he will be liable, as a past member, on the unpaid amount on shares he had held a year prior to winding up of company, and if the A List contributories, i.e., the present members are unable to pay the amount outstanding on shares.
Members also have certain duties and obligations, implied by the Articles of Association. They are:
a. Take shares that have been allotted to them, without delay.
b. To pay for shares allotted when calls are made.
c. Abide by doings of majority members.
d. Contribute at winding up when shares are partly paid.
e. Individually liable for debts of the company if membership falls below statutory minimum.
Register of members
Every company has to maintain a register of members containing the following particulars:
• Name, address & occupation of each member.
• Number of shares subscribed for and the amount paid or yet to be paid.
• Date of entering each member’s name
• Date of ceasing to be member
• Amount of stock held by member
• In case of default a fine of Rs. 500 is charged on the company and every officer for every day of default
Index of members
• According to Sec 151 every company having more than 50 members will have to maintain a Index of members.
• Any alteration in the register of members is to be entered in the index within 14 days.
• The index has to be kept at the same place where the register of members is maintained.
• Any default will attract a fine extending to Rs. 50.
Location of register of members and right of inspection (sec 163)
• The register and index of members must be maintained at the registered office of the company.
• It may also be kept at any place within the city where the registered office is situated. To do this a special resolution has to be passed in the general meeting and a copy of the proposed resolution has to be sent to the registrar before holding the meeting.
• Any shareholder or debenture holder may inspect the register and index of members free of cost.
• If an outsider wants to inspect the register or index he will have to pay a fee of Rs. 10 for 2 hours.
• The company can send copies of the register or index, within 10 days, on requisition by an applicant.
• The court can sanction or compel an immediate inspection of the register or index.
• Any default will attract a fine of Rs. 500 for every day of default.
References
1. www.sebi.gov.in
2. Companies Act 1956, Companies Amendment Act 2006, Gazettes released by Government of India and the Ministry of Corporate Affairs.
3. Kapoor, N.D., ‘Elements of Mercantile Law’, Sultan Chand & Sons, 13th revised edition, 2008.
4. Saravanavel, P. & Sumathi, S., ‘Company Law’, Himalaya Publishing House, 2006.
5. Companies Act 1956, Gazettes released by Government of India and the Ministry of Corporate Affairs.
6. www.hinduonnet.com
REVIEW QUESTIONS
Section A
1. What is a prospectus?
2. Write a brief note on statement in lieu of prospectus.
3. Is the issue of prospectus necessary?
4. State the objects of underwriting.
5. List out the objects of issuing a prospectus.
6. Briefly explain the conditions for a prospectus.
7. Define shelf prospectus.
8. What do you mean by information memorandum?
9. State the various kinds of capital.
10. What is subscribed capital?
11. Define reserve capital.
12. State the various methods of raising capital.
13. What is meant by alteration of capital?
14. What is reduction of capital?
15. Define shares. State the various types of shares that may be issued by a company.
16. What are cumulative preference shares?
17. Distinguish between shares and stock.
18. What is deferred share?
19. What is ‘allotment of shares’?
20. Define share certificate.
21. What is a share warrant?
22. Who is a member?
23. Can a minor be a shareholder in a company?
24. Give two points of difference between a shareholder and a member.
Section B
1. What is a prospectus? What are its requirements?
2. State the objects of issuing a prospectus.
3. What are the remedies available for any mis-statement made in the prospectus?
4. What is meant by statement in lieu of prospectus?
5. What is underwriting? What are its objects?
6. What do you mean by capital? What are the various kinds of share capital?
7. What are the various methods of raising capital?
8. Briefly explain the procedure for issue of shares.
9. What are the various ways in which share capital can be altered?
10. Explain the various methods of reduction of share capital.
11. Define shares and distinguish it from stock.
12. What are preference shares? State its kinds.
13. What are equity shares? List out its advantages.
14. Briefly explain what you mean by buy-back of shares?
15. What are the different methods through which membership can be acquired in a company?
16. Write a brief note on register of members.
Section C
1. What is a prospectus? Is the issue of a prospectus compulsory on the part of a company?
2. What is a prospectus? What amounts to a mis-statement in a prospectus? What are the remedies available to a subscriber who has taken shares on the basis of a mis-statement in a prospectus?
3. Discuss the liability of a company for untrue statements or omissions in its prospectus.
4. Discuss the civil as well as criminal liability of persons who authorise the issue of a false prospectus.
5. Explain the legal provisions relating to issue and registration of a prospectus.
6. What are the remedies open to an allotee of shares who have had applied for them on the faith of a false and misleading prospectus and what are the defences available to the directors of the company who have issued such a prospectus?
7. Discuss in detail the contents and the form of a prospectus.
8. Who is deemed to be an expert in relation to the prospectus of a company? What conditions must be satisfied before a report by an expert can be published therein? Is there any remedy available to the allotee of the shares who has been induced to take shares on the faith of an untrue statement of an expert in the prospectus?
9. Write short notes on: (a) Statement in lieu of prospectus, (b) Prospectus by implication, (c) Registration of a prospectus
10. Write short note on underwriting of shares.
11. What are shares? Distinguish shares from stock.
12. Explain the various kinds of shares along with their merits and demerits.
13. Define preference shares. What are its various kinds?
14. Distinguish share certificates from share warrants.
15. What is transmission of shares? What are the regulations regarding transmission of shares?
16. Write short notes on: (a) Certification of transfer, (b) Blank transfer, (c) Forged transfer
17. Explain the rights, duties and liabilities of members.
Chapter V – MANAGEMENT OF COMPANY
LEARNING OBJECTIVES
1. To enable students to have a clear understanding of the term ‘directors’, the duties and liabilities involved, their rights and powers in a company and their eligibility requirements.
2. To have knowledge of the parties who can appoint directors, how the office of directors come to an end and the legal position of directors.
3. To understand what board meetings are, how and why they are held and the duties and disabilities of directors with regard to board meetings.
4. To draw a distinction between whole time directors, part time directors, mangers and managing directors.
5. To have an understanding of who a company secretary is, the importance of a company secretary, the qualifications required for appointment to such office, the rights, duties and liabilities of company secretaries and the extent to which they can exercise their powers.
Directors – meaning and definition
According to Section 2(13), ‘any person occupying the position of director by whatever name called’, is termed as a director. The position of a director can be held only by an individual person. Moreover, it is the director who controls the affairs of the company. According to the Companies (Amendment) Act, 2006, no person can be appointed or re-appointed as director, unless he has been allotted a Director Identification Number by the Central Government.
Number of directors
According to the Companies Act, 1956, every public limited company must have a minimum of 3 directors and every private limited company a minimum of 2 directors.
According to the Companies (Amendment) Act, 2000, a public company with a paid up capital of Rs. 5 crores or more and 1000 or more shareholders shall have at least 1 director elected by small shareholders.
A ‘small’ shareholder is a shareholder who holds shares with a nominal value of Rs. 20,000 or less.
The articles of a company decide on the maximum and minimum number of directors that would constitute its board. However, alteration of number of directors is possible by alteration of Articles and passing an ordinary resolution. If the maximum number of directors exceed 12, then central government permission is required.
Eligibility to be a director
1. As per Section 253, only individuals can become company directors, i.e., a company, firm or association cannot become directors. This makes it easier to fix responsibility for actions committed.
2. Section 275 of Companies Act limits the number of directorships a person may hold. It states that no person can be a director in more than fifteen companies.
3. A person appointed as director should be competent to enter into contracts on behalf of the company. The qualifications required by law which makes an individual eligible to be a director are that:
a. He should be a major
b. He should be a person of sound mind
c. He should not have been disqualified from being a director.
3. If the articles stipulate so, then those appointed as directors must take up qualification shares within 2 months of appointment, where the nominal value of these qualification shares must not exceed Rs. 5000.
Disqualifications of directors (Section 274)
A person is disqualified from being appointed as director of a company, if:
1. He has been found to be of unsound mind by a court.
2. He is an undischarged insolvent.
3. He has applied to be declared an insolvent, and this application is pending.
4. He has been convicted and sentenced to imprisonment for not less than 6 months, for having committed a moral offence and 5 years have not elapsed since expiry of such sentence.
5. He has not made payment on calls in respect of shares held by him even after 6 months from the last date fixed for payment.
6. He has been disqualified by a court for an offence involving fraud or mismanagement of company affairs.
7. He has been held guilty for not filing of accounts and returns for more than 3 years.
Ceiling on number of directorships
No person shall hold office at the same time as director in more than fifteen companies.
For example, where a person already holding the office of director in fourteen companies is appointed as a director in two more companies, making the total number of his directorships to sixteen, he shall choose the directorships which he wishes to continue to hold so that the total number of the directorships, old and new, held by him shall not exceed fifteen.
No new appointments of director shall take effect until such choice, is made; and all the new appointments shall become void if the choice is not made within fifteen days.
In calculating the number of companies of which a person may be a director, the following companies shall be excluded:-
a A private company which is neither a subsidiary nor a holding company of a public company;
b An unlimited company;
c An association not carrying on business for profit or which prohibits the payment of dividend;
d A company in which such person is only an alternate director.
Any person who holds office, or acts, as a director of more than fifteen companies shall be punishable with fine which may extend to fifty thousand rupees in respect of each of those companies in excess of the first fifteen.
APPOINTMENT OF DIRECTORS
Directors may be appointed in the following manner:
1. First directors: First directors of a company may be appointed by subscribers to the memorandum. These first directors are usually named in the Articles of Association. If the articles are silent as to the appointment of directors, the subscribers to the memorandum may be deemed as directors and they will hold office until directors are appointed in the first annual general meeting.
2. Subsequent directors: The subsequent directors of a company may be appointed in the following manner:
a. Appointment by company in general meeting where not less than two-thirds of the total number of directors must retire by rotation. The remaining one-third of the directors is not subject to retirement by rotation. The tenure of a director is 3 years. Out of the two-third directors who retire by rotation one-third must retire every year.
b. Appointment by Board of Directors where they have the power to appoint:
i. Additional directors, who may be appointed from time to time as long as the strength of the board does not exceed the maximum strength fixed by the articles. They can hold office until next the next AGM.
ii. Casual vacancy, where an individual may be appointed instead of a director whose office has become vacant before the expiry of his term because of death, resignation, bankruptcy, etc. The period of office is till the end of the term of the director in whose place he was appointed.
iii. Alternate director, where an individual is appointed as director for a temporary period in place of a director who is absent for more than 3 months from the state in which board meetings are held. He has to vacate the director’s office on the return of the original director.
c. Appointment by third parties where third parties such as financial institutions who have provided loans and debenture holders can nominate directors to the board, which must not exceed one-third of the total strength of the board. These directors are not liable to retire by rotation. They may be of the following types:
i. Nominee directors, where a nominee or representative of financial institutions that have provided loans are appointed. The Articles must grant permission to the company to enter into such agreements with lenders.
ii. Special directors, where the directors are appointed by the Board for Industrial and Financial Reconstruction. This takes place when net worth of the company shows negative figures and an erosion of share capital takes place. This appointment of special directors is in accordance with the Sick Industrial Companies (Special Provisions) Act, 1985. These directors also need not retire by rotation and they are immune from restrictions and prosecutions.
iii. Persons appointed to replace the Board of Directors, where the National Company Law Tribunal may suppress the entire board and appoint persons or agencies to run the affairs of the company. This usually happens when there is a case charged against the company for oppression and mismanagement. The order to take over the affairs of the board is valid only for a period of one year and renewal not exceeding 1 year at a time. Maximum period during which the order for take over of management can be in force is 8 years.
d. Appointment by proportional representation where not less than 2/3rd of the total number of directors shall be appointed according to the principle of proportional representation. For example, a method wherein a shareholder holding majority shares can elect a majority of the directors, or where quotas are fixed when votes are cast, and individuals who get greater or equivalent votes to the quota fixed are appointed as directors. Appointment of directors by proportional representation shall take place once in three years and any interim casual vacancies shall be filled in the manner laid down in the articles.
e. Appointment by the central government where the Central Government can exercise its powers and appoint any number of directors as it thinks fit, on the board of directors of a public limited company. The purpose is to prevent oppression and mismanagement and protect interests of share holders and the public. These directors can be appointed for a period not exceeding 3 years and shall be made on the application of not less than 100 members or members holding not less than 1/10th of the voting power. These directors need not hold qualification shares nor do they need to retire by rotation.
f. Deemed director where any person according to whose instructions the members of the board act is deemed to be a director.
LEGAL POSITION OF DIRECTORS
The directors of a company are trustees of the company and they act in a fiduciary position towards the company in respect of their powers and the capital under their control.
• Directors are not employees of the company. However, they can hold a salaried position in the company on the basis of a special contract, in addition to their office as director of the company. Under such a situation, he will have all the rights of an employee, but they will be separate from his rights as a director.
• Directors as officers of the company are liable to penalties if the provisions of the Companies Act are not complied with.
• Directors are trustees of the company’s money and property, i.e., they enter into contracts on behalf of the company and represent the company.
• Directors of a company control the affairs of the company as its agents. The acts of a director within the scope of authority granted to him are deemed as acts of the company. Directors are agents of the company and not of shareholders. As agents they can enter into contracts and create negotiable instruments on behalf of the company.
• Since directors are the elected representatives of the shareholders, they are managing partners and their legal liability is limited to the value of shares held by them. However, a director cannot bind other directors and shareholders through their actions.
• The company deals with the outside world and carries out its activities through directors. Hence, directors are the organs of the company. The directors are considered to be the brain of the body, which is the company.
CESSATION OF DIRECTORSHIP
A person can cease to be the director of a company in any of the following manners or methods:
1. Resignation
2. Retirement
3. Acquiring a disqualification
4. Vacation of office
5. Removal
6. Withdrawal of nomination
1. Resignation: Since being a director is a voluntary act, the person being appointed as director must communicate his consent to act as director, in writing and this communication must be filed with the Registrar of Companies. If the person so desires, he may, any time after his appointment, withdraw his consent to act as director and resign from his post. A director’s resignation need not be approved or accepted by the board. It becomes effective on the date specified in his resignation letter. If no date is specified by him in his resignation letter, then it becomes effective on the day the letter is received by the company.
The Registrar will have to be informed of a director’s resignation. The company will have to file a return relating to changes in the board. The director who has resigned must either get a proof of change from the Registrar, or intimate the fact of his resignation to the Registrar through a letter.
The Companies Act does not provide any provisions for resignation by directors, however, based on various cases, there are a few practices, namely:
1. If the Articles permit resignation by a director at any time, then resignation will come into effect without the acceptance of the board or of the company.
2. Acceptance of resignation either by the board or by the company is needed if the resignation or the Articles state that such acceptance is necessary for resignation to come into effect.
3. If the Articles are silent regarding provisions of resignation, then a director may resign by giving a notice to the company, and the resignation will come into immediate effect.
4. Resignation once made cannot be withdrawn except with the consent of the company or the board of directors.
5. Oral resignation tendered at the time of a general meeting can be accepted by the meeting.
2. Retirement: Every director is liable for retirement by rotation, unless he is appointed as a non-rotational director. Every director has tenure of 3 years. The procedure for retirement is that the director intimates the company of his intention of not continuing in the post of director. If at an annual general meeting, the post of a retiring director is not filled, the meeting shall be adjourned to the same time, same place and same day of the next week. If even at the adjourned meeting, the place of the retiring director cannot be filled, then the retiring director will be reappointed.
However, such a reappointment is not applicable under the following circumstances:
1. The meeting has specifically resolved not to fill the vacancy.
2. The resolution proposing reappointment lost when it was put to vote, either in the previous meeting or in the adjourned meeting.
3. The retiring director expresses his unwillingness to be reappointed.
4. The director has been disqualified.
5. The articles require that a special resolution needs to be passed for appointment or reappointment.
Completion of tenure
Circumstances and dates under which a director’s tenure is completed:
• An Additional director’s tenure ends on the date of the next Annual General Meeting.
• For directors appointed on a casual vacancy, tenure ends on the date on which the original director should have retired.
• The tenure of an Alternate director ends on the return of the original director.
• A Nominee director’s tenure ends on the date specified by the nominating authority.
3. Vacation of office (sec 283)
The office of a director becomes vacant if:
1. Qualification shares of the company required to be taken up by the director are not taken by him within the stipulated time.
2. A court finds the director to be of unsound mind.
3. The director applies to be declared insolvent.
4. The director is adjudged an insolvent.
5. He has been convicted and imprisoned for not less than 6 months for a moral offence.
6. He is guilty of non payment of calls within six months from date fixed for payment.
7. He absents himself from 3 consecutive Board meetings or for a continuous period of 3 months, whichever is longer.
8. He accepts loan or guarantee for loan from the company in which he is a director.
9. He does not disclose to the board his interest in a contract.
10. He has been restrained by a court for fraud or misfeasance in relation to the company.
11. The director has been removed by company from his position in a General Meeting.
12. He held office of director on the virtue of having been in the employment of the company, and when he ceases to be the employee of the company, he will have to vacate the office of director.
If a person lets himself be appointed to the office of director, inspite of being aware of his disqualification, then he is in default and will have to pay a fine of Rs. 5000 for each day of the default.
4. Removal of Director
a. A director can be removed by shareholders by passing an ordinary resolution, before the completion of his tenure, other than in the following cases:
1. A director appointed by the Central Government can be removed only by the Central Government.
2. A director of a private company, appointed for life on 1st April 1952.
3. Directors appointed in accordance with the principle of proportional representation. This ensures that the majority shareholders do not remove directors appointed by minority shareholders.
4. Directors appointed by IDBI, IFCI, debenture holders, etc. can be removed only by them.
5. Directors appointed by Board for Industrial and Financial Reconstruction.
b. A director can be removed by the Central Government, on the recommendation of the National Company Law Tribunal, on the following grounds:
1. The director has been found guilty of fraud, misfeasance, negligence or default in carrying out his duties.
2. The director has been found guilty of carrying out the business against sound business principles and practices.
3. The company is carried on in such a manner so as to cause injury to the industry or trade to which it belongs.
4. The directors have been carrying on trade with the intent of defrauding creditors.
Removal by National Company Law Tribunal
• The terminated director cannot serve as manager to a company for a period of 5 years from date of order of termination.
BOARD MEETINGS
The place where the directors of a company exercise their powers jointly is termed as a meeting of the board. Meetings of board of directors must be held at least once in every three months and in a year, at least 4 such meetings must be held.
The notice of board meetings must be given to every director in writing and to his address in India. If any default is made in this matter, then every officer of the company in default is punishable with a fine of Rs. 100. The quorum for a board meeting shall be one-third of the total strength, or two directors, whichever is higher. If, for want of a quorum, the board meeting cannot be held, then it is adjourned to the same day of the next week.
Powers exercised by the Directors at Board meetings
The following powers can be exercised by the Board, by passing resolutions at board meetings:
1. Power to make calls
2. Power to issue debentures
3. Power to borrow money
4. Power to invest funds of the company
5. Power to make loans
DUTIES OF DIRECTORS
1. Duty of reasonable care: Directors must exercise skill and care in carrying out their duties. They are expected to act in a manner that is reasonably expected of a person with their knowledge and experience.
2. Duty to act honestly: Directors have a duty to act in a manner that is in the best interests of the company. He should ensure that he does not enter into any transaction in the name of the company that will lead to a personal gain.
3. Attend meetings: A director is not compelled or bound to attend all meetings of the board.
4. Inspect books of accounts: A director need not examine each transaction entered into the books of accounts.
5. Act personally: A director will have to carry out his duties personally and cannot delegate his powers to an agent.
6. Duty of disclosure of interest: A director cannot enter into any contract with the company for the purchase or sale of goods and services or for underwriting shares and debentures. If he does so, he shall disclose his interest in the subject matter.
Civil Liabilities of directors
The liabilities of directors are categorized under the following heads:
A. Liability to outsiders: The directors are not personally liable to outsiders if they act within the scope of their authority. However, the directors are personally liable in the following circumstances:
1. If the director has contracted with an outsider in his personal capacity, and not in his capacity as director of the company, then he will be personally liable.
2. If the director contracts as agent of an undisclosed principal, then too, he will be personally liable.
3. If the director has entered into a contract on behalf of a prospective company, then also he is held personally liable.
4. If the contract entered into by the director, on behalf of the company, is ultra-vires the company, then too, he will be personally liable.
5. Directors will be held personally liable to the outsider in case of any mis-statements in the prospectus.
6. In case of any irregularities in the allotment of shares, outsiders can hold directors personally liable.
7. If directors make any default in repayment of application money on shares which are not dealt with on a stock exchange, subscribers to these shares can hold each director involved with the issue personally liable.
B. Liability to company: The directors shall be held liable to the company in the following circumstances:
1. Where the directors have acted ultra-vires the company, such as paying dividend out of capital, pursuing objectives which are outside the scope of the memorandum, etc. the company can hold the directors liable.
2. If any director has acted negligently, and not in the best interests of the company, so that it has created a liability for the company, the director is liable to the company.
3. Where a director has not acted carefully in his capacity as trustee to the company, not taking into consideration the interests and benefits of the company, but has put the properties of the company to use, for his own benefit, then, he is held guilty of breach of trust and is liable to the company.
4. Where a director has been wilfully negligent or has committed any act of misconduct, that has destroyed the trust of the outsider or creditor on the company, then he is guilty of misfeasance in relation to the company.
C. Criminal liability: If directors are held guilty of fraud, not carrying out their duties as directors, omitting to comply with provisions of the Companies Act, etc. they can be penalized either with a fine or an imprisonment
If a director can prove to the court that he acted honestly, in good faith and for the benefit of the company, then he may be relieved from prosecution and default.
Directors with Unlimited liability
If provided by its Memorandum of Association, a limited liability company can have a director, managing director or manager, whose liability is unlimited. For this, a notice in writing has to be given to the person by the promoters, directors or managers of the company, and his consent obtained. If the original memorandum does not permit appointment of directors with unlimited liability, then if the articles permit so, the memorandum can be altered by passing a special resolution to make liability of managerial personnel unlimited.
DISABILITIES OF DIRECTORS
In order to protect the interests of the company and its shareholders, the Act has attached a few disabilities to the office of directors, and they are as follows:
1. A person cannot hold the office of directorship in more than twenty companies at the same time.
2. A director is prohibited from assigning his duties and office to another person.
3. A director cannot claim any exemption from indemnity on any liability which he has incurred because of an act of negligence, fraud, misfeasance, breach of trust, etc. on his part.
4. A director cannot delegate his powers to any other person, unless the articles permit so.
5. An individual who is an undischarged insolvent cannot be appointed as director in a company, nor can he take part in managing the affairs of a company.
6. A director cannot receive any loan or guarantee to a loan without approval from the Central Government.
7. No director can enter into a contract with the company, without the prior consent of the Board. This consent can extend to contract for the purchase or sale of any goods or for underwriting of shares or debentures of the company.
8. If the Board of Directors grants permission, then a director may hold any office of profit carrying a total monthly remuneration of Rs. 5,000 or more. This can extend to a relative of the director, but does not apply to managing directors, managers, bankers, legal and technical directors.
9. In certain cases such as sale of a company’s property, investment of the company’s funds in securities, extension of time for payment of debt due from director, etc. the board can act only with the consent of the company in a general meeting.
10. No company or its Board of Directors can make a contribution to any political party or person for political purposes. Any default can lead to a fine of up to Rs. 50, 000 and imprisonment of 3 years.
Managing director
According to Section 2(26), a managing director is a director who is entrusted with substantial powers of management which he would not be able to exercise otherwise.
A managing director can be appointed by:
• An agreement with the company
• Resolution by company in a general meeting
• Passing a resolution by Board of Directors
• Inserting a clause in the Memorandum or Articles of the company
Substantial powers do not include
• Power to affix common seal on any document
• Draw and endorse cheque
• Draw and endorse any Negotiable Instruments
• Sign any certificate to share or direct registration of transfer of any share
A public limited company or a private company which is a subsidiary of a public company cannot appoint a managing director unless the central government grants permission to do so. However, the Central Government shall not grant approval, unless
• It is in the best interest of the company to appoint a managing director.
• The person appointed as managing or whole time director is a fit and proper person and the appointment is not against public interest.
• The terms and conditions of appointment are fair and reasonable.
The following persons cannot be appointed as managing director:
1. A person who is an undischarged insolvent or who is adjudged insolvent.
2. A person who has suspended payment to creditors.
3. A person who has been convicted by the court for an offence involving moral turpitude.
4. The person cannot be in office as managing director of more than two companies at the same time.
In order for companies to appoint managing or whole time directors, the company must have a paid up share capital equivalent to Rs. 5 crores or more.
Any appointment and re-appointment of managing directors can be made only with Central Government approval. The tenure of a managing director is 5 years. Removal of a managing director can be made only by the Board of Directors, by the Central Government or by the National Company Law Tribunal.
Distinction between a Director and Managing Director
Distinction Director Managing director
Election Elected by shareholders Elected by directors
Tenure Tenure is 3 years Tenure is 5 years
Retirement Retirement by rotation at end of 3 years Exemption from retirement by rotation
Remuneration Receives honorarium Office of profit / salary
Powers No individual powers; only collective powers Special powers delegated by BOD
Eligibility May or may not be a shareholder Must be a director and then only a Managing Director
Duties No charge of routine management; only guide, adviser / consultant Charge of routine management, CEO & Head of Company.
Agent of Agent of shareholders / company. Agent of Board of Directors
Responsibilities In charge of overall supervision & control In charge of executive and admin work
Distinction between a Whole-time director and Managing Director
Distinction Whole-time director Managing director
Appointment Special resolution by shareholders Member consent not necessary
Tenure Tenure period has no restriction Tenure 5 years
Limit Cannot manage more than one company Manage maximum 2 companies
Status Ordinary employee Substantial powers and not ordinary employee
Existence Can be appointed along with MD and manager MD and manager cannot exist simultaneously
Manager (Section 2(4))
A manager is an individual subject to the superintendence, control and direction of the Board of Directors, has the management of whole or substantially whole of company affairs. The term ‘manager’ includes a director holding the position of manager.
Distinction between Manager and Managing Director
Distinction Manager Managing Director
Requirement Need not be company director Must be company’s director
Limit on company Company cannot have more than one manager Company can have more than one Managing Director
Appointment Appointed under contract of service Appointment by Board in a General Meeting as per agreement with company, or authority of Memorandum and Articles
Disqualification Grounds of disqualification remain effective only for 5 years Grounds of disqualification remain effective life – long
Court conviction Conviction by foreign court does not disqualify Any conviction, whether from home or abroad is a disqualification
Powers Has management over whole affairs of company; has more power than Managing Director Has substantial powers of management
Remuneration Maximum remuneration cannot exceed 5 % of net profits If more than one Managing Director is appointed, then maximum remuneration cannot exceed 10 % of net profits
References
1. Kapoor, N.D., ‘Elements of Mercantile Law’, Sultan Chand & Sons, 13th revised edition, 2008.
2. Saravanavel, P. & Sumathi, S., ‘Company Law’, Himalaya Publishing House, 2006.
3. Garg, K.C. & Gupta, Vijay, ‘Company Law and Secretarial Practice, Kalyani Publishers, 2nd revised edition, 2006.
4. www.vakilno1.com
5. www.sebi.gov.in
6. Companies Act 1956, Companies Amendment Act 2006, Gazettes released by Government of India and the Ministry of Corporate Affairs.
REVIEW QUESTIONS
Section A
1. Define the term ‘director’.
2. Who is eligible to become a director?
3. Who are first directors?
4. What is the ceiling on number of directors in a company?
5. When does a director’s office become vacant?
6. Who is a managing director?
Section B
1. What is the requirement to be eligible to be appointed as director?
2. Who can remove a director?
3. Explain in brief the circumstances under which the office of a director becomes automatically vacant.
4. Briefly explain the extent of powers of directors.
5. Elucidate on the duties of directors.
6. Describe the scope and extent of liability of directors.
7. Distinguish between manager and manager director.
Section C
1. Define the term ‘director’. Explain clearly how directors may be appointed.
2. What does the Companies Act, 1956 say about the appointment of a person as director, other than a retiring director? Explain.
3. Discuss as to how the resignation of a director becomes effective.
4. What is the procedure for removing a director (a) by shareholders; (b) by the Central government; (c) by the court?
5. Illustrate with examples, the extent of the board’s powers?
6. Who can be a manager? Distinguish between manager and managing director.
Chapter VI – MEETINGS AND RESOLUTIONS
LEARNING OBJECTIVES
1. To enable students to know the procedures for holding a company meeting.
2. To be aware of resolutions and the types.
Meaning
Since a company is an association of persons, these persons must discuss their views and opinions on various matters, on which there might be disagreements and unanimous solutions have to be found. This involves holding of meetings.
According to the Oxford Dictionary, “a meeting is a gathering or assembly of 2 or more persons for purposes of conversing, entertainment, discussion or the like.”
Meetings include:
Meetings of Members / Shareholders
Meetings of Directors
Meetings of Creditors
Other meetings held by auditors, company secretary, liquidators, etc.
MEETINGS OF SHAREHOLDERS
The meetings of shareholders can be classified into the following categories, namely:
a. Mandatory meetings, such as Statutory Meeting and Annual General Meeting.
b. Optional meetings, such as Extra Ordinary General Meetings.
c. Contingent meetings, when emergencies or contingent circumstances arise.
Statutory meeting
These meetings are required by public companies limited by shares and guarantee companies having a share capital. Statutory meeting is the first meeting of shareholders immediately after commencing of business. This meeting is held only once in the lifetime of the company, and it has to be held within a period of not less than 1 month or within a period of 6 months from the date on which it is entitled to commence business. A notice of the statutory meeting has to be made at least 21 days before the date of holding the meeting.
Private limited companies and companies not limited by share capital and unlimited companies need not hold a statutory meeting.
The object of holding a statutory meeting is:
a. To enable shareholders to discuss matters relating to the formation of the company and the carrying on of its business,
b. To approve contracts mentioned in the prospectus, and
c. To give shareholders information regarding number of shares allotted, preliminary expenses, implementation of underwriting agreements, etc.
A Statutory Report has to be prepared and filed with the Registrar and a copy of the same has to be sent to all the members for their approval at least 21 days before holding the meeting.
The Statutory Report gives details of preliminary expenses, the names and occupations of directors and auditors, details of underwriting contracts, amounts due and received on share allotment, calls due from directors, managers, etc.
Consequences of not holding the statutory meeting
If default is made in complying with the above provisions, every director or other officer of the company who is in default shall be punishable with fine up to Rs. 5000. The Registrar or a contributory may file a petition for the winding up of the company if default is made in delivering the statutory report to the Registrar or in holding the statutory meeting on or after 14 days after the last date on which the statutory meeting ought to have been held.
Annual General Meeting
These meetings are held every year in addition to any other meetings held by the company. According to the Indian Companies Act, 1956, an Annual General Meeting should be held at the earliest of 3 relevant dates, i.e., either within 6 months from the close of the financial year, or within 15 months from the date of the previous Annual General Meeting, or on the last day of the next calendar year. The first annual general meeting of the company must be held within 18 months from the date of its incorporation.
The Annual General Meeting enables members to exercise control over the affairs of the company & protect their interests. The businesses that are transacted in an Annual General Meeting may be classified as Ordinary business and Special business. Ordinary business includes appointment of directors and auditors in place of those retiring, declaration of dividend, etc. Special business includes removal of directors, issue of bonus shares, etc.
The authority to call for an annual general meeting rests with the board of directors. An AGM may also be called for by the secretary, manager, managing director or any other officer of the company, as long as it is ratified by the board.
The notice of the annual general meeting must be given to members at least 21 clear days before the meeting is to be held. It shall be held during business hours at the registered office of the company and on a day that is not a public holiday. It can also be held within any town or village in which the registered office of the company is situated. An annual general meeting for which a notice has been issued can also be cancelled or postponed by the board of directors for valid reasons. At the same time, an AGM being conducted may be adjourned by the chairman of the meeting, for bona fide reasons.
Consequences of not holding the Annual General Meeting
In case of default in holding an annual general meeting, the following are the consequences:-
a. Any member of the company may apply to the NCLT. The NCLT may call, or direct the calling of the meeting, and give such ancillary or consequential directions as it may consider fit in relation to the calling, holding and conducting of the meeting. The NCLT may direct that one member present in person or by proxy shall be deemed to constitute the meeting. A meeting held in pursuance of this order will be deemed to be an annual general meeting of the company. An application by a member of the company for this purpose must be made to the concerned Regional Bench of the NCLT by way of petition in Form No. 1 in Annexure II to the CLB Regulations with a fee of rupees fifty accompanied by (i) affidavit verifying the petition, (ii) bank draft for payment of application fee.
b. Fine which may extend to Rs. 50,000 on the company and every officer of the company who is in default may be levied and for continuing default, a further fine of Rs. 2,500 per day during which the default continues may be levied.
Extraordinary General Meeting
These meetings are convened to discuss urgent matters which cannot be postponed to the next Annual General Meeting. An extraordinary general meeting is held between two consecutive Annual General Meetings. It may be held for reasons such as issue of rights shares, increasing remuneration of director, managing director, etc. These meetings can be convened by the directors whenever they think fit, on requisition of shareholders and by the National Company Law Tribunal.
The notice informing the extraordinary general meeting must be accompanied by an explanatory statement, explaining as to the reasons for holding the meeting.
Class Meeting
These are meetings held by shareholders of a particular class. These meetings might be held to obtain the consent of that class of shareholders for altering their rights, or for converting one class of shares into another, i.e., converting Preference Shares into Equity Shares.
MEETINGS OF DIRECTORS
These meetings are convened and held by the Board of Directors. They are held in order to arrive at collective decisions for the proper management of company affairs.
There can be two types of board meetings, and they are:
a. Committee Meetings, where specific problems are discussed and the company investigates the problem and solutions are arrived at to solve the problem.
b. Board Meetings, where the Board of Directors of a company exercises most of their powers in a joint meeting held 4 times a year or once in every 3 months. The aim of board meetings is to frame policies for the easy running of the business.
The notice of board meeting must be given in writing to each director and it need not necessarily disclose the purpose of holding the meeting, however, it must be accompanied by a copy of the agenda of the meeting. The board meetings may be held at any place that is convenient to the members of the board. The quorum required to make a board meeting valid is at least 1/3rd of the total strength, or two directors, whichever is higher.
MEETINGS OF CREDITORS AND OTHER CONTRIBUTORIES
Meetings with creditors are held in order to discuss various arrangements with the company creditors. The scheme of arrangements with creditors must be as sanctioned by the Court, if the Court orders the company to hold the creditors meeting. This may be at the time of winding up of a company.
Meetings of debenture holders are held in order to discuss the variations in the terms of security or in order to discuss alteration of their rights, such as redemption or conversion of debentures which are specified in the Debenture Trust Deed.
(i) consideration of a/cs, B/S Explanatory statement annexed to notice
(ii) declaration of dividend
(iii) appointment of directors
(iv) appointment of auditors
(v) fixing of auditors remuneration
REQUSITES OF A VALID MEETING
1. To be a valid meeting, it must be called by a proper authority, such as the Board of Directors, the Central Government or the National Company Law Tribunal.
2. A notice of the meeting communicating the date, time and business of the meeting must be sent to all those who are concerned with the business of the meeting and are entitled to attend it, such as members, legal representatives, auditors, etc. The length of a notice is 21 days, which may be shortened if all members entitled to vote give their consent. The notice must give details of the place, day and time of the meeting and a statement of the business which is going to be transacted. If any special business is to be transacted at the meeting, then an explanatory statement shall be attached to the notice of the meeting. The notice of the meeting is usually signed by the Secretary under the authority of the Board. In case of companies not having a secretary, then the notice may be signed by a director or any officer of the company authorised to do so.
3. In order to transact the business of a meeting, an ‘Agenda Paper’ or ‘Agenda’, which is an itemized list of matters to be taken up in a meeting, has to be prepared. It is the duty of the Company Secretary to prepare the Agenda, after proper discussions with the Chairman of the company. The Agenda puts routine items first and complicated items later. Where any other business which is not specifically mentioned in the Agenda needs to be discussed, the secretary can add it as the last item in the agenda, and the agenda becomes known as a ‘loophole agendum’.
4. A minimum number of persons are required to be present at a meeting for transacting a valid business. These minimum numbers of persons are termed as ‘Quorum’. Absence of quorum makes any meeting invalid. In case of a public company, the quorum is five persons personally present and for a private company, two persons personally present. A quorum of members must be present at the time when the meeting proceeds to carry on business. One person can also constitute a quorum, especially where all the shares of a particular class are held by one person or when the meeting is called by the Central Government or by the National Company Law Tribunal. Quorum for board meetings can be decided by the directors or else as per Section 287, one third of the total strength of the board or two directors, whichever is higher.
5. One of the essentials of a valid meeting is that it must have a presiding officer who is the chief authority in the conduct and control of the meeting. The chairman is the head of the meeting. The chairman is elected at every meeting before it transacts it business. The chairman of a meeting may be the Chairman of the Board, or any director in case of the absence or unwillingness of Board’s Chairman or any member in the absence or unwillingness of the directors. The Chairman has the power to decide on all the questions and points discussed in the meeting and on the priority of speakers demanding poll. He can also adjourn a meeting, cast a vote, expel an unruly member and close a discussion. At the same time, he has the duty to act in the best interest of the company, to ensure that the meeting is duly convened, maintain sense, discipline and order of the meeting, consider questions arising in the course of decision making and ensure that all the members present at the meeting are given an equal opportunity to express their views and also that voting is fair.
6. All proceedings of general meetings and board meetings are recorded in a summarized manner, which later forms an official record of the meetings of a company. This is termed as ‘minutes’ of a meeting and the book is the Minutes Book. The minutes’ books of the general meetings are to be kept at the registered office of the company and members can inspect it during office hours.
7. A member, who is a shareholder in a company limited by shares or a guarantee company with a share capital, can appoint another person to represent him at the meeting and vote on his behalf. This person so appointed represent the member is termed as a ‘proxy’ and their relationship is that of an agent and principal. The proxy cannot speak at a meeting but he can demand a poll. The instrument appointing a proxy must be in writing and duly signed and must be deposited with the company at least 48 hours before the meeting is to be held. A proxy can be revoked any time before voting takes place or if the original member attends and votes at the meeting. Every member can inspect the proxies from 24 hours before the meeting until the meeting concludes. No officer of the company can canvass the members to appoint proxies from a list provided. If they do so, then they are liable to a fine of Rs. 10, 000.
8. Every member of the company has the right to vote on each share that he holds. In meetings, decisions are made by common consent or where it is not possible to reach a common consent, and then the decision made by the majority is accepted. The motion accepted by majority votes becomes a resolution. The persons entitled to vote are equity shareholders; preference shareholders based on rights granted on their shares; holders of share warrants if the articles permit; joint holders of shares; the legal representative of an insolvent or deceased member; representatives of companies, President or Governor; a public trustee; proxy; persons of unsound mind during periods of soundness. Voting can be by show of hands, by poll by ballot, etc.
9. Meetings can be adjourned, that is, dissolved or suspended and postponed to a later time or date which can be decided in the same meeting or at a later date. Meetings may be adjourned for a lack of quorum, if the chairman decides so, if sufficient information regarding a matter is not obtained, etc.
Methods of voting
The sense of the meeting is the mind or opinion of the people constituting the meeting. If the majority agrees on a topic, then it makes the sense of the meeting house. The sense of a meeting can be found out by the following methods of voting. They are as follows:
1. Acclamation: When approval or disapproval for a motion is obtained from the members who are present in a meeting either by clapping of hands, applause or cheering, then it is known as voting by acclamation.
2. Voice: Where a motion is put to vote by the Chairman of a meeting, by asking the members present to say either ‘yes’ or ‘no’ and he gauges the strength of the sound of ‘yes’ or ‘no’ and thus decides the sense of the meeting, it is known as voting by voice.
3. Show of hands: When a motion is put to vote, the chairman asks those who support the motion to raise their hands and takes a count, and does the same for those who are against a motion, and then decides the sense of the meeting, it is termed as voting by show of hands.
4. Division: In this method, the chairman asks members who are present to divide themselves into two groups – those for the motion and those against. He then makes a count and determines the sense of the meeting.
5. Standing vote: In this method of voting, members for a motion stand up in their seats, and the chairman takes a count. The same procedure is repeated to count those against a motion. At the end of the exercise, the verdict of the meeting is declared.
6. Ballot: in this type of voting, secrecy is maintained, i.e., the members do not know the identity of persons who voted for or against a motion put before the meeting. In this method, each member is handed a paper, called a ‘ballot’, which has a list of all the options, with a space provided for his vote. The member puts an ‘X’ mark against the option he has selected and hands the ballot paper back for counting. At the end of the count, the chairman gives the verdict, by declaring the number of votes obtained for each option. The option with the highest number of votes is considered as the verdict, based on which the motion may be passed or rejected.
7. Poll: In this method of voting, the member gets to vote on the strength of shares that he holds. Therefore, more the number of shares that he holds, greater are the votes that he can have. When a poll is conducted, the members present are given a polling paper, where each member will have to enter his name, the number of votes that he has, the number of votes he has by proxy, and whether he is for or against the motion. The polling papers are handed back to scrutineers appointed by the chairman, who will enter the details in a sheet called the polling list. The scrutineers after checking the polling list obtain the results and communicate the same to the chairman who will declare the result to the meeting.
Voting by proxies is not possible for vote by show of hands, vote by division and vote by standing.
MOTIONS
A proposal which is to be discussed at a meeting by the members is termed as a motion. These are matters which are kept before the meeting on which decisions have to be taken. A motion is a proposal, proposition or question that is moved by a member or any item relating to business which is submitted to the meeting for discussion and decision making.
In order for a motion to be discussed at a meeting, it has to be proposed by a member and seconded by another member. A motion that has been proposed by the chairman of the meeting need not be seconded by any one.
Characteristics of a valid motion
In order for a motion to be considered valid enough to be discussed at a meeting, it should fulfill the following conditions:
c. It must be in writing.
d. It must be dated and signed by the proposer of the motion.
e. It must be seconded by another person.
f. It must be introduced before the meeting with a prior notice.
g. It should not be lengthy but must be carefully worded to convey the meaning clearly and precisely.
h. The motion should be within the scope of the meeting and related to the business of the company.
i. It should be in a positive form and must start with the word ‘that’.
j. Motions must be handed to the chairman.
k. A proxy cannot move a motion, only the members can.
l. It must not contain an argument or use defamatory language.
A motion, once it has been put before the meeting, cannot be withdrawn without the unanimous consent of all members present.
The following are the different types of motions:
1. Original motion: A motion in its original form.
2. Substantive motion: When an original motion is altered, it is called a substantive motion.
3. Dropped motion: A motion which does not have a seconder, or which does not interest the meeting and hence has no support, is called a dropped meeting. The chairman allows such motions to lapse.
4. Formal motion: These motions do not affect the subject matter of the business, but the procedure of the meeting. These motions are passed in order to delay the discussions on motions.
When a motion is under discussion, it is termed as a debate and this debate may be interrupted by these formal devices:
a. Amendments
b. Points of order
c. Formal or dilatory motions
Amendment of Motions
Amendments interrupt the debate taking place on a motion at a meeting. These amendments are alterations proposed on the terms of the motion. These are the suggestions and opinions that arise at the time of discussion on the motion. Any amendments to be made will have to be done so after the chairman invites members to discuss the motion and before the closure of the motion, i.e., before it is put to vote.
The rules regarding amendment of motions are as follows:
1. It should be relevant to the motion.
2. It should be in writing.
3. It should not be a negative of the original motion.
4. It should be moved before putting the motion to vote.
5. It should be with a bona fide motive of amending the original motion.
6. An amendment can be moved and seconded by a member who has not spoken on the original motion.
7. The mover of an amendment can speak only once.
8. Any number of amendments can be moved to alter the original motion.
9. Amendments to the motion are put for discussion in the order in which they have been moved.
10. Each person can move only one amendment.
11. An amendment once moved cannot be withdrawn except with the unanimous consent of the meeting.
Points of order
This is a question regarding the procedure of a meeting. At the time of debate, if any member feels there is an irregularity in the manner in which the meeting is proceeding, then he may draw the attention of the chairman by raising a point of order. The chairman may allow the point of order to be discussed and debated and give his final ruling, which is binding. The points of order which are usually raised by member are based on the lack of quorum to start a meeting or a fall in the quorum because of members leaving during the meeting, the use of derogatory or abusive language during the meeting, or the lack of procedural formalities at a meeting.
Formal motions
These are also known as procedural or dilatory motions and are moved in order to delay, interrupt or speed up the discussions on a motion. Formal motions may be moved:
a. to close the discussion of a particular motion (closure),
b. to prevent further discussions on the main motion under discussion especially when its amendment motions have to be discussed (previous question),
c. to stop discussion of the present topic and move on to the next item to be discussed on the agenda,
d. to reject a motion being discussed and refer it back to a committee,
e. to break off a matter being discussed and adjourn it to another date and time in the near future, and
f. to postpone a meeting before the date of its arrival, to another date and time.
RESOLUTIONS
The formal decision of a meeting, taken on any motion placed before it for discussion, is termed as the resolution of the meeting. There are three types of resolutions, namely:
1. Ordinary resolutions
2. Special resolutions
3. Resolutions requiring special notice
An ordinary resolution is that which is passed at a general meeting of shareholders by a simple or bare majority, i.e., more than 50% of votes. These ordinary resolutions are sufficient for the approval of the statutory report, adoption of annual report, director’s report, etc., appointment of auditors, election of directors, declaration of dividends, etc.
A special resolution is one in which:
a. The notice for the meeting specifies that a special resolution is proposed to be passed,
b. The notice has been given 21 days before the meeting, and
c. At least 75% of the members entitled to vote, by person or proxy, have voted in favour of the resolution.
Special resolutions are needed to alter the registered office clause and name clause in the memorandum, to alter the articles of the company, to create reserve capital, to reduce the share capital of the company, to wind up the company, etc.
A resolution requiring special notice is one where the notice of the intention to move the resolution shall be given to the company not less than 14 days before the meeting at which it is to be moved. The company on receiving the notice shall give its members notice of the resolution in the same manner as it gives notice of the meeting. If that is not possible, the company may give a newspaper advertisement not less than 7 days before the meeting.
These types of resolutions are needed when an auditor other than a retiring auditor is to be appointed, when a retiring auditor shall not be reappointed, for removing a director before the expiry of his term, etc.
MINUTES
The term minutes refers to accurate official record of decisions taken at various company meetings. Every company must keep the minutes containing summary of all proceedings of general and Board meetings in books .Minutes should be brief and factual.
It should be so accurate as not to give room for misinterpretation. It should be free from superfluous words.
The following particulars should be present in the minutes.
1. Nature of meeting – Annual General, Extraordinary, Board, etc
2. Date, time and place of meeting
3. Names of chairman, directors, secretary, and number of members attending
4. Business of the meeting in the order set out in the agenda
5. Approval of the minutes of the last meeting
6. Resolutions passed in the meeting
7. Chairman’s signature with date
References
1. Kapoor, N.D., ‘Elements of Mercantile Law’, Sultan Chand & Sons, 13th revised edition, 2008.
2. Saravanavel, P. & Sumathi, S., ‘Company Law’, Himalaya Publishing House, 2006.
3. Garg, K.C. & Gupta, Vijay, ‘Company Law and Secretarial Practice, Kalyani Publishers, 2nd revised edition, 2006.
4. Appannaiah, Reddy, Prabhu Dev, Company Law and Secretarial Practice, Himalaya Publishing House, 2004.
REVIEW QUESTIONS
Section A
1. What is a ‘company meeting’?
2. State two essentials of a company meeting.
3. State the different kinds of meetings.
4. What is the significance of a statutory meeting?
5. What is an ordinary business of a meeting?
6. Define the term motion.
7. What is a resolution?
8. What are the three methods through which a meeting may be interrupted?
9. What is an amendment?
10. What is a point of order?
11. What is a special resolution?
Section B
1. What are the essentials of a company meeting?
2. Briefly explain the different kinds of meetings.
3. Write short notes on: (a) Board meetings (b) Extra ordinary general meetings and (c) Class meetings.
4. Explain the different types of resolutions.
5. Give a brief explanation on ‘interruptions in a meeting’.
6. What are the methods of voting?
7. Write a note on statutory meeting of a company.
Section C
1. Explain the various kinds of company meetings.
2. Discuss the legal provisions relating to board meetings.
3. Discuss the requisites of a valid meeting.
4. Enumerate on the essentials of a valid motion and a valid amendment.
5. What is a statutory meeting? List out the contents of a statutory report.
6. Write explanatory notes on: a) Annual General Meeting b) Board Meeting c) Extraordinary General Meeting
7. Discuss the different types of resolutions that can be passed in the meetings of a public limited company and the business transacted in each category.
8. Write explanatory notes on: a) Proxy b) Quorum c) Minutes
Chapter VII – WINDING UP OF COMPANIES
LEARNING OBJECTIVES
1. To have an understanding of the procedure for winding up to be followed by companies.
2. To understand the types of winding up.
3. To distinguish between winding up and dissolution.
4. To be aware of the secretarial duties with regard to winding up proceedings.
Definition
Winding up refers to the last stage in the life of a company. It is the legal process through which the company comes to an end. At the time of winding up, the property of the company is put at the disposal of its creditors and shareholders. A liquidator is appointed to take control of the company and its assets, profits and debts and to distribute any surplus that remains among the shareholders in proportion to their rights.
The main objectives of the companies winding-up are:
a. To ensure that all the company’s affairs have been dealt with properly;
b. To have the company dissolved.
Thus, the steps involved in winding up are:
a. Appointment of ‘liquidator’ in case winding up is voluntary, or ‘official liquidator’ if winding up is ordered by the National Company Law Tribunal.
b. Closure of the company’s business, conversion of its assets into cash which is used to pay of debts and liabilities.
c. If surplus remains after paying off liabilities, it is distributed among shareholders in accordance to their rights and interests in the company.
d. Dissolution of the company and the removal of its name from the Register of Companies.
Distinction between winding up and dissolution
Winding up Dissolution
This is the first step This is the final step
Realization of the assets and liabilities of a company Removal of the name from the Register of Companies
Legal entity continues Legal entity does not continue
Procedure carried out by Liquidator Procedure carried out by Court
Liquidator can represent the company Liquidator cannot represent the company
Creditors can prove their debts Creditors cannot prove their debts
Modes or types of Winding up
A. Compulsory Winding Up
When a company is bound up based on an order received from the NCLT, it is termed as a compulsory winding up. The grounds for a compulsory winding up are as follows:
1. On passing of a special resolution: In this case, the company must have passed a special resolution to the effect that it is resolved that the company be wound up by the Tribunal. Here, the Tribunal may not grant permission to wind up, if it affects the company’s interests or if winding up is opposed to public policy.
2. Failure to hold statutory meeting: If there is a default in holding the statutory meeting or in giving a copy of the statutory report to the Registrar, the court may, on petition of the Registrar or of a Contributory, order the winding up of the company. This petition for winding up can be made only after the completion of 14 days from the date on which the statutory meeting should have been held.
3. Failure of company to commence business: If a company does not commence its business within a year from its incorporation, or if it suspends its business for a whole year, the Tribunal may order that the company be wound up. The Tribunal may not wind up the company if it abandons only one of its several businesses, and not its main business. The Tribunal may wind up the company only if it has absolutely no intention of carrying on its business.
4. Reduction in number of members below minimum: The Tribunal may order the winding up of a company if the number of members is reduced below minimum, i.e., below 2 in case of a private company and below 7 in case of a public company.
5. Inability of the company to pay its debts: When a company is commercially insolvent, i.e., even though it has assets, it may not be in a position to meet its current obligations, the Tribunal may order for its winding up. A company is deemed to be unable to pay its debts in the following circumstances:
a. where a creditor to whom the company owes more than Rs. 1,00,000 has served a notice on the company and the company has been unable to pay the amount even after a period of 3 weeks;
b. the company is unable to pay public deposits on their due dates;
c. the company is unable to pay dividends declared
6. Winding up on just and equitable grounds: If the Tribunal feels that it is just and equitable that a company be wound up, then the Tribunal may order to do so. Just and equitable grounds may be of the following kinds, namely, where there is a deadlock in the management, where the company cannot carry on business in a profitable manner, where the company is carrying on an illegal activity, where there is oppression of the minority, where the company carries out activities that are against public policy, etc.
7. Default in filing financial statements: If the company is in default in filing up with the Registrar its balance sheet and profit and loss account for five consecutive financial years then the Tribunal may order that the company be wound up.
8. Threat to the nation: If the company has acted against the interests of the sovereignty and integrity of India or security of any state, friendly relation with foreign states, public order, decency and morality then the Tribunal can demand the winding up of the company.
The following are the persons who may petition the NCLT for winding up a company:
a. The company.
b. Any creditor or creditors.
c. Any contributory or contributories.
d. All of the above individually or together.
e. The Registrar.
f. The workers.
g. Any person authorised by the Central Government, such as an Official Liquidator.
Procedure for compulsory winding up
1. Application or petition to the court by persons who are eligible to do so, for winding up.
2. The court hears the disposition of the petition.
3. The court, in consultation with the NCLT appoints the Official Liquidator for winding up, and informs the Registrar of the winding up order.
4. The Official Liquidator takes care of winding up proceedings, such as taking authority to dispose assets of the company and pay off liabilities.
5. Dissolution of the company.
Secretary’s duties in connection with compulsory winding up:
1. Assist the director’s in winding up proceedings.
2. File with the Registrar a certified copy of the winding up order.
3. Submit to the Official Liquidator a statement of affairs of the company.
4. Furnish to the Official Liquidator any other information regarding the company.
5. Ensure that the words ‘The company is under liquidation’ is mentioned on every document issued by the company.
B. Voluntary Winding Up
A company may, voluntarily wind up its affairs, if it is unable to carry on its business, or if it was formed only for a limited purpose, or if it is unable to meet its financial obligation, or it has passed a special resolution to voluntarily wind up the company. A company may voluntarily wind itself up, under any of the two modes:
Member’s voluntary winding up.
Creditor’s voluntary winding up.
In case of voluntary winding up, the entire process is done without Court Supervision. When the winding up is complete, the relevant documents are filed before the Court for obtaining the order of dissolution. A voluntary winding up may be done by the members as it may be done by the creditors. The circumstances in which a company may be wound up voluntarily are: -
a. When the period fixed for the duration of the company in its articles has expired.
b. When an event on the happening of which the company is to be dissolved as per its articles happens.
c. The company resolves by a special resolution at a general meeting to be voluntarily wound up.
A voluntary winding up commences from the date of the passing of the resolution for voluntary winding up. This is so even when after passing a resolution for voluntary winding up, the Court presents a petition for winding up. The effect of the voluntary winding up is that the company ceases to carry on its business except so for as may be required for the beneficial winding up thereof.
Both types of resolution shall be passed in the general meeting of the company.
Once the resolution of voluntarily winding up is passed and the company may be wound up either by the members or by the creditors.
The only difference between the two is that in case of members voluntarily winding up the Board of Directors have to make a declaration to the effect that the company has no debts.
Distinction between compulsory winding up and voluntary winding up
Compulsory Winding up Voluntary Winding up
Can be wound up on order of court Can be wound up on desire of members or creditors
Is only of one type Is of two types – winding up by members and creditors
Liquidator is appointed by the court Liquidator is appointed by members
Can be adopted by all companies Unlimited companies cannot be wound up voluntarily
MEMBERS VOLUNTARILY WINDING UP
The directors of the company shall call for a Board of Directors Meeting, and make a declaration of winding up, accompanied by an affidavit, stating that;
a. The company has no debts to pay, or
b. The company will repay its debts; if any, within 3 years from the commencement of winding up, as specified in the declaration;
c. The declaration will be accompanied by a statement of assets and liabilities up to the date of declaration;
d. A copy of the auditor’s report on the P&L account and Balance Sheet immediately before making the date of declaration;
e. The declaration shall be filed with the registrar within 5 weeks of passing the resolution for winding up.
The procedure for members’ voluntary winding up
a. The Company shall appoint one or more liquidators, in a general meeting, who shall look after the affairs of winding up procedure and distribution of assets.
b. The liquidator so appointed shall be paid remuneration for his services, which shall also be fixed in the general meeting.
c. The Company shall also give notice of appointment of liquidator to the registrar within ten days of appointment.
d. Once the company has appointed the liquidator the powers of the Board of Directors, Managing Director, and Manager shall cease to exist.
e. The liquidator is generally given a free hand to carry out the winding up procedure in such a manner as he thinks best in the interest of the creditors and the company.
f. In case the winding up procedure takes more than one year then the liquidator will have to call a general meeting at the end of each year and he shall present a complete account of the procedure and position of liquidation.
g. When the affairs of the company are fully wound up, the liquidator shall call a general meeting of the members of the company and make a complete account of winding up and show how the proceedings have been conducted and how the property of the company has been disposed off. The meeting shall be called by an advertisement specifying the time, place and object of the meeting.
h. The liquidator shall send to the Registrar and Official Liquidator appointed by the court a copy of the account, within one week of the meeting.
i. If, from the report, the Official Liquidator comes to the conclusion that the affairs of the company have not been carried on in a manner prejudicial to the interest of its members or public, then the company shall be deemed to be dissolved from the date of report to the court. However, if the Official Liquidator comes to a finding, that the affairs of the company have been carried in a manner prejudicial to the interest of members or public, then the court may direct the liquidator to investigate further.
CREDITORS VOLUNTARILY WINDING UP
Where the declaration of solvency is not made the winding up is referred to as a creditors’ voluntary winding up. Hence, a creditors’ voluntary winding up takes place when the company is insolvent.
The procedure for creditors’ voluntary winding up
a. Where the resolution for winding up has been passed, but the Board of Directors is not in a position to give a declaration on the liability of the company, they may call a meeting of creditors for the purpose of winding up. In this meeting, the creditors may appoint a liquidator. They may either agree on one liquidator, or if two names are suggested, then liquidator appointed by creditor shall act.
b. It is the duty of the Board of Directors to present a full statement of the company’s affairs, and a list of creditors along with their dues, before the meeting of creditors.
c. Whatever resolution the company passes in creditor's meeting shall be given to the Registrar within 10 days of its passing.
d. Any director, member or creditor may approach the court, for direction that the Liquidator appointed in general meeting shall act individually, or he shall act jointly with liquidator appointed by creditor, or for appointing Official Liquidator, or that some other person be appointed as liquidator.
e. The remuneration of the liquidator shall be fixed by the creditors, or by the court.
f. On appointment of the liquidator all the powers of the Board of Directors shall cease.
g. In case the winding up procedure takes more than one year then he will have to call a general meeting and a meeting of creditors at the end of each year and he shall present a complete account of the procedure and the status or position of liquidation.
h. The liquidator shall take the following steps when the affairs of the company are fully wound up:
Call a general meeting and meeting of creditors and lay before it a complete picture of accounts, winding up procedure and how the properties of company are disposed of.
The meeting shall be called by advertisement specifying the time, place and object of the meeting.
The liquidator shall send to the Registrar and official liquidator a copy of accounts within one week after the meeting.
If, from the report the official liquidator comes to the conclusion that the affairs of the company are not being carried in a manner prejudicial to the interest of its members or public, then the company shall be deemed to be dissolved, from the date of report to the court.
However, if official liquidator comes to a finding, that affairs have been carried in a manner prejudicial to intent of members or public then the court may direct the liquidator to investigate further.
The Central Govt. shall keep a cognizance over the functioning of the official liquidator and may require him to answer any inquiry.
DISTRIBUTION OF PROPERTY OF COMPANY ON VOLUNTARILY WINDING UP
Once the company is fully wound up, and assets of the company sold or distributed, the proceedings collected are utilised to pay off the liabilities. The proceedings so collected shall be utilised to pay off the creditors in equal proportion. Thereafter any money or property left may be distributed among members according to their rights and interests in the company.
PRIORITY IN DISPOSING LIABILITIES
When the company is wound up by any mode, the liabilities shall be discharged in the following priority:
a. Workmen’s dues.
b. Debts due to secured creditors in case of insolvency.
c. All taxes, cesses and rates due from the company to the central government or a state govt.
d. All wages and salary of any employee due within four months.
e. All holiday remuneration becoming payable to any employee.
All such debts shall be paid in full. If assets are insufficient to meet them, they shall abate in equal proportions.
Secretary’s duties in connection with voluntary winding up:
a. Arrange for the preparation and audit of final accounts.
b. Convene a meeting of the board of directors.
c. Pass notice in the extraordinary general meeting.
d. File copy of the resolution with the Registrar.
e. See that the liquidator is properly appointed.
f. Any notice, order and business letter issued by the company during this period of winding up should indicate that the company is under liquidation.
Distinction between members’ voluntary winding up and creditors’ voluntary winding up
Members’ Voluntary Winding Up Creditors’ Voluntary Winding Up
Resorted by solvent companies Resorted to by insolvent companies
Declaration of the solvency of the company by its directors Declaration of the solvency of the company is not possible
Liquidator will be able to pay off all the liabilities Liquidator will not be pay off all the liabilities
Liquidator is appointed by the members Liquidator is appointed by the creditors
Remuneration of liquidator is fixed by members Remuneration is fixed by creditors or committee of inspection
Members have the dominant control over the winding up process Creditors have the dominant control over the winding up process
C. The Registrar may petition for winding up in the following circumstances: -
a. If default is made in delivering statutory report or holding the statutory meeting.
b. If the company does not commence its business within one year from its incorporation or suspends its business for a whole year.
c. If it appears to him either from the financial position of the company as disclosed in the balance sheet of the company or from the report of a special auditor or an inspector that the company is unable to pay its debts.
d. Where the Registrar is authorized by the Central Government to petition for winding up the company.
e. Where the number of members of the company falls below the statutory minimum.
f. Where it is just and equitable that the company be wound up.
D. Any person authorised by the Central Government.
Under section 243, any person authorised by the Central Government may demand winding up of a company. This may be done so, if any report of an inspector appointed to investigate the affairs of the company discloses: -
a. That the business of the company is being conducted to defraud its creditors or members or for a fraudulent or unlawful purpose.
b. That the persons concerned in the formation or management have been guilty of fraud, misfeasance, and it appears to the Central Government from such report that it is true, then the Central Government may authorize any person including the Registrar to petition for winding up the company on the ground that it is just and equitable to do so.
References
1. Kapoor, N.D., ‘Elements of Mercantile Law’, Sultan Chand & Sons, 13th revised edition, 2008.
2. Saravanavel, P. & Sumathi, S., ‘Company Law’, Himalaya Publishing House, 2006.
3. Garg, K.C. & Gupta, Vijay, ‘Company Law and Secretarial Practice, Kalyani Publishers, 2nd revised edition, 2006.
4. www.ministryofcorporateaffairs.com
5. www.linexlegal.com
REVIEW QUESTIONS
Section A
1. Define the term ‘winding up’ of a company.
2. Who all may petition the NCLT for winding up?
3. What are the various circumstances under which a company may be wound up voluntarily?
4. What is creditor’s voluntary winding up?
Section B
1. What is meant by winding up? Differentiate it from dissolution.
2. What are the different methods of winding up?
3. What do you mean by voluntary winding up? Explain the kinds briefly.
4. What are the kinds of voluntary winding up? State the points of distinction between the kinds.
Section C
1. Explain the various kinds of winding up briefly.
2. Enumerate the various grounds for compulsory winding up.
3. Discuss the procedure for members’ voluntary winding up.
4. Discuss the procedure for creditors’ voluntary winding up.
Chapter VIII - COMPANY SECRETARY AND SECRETARIAL PRACTICES
LEARNING OBJECTIVES
1. To understand the duties, power and liabilities of a company secretary.
2. To be aware of the role of a company secretary and his legal position.
3. To have an understanding of the qualifications needed by a company secretary.
4. To have a thorough knowledge of secretarial duties to be carried out at the time of incorporation, changes in memorandum and articles, holding company meetings, winding up, etc.
DEFINITION
The word ‘secretary’ has been derived form the Latin word ‘secretarius’, meaning confidential officer.
Section 2(45) of the Act defines a secretary as follows:
Secretary means a company secretary within the meaning of section 2(1) (c) of the Company Secretaries Act, 1980 and includes any other individual possessing the prescribed qualifications and appointed to perform the duties which may be performed by a secretary under this act and any other ministerial or administrative duties.
MEANING
A company secretary is the chief administrative officer of a company. He is the eyes, ears and hands of the company and ensures that policies of the management are executed as per directions and decisions taken by the directors in their board meetings.
A company secretary is appointed by the directors in a meeting of the board. The resolution passed for appointing the company secretary has to be filed with the Registrar of Companies.
The importance of a company secretary
As an officer of great importance, a secretary has extensive duties and responsibilities.
The success of the company depends upon his efficient functioning and capacity for a quick grasp of complicated situations.
1. Though he is chiefly concerned with the implementation of the policy framed by the company, he has authority to do many important things on behalf of the company. Though he is not an agent of the company, he is entitled to sign the contracts concerned with the administrative side of a company’s affairs.
2. With growing industrialisation the company administration has become more and more complex. Various legislative enactments which have bearing on a company’s functioning require a thorough understanding of law, accountancy, management, industrial relations, and the multitude of other aspects affecting administration. This has significantly changed the role and importance of company secretary. Hence the Companies Act has made it obligatory for every company having a paid up capital of Rs.50 lakh or more to appoint a duly qualified company secretary.
3. The importance of the role of a secretary also becomes clear when it is noted that Income Tax Act, 1961 and various other Acts consider the secretary to be the principal officer of the company. He is in fact the Chief Executive Officer and the principal co-coordinator.
4. Most of the important things are carried out only through resolutions passed at the Board meetings and other meetings of the company. It is the secretary who does all the work necessary for the successful conduct of any meeting.
5. He also acts as a spokesperson of the company, raising its image and reputation of the company through his personality, integrity, time sense and knowledge of business.
6. As an agent of the Board of directors, he serves as a link between the Board on the one hand and the staff, shareholders and customers on the other hand. Through his initiative, drive and enthusiasm, he removes misunderstandings and builds up smooth relationship.
The problems of giant companies of today are more complicated and the problems assume enormous proportions. While the services of a number of specialists are available to attend to this problem, it is the company secretary with his all-round expertise to co-ordinate the various activities ensures the smooth and successful functioning of the company. The company secretary is undoubtedly the pivot around which revolves the corporate machinery.
Qualifications of a Company Secretary
• The company must have a paid up share capital of not less than Rs. 50 lakhs, to appoint a whole time secretary.
• To be a whole time secretary, the person must be a member of the Institute of Company Secretaries of India.
• In case of companies not having a paid up share capital of Rs. 50 lakhs, the company may appoint any person as a whole time secretary, even though he is not a member of the Institute of Company Secretaries of India.
• Other than being a member of the Institute of Company Secretaries of India, a company secretary must also have the following qualifications, namely:
a. Pass in the intermediate examination of the Institute of Company Secretaries of India;
b. Post graduate degree in commerce or corporate secretaryship granted by any university in India;
c. Degree in Law;
d. Member of the Institute of Chartered Accountants of India;
e. Member of the Institute of Cost and Works Accountants of India;
f. Post graduate diploma in management sciences form any university;
g. Post graduate diploma in company secretaryship granted by the Institute of Commercial Practice, in New Delhi;
h. Post graduate diploma in Company Law and Secretarial Practice granted by the University of Udaipur; or
i. Membership of the Association of Secretaries and Managers, Calcutta.
• The statutory qualifications of a company secretary are not enough. The other qualifications that he needs are as follows:
a. Proficiency in Language. Secretary’s job requires a lot of correspondence, writing reports, etc. Therefore, he must have command over the specialized business language. It would be better if he has a working knowledge of one or more foreign language.
b. Wide Knowledge. He must have a wide general knowledge; only then he can render advice to directors. He must be well conversant with the particular industry or trade in which the company is engaged.
c. Knowledge of Company Law. He must have a thorough knowledge of company law. He must know the rules for convening various meetings. His knowledge must be up-to-date.
d. Knowledge of Other Laws. Besides company law, a secretary should also have the knowledge of other laws such as Contract Act, Sale of Goods Act, Negotiable Instruments Act and various labour laws.
e. Knowledge of Office Organization and Methods. A secretary should have sound practical knowledge of the methods of filing, use of office equipment and machinery and other labor-saving devices.
f. Knowledge of Economics, Banking and Finance. A secretary must have the basic knowledge of economics, law and practice of banking, working of money and capital markets, foreign exchange regulations, etc.
g. Good Personality. A secretary has to deal with the staff members, shareholders, traders and outsiders. By his personality and good behaviour, he can win them over and inspire confidence in them. He should be industrious and patient.
Appointment of Secretary
• The promoters of the company generally appoint the first secretary referred to as the pro tem secretary, who helps them in carrying out all preliminary work connected with the formation of the company. He may not be appointed as the regular secretary.
• A company secretary is generally appointed by the directors at their meeting in exercise of an express power conferred on them by the articles or of general powers of management which the articles usually give them.
• If the directors decide not to appoint the pro tem secretary after incorporation of the company, he cannot sue the company even if his name appears in the articles provided he is given proper notice in such a case. The following procedure must be followed in connection with the appointment:
a. A resolution must be passed at the meeting of the Board of Directors appointing the secretary and approving the terms and conditions of his appointment in the service agreement. The agreement must clearly state the whole of the terms of contract, such as, remuneration, duties, length of appointment, etc.
b. Any director interested in the appointment of the secretary must disclose his interest and must not take part in the discussion or voting on the resolution.
c. The particulars of the appointment must be filed in duplicate with the Registrar within 30 days of the appointment.
d. If the person appointed holds an appointment in any other company he must notify the same within 30 days of appointment.
e. If a director or his relative is appointed as the secretary then a special resolution has to be passed in the general meeting for such an appointment in accordance with the provisions of Sec. 314.
f. Lastly, the necessary particulars must be entered in the Register of Particulars of directors, managing director, manager, secretary, etc.
Duties of Company Secretary
a. Statutory duties
– Under the companies act: The company secretary can sign documents requiring the company’s authentication, make entries in the register of members of share warrants, sign the annual return, allow inspection of the register of members, file resolutions and agreements requiring registration with the registrar, send notice of general meetings to company members, make available for inspection books of general meetings, etc.
– Under income tax act: The secretary is considered as the principal officer of the company and he has to see to it that proper income tax is deducted from employees’ salaries, shareholders’ dividends and debenture holders’ interests’. He has to see that a certificate of income tax deducted at source is furnished to shareholders and debenture holders and income tax returns are filed with the IT department.
– Under stamp act: The secretary has to see that share certificates, share warrants, debenture certificate, transfer forms and other certificates are stamped as per the requirements of the Indian Stamp Act.
– Under other acts: The secretary will have to comply with provisions of various Acts such as The Factories Act, 1949, The Minimum Wages Act, 1948, Foreign Exchange Management Act, 1999, etc.
b. General duties
– Duties to the directors: The secretary will have to work as per the instructions given by the directors, handle and maintain their correspondence, issue notices and prepare agenda for board meetings and draft director’s reports. He has to advise the directors during their deliberations regarding the provisions of the various acts. He is a confidential clerk. He communicates the policies to the staff as well as the shareholders. He has to keep the board posted with all the developments relating to the company.
– Duties to the share holders and public: The secretary has to do all those things that are necessary in relation to shares and debentures, issue prospectus, handle transfer and transmission of shares and debentures, correspond with shareholders, creditors and public, give information about meetings, etc. He also should ensure that he does not make any secret profits, and he should not disclose any secret information regarding the company to outsiders. He must be tactful but at the same time courteous, friendly and helpful. He must be aware of all the important aspects of the company and has to function as the medium of communication between the directors and general public consisting of debenture holders, bankers, solicitors and prospective investors.
– Duties before incorporation: He must attend all the preliminary meetings of the promoters and prepare minutes of the proceedings of these meetings. He has to guide the promoters regarding the provisions of the Companies Act relating to incorporation. He must also help in the preparation of various documents like the Prospectus, Memorandum and Articles.
– Duties after incorporation: He has to arrange for the first board meeting and get the necessary resolutions passed. He must take the steps necessary to get the certificate of commencement. He must prepare a statutory report and arrange for a statutory meeting after getting the certificate.
– Duties towards organisation and office: He must ensure that the office works with maximum efficiency. He must supervise the various activities as well as co-ordinate the activities of the different departments. He has the overall duty to select, organize and guide personnel. This requires that he should devote particular attention to the terms and conditions of their service and also maintain personal contact with individual members of the staff.
Rights and Powers of a Company Secretary
• Right to supervise and control the secretarial department of the company.
• Right to sign documents as a principal officer of the company.
• Right to issue share certificates to shareholders on behalf of the company.
• Right to be indemnified by the company for any loss suffered by the secretary in the course of performing his official duties.
• Right to perform all acts of the company.
• Right to claim his salary from the company as a preferential creditor in the case of winding up of company.
Liabilities of a Company Secretary
a. Statutory Liability: If the company secretary fails to perform his statutory duties, he becomes liable to punishment or penalty prescribed under the Indian Companies Act. He may be held liable for:
– Default in filing a return of allotment
– Default in keeping ready for delivery share certificates
– Default in filing annual return
– Default in holding annual general meeting
– Default in circulation of members resolution
– Default in holding statutory meeting
– Failure to maintain following statutory books:
• Register of members
• Index of register of members
• Register of directors
• Register of director share holding
b. Contractual Liability: The company secretary has certain liabilities arising out of his service contract with the company, and he has to ensure that:
He performs his duties with due care and diligence
He does not do anything beyond his authority
He does not make any secret profits on account of his fiduciary position
He does not commit any fraud or wrong as an employee of the company
He does not reveal any secret or confidential information of the company to outsiders.
Removal of a secretary
He may be removed by the board of directors, under the power given expressly in the articles or under their general powers. Being a servant of the company, his suspension and dismissal are governed by the normal law applicable to employer and employee. The services may be terminated by giving him notice as per the agreements.
The services can be terminated without notice if he is making profits secretly. He may be dismissed for wilful disobedience, misconduct, moral turpitude, negligence, incompetence, etc.
Compulsory winding up of the company by court order translates into the termination of his services.
Legal Position of Company Secretary
• The legal position of a company secretary is that of an agent and servant.
• He is an officer of the company with extensive duties and responsibilities.
• He takes care of day to day activities of the company.
Role of Company Secretary
• As a Statutory Officer
• As a Coordinator
• As a Administrative Officer
As A Statutory Officer
• The Company Secretary is an officer responsible for compliance with the legal requirements under the Companies Act, 1956
• Some of the provisions are:
– He is authorised to sign any document for authentication
– He is authorised to sign and deliver to the Registrar the Annual Return of the company
As A Coordinator
• He is the link between the company and its share holders, society and government. He has duties in the following manner:
– Relating to personnel functions, such as recruitment and training of personnel, training of personnel, negotiations with employee organisations, etc.
– Relating to legal functions, such as acting as the internal legal advisor of the company, providing advice and interpretation of legal matters, preparing briefs and material for filing cases, appear before legal authorities, etc.
– Relating to finance functions, such as conducting internal audit, internal check, delegation of financial powers, etc.
Duties of a secretary with regard to incorporation of Private and Public Ltd. Cos.
Duties of a secretary before incorporation
The secretary must assist the promoters in performing preparatory work and in fulfilling many legal formalities. He has to assist the promoters in convening and conducting meetings, drawing up preliminary contracts and documents required for registration. The duties to be performed are:
a. To help the promoter make a detailed investigation of the proposed venture.
b. If necessary, on the advice of the promoters to secure the opinion of the experts in different fields on the proposed venture.
c. To help the promoters develop the financial plan of the proposed venture.
d. To attend to all the preliminary meetings of the promoter, keep a record of proceedings of the meetings and to help in the discussions.
e. To secure the approval of the Registrar for the proposed name of the venture.
f. Help in the preparation of the preliminary contracts.
g. Help in the drafting and finalizing of documents such as the memorandum of association and articles of association.
h. To follow the guidelines of issued by SEBI.
i. To see that all the requirements of the Act as to incorporation and registration are complied with and that documents such as the memorandum and articles, along with the required stamp duty, filing fees and registration charges are duly filed with the Registrar.
j. To collect the certificate of incorporation from the Registrar.
k. To send a notice of the registered address of the company to the Registrar within 30 days of the date of registration.
Duties of a secretary before incorporation
A private company can commence business immediately after incorporation, but a public company can commence business only after attaining the certificate to commence business from the Registrar. The duties of the secretary are as follows:
a. To make himself thoroughly conversant with the memorandum and articles of association.
b. To prepare the draft of prospectus and statement in lieu of prospectus.
c. To call the first board meeting and get the draft prospectus and the preliminary contracts approved by the board.
d. To see that his own appointment is made and confirmed at the first board meeting.
e. To get the necessary resolution passed for the appointment of bankers, legal advisors and other responsible officers of the company.
f. To arrange for the listing of the securities of the company.
g. To arrange for the opening of a bank account as per the directions of the board.
h. To secure the necessary forms and stationary and to arrange for the preparation of the common seal of the company.
i. To see that the prospectus or the statement in lieu of prospectus is filed with the Registrar and to arrange for the issue of the prospectus to the public.
j. To arrange with the bankers to receive the application money from prospective investors.
k. To arrange a board meeting as soon as the minimum subscription is reached and to get the necessary resolution passed for allotment of shares.
l. To arrange for the refund of the application money to those who have not been allotted shares.
m. To issue letters of allotment/regret to applicants as per the decision of the board.
n. To see that all the legal requirements for commencement of business are complied with.
o. To see that a declaration is filed with the Registrar by one of the directors or the secretary himself, stating that the conditions required to be fulfilled for getting the certificate of commencement of business have been complied with.
p. To collect the certificate of commencement of business from the Registrar.
Duties of the secretary when converting a private company into a public company
The secretary of a private company has to take the following steps to convert a private company into a public company:
a. To arrange a board meeting in consultation with the directors to consider and finalise the plan of conversion and to call the general meeting for passing the necessary resolution for converting the company.
b. To prepare a new set of articles or an altered set of articles in consultation with the board of directors.
c. To issue notices and circulars of the extraordinary general meeting as per the decision of the board.
d. To get the resolutions passed at the meeting, i.e., a special resolution for conversion and for adoption of a new set of articles and an ordinary resolution for increasing the share capital.
e. To file a prospectus or statement in lieu of prospectus with the Registrar.
f. To file with the Registrar, copies of the special resolution along with the explanatory statement within 30 days of passing the resolution.
g. To file with the Registrar notices of increase of share capital and the altered copy of the articles.
h. To get from the Registrar a new certificate of incorporation in the changed name.
i. To take steps to raise additional capital from the public, if needed for further expansion of business.
Duties of the secretary when converting a public company into a private company
The steps to be taken by the secretary of a public company when it comes to concerting a public company into a private one are as follows:
a. To arrange for the board meeting in consultation with the directors for the purpose of calling an extraordinary general meeting.
b. To issue notices and circulars of the extraordinary general meeting.
c. To get the special resolution passed for conversion and for altering the articles or adoption of a new set of articles, incorporating the compulsory provisions, i.e., restricting the right to transfer shares, limit the membership to 50 and prohibit public invitation to subscribe to shares and debentures.
d. To file with the Registrar copies of special resolutions with explanatory statements within 30 days of the date of the resolutions.
e. To apply to the Central Government with the necessary documents for approval of conversion within 3 months of passing the special resolution for conversion. The application to the Central Government must be sent through the regional director.
f. To publish a notice in a leading newspaper about the conversion, if the regional director so requires and send the newspaper clipping to the government.
g. After obtaining government approval, file with the Registrar within one month of the approval, a printed copy of the new or altered articles of association.
Secretarial duties for alteration of the memorandum
Alteration of name clause
The secretary has to ascertain form the Registrar whether the proposed name is acceptable.
If the Registrar informs him that the proposed name is acceptable, the secretary has to obtain a written consent from the Central Government for the change of name.
The secretary has to arrange a board meeting for the purpose of recommending the changed name to the members and to convene an extraordinary general meeting.
The secretary has to get a special resolution passed at the EOGM and get copies of the special resolution signed by the chairman of the meeting
The secretary has to file a copy of the special resolution with the Registrar within 30 days of passing of the resolution.
On filing of the resolution, the registrar makes the necessary change in the register and issues a fresh certificate of incorporation with the changed name.
The secretary has to arrange for the changing of name on all the documents of the company and for getting the new seal approved by the board. He should also notify all parties dealing with the company of the change of name.
Alteration of domicile clause
a. Passing of a special resolution at an EOGM.
b. Filing a copy of the resolution with the Registrar within 30 days of passing the resolution.
c. Getting a certificate of registration of transfer from the registrars of both states if it is an inter-state transfer.
d. Giving notice of location of the new office to the Registrar of the state to which the company is shifted within 30 days of the transfer.
Alteration of objects clause
a. Arrange a board meeting to discuss the proposed change and approve the explanatory statement which will be sent to the members along with the notice. The board will resolve to call for an EOGM to pass a special resolution.
b. Send notice of EOGM with explanatory statement to members, debenture holders, creditors and all those whose interests will be affected by the proposed change.
c. Get a special resolution passed and make a petition to the Central Government for sanction of change. A notice of the company’s petition should be sent to the registrar.
d. If any person objects to the alteration, either his consent to the alteration has to be obtained or his debt has to be discharged or secured by adequate provision of security. This arrangement should also be brought to the notice of the Central Government.
e. On receipt of the confirmation order from the Central Government, a copy of the order and a copy of the altered memorandum should be filed with the registrar within 3 months from the date of the board’s order.
Alteration of capital clause
Secretarial procedure for reduction of authorised capital
a. Arrange a meeting of the board of directors to consider the plan of reduction of capital, to fix the date of the EOGM and to approve the form of special resolution to be moved in the meeting and the explanatory statement which should be sent to members.
b. Send to the members’ notices of the EOGM along with the explanatory statement.
c. Get a special resolution passed at the EOGM for reduction of capital and get the minutes signed by the chairman of the meeting.
d. File a copy of the minutes with the registrar.
e. Make an application to the court along with the copy of the minutes for the confirmation order.
f. Make necessary steps for the settlement of the list of objecting creditors and satisfaction of their claims.
g. Receive the court order of confirmation for reduction of capital.
h. Notify the causes of reduction of capital to the general public, if the court directs so.
i. File a copy of the court order and the minutes describing the particulars of reduction with the registrar.
j. Obtain the certificate of registration of the court order and the minutes.
k. File altered copies of the memorandum and articles of association with the registrar.
l. Take necessary steps to execute the scheme for reduction of capital.
m. Insert the words ‘and reduced’ in the company’s name for a certain period if so directed by the court.
Secretarial procedure for increase of authorised capital
If the articles do not empower increase in the company’s capital, the secretary must arrange for a general meeting where a special resolution is to be passed for suitably altering the articles.
A board meeting will have to be arranged to consider the plan of the issue, the terms of the issue and the draft resolution to be passed ate the EOGM. The date of the EOGM will also have to be fixed.
The secretary will have to arrange for the closure of the register of transfers for preparing the list of members.
Get an ordinary resolution passed at the general meeting for increasing the authorised capital.
File with the registrar a notice of increase of capital specifying the amount of proposed increase and the class of shares affected within 30 days of passing the resolution and pay the necessary fees and capital duty.
Make necessary changes in the memorandum and articles of association, and file the altered copies of these documents with the registrar within 3 months of alteration.
Secretarial duties for alteration of the articles
a. Arrange a board meeting to decide on the alteration in the articles and to fix up the day for an extraordinary general meeting for passing a special resolution to effect a change in the articles.
b. See that the alterations do not violate any provision of the Companies Act, the general law or the company’s memorandum of association. Alteration should not also lead to a fraud on a small minority and it should be in the general interests of the members of the company.
c. Issue notices of the general meeting along with the proposed special resolution and an explanatory statement at least 21 days before the meeting.
d. Get the special resolution passed at an EOGM.
e. File a copy of the special resolution along with the explanatory statement with the registrar within 30 days of passing the resolution.
f. File with the registrar an altered or revised printed copy of the articles of association within 3 months of passing the resolution.
Secretarial duties relating to statutory meeting
a. Prepare a draft of the statutory report and the notice of the meeting in consultation with the directors.
b. Arrange for convening a board meeting and get the statutory report and the notice approved by the board.
c. Get the report certified by the auditors and at least by two directors, one of whom should be a managing director.
d. Get the notice and the report printed and send them to every member at least 21 days before the meeting is scheduled to be held.
e. File a copy of the statutory report with the registrar.
f. Prepare a detailed agenda for the meeting in consultation with the chairman and also a list of the members showing their names, addresses, occupations, number of shares held by each member, etc, for the purposes of producing it at the meeting.
g. Make necessary arrangements for holding of the meetings.
h. Ascertain the quorum of the meeting before the proceedings have commenced.
i. If the quorum is present, read the notice of meeting and also the statutory report.
j. Produce a list of members at eh meeting to supply necessary information and explanation to the meeting, if required.
k. Take down the notes of the proceedings during the meeting.
l. After the meeting, prepare the minutes of the meeting form the notes taken during the meeting and get the same approved by the board at its next meeting.
m. To implement the decisions arrived at the meeting.
Secretary’s duties in connection with annual general meeting
Since the annual general meeting is a recurrent affair in the life of a company, the company secretary is responsible for making all arrangements in holding this meeting in a successful manner. The entire secretarial work maybe divided into three parts. Namely:-
a. Secretarial work before the meeting
b. Secretarial work during the meeting
c. Secretarial work immediately after the meeting
Before the meeting
The following are the duties of a company secretary before the meeting:-
1. Arrange for the preparation of the P&L account, the balance sheet as per the provisions of the companies act.
2. Submission of the P&L account and balance sheet to the board for its approval.
3. Submission of the authenticated P&L account and balance sheet to the statutory auditors of the company.
4. Preparation of the annual report of directors and the chairman’s speech.
5. Fixture of the date of board meeting an issue of notice and agenda of the board meeting to all directors.
6. Arrange for the printing of the P&L account, balance sheet, directors report, auditors report and the notice of the meeting.
7. Give advice to stock exchange of the extent of dividend declared and the date on which shareholders registered with the company will be entitled to dividend.
8. Notice of the annual general meeting is to be sent to shareholders, directors, auditors and stock exchanges at least 21 days before the meeting.
9. Publish a notice of closure of the register of members and share transfer books in a local newspaper.
10. Prepare a list of and an attendance register for valid proxies which have been received at least 48 hours before the meeting.
11. Make arrangements for poll.
12. Prepare detailed agenda for the meeting.
13. Prepare dividend list from register of members.
14. Make necessary arrangements such as seating, lighting, etc for the meeting.
During the meeting
1. Arrange for the share holders to sign the attendance register.
2. Help chairman to ascertain quorum.
3. Read the notice of the meeting.
4. Read the auditors’ report and directors’ report.
5. Help the chairman to conduct the meeting.
6. Supply the chairman with information in connection with questions raised by shareholders during the meeting.
7. Take note of proceedings to prepare minutes of the meeting.
8. To keep before the meeting the register of directors shareholding, register of members, minutes book, copies of accounts, copies of memorandum and articles or association, etc.
After the meeting
Immediately after the meeting the secretary will have to ensure the following:-
1. Preparation of minutes of the meeting.
2. Approval of the minutes by the chairman and obtain his signature within 30 days of the meeting.
3. Inform directors and auditors of their appointment or reappointment.
4. Make necessary changes in the register of directors and a copy of the same has to be filed with the Registrar within 30 days of the meeting.
5. Copies of the balance sheet, P&L account, resolutions adopted at the meeting, etc have to be filed with the Registrar within 30 days of the meeting.
6. Open a separate bank account for dividends payable.
7. Obtain dividend warrants.
8. Dispatch to share holders within 42 days of dividend declaration the dividend warrants with the notice of dividends and tax deduction certificates.
9. Pay income tax deducted from dividend to the income tax office.
10. File annual return with the Registrar within 60 days of the meeting.
11. To brief the press about the meeting.
Secretarial duties relating to extra ordinary general meeting
1. If the meeting is convened on the board’s initiative, consult the chairman and convene the board meeting to fix the date, time and place of the meeting.
2. If the members have requisitioned to call for an EOGM, the secretary, after making a scrutiny of the requisition to ascertain whether it is in order, has to convene a board meeting in consultation with the chairman for fixing the date and time of the EOGM.
3. The secretary also prepares the draft resolution, explanatory statement and after getting them approved by the board, arranges for their printing.
4. The secretary issues notices to members along with an explanatory statement and will also advertise the notice in a local and national newspaper.
5. The secretary will scrutinise the proxies received, prepare a list of proxies and arrange for a poll, if demanded.
6. Arranges for seating of members and recording their attendance.
7. Arrange for checking the admission cards at the entrance.
8. Ascertain whether the required quorum is present at the meeting, and then read out the notice of meeting.
9. Assist the chairman in conducting the meeting, including supply of necessary information and documents if required by the meeting, taking of poll, counting of votes, etc.
10. Make notes of proceedings of the meeting.
11. After the meeting, draft the minutes of the meeting and get the approved by the chairman in the next board meeting.
12. Carry out the instructions and decisions of the meeting.
13. File a certified copy of the special resolution with the registrar within 30 days of passing of the resolution. Failure to do so will lead to a fine of Rs. 20 per day will be imposed on the company till default continues.
14. If any changes have been made in the memorandum or articles of association of the company, then the altered copies of these documents must be filed with the registrar within 3 months.
References
1. Kapoor, N.D., ‘Elements of Mercantile Law’, Sultan Chand & Sons, 13th revised edition, 2008.
2. Saravanavel, P. & Sumathi, S., ‘Company Law’, Himalaya Publishing House, 2006.
3. Garg, K.C. & Gupta, Vijay, ‘Company Law and Secretarial Practice, Kalyani Publishers, 2nd revised edition, 2006.
4. Appannaiah, Reddy, Prabhu Dev, Company Law and Secretarial Practice, Himalaya Publishing House, 2004.
REVIEW QUESTIONS
Section A
1. Define who a company secretary is.
2. State the qualification which a company secretary must possess.
3. List out the roles of a company secretary.
Section B
1. Discuss duties and responsibilities of a company secretary.
2. Detail the secretarial procedure for holding of the statutory meeting.
3. Enumerate the secretarial duties involved in holding an extraordinary general meeting.
Section C
1. Briefly explain the duties of a secretary before and after incorporation.
2. What are the secretary’s duties prior to incorporation and after?
3. Enumerate the secretarial duties before, during and after an annual general meeting.
APPENDIX – PRACTICAL PROBLEMS
1. S formed a company with a capital of £ 40,000. He sold his business to the company for £ 30,000. As a part payment for sale, he accepted 20,000 shares of £ 1 each. The balance of £ 10,000 was considered as loan and S secured the amount by the issue of debentures. His wife, daughter and four sons took one share each. Owing to strike the company was wound up. The assets of the company were valued at £ 6,000. The debts due to unsecured creditors were £ 7,000. S retained the entire sum of £ 6,000 as part payment of loan. The other creditors objected. Their contention was that a man could not own any money to himself, and the entire sum of £ 6,000 should be paid to them.
Examine the rights of S and other creditors. Who will succeed?
2. A public limited company has only seven shareholders. All the shares were fully paid up. The shares of one of the shareholders were sold in a court auction and were purchased by another shareholder of the company to the knowledge of all other shareholders. The company continued to carry on business thereafter. What would be its consequences?
3. A husband and wife, who were the only two members of a private limited company, were shot dead by dacoits. Does the company also die with them?
4. A Hindu undivided family, consisting of a father and five major sons and another family consisting of father, five major sons and one minor son carried on banking business, as owners thereof. Discuss if the organization requires registration under the Companies Act?
5. An association of 12 persons starts a banking business without being registered. Four members retire and thereafter a suit is instituted by one of the continuing members for the partition of the assets of the business. Is the suit competent?
6. A partnership consisting of four firms was formed. Each firm had six partners. The partnership was not registered under the Companies Act. The partnership sold certain goods valued at Rs. 10,000 to Mr. Tom. Tom refused to pay the money. Can the partnership recover by a suit?
7. The Bombay Stock Exchange has 200 members. It is not registered under the Companies Act. One of the members has filed a suit for declaring it illegal. Do you think the suit is maintainable?
8. Five people are the only members of a private company. All of them go in a boat on a pleasure trip into an open sea. The boat capsizes and all the five die being drowned. Is the private company no longer in existence?
9. In a Private Limited Company it is discovered that there are in fact 54 members. On an enquiry it is ascertained that 6 of such members have been employees of the company in the past and they acquired their shares while they were still employees of the company. Is it necessary to convert the company into a Public Limited Company?
10. Mahavir Traders Limited was registered as a public company. There are 64 members in the company as noted below.
(i) Directors and their relatives
(ii) Employees
(iii) Ex-Employees (Shares were allotted when they were employees)
(iv) 5 couples holding shares jointly in the name of husband & wife (5 x 2)
(v) Others
The Board of Directors of the Company proposes to convert it into a private company. Also advise whether reduction in the number of members is necessary.
11. The number of members in a Public Limited Company got reduced to six on 6th September 2003. The company incurs trade debts on 8th September 2003, 10th December 2003, 4th March 2004, 16th March 2004 and 4th April 2004. How far are the remaining six members liable for the debts?
12. The Memorandum and the Articles of Association of a company were delivered to the Registrar of companies for registration of January 6, 2003. On January 8, 2003 the Registrar issued the certificate of incorporation but dated it January 6, 2003. On that very day (January 6, 2003), the company made allotment of its shares. The allotment was challenged on the ground that it was made before the actual issue of the certificate of incorporation. How would you decide and why?
13. Six of the seven signatures to the memorandum of association of a company were forged. The memorandum was duly presented, registered and a certificate of incorporation was issued. The existence of the company was subsequently challenged on the ground that the registration was void. Decide.
14. X, a solicitor on the instructions of promoters who became the directors of the company, prepared the Memorandum and the Articles before its formation. X claims his costs and charges from the company. The company refuses to pay on the ground that it was not in existence when he was appointed. Will the contention of the company succeed?
15. P.K. Ltd. had its registered office in Lucknow. The company applied to the Registrar of Uttar Pradesh to seek permission to transfer its registered office to Patna. The Registrar of Uttar Pradesh granted such permission to P.K. Ltd. which accordingly transferred its registered office to Patna. Is the transfer of registered office valid?
16. A.K. Ltd. has its registered office in Calcutta. The company is mainly engaged in the production and distribution of films. The company passes a special resolution for shifting its registered office from Calcutta to Bombay. The move is opposed by the State of West Bengal on the ground that it will affect the revenues of the State. Decide giving reasons.
17. The directors of a company paid rupees one thousand out of the capital of the company as interest to ‘A’ on the shares held by ‘A’ in the company. The company later on went into liquidation. The liquidator asked the directors to refund rupees one thousand to the company. Can the liquidator compel the directors for the refund?
18. A telephone company did not have the powers to lay telephone lines in a particular area as per its M.O.A. The company laid down the lines and a miscreant X cut them down. Can the company sue X for the damages done to the wires?
19. A company has its registered office in Bombay. Due to some reasons favourable to the company, it wishes to shift its registered office to London. Can the company be permitted to shift its registered office?
20. A company had been formed to permit, assist and protect the use of bicycles, tricycles, and other similar vehicles on the public roads and for further objects connected with same road users. The company proposes to alter its objects clause to include motorists as well for benefits under the scheme of the company. Should the Tribunal confirm such an alteration?
MODEL QUESTION PAPER
Course: III B.Com Max Marks: 100
Subject: Company Law and Secretarial Practice Time: 3 Hours
SECTION A
1. Answer any 12 questions, in two or three sentences each. 2x12=24
Each question carries 2 marks.
a. Define company secretary.
b. What is table A?
c. What is listing?
d. What is a statutory report?
e. What is promotion of a company?
f. Define a company.
g. What is a blank transfer?
h. Give the meaning of agenda.
i. What is a motion?
j. Give two points of differences between a holding company and a subsidiary.
k. What are producer companies?
l. What is an ultra vires activity?
m. What is the NCLT and what is its role?
n. What is a prospectus?
SECTION B
Answer any 5 questions. 5x8=40
Each question carries 8 marks.
2. Write a note on any ten contents of the Articles of Association.
3. What is a memorandum of association? Explain its clauses.
4. Briefly discuss the different ways in which a person ceases to be a member.
5. Write a detailed note on the essentials of a valid meeting.
6. Discuss the role of promoters in the formation of a company.
7. What are the privileges enjoyed by a private company, in comparison to a public company?
SECTION C
Answer any 3 questions. 3x12=36
Each question carries 12 marks.
8. Discuss civil and criminal liability of directors, with regard to mis-statements in the prospectus. Support your answer with valid justifications and illustrations.
9. What is an annual general meeting? What are the duties of a secretary before, during and after the meeting? What are the consequences that a company may face for not holding the annual general meeting?
10. Explain in detail the different modes of winding up of a company.
11. Enumerate the various stages involved in the formation and commencement of a public limited company.
Pg. no.
Chapter 1 –
COMPANY
Chapter II –
PROMOTION AND INCORPORATION OF COMPANIES
Chapter III –
MEMORANDUM AND ARTICLES OF ASSOCIATION
Chapter IV –
SHARE CAPITAL AND MEMBERSHIP
Chapter V –
MANAGEMENT OF COMPANY
Chapter VI –
MEETINGS AND RESOLUTIONS
Chapter VII –
WINDING UP OF COMPANIES
Chapter VIII –
COMPANY SECRETARY AND SECRETARIAL PRACTICES
APPENDIX –
PRACTICAL PROBLEMS
Chapter I – COMPANY
LEARNING OBJECTIVES
1. To bring awareness among students of the concept of a company.
2. To bring an understanding of the outstanding features of companies.
3. To obtain understanding of the different types of companies existing in India.
4. To enable students to draw a distinction between incorporated and unincorporated companies and focus on the benefits of incorporated companies in the context of modern economies.
5. To distinguish between private and public limited companies and the major privileges available to private companies.
The Companies Act, 1956
The Companies Act is based on the recommendations of the company law committee (Bhabha Committee). It is based on the English Companies Act, 1948, with changes suiting to Indian conditions. The Act contains 658 sections and 15 schedules.
Objectives and Policies of the Companies Act, 1956
The Companies Act, 1956 regulates the formation, financing, functioning and winding up of companies. The Act prescribes regulatory mechanisms regarding all relevant aspects including organisational, financial and managerial aspects of companies. The winding up matters, presently are largely within the domain of the jurisdiction of High Courts. Regulation of the financial and management aspects constitutes the main focus of the Act.
In the functioning of the corporate sector, although freedom of companies is important, the protection of investors and shareholders, on whose funds they flourish, is equally important. The Companies Act plays the balancing role between these two competing factors, namely, management autonomy and investor protection. The main objects of the Act are as under:
a. To protect the interests of large number of shareholders, as there exists separation of ownership from management in a company;
b. To safeguard the interests of creditors;
c. To help the development of companies in India on healthy lines, because corporate sector constitutes a very important segment of the economy;
d. To help the attainment of the ultimate ends of the social and economic policy of the Government;
e. To equip the Government with adequate powers to intervene in the affairs of a company in the public interest and as per the procedure prescribed by law so that the interest of all the stake-holders may be protected from unscrupulous management.
There were various amendments to the Companies Act. The more important amendments are discussed below.
The Companies (Amendment) Act, 2000
The amendment act includes important changes aimed at better corporate governance and investor protection. The following were the major changes:
a. Private and public companies to have a minimum paid up capital of Rs. 1 lakh and 5 lakhs respectively.
b. Change of place of registered office from jurisdiction of one Registrar of Companies to another Registrar within the same state to require confirmation from Regional Director.
c. SEBI is entrusted with powers with regard to issue and transfer of securities and non-payment of dividend by listed public companies.
d. Certain measures proposed to protect the interests of small deposit holders of a company.
e. A preferential offer of securities to more that 50 persons shall be treated as public issue.
f. Every listed company making an initial public offer of any security for a sum of Rs. 10 crores or more will have to issue the same only in dematerialized form.
g. Voting through postal ballot for important items has been allowed in order to ensure good corporate governance.
h. The period for disbursing dividend including interim dividend has been reduced to 30 days from the date of dividend declaration. The amount of dividend declared should be deposited in a separate bank account within 5 days from the date of dividend declaration.
i. Private companies shall be excluded in reckoning the number of companies which an auditor can audit.
j. A holder of security which carries voting rights in a company is disqualified for appointment as an auditor in the same company.
k. No person can hold office of director in more than 15 companies (excluding private companies) at a time.
l. A public company having a paid up capital of Rs. 5 crore or more and 1000 or more small shareholders may appoint at least one director elected by small shareholders on the board of the company (small shareholders mean those holding shares of nominal value of Rs 20,000 or less).
m. Every public company having a paid up capital of not less that Rs. 5 crores shall constitute an ‘Audit Committee’ of the board.
n. Companies with a paid up capital of Rs. 10 lakhs or more and which are not required to have a whole time secretary will have to submit a Secretarial Compliance certificate from the company secretary in whole time practice. A copy of the certificate shall be attached with the directors’ report.
The Companies (Amendment) Act, 2002
The amendments were regarding the dissolution of the Company Law Board and formation of the National Company Law Tribunal and the National Company Law Appellate Tribunal, to ensure better jurisdiction. It also included transfer of the powers of the court to wind up companies into the hands of the Tribunal, transfer of the powers of the Board for Industrial Finance and Reconstruction (BIFR) to the Tribunal.
The Companies (Amendment) Act, 2006
The amendments brought about were:
1. Persons intending to become directors of a company and all those directors who have been holding the office of director before the commencement of the Amendment Act, 2006, must obtain a Director Identification Number from the Central Government.
2. Provisions relating to filing of applications, documents inspection etc. through electronic form, i.e., all balance sheets, applications, prospectus, returns, memorandum and articles of association, etc. of the company shall also be submitted through the electronic form.
Application of the Companies Act
The act applies to the following companies:
1. The companies formed or registered under the act.
2. Existing companies.
3. Companies registered but not formed under any previous companies act.
4. Unlimited companies registered as limited companies according to a previous act.
5. Unregistered companies for the purpose of winding up under the act.
6. Foreign companies.
7. Insurance companies.
8. Banking companies.
9. Companies engaged in the generation or supply of electricity.
10. Any body corporates incorporated by any act for the time being in force as the central government may notify.
11. Government companies.
12. Mutual benefit societies.
The Act does not apply to
1. Companies established under special acts of parliament such as RBI, LIC, STC.
2. Partnership firms.
3. Corporate societies.
4. Societies governed by the Societies Registration Act, 1860.
5. Trusts governed by the Indian Trusts Act, 1882.
Administrative authorities under the Companies Act
1. Central government.
2. National Company Law Tribunal.
3. National Company Law Appellate Tribunal.
4. The Zonal Offices headed by Regional Directors.
5. Field Offices headed by the Registrar of Companies for each state.
Meaning of Company
A ‘company’ is any group or association of persons who come together, for the purposes of attaining common goals and objectives, which can be social, political or economical. Thus, it can represent any form of association, whether business or otherwise. The law relating to companies in India is contained in the Indian Companies Act, 1956, which was recently amended in 2006.
Definition of Company
According to Section 3(1) (i) of the Companies Act, 1956 a company means, “a company formed and registered under this Act or an existing company formed and registered under any of the previous companies laws”.
Lord Justice Lindley defines a company as “associations of many persons who contribute money or money’s worth to a common stock, and employs it in some common trade or business and who share the profit or loss arising therefrom. The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute it, or to whom it belongs, are members. The proportion of capital to which each member is entitled is his share. Shares are always transferable although the right to transfer them is often more or less restricted.”
Another definition of company has been given by Chief Justice Marshall of USA, “a company is a person, artificial, invisible, intangible, and existing only in the contemplation of the law. Being a mere creature of law, it possesses only those properties which the charter of its creation confers upon it either expressly or as incidental to its very existence.”
A company may thus be defined as an incorporated association, which is an artificial person, having an independent legal entity, with a perpetual succession, a common seal, a common capital comprised of transferable shares and carrying limited liability.
Characteristics of a Company
1. Incorporated Association: A company must be registered under the Companies Act. The minimum number of persons needed to register a public company is seven and in case of a private company two (Sec. 12). A banking business shall not have more than ten persons, and any other business shall not have more than twenty persons, unless it is registered as a company under the Companies Act, or under any other law in force (Sec.11).
2. Artificial person: the law considers persons as of two types: (a) natural human persons and (b) artificial legal persons. Legal or artificial persons are created by law and these can act only through natural persons. Since the law has created a company through legal processes, it is called artificial and since it has certain rights and obligations, it is called person. Thus, a company is an artificial person.
3. Separate legal entity: Any company formed and registered under the Companies Act has a distinct legal entity. It is a fiction of law having no natural or physical existence. Though devoid of any physical existence, it enjoys many attributes of a natural person. It has the power to use its own name, can own and sell property and can enter into contracts in its own name. Its personality and property is different and separate from that of its owners, and it can also enter into contracts with its own members.
The principle that a company is a legal entity distinct from its members is illustrated in the leading case of Saloman vs. Saloman & Co. Ltd., (1897) A.C.22
Saloman had a boot business. He sold the business to a company named Saloman & Company Ltd., which he formed. There were seven members – his wife, daughter and four sons who took 1 share each and Saloman himself who took 20,000 shares. The price paid by the company to Saloman was £ 30,000; but instead of paying him cash, the company gave him 20,000 fully paid shares of £ 1 each and £ 10,000 in debentures. Owing to strike in the boot trade the company was wound up. The assets of the company amounted to £ 6,000 only. Debts amounted to £ 10,000 due to Saloman and secured by debentures and a further £ 7,000 due to unsecured creditors. The unsecured creditors claimed that as Saloman & Company Ltd., was really the same person as Saloman, he could not owe money to himself and that they should be paid their £ 7,000 firs. It was held by the House of Lords that Saloman was entitled to £ 6,000 as the company was an entirely separate person from Saloman. The unsecured creditors got nothing.
Thus the case of Saloman vs. Saloman Company Ltd. established beyond a doubt that in law a registered company is an entity distinct from its members, even if one person holds all the shares in the company. There is no difference in principle between a company consisting of only two shareholders and a company consisting of two hundred shareholders. In each case, the company is a separate legal entity.
Implications of separate legal entity:
i. The member has no insurable interest in the property of the company.
ii. Even when members die, the company continues to exist.
iii. The nationality of the company does not depend on the nationality of its members.
iv. The company can sue and be sued in its own name.
In fact, there is no difference between a company consisting of only two shareholders and a company consisting of two hundred shareholders. In every case, the company is a separate legal entity.
Example: Of the 3,000 shares in a company L held 2,999. He voted himself as the governing director and chief pilot at a salary. L was killed in an air crash while working for the company. His widow claimed compensation for personal injuries to her husband while in the course of his employment. It was argued that no compensation was due because L and Lee’s Air Farming Ltd. were the same person. The Privy Council applied Saloman’s case and said that L was a separate person from the company he formed and compensation was payable. (Lee vs. Lee’s Air Farming Co., Ltd., 1960)
4. Separate property: A company is capable of owning, enjoying and disposing of property in its own name. This arises because of the fact that it is a legal person. The property of the company will not be considered as property of the members and thus the members do not have insurable interest in the company’s property.
M was the holder of nearly all the shares except one of a timber company. He was also a substantial creditor of the company. He insured the company’s timber in his own name. The timber was destroyed by fire and M claimed the loss from the insurance company. It was held that the insurance company was not liable to him. [Macaura vs. Northern Assurance Co. Ltd. (1925) AC 619]
5. Perpetual succession: Quite unlike a natural person, a company does not die. It is an entity with a perpetual succession, i.e., it is an entity that is separate and distinct form its shareholders, and its life is not affected by the life of its members. It is not affected by the death, lunacy or insolvency of its members. Even if all the members were to die, the company will still remain in existence, until is brought to an end by an act of law.
In the book ‘The Principles of Modern Company Law’ by LCB Grower, he says, ‘during the war all the members of one private company, while in a general meeting, were killed by a hydrogen bomb. But the company survived, not even a hydrogen bomb could have destroyed it.’
6. Limited liability: This is one of the most important and attractive features of a company. In case of companies limited by shares, the liability of members is limited to the face value of shares subscribed to by them. In situations where the assets of the company are insufficient to meet the claims of creditors, the members cannot be asked to pay up more than what is due on the shares of the company held by them. In the case of companies limited by guarantee, the liability of members is limited to the extent guaranteed to be paid up at the time of winding up.
However, in the following cases, a shareholder or member may lose the privilege of limited liability:
i. Where members of a company are reduced below the statutory minimum – two in case of private companies and seven in case of public companies – and the company carries on business for more than 6 months while the members are so reduced, then every person who is a member of the company during the time that it carries on business after those six months and is aware of the fact that it is carrying on business with fewer than two members or seven members, shall be personally liable for the payment of the whole debts of the company contracted during that time, and may be personally sued (Section 45).
ii. If in the course of the winding up of a company, it appears that any business of the company has been carried on, with intent to defraud creditors, or for any fraudulent purpose, the Court may declare that any persons who were knowingly parties to the transaction shall be personally responsible, without any limit, for all the debts or liabilities of the company (Section 542).
7. Common seal: Since a company is an artificial person, it cannot sign its name on a contract. Therefore, it functions with the help of a seal. A common seal is used as a substitute to its signature. Since a rubber stamp does not serve the purpose, every company must have a seal with its name engraved on it. Anything done under an agreement between the company and the third party requires recognition of the company in the form of an official seal unless exempted by the Act. A document not bearing the common seal of the company is not authentic and as such is not binding on the company.
8. Transferability of shares: One of the most important reason as to why people prefer to invest in a company rather than a partnership is because shares of a company can be freely sold or purchased in the share market. However, this applies to public companies limited by shares, and in the case of private companies, certain restrictions have been placed on free transfer of shares.
9. Capacity to sue and be sued: A company acquires a separate and independent legal personality on incorporation. As a legal person it can sue and be sued in its own name. A company may be sued for contempt of court, for malicious prosecution, infringement of copyrights and negligence. It may sue for an injury done to its business reputation by defamation.
10. Company is not a citizen: Although a company is a legal person that can hold property and sue and be sued in its own name, it cannot acquire citizenship. However, it can have nationality, domicile and residence. The nationality of the company is decided by the place of its incorporation. Similarly, the domicile of the company is the place of its registration and will remain so throughout the company’s existence. A company can have only one nationality and one domicile, but may have several residences at the same time. For example, a company incorporated in Bangalore, India will be an Indian company (though not an Indian citizen), even though its members are all foreign, its domicile in Bangalore and if it has trading offices in Malaysia, London and Hong Kong, its residences will be all these three foreign cities as well. The residence of the company is important for taxation purposes.
11. Company’s actions limited: No company can go beyond the powers laid down in its Memorandum of Association. Therefore, its actions are limited. So as to enable a company to carry out its activities without hindrances, sufficient powers are granted in the Memorandum of Association. Once these powers are laid down, it cannot go beyond the memorandum, unless the memorandum itself is altered before doing so.
Advantages of a company
a. Financial strength: Public limited companies can issue various types of securities to attract investors. The capital is divided into shares and there is no limit to the number of members. This enables public limited companies to raise huge capital. At the same time, these companies also enjoy a good credit standing among creditors and financial institutions.
b. Economies of scale: Having huge financial access and because of the type of ownership, companies find it easier to grow and expand, thus enjoying the full benefits of large scale operations.
c. Limited liability: A major attraction of investing in limited companies is that it provides the benefit of limited liability to investors. They become liable only to the extent of amounts unpaid on the shares held by them.
d. Efficient management: Professional and efficient managers are appointed to manage the business and evolve long term policies. Balanced and rational decision making ensures long term success of the organisation.
e. Stability: Changes in ownership and management do not affect the existence of the company. Perpetual succession ensures that the company is not threatened by instability and the fear of coming to an end after a period of time.
f. Transferability of interest: Since shares of a company are freely transferable on a stock exchange, it encourages even timid investors to invest their capital. This encourages formation of capital within an economy and also generation of economic activities. Moreover, since the prices of shares are listed on a stock exchange, investors get to know of the value of their holdings.
g. Diffused risk: The risk of loss is spread over a large number of shareholders.
h. Tax relief: Companies pay income tax at a flat rate. Hence, at higher levels of income, the tax liability is lower. Moreover, companies enjoy tax sops on export promotion, development of under developed areas, etc.
i. Goodwill: Due to transparency of company affairs, filing of financial statements with the Registrar of Companies, the need to comply with statutory provisions, etc. public limited companies enjoy reputation and prestige in society. Holding of Annual General Meetings and the exercise of voting rights by shareholders, present a picture of a democratic set-up.
Disadvantages of a company
1. Legal formalities: The procedure involved in setting up a limited company is highly complex and time consuming, involving a lot of legal provisions, documents and hurdles. This acts as a deterrent to individuals who are interested in forming body corporations.
2. Lack of personal interest: Since there is a divorce between ownership and management and as managers and directors run the affairs of the company, for which they are paid pre-determined salaries, they may not take a personal interest in the affairs of the company, nor may they give importance to creating a personal relationship between employees and customers.
3. Corrupt management: Companies with huge financial investments having managers with very little professional ethics and values can swindle investors of their hard-earned money. Malpractices and scams in many corporates are glaring examples of corrupt management.
4. Oligarchy: A small group of directors elected by the shareholders rule the company. They can misuse their powers to the detriment of the shareholders’ interests.
5. Excessive statutory control: At every stage in the day-to-day functioning of the company, a lot of statutory rules and regulations have to be complied with. Non-compliance can invite penalties. These controls tend to waste a lot of time and effort.
6. Delay in decisions: No decision in a company can be made without conducting a meeting and passing a resolution. This quells individuality, creative and quick decision making. The fear of penalties prompts managers and officers to shift responsibility.
7. Conflict of interest: There can be conflict of interest among the stakeholders such as employees, investors, directors, financial institutions, etc. These conflicts can delay decision making and its implementation. At the same time it brings down employee morale and management efficiency. Frequent changes in the board of directors can also be reason for conflict of interest among various stakeholders.
8. Unhealthy speculation: The greed for personal gains and the desire to paint a more than healthy picture of the company in the outside world can induce officers and directors of the company to manipulate share prices and show artificial profits and losses. This can inadvertently affect the goodwill of the company.
9. Social evils: Huge companies can lead to concentration of power in the hands of a few. In order to navigate around the statutory provisions, directors and officers may be encouraged to indulge in political and financial corruption.
However, the advantages of a company organisation outweigh its disadvantages. This form of an organisation structure is best suited for those businesses which require large amounts of capital investments, highly professional management and are dealing in areas that are of a high-risk nature.
Distinction between a partnership and company
Points of difference Partnership Firm Joint Stock Company
Act Indian Partnership Act, 1932 Indian Companies Act, 1956
Registration Not compulsory Compulsory
Number of members Minimum 2; maximum 10 for banking and 20 for others. Minimum 2 and maximum 50 for private limited; minimum 7 and maximum unlimited for public limited.
Legal status No individuality Separate legal existence
Property Property of firm is property of partners Company property does not belong to members
Contracts Partner cannot contract with firm Members can contract with company
Management Vests in the hands of active partners Vests in the hands of Board of Directors elected by shareholders
Life Firm has no perpetual existence Long and continued perpetual existence
Liability Partners face unlimited liability Shareholders face limited liability
Creditors Creditors of firm also creditors of partners individually Creditors of company not creditors of shareholders
Transfer of interest Partner cannot transfer his interest in the firm without consent of other partners Shares are freely and easily transferable
Statutory obligations Less statutory obligations Strict statutory obligations and regulations
Types of companies
There are various kinds of companies in existence in India. They are as follows:
I. Unincorporated Companies
Those companies which are not incorporated under the Companies Act or any Special Act or Charter are called ‘Unincorporated Companies’. They are in fact, large partnerships. If the number of members exceeds 10 in case of a banking company and 20 in case of other business companies, then these companies become illegal unless they are registered under the Companies Act.
II. Incorporated Companies
Those companies established by means of incorporation under the Companies Act or under a Special Act or a Charter, are called Incorporated Companies.
CLASSIFICATION OF INCORPORATED COMPANIES
Incorporated companies can be classified into three kinds:
1. Chartered Companies: These are companies which are created by granting a royal charter to persons who desire to be incorporated and form a corporation. Companies created on the decree of a royal charter are known as chartered companies. The charter under which the company is incorporated defines the powers and nature of business of the company. Example: East India Company (1600) and Bank of England (1694).
2. Statutory Companies: When companies are incorporated by means of a special act of Parliament or any State Legislature, statutory companies are formed. These companies are formed to carry out public undertakings such as railways, power and gas generation, etc. These are enterprises of national importance. Example: the Life Insurance Corporation, the Food Corporation of India, the Reserve Bank of India.
3. Registered Companies: These are companies formed and registered under the Indian Companies Act, 1956 or under any of the earlier Companies Acts. These companies come into existence when they are granted a certificate of incorporation by the Registrar of Companies. According to Section 12(2), companies registered under the Act may be:
a. Companies limited by shares: These are companies where the liability of members is limited to the extent of unpaid value on shares held by them. The outstanding liability of the members can be enforced either during the existence of the company or during the winding up of the company. If the shares held are fully paid up, then usually no liability exists for the members, other than the exception laid down in Section 45.
b. Companies limited by guarantee: In these companies, the liability of members is limited the extent of amounts which they have undertaken by the memorandum to contribute to the assets of the company in the event of its being wound up. Companies limited by guarantee have a legal personality distinct from its members. The Articles of guarantee companies must state the number of members with which the company is to be registered. Usually companies limited by guarantee are formed for the promotion of art, science and culture and not for making profits, and they may or may not have a share capital.
c. Unlimited companies: Any seven or more persons, or where the company to be formed will be a private company, any two or more persons, may form an incorporated company, with or without limited liability. A company not having any limit on the liability of its members is termed "an unlimited company" (Section 12). In case of unlimited companies, every member is liable for all the debts of the company, contracted in the course of its business activities. Unlimited companies may or may not have share capital. If it has share capital, it can be a public or a private unlimited company. It must have its own Articles of Association.
PRIVATE AND PUBLIC COMPANIES
Private company
"Private company" means a company which, by its articles:
a. Restricts the right to transfer its shares, if any;
b. Limits the number of its members to fifty not including:
i. Members who are in the employment of the company, and
ii. Members who were former employees of the company.
c. Prohibits any invitation to the public to subscribe for any shares in, or debentures of the company. (Section 3(1)(iii))
Where two or more persons hold one or more shares in a company jointly, they shall be treated as a single member.
The minimum number of members required to form a private company is two and the maximum number of members shall not exceed 50.
A private limited company must add the words ‘private limited’ after its name.
Public company
"Public company" means a company which is not a private company. (Section 3(1) (iv))
Privileges of a private company
Certain provisions of the Companies Act which are applicable to public limited companies are not applicable to private limited companies. These may be considered as special privileges and exemptions available to private limited companies. They are:
1. A private company can be incorporated with a minimum of two members only.
2. A private company can commence business immediately after incorporation.
3. It may allot shares without issuing a prospectus or filing a statement in lieu of prospectus.
4. It can give financial assistance for purchase of its shares or of its holding company’s.
5. It is not required to hold a statutory meeting or file a statutory report with the Registrar. (Sec. 165 (10))
6. It can have a minimum of two directors.
7. The provisions of Section 81 with regard to further issue of capital do not apply to a private company.
8. A private company can issue both equity and preference shares as well as deferred shares and shares with disproportionate voting rights.
9. The public cannot inspect copies of Profit and Loss Account and Balance Sheet that a private company files with the Registrar.
10. Holding of qualification shares is not mandatory for the director of a private company.
11. Restrictions imposed by Section 309 with regard to managerial remuneration do not apply to these companies.
12. Any interested director can participate in a Board meeting and cast his vote.
13. All directors can be appointed by a single resolution.
14. Directors of a private company need not file their written consent to act as directors, nor do they need to take up qualification shares. (Sections 264 & 266)
15. Directors need not retire by rotation.
16. Provisions dealing with restrictions on appointment or advertisement of directors do not apply to private companies. (Sec. 266 (5) (b))
17. Unless a private company is a subsidiary of a public company, the requirement that a special notice of fourteen days is to be made on appointment of a new director, does not apply. (Sec. 257 (2))
18. It need not maintain an index of members. (Sec. 151 (1))
19. Unless the articles provide for a larger number, two members personally present at a meeting can form the quorum of the meeting. (Sec. 174 (1))
20. One member present in person or by proxy can demand a poll if not more than seven members are present. If more than seven members are present, then two members can demand poll. (Sec. 179 (1) (b))
21. Section 295 which prohibits loan to directors does not apply to private companies.
22. A private company can be registered with a paid-up capital of Rs. 1 lakh, whereas a public company needs to have a minimum paid-up capital of Rs. 5 lakh.
Conversion of Private Company into Public Company
A private company may become a public company under the following circumstances:
1. Conversion by default: According to Section 43, if a private company contravenes any of the provisions included in its Articles under Section 3(1) (iii) then the company shall cease to enjoy privileges and exemptions conferred on private companies. If the Company Law Board is satisfied that the failure to comply with the conditions was accidental or if it feels that it is just and equitable to grant relief may do so on the application of the company or any other interested.
2. Conversion by choice (Section 44): If a private company alters its articles to remove the provisions of Section 3(1) (iii) which make it a private company, the company -
a. Shall, as on the date of the alteration, cease to be a private company; and
b. Shall file with the Registrar either a prospectus or a statement in lieu of prospectus
The following requirements shall also be complied with if a private company chooses to be a public company:
a. If minimum number of members is less than seven, it must be raised to seven.
b. If number of directors is less than three, it must be raised to three.
c. Alter the regulations contained in the articles which are inconsistent with those of a public company.
d. The word ‘private’ shall be deleted before the word ‘limited’ in its name.
If default is made in complying with these provisions, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five hundred rupees for every day during which the default continues.
Where any prospectus or statement in lieu of prospectus filed under this section includes any untrue statement, any person who authorised the filing of such prospectus or statement shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to five thousand rupees, or with both.
Companies deemed to be public (Section 43A): Under certain conditions, a private company can be deemed to be a public company and all rules and regulations applicable to public companies regarding disclosure, etc. shall also be applicable to such companies. A private company is deemed to be public company where not less than twenty-five per cent of the paid-up share capital of a private company is held by one or more bodies corporate.
However, in the following cases, a private company will not be treated as a public company:
a. If the entire paid-up share capital is held by another single private company or by companies incorporated outside India.
b. If the shares are held by companies incorporated outside India, which if incorporated in India would have been a private company provided that the Central Government by order so directs.
c. Where the shareholding company is itself a private company or all the shareholding companies are private companies and no other company holds shares in any such company and the total number of members in all these companies including the private company does not exceed fifty.
Within three months from the date on which a private company becomes a public company by virtue of this section, the company shall inform the Registrar that it has become a public company and the Registrar shall delete the word "Private" before the word "Limited" in the name of the company upon the register and shall also make the necessary alterations in the certificate of incorporation issued to the company and in its memorandum of association.
If a company makes default in complying with the above clause, the company and every officer of the company who is in default shall be punishable with fine which may extend to five hundred rupees for every day during which the default continues.
Conversion of Public Company into Private Company
A public company may be converted into a private company by altering the articles incorporating the restrictions of Section 3(1) (iii). To alter the articles a special resolution has to be passed and the approval of the Central Government has to be obtained. A copy of the special resolution has to be filed with the Registrar within 30 days of passing the resolution. Once the approval of the Central Government has been obtained, a copy of the approval shall be filed with the Registrar within one month. An altered copy of the articles shall be filed within the Registrar within one month of the date of receipt of the order of approval. The word ‘private’ shall be added before the word ‘limited’ in its name.
HOLDING COMPANY AND SUBSIDIARY COMPANY
A company which controls another company is termed as a ‘holding company’ and the other company so controlled is termed as a ‘subsidiary company’.
According to Section 4, a holding company is one which:
a. Controls the compositions of the Board of directors of another company; or
b. Holds more than half in nominal value of the equity share capital of another company; or
c. The company is a subsidiary of any company which is in turn a subsidiary of another company.
For example, Beta Company is a subsidiary of Alpha Company, and Gamma Company is a subsidiary of Beta Company. Gamma Company is a subsidiary of Alpha Company.
d. Controls more than half of the total voting power of the other company.
The requirement as to the control over the composition of a company's Board of directors is satisfied if the member company has independent powers to appoint or remove all or a majority of the directors. Such power is deemed to exist where:
a. A person cannot be appointed without the exercise in his favour of the power of appointment held by the holding company;
b. A person's appointment to directorship follows necessarily from his appointment as director, managing agent, secretaries and treasurers, or manager of, or to any other office or employment in, the holding company; or
c. The directorship is held by an individual nominated by the holding company itself or by a subsidiary of it.
A subsidiary company cannot hold shares or be a member of its holding company except as a legal representative of a deceased member of the holding company or as a trustee.
GOVERNMENT COMPANY
According to Section 617, a Government company means any company in which not less than fifty-one per cent of the paid-up share capital is held by:
a. The Central Government, or
b. By any State Government or Governments, or
c. Partly by the Central Government and partly by one or more State Governments and includes a company which is a subsidiary of a Government company.
In the case of a Government company, the following provisions, as laid down in Section 619 shall apply:
a. The auditor of a Government company shall be appointed or re-appointed by the Central Government on the advice of the Comptroller and Auditor-General of India.
b. The Comptroller and Auditor-General of India shall have the power:
i. To direct the manner in which the company's accounts shall be audited by the auditor
ii. To conduct a supplementary or test audit of the company's accounts by an auditor he authorises.
c. The auditor shall submit a copy of his audit report to the Comptroller and Auditor General of India who shall have the right to comment upon it.
d. The comments of the C&AG shall be placed before the annual general meeting of the company along with the audit report.
e. Where the Central Government is a member of a Government company, the Central Government will ensure that an audit report with the C&AG’s comments and the annual report on the working and affairs of the company is prepared and laid before both Houses of Parliament within three months of its annual general meeting.
f. If any State Government is also a member of a Government company, then the annual report shall also be laid before the State Legislature.
g. If the Central Government is not a member of a Government company, then the State Government will ensure that the annual report is laid before the Houses of Parliament and the State Legislature.
h. The provisions of Section 619 shall apply to a company (as if it were a Government company), in which at least fifty-one per cent of the paid-up share capital is held by one or more of the following:
i. The Central Government and one or more Government companies;
ii. Any State Government or Governments and one or more Government companies;
iii. The Central Government, one or more State Governments and one or more Government companies;
iv. the Central Government and one or more corporations owned or controlled by the Central Government;
v. The Central Government, one or more State Governments and one or more corporations owned or controlled by the Central Government;
vi. One or more corporations owned or controlled by the Central Government or the State Government;
vii. More than one Government company.
i. Government companies will have to seek the approval of the Department of Company Affairs for the appointment of managing or whole-time directors and payment of remuneration to them. Any proposals for reduction of capital and amalgamation of two or more government companies will have to be sanctioned by the Central Government in the Department of Company Affairs instead of by the High Court.
FOREIGN COMPANIES
These are companies which are incorporated outside India and have a place of business in India. However, those companies which are incorporated outside India, does not have a place of business in India, but employs agents in India, are not foreign companies.
Thus, according to Section 591, a foreign company is one incorporated outside India, which:
a. Established a place of business within India after the commencement of this Act, or
b. Had a place of business within India before the commencement of this Act and continues to have the same at the commencement of this Act.
According to the Companies Amendment Act 1974, if at least 50% of the paid-up share capital is held by Indian citizens or by companies incorporated in India, then such a company will be treated as though it were a company incorporated in India.
1. Documents: Every foreign company shall, within thirty days of the establishment of the place of business, deliver to the Registrar for registration:
a. A certified copy of the charter, statutes, or memorandum and articles, of the company and a translation in English if the documents are in a foreign language.
b. The full address of the registered or principal office of the company.
c. A list of the directors and secretary of the company.
d. The name and address of one or more persons resident in India authorised to accept notices and documents on behalf of the company.
e. The full address of the office of the company in India which is deemed as its principal place of business in India. (Section 592)
2. Accounts: Once in every year, all foreign companies have to prepare a balance sheet and profit and loss account and deliver three copies of this to the Registrar. However, the Central Government may, by notification in the Official Gazette, exempt a foreign company from preparing and filing the balance sheet and profit and loss account with the Registrar.
If any of these documents are in a foreign language, they shall be translated before being filed with the Registrar. (Section 594)
3. Name: Every foreign company shall state in every prospectus inviting subscriptions for its shares or debentures in India, the name of the company and the country in which the company is incorporated. It will also exhibit on the outside of every office it carries on business in India, the name of the company and the country in which it is incorporated, in English, and also in a local language. It will also ensure that the name of the company and the country in which it is incorporated is stated in English on all business letters, bill-heads and letter paper, and in all notices, and other official publications of the company. If the liability of the members of the company is limited, then this fact must be stated in every prospectus, documents and exhibited on the outside of every office it has in India. (Section 595)
4. Service on foreign company: Any process, notice, documents that have to be served on a foreign company shall be considered as delivered to the company if it has been addressed to any authorised person of the company. (Section 596)
5. Delivery of documents: All documents which a foreign company is required to file, shall be delivered to the Registrar at New Delhi, and also to the Registrar of the State in which the business of the company is situated. (Section 597)
6. Penalties: If any foreign company fails to comply with any of the provisions laid down in Sections 591 to 597 the company, and every officer or agent of the company who is in default, shall be punishable with fine which may extend to ten thousand rupees, and in the case of a continuing offence, with an additional fine which may extend to one thousand rupees for every day during which the default continues. (Section 598)
Any failure by a foreign company to comply with any of the provisions shall not affect the validity of any contract, dealing or transaction entered into by the company or its liability to be sued. However, the company shall not be entitled to bring any suit, claim any set off, make any counter-claim or institute any legal proceeding in respect of any such contract, dealing or transaction, until it has complied with the provisions of this Act.
7. Registration of charges: All provisions relating to registration of charges on property in India apply to foreign companies. Provisions relating to annual returns, inspection of books of account, special audit, investigations, etc. shall apply to foreign companies in respect of Indian businesses as they apply to companies incorporated in India. (Section 600)
8. Requirements as to the prospectus: According to Section 603, the prospectus of a foreign company that is being circulated and distributed in India shall contain the following information:
a. The instrument constituting or defining the constitution of the company.
b. The enactments or provisions under which the company was incorporated.
c. An address in India where the enactments or provisions can be inspected.
d. The date on which and the country in which the company was incorporated.
An application form for shares or debentures in a foreign company cannot be issued to the public without a copy of the prospectus except in the case of an issue to existing shareholders or debenture holders of the company. (Section 603)
If the prospectus includes a statement authorised to be made by an expert, a statement that he has given and has not withdrawn his consent shall be included in the prospectus (Section 604). Such a prospectus shall be registered with the Registrar (Section 605).
The provisions regarding civil liability for mis-statement in the prospectus and criminal liability for contravention of relevant provisions shall apply in the same manner as they apply to Indian companies (Section 607).
Any person who knowingly contravenes any of the provisions of sections 603, 604 and 605 shall be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to fifty thousand rupees, or with both (Section 606).
9. Winding up: Foreign companies carrying on business in India may be wound up by a court order as an unregistered company. It can also be wound up as an unregistered company even if it had already been dissolved or otherwise had ceased to exist as per the laws of the country under which it was incorporated (Section 584).
ONE MAN COMPANY
Companies where one person holds almost all the share capital with a few others (usually relatives and nominees) holding the few remaining shares, is termed as a one man company.
A one man company, like any other incorporated company, has a separate legal entity distinct from its members.
ILLEGAL ASSOCIATIONS
The law restricts the number of persons that can legally constitute an association or partnership. Sole proprietorships and partnerships are unincorporated businesses and if they consist of a large number of persons then they can be declared illegal.
According to Section 11, banking businesses shall not have more than ten persons as its members, and partnerships shall not have more than twenty persons as members. If it has more than ten persons, or twenty persons, respectively, as members, then it should be registered as a company under the Indian Companies Act. If these are not registered, then they can be declared as illegal associations.
However, the activities carried out by these illegal associations may be entirely legal. They have only become illegal because of the increase in the number of their members, and their failure to register as a company.
Consequences of illegal associations
a. Every member of such an illegal association shall be personally liable for all liabilities incurred in such a business and shall also be liable to a fine of up to Rs. 10,000.
b. An illegal association cannot sue to recover any debt or property. However, it can make claims after becoming legal.
c. These illegal associations cannot be dissolved under the Act either on demand by a creditor, member, or the association itself.
ASSOCIATIONS NOT FOR PROFIT
According to Section 25, the Central Government may grant a licence which orders that an association may be registered as a company with limited liability, without the addition of the word "Limited" or the words "Private Limited" to its name, if the Central Government is satisfied that an association is about to be formed as a limited company for:
a. Promoting commerce, art, science, religion, charity or any other useful object;
b. It intends to apply its profits or other income in promoting its objects; and
c. To prohibit the payment of any dividend to its members,
PRODUCER COMPANY
Until recently, there were only three main types of companies, namely, companies limited by shares – public and private, companies limited by guarantee and unlimited companies. With the Companies Amendment Act 2002, a fourth type, ‘Producer Company’, has come into existence.
Only certain categories of persons can participate in the ownership of such companies. These have to be individuals who are engaged in ‘primary produce’ activities.
Primary produce means products arising out of agricultural activities and includes animal husbandry, horticulture, floriculture, pisciculture, viticulture, forestry, bee raising, plantation, handicrafts, etc.
Producer companies can be formed by a minimum of 10 or more individuals, who are producers, or two or more institutions that are producer companies or any other institution having only producers or producer companies as its members. Also, a combination of ten or more individuals and producer institutions can get a producer company incorporated under the Act.
The companies shall be termed private limited and the liability of its members will be limited to the extent of sums unpaid on the shares. However, unlike a private company, the provision of a minimum paid-up capital of Rs. 1akh does not apply and the maximum number of members can exceed 50.
The members’ shareholding cannot be traded on the securities market, but they can be transferred.
LIMITED LIABILITY PARTNERSHIP
A limited liability partnership is a body corporate formed and incorporated under the Indian Companies Act and it is considered as a legal entity that is considered separate from that of the partners. Just like a company, an LLP shall have perpetual succession, and any changes in the partners will not affect the existence, the rights or liabilities of an LLP.
References
1. Kapoor, N.D., ‘Elements of Mercantile Law’, Sultan Chand & Sons, 13th revised edition, 2008.
2. Saravanavel, P. & Sumathi, S., ‘Company Law’, Himalaya Publishing House, 2006.
3. Garg, K.C. & Gupta, Vijay, ‘Company Law and Secretarial Practice, Kalyani Publishers, 2nd revised edition, 2006.
4. www.vakilno1.com
5. www.sebi.gov.in
6. Companies Act 1956, Companies Amendment Act 2006, Gazettes released by Government of India and the Ministry of Corporate Affairs.
Section A
1. Define the term ‘Company’.
2. Is company a citizen?
3. What is meant by perpetual succession and common seal?
4. Discuss the principles laid down in the case Saloman vs. Saloman & Company Ltd.
5. What is corporate veil?
6. What is unlimited liability?
7. Define a company limited by guarantee.
8. When is a company not a private company?
9. What are the three important characteristics of a private company?
10. Give three examples of statutory companies functioning in India.
11. What is a holding company?
12. Define a Government Company.
13. What is a one man company?
14. Mention five privileges of a private company.
15. What is a foreign company?
16. How can a private company be converted into a public company?
17. A private company issues debentures to public. Does the private company become a public company?
18. Can a company with ‘unlimited liability’ be formed under the Companies Act, 1956?
19. A private company need not issue a prospectus. Why?
20. Is it necessary to add the word ‘limited’ after the name of a company?
21. What are Chartered companies?
22. What is a statutory company? Give two examples.
23. What do you mean by a producer company?
24. What is an LLP?
Section B
1. State in brief the various kinds of companies which can be registered under the Companies Act, 1956.
2. Define a private company and state the special “privileges which it enjoys under the Companies Act, 1956.”
3. Explain why many of the provisions of the Companies Act, 1956, have been made inapplicable to private companies or have been made rigorous in their application to private companies.
4. What are the privileges and exemptions enjoyed by a private company when compared with a public company? Mention eight such items.
5. Distinguish between a private and a public company.
6. What is the procedure for converting a private limited company into a public limited company?
7. Narrate the full procedure for conversion of a public company into a private company.
8. What is the effect of the failure by a private company to observe the limitations and restrictions placed upon it by the Companies Act?
9. State the consequences which follow where a private company infringes the special conditions contained in its articles of association constituting it a private company.
10. Distinguish between a holding company and a subsidiary company. Explain under what circumstances and conditions a company may become the holding company or a subsidiary of another when the latter is incorporated as a body corporate (a) in India (b) in a country outside India.
11. Give the circumstances in which a company may be incorporated without having the words ‘Limited’ as part of the name.
Section C
1. Explain briefly the various kinds of companies which can be registered under the Companies Act 1956.
2. Define a private company and state the privileges which it enjoys, under the Companies Act 1956.
3. Under what circumstances does a private company become a ‘deemed public company’?
4. What is a public company? Distinguish it from a private company.
12. Define a government company. Summarise the special provisions of the Companies Act relating to government companies. Can the Central Government modify or exempt the provisions of the Companies Act in their application to government companies?
13. What is a foreign company? How far is it governed by the Companies Act, 1956?
14. State and discuss the obligations of a foreign company under the Companies Act, 1956.
15. What is an illegal association? What are its effects?
16. Write notes on:
(a) Holding company (b) One man company
(c) Statutory companies (d) Producer companies
(e) Illegal associations (f) Unlimited companies
Chapter II – PROMOTION AND INCORPORATION OF COMPANIES
LEARNING OBJECTIVES
1. To enable students to understand the legal procedures involved in the formation of incorporated companies and the importance of these legal procedures.
2. To obtain an understanding of who a promoter is, his duties and liabilities.
3. To provide an understanding of the various documents involved in the process of registration of companies.
4. To acquire an understanding of the term ‘corporate veil’, its importance to companies and the situations in which this privilege may be taken away from a company.
The entire process of formation of a company can be divided into three parts:
a. Promotion
b. Incorporation
c. Floatation
PROMOTION OF A COMPANY
Promoter: When a number of persons come together and explore all available opportunities and thereby bring a company into existence, then these persons are known as promoters. Promoters are the individuals who conceive the idea of the company, plan on its formation and actually bring it into existence. They decide the scope of business activities, negotiate for the purchase of assets, instruct solicitors, provide registration fees, arrange for advertising, raising capital and circulating the prospectus.
The promoters have to take the following preliminary steps in incorporating a company:
a. Confirm with the Registrar of Companies that the name proposed for a company is available. For this the promoter will have to make an application in the prescribed form with a prescribed fee and also send to the Registrar at least 3 or 4 names in the order of preference.
b. If the proposed company falls within a category of industries that needs a licence under the Industries (Development & Regulation) Act, 1951, then the promoters have to apply with the concerned ministry of the Central Government.
c. If the company intends to raise capital from the public through the issue of shares and debentures, then a draft prospectus must be submitted to the Securities and Exchange Board of India (SEBI). This draft prospectus must be certified as complying with all legal formalities by a merchant banker who acts as a lead banker to the issue.
d. The promoter will then have to prepare and print the company’s Memorandum and Articles of Association.
e. Finally, the promoter should decide on the underwriters, brokers, solicitors, auditors, etc.
Kinds of Promoters
i. Professional promoters: These promoters carry out the job of promoting companies. Once they bring a company into existence, they hand it over to whoever is interested in running the company. These kinds of promoters are rarely found in India.
ii. Occasional promoters: These promoters undertake the task of promoting a company once in a while. Once they have promoted a company, they hand it over to its new owners, and then go back to their own business or occupation.
iii. Financial promoters: These are financial institutions like ICICI, IDBI, etc. which undertake the task of promoting a company. Examples of companies promoted by financial institutions are mutual funds and insurance companies.
iv. Entrepreneurial promoters: These promoters conceive a business idea, take all the necessary steps that are required for bringing a company into existence and then really bring it into existence. They then continue to manage and control the company promoted by them. Most of the promoters in India are of this type.
Functions of a promoter
i. Conceive the idea of stating a business and explore all the possibilities of starting this business.
ii. Take the help of experts, if necessary, to conduct negotiations for purchasing a business if it is intended to purchase an already existing business.
iii. Collect the necessary number of persons who are needed to sign the memorandum and articles of the company and also agree to act as the first directors of the company (two in case of private and seven in case of public).
iv. Decide on the name and location of the registered office of the company, the amount and form of capital to be raised, the underwriters to the capital issue, the bankers, auditors and legal advisors.
v. Get the memorandum and articles drafted and printed.
vi. Enter into preliminary contracts with vendors and underwriters.
vii. Arrange for the preparation of the prospectus, its filing, advertisement and issue of capital.
viii. Pay the preliminary expenses.
ix. Arrange for loans and other types of financial assistance from financial institutions.
Legal position of a promoter
The promoter cannot act as an agent of the company, because a company cannot have an agent before it comes into existence. Similarly, he cannot also be treated as a trustee either. The legal position of a promoter is that of a fiduciary position. This means that from the moment a promoter acts with the company and its requirements and future success in mind, he stands in a fiduciary position towards the company. This is because they have the power create, mould and define a company and decide as to when, in what shape and under whose supervision the company shall come into existence and start trading activities.
Duties of a promoter
1. Duty not to make secret profit at the cost of the company: No promoter can make any secret profits directly or indirectly at the cost of the company, and without the knowledge and consent of the company, and if he does so, then the company can force him to account for it, and pay it back to the company.
For example: The Olempia Company was in difficulties and the debentures were worth very little. A syndicate consisting of X, Y and Z purchased a great number of debentures very cheaply. Then they purchased Olempia for 1, 40,000 pounds and sold it to a new company which they promoted for 1, 80,000 pounds. Consequently, the debentures were paid in full out of 1, 40,000 pounds and the syndicate made a profit of 20,000 pounds on the debentures. X, Y and Z became directors of the new company. They disclosed their profit of 40,000 pounds but not their profit of 20,000 pounds. It was held that there was not sufficient disclosure and X, Y and Z must pay 20,000 pounds to the company. (Gluckstein vs. Barnes (1900))
2. Duty to disclose all material facts: A promoter cannot make profits by selling his own property to the company, unless and until all material facts relating to the property are fully disclosed. If the company realizes that all material facts relating to the property have not been disclosed by the promoter and the promoter has made secret profits through the deal, then the company has two options – either the company can repudiate the sale, or else, can affirm the sale and recover the secret profits from the promoter. In this way it is ensured that the promoter does not take advantage of the company by his dishonesty.
A leading case on this point is given below:
A syndicate of which E was the head purchased an island containing mines of phosphate for 55,000 pounds. E then formed a company to buy this island. A contract was made between X a nominee of the syndicate and the company for its purchase at 1, 10,000 pounds. The details of the sale were not disclosed to the shareholders or to an independent Board of Directors. The company now sought to rescind the contract of sale. It was held that as there had been no disclosure by the promoters of the profit they were making, the company was entitled to rescind the contract. (Erlanger vs. New Sombrero Phosphate Co. (1878))
If a promoter desires to sell his property to the company then he must make a full disclosure to the company regarding his interest in the transaction. He can make his disclosure to:
a. an independent board of directors, or
b. in the articles of association of the company, or
c. in the prospectus, or
d. to the existing and intended shareholders directly.
Liabilities of a promoter
1. Liable for false statement, omission of facts, etc.:
a. A promoter may be held liable for not stating matters and setting out reports in the prospectus (Section 56).
b. A person, who has subscribed to any shares or debentures of the company on the faith of any untrue statements in the prospectus, can sue the promoter for compensation for any loss or damage suffered by him (Section 62).
c. If any promoter has made any untrue and deceptive statements in the prospectus for raising capital, then they are held criminally liable and can face severe penalty (Section 68).
d. If a liquidators report alleges that fraud was committed during promotion or formation of the company, then the promoters can be publicly examined by a court of law (Section 478).
e. If a promoter has misapplied or retained the property of the company or if he has been held guilty of misfeasance or breach of trust of the company, then the company may proceed against a promoter for deceit or breach of duty (Section 543).
If there is more than one promoter then the promoters are jointly and severally liable and if any one of them is sued and has to pay for damages, then he can claim contribution from the other promoters.
If a promoter dies, his estate is not relieved from the liability that arises out of his abuse of his fiduciary position.
2. Liability of promoters for preliminary contracts: The contracts which promoters enter into with third parties, on behalf of the company, before its incorporation, are termed as preliminary contracts.
These preliminary contracts are not legally binding upon the company, and cannot be ratified by the company even after its incorporation, nor can it sue the vendors on the contracts. The company cannot adopt these preliminary contracts even by passing a special resolution, or by adopting it as an object in its memorandum of association.
Difference between preliminary contracts and provisional contracts
PRELIMINARY CONTRACTS PROVISIONAL CONTRACTS
Contracts entered into before a company comes into existence Contracts entered into after incorporation but before commencement
No effect Not binding until commencement and ratification of contract
Enforced against company only if supported by terms and conditions of incorporation Cannot be enforced if the company goes into liquidation immediately after commencement
Therefore, a company has no capacity to enter into contracts until it comes into legal existence through incorporation.
Example: Newborne, a director, entered into a contract in the name of the company before its incorporation. He signed his name underneath the name of the company, ‘Leopold Newborne (London) Ltd.’. It was held that there was no contract as the company was not in existence. (Newborne vs. Sensolid (Great Britain) Ltd. (1954))
The company is also not bound by the preliminary contracts that were entered into, once it is registered.
Example: A solicitor prepared the memorandum and articles of association and paid the necessary registration fees on the instructions of persons who later became directors. He claimed his fees and expenses on the liquidation of the company. The Court of Appeal held that the company was not liable to pay the solicitor’s costs though it had been taken the benefit of his work. (English & Colonial Produce Co. Ltd. (1906))
Remuneration of promoters
The remuneration for promoters must be disclosed in the prospectus if it is paid within the preceding two years or if the company intends to pay it at any time. Since, being a promoter requires considerable skill, the company will have to provide adequate remuneration. Unless there is a contract to the effect of providing remuneration, between the company and the promoter, the promoter cannot claim remuneration. The remuneration to promoters may be paid in any of the following ways:
i. A promoter can purchase the business or any other property of the business and sell the same to the company at a higher price or he may sell his own business to the company at a profit.
ii. If the company has acquired any business or property through a promoter, then the company may pay a commission to the promoter on the purchase price of the property.
iii. The promoter may be paid a lump sum as remuneration for services rendered by him.
iv. The promoter may be given fully or partly paid shares as remuneration.
v. The promoter may be paid commission on shares sold.
vi. The promoter can be provided with the option to subscribe at par to the unissued shares of the company.
Example: A syndicate promoted a company and paid 416.25 pounds in respect of registration fees and stamp duty. The company shortly afterwards went into liquidation. It was held that the syndicate could not recover the payments it has made. (Clinton’s Claim (1908))
The company cannot also sue any persons who had, before incorporation,b contracted to buy its shares.
Example: N company agreed with Mrs. C an agent of a syndicate before its incorporation that N company would grant a mining lease to the syndicate. The syndicate was incorporated as P Company. P Company discovered coal whereupon N company refused to grant the lease. The Privy Council held that there was no binding contract between N Company and P Company, as the latter was not in existence when the contract was signed. (Natal Land and Colonisation Company vs. Pauline Colliery and Development Syndicate Ltd. (1904))
However, if a preliminary contract entered into by a company before incorporation, has been accepted aft\]r its incorporation and communication of its acceptance has been sent to the other party or company, then the company is bound by the terms of incorporation and will have to specifically perform the contract.
Example: The promoters of an ice manufacturing company entered into a contract with M for the purchase of the manufacturing machinery for the company. The company on its incorporation adopted the contract and sent the communication of acceptance to M. It was held that the contract was for the purpose of the company and as such the company could sue and be sued upon it. (Imperial Ice Manufacturing Co. Ltd. vs. Manchershaw I.L.R (1889)
INCORPORATION OF A COMPANY
According to Section 12, at least 7 or more persons must come together and incorporate a company by subscribing their names to the memorandum of association and complying with other requirements of registration. Subscribing to the memorandum means putting the names and signatures of the members in the memorandum, which has to be stamped and filed with the Registrar of Companies.
The persons who are subscribers to the memorandum must not be minors, an undischarged insolvent, a person disqualified by law from entering into contracts, a lunatic and an alien enemy. If a person’s name appears in all the documents of the company, but if his signature has not appeared in the declaration in the memorandum as signatory, he will not be considered as a subscriber to the memorandum, and hence not treated as an original member of the company.
The objectives of the company must be to carry out legal activities, i.e., activities that are not against public interests and policies. Even if the company were to obtain a certificate of incorporation, in spite of having been set up to carry out unlawful activities, it will not be considered that the company has been set up to carry out lawful business.
The promoters of the company will have to find suitable name for the company, in consultation with the Registrar. They will have to submit at least four alternative names, and ensure the suitability and availability of the name. The Registrar will inform the company in 14 days of the application, whether the name submitted by them is available and acceptable.
Once the promoter has taken steps to promote the company, he will have to take the following steps to get the company incorporated:
i. Filing of the necessary documents
ii. Payment of the necessary fees
iii. Obtaining certificate of incorporation
Filing of documents with the Registrar
The application for registering the company should be filed with the Registrar of the state in which the company is to be situated. The application shall be submitted along with the following documents and fees:
a. The Memorandum of Association with its objectives, the extent of capital it can raise during its lifetime, the name address and place of its registered office, the nature of liability of members, the names, addresses and agreements of the persons who have agreed to be members and hence incorporate the company.
b. The Articles of Association signed by the signatories to the Memorandum. However, a public company limited by shares can adopt Table A of Schedule I of the Act.
c. A draft of the memorandum and articles of the company will have to be submitted to the Registrar for vetting and once the draft is approved of it will be printed, stamped and signed by the signatories to the documents.
d. The memorandum and articles should be printed in the manner prescribed and laid down in Section 15.
e. The documents have to be stamped according to the stamp laws applicable in the state where the registered office of the company is to be situated.
f. Each subscriber or his attorney will have to sign the memorandum and articles, adding his address, occupation, etc. A company can also be a signatory to the memorandum, by appointing an agent to act on its behalf. Each subscriber will have to take up at least one share and state clearly the number and type of share that he has taken up. Every signature in the memorandum and articles will be attested by witnesses, who will write their names, occupations, addresses, etc.
g. The memorandum and articles will be dated and the date will be either the date of stamping or a date later to it, but not before the actual date of stamping.
h. A statement of the authorised capital, which is to be provided with the memorandum.
i. A notice of the registered office of the company, to be filed at least within 30 days of registration, or from the first day it begins to carry on business, whichever is earlier.
j. A List of Directors, signed by them, giving their consent to act as such (not applicable to private companies).
k. An Undertaking by each of the directors promising to take up and pay for qualification shares (not applicable to private companies).
l. The Agreement, which the company proposes to enter into with any individual for appointment as managing or whole time director or manager.
m. A Declaration that all terms and conditions of the Act have been complied with. This declaration may be signed by an advocate of the Supreme or High Court, an attorney of the High Court, a Chartered Accountant practicing in India who was engaged in the formation of the company, or by any person whose name has been mentioned in the articles as director, manager or secretary of the company.
n. All the documents, once they are checked for their order and completeness will be filed with the Registrar of Companies of the state in which the company is proposed to be registered, along with the requisite fee which is non-refundable.
Registration of documents
If the Registrar is satisfied with the order of all the documents delivered to him, he shall register the Memorandum and Articles of the company and place the company’s name in the register of companies. However, he should be satisfied with the following points:
a. The relevant provisions of the Act have been complied with.
b. The objects of the company are lawful.
c. The number of persons required under the Act have subscribed and duly signed.
d. The Memorandum and Articles comply with all provisions of the Act.
e. The name selected by the company is acceptable.
f. The statutory declaration has been properly made.
Once all these documents have been found to be complete and in proper order, the Registrar can do nothing other than register the company and bring it into existence by issuing it with a certificate of incorporation. If there are any minor defects in any of the documents, the Registrar can ask for its rectification. However, if there are major or material defects, he can refuse to register the company.
CERTIFICATE OF INCORPORATION
Upon registration of the company, the Registrar will issue a certificate of incorporation certifying that the company is incorporated and if it is a limited company, that the company is limited. From the date of its incorporation, the company becomes a legal person separate from its shareholders.
Legal effects of incorporation
a. The company gains a legality that makes it distinct from its members. Therefore, even if all members die, the company will still continue.
b. The company gets a perpetual succession and a common seal and becomes an immortal being.
c. A company can sue and be sued in its own name.
d. The property of the company belongs to itself and does not belong to the members.
e. The company’s liabilities are the company’s alone and not the liability of its members.
The certificate of incorporation is the conclusive evidence of a company’s existence. It is the birth certificate of a company and it is proof that the company has followed all the conditions leading to registration. Therefore, even if all the seven signatures to a memorandum were forged by one individual or if all signatories were infants, but the Registrar being unaware of these facts issued a certificate of incorporation, the certificate will still be conclusive.
Example: A proposed memorandum of association after signatures had been obtained and before registration, had been materially altered without the authority of the subscribers. The company was subsequently registered and the registrar issued the certificate of incorporation. It was objected on the grounds that the memorandum of association had not been signed by seven or indeed by any subscriber and that the provisions of the Act had not been complied with. To that Lord Cairns replied, “When once the certificate of incorporation is given, nothing is to be enquired into as to the regularity of the prior proceedings. (Peel’s case (1867))
Another leading case on this point is also given below:
The memorandum of a company was signed by two adult persons and by a guardian of the other five, who were minors at that time, the guardian making a separate signature for each of the minors. The Registrar registered the company and issued under his hand a certificate of incorporation. The plaintiff contended that this certificate of incorporation should be declared void. The Privy Council held that the certificate of incorporation was conclusive. The memorandum shall be deemed to have been properly signed, registered and presented to the Registrar and no evidence can be admitted to the contrary, even a plea of fraud would be shut out. Hence, the certificate of incorporation is conclusive evidence that the company came into existence on the date the certificate was issued and it denotes the existence of the company during the whole day. (Moosa Goolam Ariff vs. Ebrahim Goolam Arif (1913))
CAPITAL SUBSCRIPTION
Once the company has been registered and has received its certificate of registration, then it is ready for floatation, that is, it can raise capital that is necessary to commence business activities. A private company can commence business immediately after receiving the certificate of incorporation, whereas a public company can commence business only after receiving the certificate of commencement of business from the registrar.
The capital necessary for a private company is raised from friends and relatives, whereas capital for public companies can be raised from the general public. However, a public company is also free to raise capital from promoters and owners, rather than from the general public.
Section 70 makes it compulsory for public companies to take either of the following two steps:
i. Issue a prospectus in case the public is to be invited to subscribe to its capital, or
ii. Submit a ‘statement in lieu of prospectus’ in case capital has been arranged privately, which must be done at least 3 days before allotment.
According to SEBI Guidelines 2000, new companies cannot make a public issue unless its project has been appraised by a public financial institution or by a commercial bank; and, the financial institution is financing at least 10% of the project cost.
It must be ensured that the minimum paid-up capital of the company is Rs. 5 lakhs in case of public companies and Rs. 1 lakh in case of private companies.
COMMENCEMENT OF BUSINESS
A private company can commence business immediately after receiving the certificate of incorporation, but a public company cannot commence business until it has received the certificate of commencement of business (Trading Certificate) from the Registrar of Companies.
In case of a company which has issued a prospectus inviting public subscription to its shares or debentures, then the company cannot commence business until:
a. Minimum subscription has been received on shares allotted.
b. Directors have paid in cash the application and allotment money on shares taken by them.
c. There exists no liability on the part of the company to repay application money for failure on the part of the company to get permission for shares or debentures to be dealt with on a stock exchange.
d. A statutory declaration verified by any director or secretary that all conditions have been complied with have to be filed with the Registrar.
In case of companies which has not issued a prospectus to the public, then it cannot commence business unless:
a. A statement in lieu of prospectus has been filed with the Registrar.
b. Directors have paid in cash the application and allotment money on shares taken by them.
c. A statutory declaration verified by any director or secretary that all conditions have been complied with have to be filed with the Registrar.
A company must start business within a year of its incorporation, failing which it can be wound up by the court (Section 433(c))
LIFTING THE CORPORATE VEIL
A company is a separate legal person distinct from its members. This was laid down in Saloman vs. Saloman & Co. Ltd. The courts consider themselves bound by this principle. The effect of the principle laid down in this case is that there is a veil between the company and its members and the courts do not lift the veil to look at the economic reality. This principle of separate entity is regarded as a curtain, a veil or shield between the company and its members, thus protecting the members from the liability of the company.
The fact, however, is that a company is an association of persons who are the beneficial owners of all the corporate property. And, sometimes it may become necessary to break through the corporate veil of façade and to look at the persons behind the company. In such a case, the court may in its discretion disregard the corporate fiction, to pay regard to economic realities behind the legal façade. Here the court may look behind the artificial person – the company – and take account of the personalities of natural persons – the cooperators.
Exceptions to the principle of separate legal entity in Saloman vs. Saloman & Company Ltd.
The circumstances under which the courts may lift the corporate veil may be discussed under the following two heads:
A. Common Law Exceptions (Judicial interpretations)
B. Statutory Exceptions
A. Common Law Exceptions
In these exceptional cases the law either goes behind the corporate personality tot eh individual members or ignores the separate personality of each company in favour of the economic reality constituted by a group of associated concerns. When this protection is taken away, the veil is said to have been lifted or pierced. The corporate veil is lifted by the courts in the following cases:
1. Determination of the character: during times of war, the court will lift the corporate veil to see whether a company is being controlled by aliens or enemies. Thus, a company registered in India may be an ‘alien enemy’ if its agents or the persons at its helm controlling the affairs of the company are alien enemies. This point was made clear in a leading case in England – Daimler Co. Ltd. vs. Continental Tyre and Rubber Co. Ltd. (1916).
C, a private company was incorporated in England for the purpose of selling the motor tyres manufactured in Germany by a German company. The German company held the bulk of the shares in company C and all the directors were German residents in Germany. During the First World War, C Company commenced an action to recover a trade debt. The House of Lords held that the company C was an enemy company for the purposes of trading because its effective control was in enemy hands. Accordingly the company was debarred from maintaining the action. It would be against public policy to allow alien enemies to trade under the corporate façade.
/The point decided in this case was that a company may assume an enemy character when persons in de facto control of its affairs are residents in any enemy country or wherever residents are acting under the control of enemies.
2. Where company is a sham: Where the court feels that incorporation is being used for some illegal or improper purposes and where the company is a mere cover or sham to carry out illegal activities, then the corporate veil can be lifted.
In the case of P.N.B. Finance vs. Shital Prasad (1983), a person borrowed money from a company and invested it in three different companies in all of which he and his son were the only members, the lending company was permitted to attach the assets of all the three companies as they were created to hoodwink the lending company.
3. Fraud or improper conduct: where a company has been formed for promoting fraudulent purposes or in order to avoid legal obligations, then the court will refuse to uphold the separate existence of the company.
Horne was appointed as a managing director of the plaintiff company on the condition that he shall not at any time solicit or entice away customers of the company. He, however, formed a new company to carry on the same business. The new company solicited the plaintiff’s customers. An injunction was granted against both Horne and the company. The court held the company was a mere cloak for the purpose of enabling the defendant to commit a breach of his agreement against solicitation. [Gilford Motor Co. Ltd. vs. Horne (1933) Chp. 935]
4. Where the company is acting as the agent of the shareholders: The shareholders will be held liable for the acts of the company, if the company is acting as an agent for its shareholders. Whether it is acting as an agent of its shareholders is a question of fact in each case. However, the government company is not an agent of the state unless it is performing in substance governmental or sovereign functions.
An English company was formed with a capital of £ 100 in £ 1 shares, and 90t of which were held by an American the director of the United States Film Company, and 10 were held by another director, a British subject. The company produced a film called ‘Monsoon’, the production of which was financed by the company. The court refused to agree that the film was made by the British company, as the company was merely the nominee or agent of the United States Film Company. [Re: F.G. Films Limited (1953)]
5. Protection of revenue: The corporate entity of a company may be disregarded by the courts where the corporate veil is used as a means to evade tax. In order to establish the residential status or character of a company for tax purposes, the court may lift the veil and find out where its central management is and the case determines its residence.
D was a wealthy man getting huge dividend and interest income. In order to avoid super tax, he formed four private companies and agreed to hold a block of investments as an agent for them. Dividends received were credited in the account of the company and the amount was handed back to him as loan. Thus, he divided his income in four parts to avoid tax liability. The court held that as the companies did no business, the four companies were nothing more than he himself. (Sir Dinashaw Mancekjee Petit, 1927)
6. Avoidance of and welfare legislation: Avoidance of welfare legislation is as common as avoidance of taxation. Where the sole purpose of forming a company is to avoid paying welfare legislations, or to reduce such amounts, the courts can pierce the corporate veil to look at the real transactions.
A subsidiary was formed to split the profits of the company so that the incidence of bonus in the hands of the parent company will be reduced. The Supreme Court disregarded the existence of a separate company for the purpose of working out bonus for its employees. (Workmen of Associated Rubber Industry vs. Associated Rubber Co. 1986)
7. Protecting public policy: The corporate veil can be lifted by the courts in order to protect public policy and to prevent transactions which are against or in conflict of public policy.
8. Company avoiding legal obligations: where the use of an incorporated company is being made to avoid legal obligations the court may disregard the legal personality of the company and proceed on the assumption as if no company existed.
B. Statutory Exceptions
The Companies Act, 1956 disregards the separate existence of the company in certain cases to check the misuse of the corporate personality by directors for members of the company, i.e., the benefit of separate entity and limited liability may not be allowed to be enjoyed in certain circumstances. Such cases are as follows:-
1. Number of members below statutory minimum: If at any time the number of members of a company is reduced, in the case of public company, below seven, or in the case of private company, below two, and the company carries on business for more than six months while the number is so reduced, every person who is a member of the company during the time that it so carries on business after those six months and is aware of the fact that it is carrying on business with fewer than seven members or two members, as the case may be, shall be severally liable for the payment of the whole debts of the company contracted during that time, and may be severally sued. (Section 45)
2. Failure to refund application money: All moneys received by the company from applicants for shares shall be returned if minimum subscription has not been received by the company within 120 days from the first issue of prospectus. If the amount is not returned within 130 days the directors shall be jointly and severally liable to repay the money with interest at the rate of 6% per annum. (SEBI guidelines @ 15% p.a.)
3. Where prospectus includes a fraudulent mis representation: if a prospectus contains a fraudulent mis representation as to the material fact, Sections 62 and 63 make the promoters, directors etc. personally liable not only to damages, but they can be prosecuted with a fine of up to Rs. 50,000 or imprisonment up to two years or both.
4. Company name not mentioned on a Bill of exchange: If an officer of a company or any person signs on behalf of the company any bill of exchange, promissory note, endorsement, cheque or order for money or goods wherein its name is not mentioned such officer or person shall be personally liable unless it is duly paid by the company. (Section 147)
5. Group accounts: if a company has subsidiaries and group accounts have to be laid before the company in the general meeting when the company’s own profit and loss account and balance sheet have to be presented, the principle of separate legal entity may be disregarded. (Section 212)
6. Investigation into related companies: An inspector appointed under Section 239 by the Central Government may lift the veil of incorporation if he thinks it necessary for the purpose of investigation into the affairs of its subsidiary or holding company.
7. Fraudulent trading: If in the course of the winding up of a company, it appears that any business of the company has been carried on, with intent to defraud creditors of the company or any other persons, or for any fraudulent purpose, the Court may declare that any persons who were knowingly parties to the carrying on of such business shall be personally responsible for all the debts and other liabilities of the company. (Section 212)
8. For investigation of ownership of a company: An inspector appointed by the Central Government, under the authority of Section 247 of the Indian Companies Act, may lift the veil of incorporation to investigate and report on the membership of any company for the purpose of determining the true persons who are financially interested in the company and who control or materially influence its policy.
References
7. Kapoor, N.D., ‘Elements of Mercantile Law’, Sultan Chand & Sons, 13th revised edition, 2008.
8. Saravanavel, P. & Sumathi, S., ‘Company Law’, Himalaya Publishing House, 2006.
9. Garg, K.C. & Gupta, Vijay, ‘Company Law and Secretarial Practice, Kalyani Publishers, 2nd revised edition, 2006.
10. www.majmudarindia.com
11. www.wikipedia.org
12. www.wiziq.com
Section A
1. What do you understand by separate legal personality of a company?
2. What do you understand by ‘perpetual succession’ of a company?
3. State whether a company is a natural person, a legal person or an artificial person.
4. What is meant by limited liability? Explain with the help of an example.
5. A shareholder of a company cannot claim to be the owner of its property during its existence. Why?
6. A company continues to exist even if there is a death of all its members. Why?
7. Define corporate veil.
8. Who is a promoter?
9. What is a certificate of incorporation?
Section B
1. Define the term ‘company’. What are its characteristics?
2. “A company is an artificial person, created by law with a perpetual succession and a common seal.” Explain this statement.
3. “The fundamental attribute of corporate personality is that the corporation is a legal entity distinct from its members.” Discuss fully.
4. What is a corporate veil? When can it be lifted?
5. “A company is a legal person distinct from its members taken individually or collectively.” Discuss. Are there any circumstances in which the law would disregard the legal personality of a company?
6. “A joint stock company is a legal person with perpetual succession and common seal.” Examine this statement.
7. Distinguish between a company and partnership.
8. Explain in brief the legal position of a promoter and their functions.
9. What are the provisions of the Companies Act regarding commencement of a new business?
10. Explain briefly as to how promoters may be compensated for their services.
Section C
1. Explain in detail the exceptions to the rule of separate legal entity.
2. Write notes on: (a) Pre-incorporation contracts (b) Certificate of incorporation (c) Commencement of business.
3. Discuss the various stages in the formation of a company.
Chapter III – MEMORANDUM AND ARTICLES OF ASSOCIATION
LEARNING OBJECTIVES
1. To understand the meaning and importance of the memorandum and articles of association of companies and its relevance.
2. To understand the various clauses of the memorandum and the articles and the modes of altering the clauses and contents.
3. To be aware of the doctrine of ultra vires and its effects.
4. To be aware of the doctrine of indoor management and its legal effects.
MEMORANDUM OF ASSOCIATION
Meaning
The memorandum of association is one of the most important external documents of a company that has to be filed with the Registrar of Companies at the time of incorporation of a company. It is a foundation on which the structure of the company is formed and it lays out the constitution of the company. It states the fundamental conditions upon which the company can be incorporated. The company can only follow those objects and exercise only those powers that are incorporated in the memorandum of association. No company can depart from the provisions laid down in its memorandum, whatever the cause may be; and if it does so, then such acts of the company become ultra vires or beyond the powers of the memorandum, and therefore, entirely void. The memorandum defines the relationship of the company with the outside world, and the scope of its activities. The main purpose of the memorandum is to enable stakeholders such as investors, creditors, etc., to know what the permitted range of the enterprise is.
Definition
Section 2 (28) defines a memorandum as, “the memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous company law or of this Act.”
Lord Cairns, in Ashbury Railway Carriage Co. vs. Riche pointed out, “the memorandum is at where, the area beyond which the action of the company cannot go; inside that area the shareholders may make such regulations for their own government as they think fit.” (1875).
Thus, the memorandum not only defines and confines the powers of the company, and lays down its objects, but it also defines the scope of the company beyond which it cannot exceed. Moreover, since it is an external and public document that is kept available for inspection by the general public, it is assumed that all those who deal with a company have thorough knowledge of the contents of the memorandum.
Purpose of the memorandum
The purpose of the memorandum is two-fold:
a. Provides stakeholders with sufficient information as to the extent of risk involved when dealing with the company and as to whether contracts are within its corporate objectives.
b. Prospective investors can gauge the extent of risk involved when investing their funds with the company and the area in which his money is to be put at risk.
Signing and printing of memorandum
In case of a public company at least seven persons and two in case of a private company must subscribe to the memorandum (Section 12).
Both artificial and natural persons can be subscribers to a memorandum. However, only a person capable of entering into a contract on his own can be a subscriber to the memorandum.
An individual who is illiterate can subscribe to the memorandum using his thumb impression or a mark that is duly attested by the person writing for him.
The memorandum shall be printed, divided into consecutively numbered paragraphs, and shall be signed by each subscriber, with his address, description and occupation added, in the presence of at least one witness who will attest the same (Section 15).
CONTENTS OF MEMORANDUM
According to Section 13 the memorandum of every company must contain the following clauses:
1. The name of the company with ‘limited’ as the last word of the name in the case of a public limited company and ‘private limited’ as the last word in the case of a private limited company.
2. The state in which the registered office of the company is to be situated.
3. the objects of the company to be classified as:
a. The main objects of the company to be pursued by the company on its incorporation and objects incidental to the attainment of main objects, and
b. Other objects not included in a. above.
4. The liability of members is limited if the company is limited by shares or by guarantee.
5. In the case of a company having a share capital, the amount of share capital with which the company proposes to be registered and its division into shares of a fixed amount.
A limited company need not include items 4 and 5 in its memorandum.
The clauses in the memorandum of association are discussed below:
Name Clause
A company can be registered under any name that it desires. However, it shall not be registered with a name that the in the opinion of the Central Government is undesirable and is identical or has close resemblance to the name of an existing company (Section 20)
Example: The plaintiff was carrying on business under the trade name of Buttercup Dairy Company. Another company was registered under the name of Buttercup Margarine Company Limited. It was held that the plaintiff was entitled to restrain the newly registered company from carrying on business on the ground that the public might reasonably think that the registered company was connected with his business. (Ewing vs. Buttercup Margarine Company Ltd. (1917))
A company cannot adopt any name which violates the provisions of the Emblems and Names (Prevention of Improper Use) Act, 1950. This Act prohibits the use of names and emblems of the United Nations and World Health Organisation, the official seals and emblems of the Central and State government, the Indian National Flag, the name and pictorial representation of Mahatma Gandhi and the Prime Minister of India.
Every public company must write the word ‘limited’ after its name and every private company must write the word ‘private limited’ after its name. The use of the word ‘company’ is not compulsory. Companies whose liabilities are not limited cannot use the word ‘limited’.
In case of companies that have been set up for charitable purposes, for promoting arts, science, culture, religion, etc. can be registered without the word ‘limited’ under a licence granted by the Central Government (Section 25).
Every company is required to publish or display its name outside its registered office, and outside every place where it carries on business, to have its name engraved on its seal and to have its name on all business letters, bill heads, notices and other official publications of the company (Section 147).
In case of default in painting or affixing its name, the company and its officers in default shall be liable to a fine up to Rs. 50 for each day of default.
If the company fails to engrave its name on its seal or fails to put its name on its business letters, notices, etc., then the company is liable to a fine up to Rs. 500.
Registered Office Clause
This clause is also known as the domicile clause or the situation clause and it states the name of the State where the registered office of the company is to situate. This clause is important for three major reasons. First, it ascertains the domicile and nationality of the company. Second, it is the place to which all letters, notices and communication are to be sent and also the place where various registers and statutory books relating to the company are kept. Third, the domicile of the registered office helps to determine jurisdiction of courts. However, it is not necessary that a company should carry out its daily business from its registered office.
A company shall have its registered office either within 30 days after incorporation or from the date on which the company begins to carry on business, whichever is earlier. Notice of situation of the registered office and every change must be given within 30 days from the date of incorporation of the company or after the date of the change, as the case may be (Section 146).
Default in complying with the above requirements can make the company and its defaulting officers liable to be punished with a fine of up to Rs. 50 for every day the default continues.
Objects Clause
This is the most important clause in the Memorandum of Association of a company.
a. It gives an idea to prospective shareholders the purposes for which their money will be used.
b. It will enable all persons dealing with the company to ascertain the extent of its powers.
The objects clause must state the main objects and the other objects of the company. The objects chosen for the company by the subscribers to the memorandum should neither be against the constitution of India, should not be illegal or against public policy, nor should it be against the Companies Act.
Thus, any activity which is not important and aiding in the attainment of the main objectives of the company cannot be pursued by the company.
Example: One of the objects of the company was to acquire gold mines in Mysore and elsewhere. The company wanted to work gold mines in the gold Coast in Ghana. It was held that the company could not do so because ‘elsewhere’ could not be taken to mean any other place outside India. (Stephens vs. Mysore Reefs Mining Co. Ltd. (1902))
Liability Clause
This clause states that the liability of the company’s members is limited. In case of companies limited by shares, this clause will limit the liability of members to the extent unpaid on shares, for companies limited by guarantee, liability is limited to amount guaranteed to be paid on winding up and in the case of unlimited companies this clause is omitted entirely. The liability clause cannot be altered to increase the liability of members.
Capital Clause
A company limited by shares must state in its memorandum the nominal or registered share capital, the different kinds of shares, the nominal value of each share. This clause helps a company to know what are the funds needed to start the business and keep it running and what would be the sources from which these funds may be raised.
Subscription clause
This clause is also known as the association clause and it provides that the signatories to the memorandum must give their consent to associate and form a company. Each subscriber to the memorandum must take up at least one share in the company.
ALTERATION OF MEMORANDUM
The memorandum of association, being the charter of the company, cannot be changed always, other than in exceptional cases and in a manner laid down in the Companies Act.
Alteration of Name Clause
The name of the company can be changed at any time. To change the name of the company, it must pass a special resolution and get a written approval from the central government. A copy of the resolution must be filed with the Registrar within 30 days of its passing. The following points are to be noted:
a. Central government permission is not required to include or delete the word ‘private’ on conversion of public company into private or vice versa.
b. Only an ordinary resolution need be passed to change the name of a company if the central government feels that its present name closely resembles an existing company’s name.
c. On changing the company’s name, the central government will ensure that the new name resembles the objects of the company, that the change is necessary and will ensure that the new name is not undesirable.
d. The central government may also order a company to change its name within 12 months of its registration. The company will have to make the change within 3 months of the order by passing an ordinary resolution.
e. Once changes have been notified, the Registrar will enter the new name of the company in the Register of Companies and shall issue a fresh certificate of incorporation, and make changes in the memorandum of association.
Alteration of Registered Office Clause
A company can change its registered office from one place to another within the same city, town or village; from one town to another town in the same state; or from one state to another state.
If the company intends to change its registered office from one place to another within the same city, town or village, it can do so by passing a resolution of the Board of Directors and giving a notice of the change to the Registrar within 30 days of making the change.
If the company intends to change its registered office from one town to another town but within the same state, it can do so by passing a special resolution and giving a notice of the change to the Registrar within 30 days of making the change.
If the company intends to change its registered office from one state to another state, then it must change the provisions of its memorandum and may do so only for certain purposes. (These purposes have been discussed under the head ‘alteration of the objects clause). The company must pass a special resolution in a duly convened meeting and a copy of the resolution must be filed with the Registrar within 30 days of passing the resolution. The alteration of the provisions of the memorandum shall take effect only when it is confirmed by the Central Government on a petition.
Before confirming the change, the Central government will consider the interests of shareholders, the company, employees, creditors, the State and the Registrar and ensure that the change is not against public interest. The State from which the company is shifting its registered office cannot object to the change on the grounds of loss of revenue, but it can object as a creditor who may stand a chance to lose the arrears of revenue due to it.
Once the Central Government order has been obtained, the company must file a copy of the order within 3 months from date of order, along with a copy of the altered memorandum. The Registrar will certify these documents and issue a certificate of registration.
However, no company can change its registered office from India to any other country.
Alteration of Object Clause
A company cannot alter its objects clause as and when it requires, no matter how urgent or beneficial the alteration may be. Section 17 of the Companies Act provides only a limited right to companies to alter their objects clause. The limits are both substantive and procedural.
Substantive limits
A company may, by special resolution, alter the provisions of its memorandum so as to change the place of its registered office from one State to another, or change the objects of the company to enable it—
a. To carry on its business more economically or more efficiently;
b. To attain its main purpose by new or improved means;
c. To enlarge or change the local area of its operations;
d. To carry on some business, which under existing circumstances may conveniently or advantageously be combined with the business of the company;
e. To restrict or abandon any of the objects specified in the memorandum;
f. To sell or dispose of the whole or part, of the under taking of the company; or
g. To amalgamate with any other company or body of persons.
However, the company cannot take on any business which is not related to its existing operations.
In the leading case of Re Cyclists Touring Club (1907), the Company’s business was to promote, assist and protect cyclists on the public roads. The Company by altering the objects clause desired to include among the persons to be assisted, all tourists, including motorists.
It was held by the Courts that it was impossible to combine the two businesses, as one of the objects of the company was to protect cyclists from motorists.
Procedural limits
a. Before altering its objects clause, the company will pass a special resolution sanctioning the alteration.
b. A copy of the special resolution will be filed with the Registrar within 30 days of passing it.
c. The alteration shall take effect when it has been confirmed by the Central Government.
The Central Government, before confirming the alteration, will ensure that the alteration is fair and sufficient notice has been given to shareholders, debenture holders, and other stakeholders in the company such as employees and creditors.
A certified copy of the order confirming the alteration and a printed copy of the altered memorandum will be filed by the company with the Registrar, within three months from the date of the order. The Registrar shall register the same and issue a certificate of registration within one month.
Any lapse on the part of the company in the above proceedings will make the order become void and inoperative.
Alteration of Liability Clause
Companies cannot alter the liability clause so as to increase or make unlimited the liability of its members. Such alteration will be considered void. However, if the members agree in writing to be bound by the alteration of the liability clause, then this provision will not apply (Section 38).
Increase in liability may be in the form of subscribing to additional shares.
In case of clubs or similar associations, any alteration made to the liability clause to increase the periodical subscription charges shall be binding on the member, even though the member has not agreed in writing to be bound by the alteration.
In case of unlimited liability companies, the liability of members may be made limited by re-registering the company. This alteration will not affect the debts, liabilities or obligations contracted by the company before re-registration.
Alteration of Capital Clause
A limited company can change its capital clause, subject to the provisions of its Articles, by passing a resolution in the general meeting. Court confirmation is not required if the alteration in the capital clause is made for the following purposes:
a. to increase its share capital
b. to consolidate and divide its capital into shares of a larger amount
c. to convert its fully paid shares into stock and reconvert the stock into fully paid shares
d. to sub-divide its shares into shares of a smaller amount
e. to cancel its shares
However, a special resolution and court confirmation is necessary if the company wants to reduce its share capital.
DOCTRINE OF ULTRA VIRES
Any action carried out by the company, though within legal limits, but beyond the powers of, or is not authorised by the objects clause of its memorandum of association is termed as ultra vires. An ultra vires act is considered void and cannot be ratified even by a unanimous resolution of all the shareholders.
There are two purposes of the doctrine of ultra vires:
a. It protects the shareholders, in that their money is not invested in activities which they were not aware of when they invested in the company.
b. It protects the interests of creditors as the property of the company cannot be diverted to unauthorised objects.
The doctrine of ultra vires was shown in its modern form in the leading case of Ashbury Railway Carriage and Iron Co. Ltd. vs. Riche (1875)
The memorandum gave the company power to make and sell, or lend on hire railway carriages and wagons and to carry on the business of mechanical engineers and general contractors. The company entered into a contract with Riche for the financing of the construction of a railway line in Belgium and there was evidence that the contract had been ratified by all the members. The company repudiated the contract. The other party brought an action for damages for breach of contract. His contentions were: (1) that the contract in question came well within the meaning of the words general contractors and was, therefore, within the powers of the company, and (2) that the contract was ratified by the majority of the shareholders.
It was held that the contract was entirely beyond the objects of the memorandum of association and hence void.
Thus the following points have to be noted with regard to the doctrine of ultra vires:
a. Though an act is legal, but if it is beyond the scope of the company’s object clause, then the act is considered ultra vires the company.
b. Ultra vires transactions are not binding on the company and third parties cannot sue the company for enforcement of ultra vires contracts.
c. Ultra vires transactions cannot be ratified even by a resolution passed by all the shareholders of the company.
d. If an individual lends money to the company for transactions which are ultra vires, he cannot recover the money from the company; however, he may recover goods bought out of these monies, if he can properly identify the goods.
e. If an act is ultra vires the directors, but intra vires the company, then the act can be ratified by all the shareholders of the company.
f. If an act is ultra vires the articles, then it can be ratified by passing a special resolution to alter the articles.
Effects of ultra vires acts
1. Contract void: Ultra vires contracts are null and void, and are not legally binding.
2. Injunction: A company can be prevented from doing ultra vires acts by an injunction.
3. Personal liability of directors: If any money is used unlawfully, the directors will be personally liable to restore the amount of money spent.
4. Breach of warranty on authority: If any director or officer of the company persuades a third person to enter into a contract which is ultra vires the company, then an action may be brought against them for breach of warranty on authority.
5. Ultra vires contracts: Those contracts which are ultra vires cannot be enforced nor can it become intra vires by reason of estoppel, lapse of time, ratification or delay.
6. Ultra vires acquired property: Even though property has been acquired by an ultra vires payment, the company has the power to protect such property and recover damages on such property.
7. Restitution and Subrogation: If the company has acquired property by an ultra vires transaction, but the property exists in specie or it can be traced, then the person who handed it over can recover it from the company.
8. Ultra vires borrowing: If a person has lend money to a company and the company has no borrowing powers or if it has exceeded its borrowing powers or if the money is being borrowed for an ultra vires transaction, then the contract for loan is void and the lender cannot take any action to recover the loan amount.
9. Ultra vires torts: If the company has committed torts or crimes in the pursuit of its stated objects, then it can be held liable. However, if torts were committed in the pursuit of objects which are ultra vires, then the company is not held liable, but the officer or agent can be held personally liable.
ARTICLES OF ASSOCIATION
Meaning
According to Section 2(2) of the Companies Act, "articles" means the articles of association of a company as originally framed or as altered from time to time in pursuance of any previous companies’ law or of this Act.
The articles of association of a company are rules and regulations framed for the purpose of internal management of its affairs. The articles define the powers of its officers; establish a contract between the company and members and between the members (members interse). The articles enable the company to carry out the objects of the memorandum.
The articles are subordinate to the memorandum and shall not contain anything that contradicts or goes beyond the memorandum. It can be used to explain and make clear anything that is contained in the memorandum.
Model form of memorandum and articles
Section 14 requires that the memorandum and articles of a company shall be in one of the Forms in Tables B, C, D and E as given in Schedule I to the Companies Act, 1956 as may be applicable in the case of the company.
Table B is a form for memorandum of association of a company limited by shares.
Table C is a form for memorandum and articles of association of a company limited by guarantee and not having a share capital.
Table D is a form for memorandum and articles of association of a company limited by guarantee and having a share capital.
Table E is a form for memorandum and articles of association of an unlimited company.
Table A is the model set of articles for a public limited company.
Companies which must have their own articles
The following companies shall have their own articles:
a. Private companies limited by shares
b. Companies limited by guarantee
c. Unlimited companies
The articles of all these companies shall be signed by the signatories to the memorandum and registered with the memorandum.
Form and signature of the Articles
Section 30 requires that the articles shall:
a. Be printed;
b. Be divided into paragraph numbered consecutively;
c. Be signed by each subscriber to the memorandum.
Contents of Articles of Association
The articles contain the following matters:
1. Exclusion, either wholly or partly, of Table A
2. Adoption of preliminary contracts
3. Number and value of shares
4. Allotment of shares
5. Calls on shares
6. Lien on shares
7. Transfer and transmission of shares
8. Forfeiture of shares
9. Alteration of capital
10. Share certificates
11. Conversion of shares into stock
12. Voting rights and proxies
13. Meetings
14. Directors, their appointment, etc.
15. Borrowing powers
16. Accounts and audit
17. Issue of share warrants
18. Issue of bonus shares
19. Dividends and reserves
20. Winding up
Regulations framed in the articles of association should not be beyond the scope of the memorandum and the Companies Act; else the clauses will be considered ultra vires the memorandum and the Act.
ALTERATION OF ARTICLES OF ASSOCIATION
Companies can alter their articles any time and any restriction placed on such alteration is invalid. To alter the articles, the company needs to pass a special resolution, and a copy of this resolution must be filed with the Registrar within one month of its passing.
However, there are certain conditions or limitations placed on companies exercising their freedom of altering articles. These conditions are:
1. The alteration must not go beyond the provisions of the Memorandum.
2. The alteration must not oppose the provisions of the Companies Act.
3. The alteration must be for the benefit of the company as a whole and in good faith. However, an alteration cannot be considered invalid just because it causes hardship to one individual shareholder.
4. The alteration must not oppose or suppress the rights of minority shareholders, nor must it amount to committing a fraud on the minority.
5. The alteration must not in any way increase the liability of any member, that is, the alteration should not cause a shareholder to take up more shares than what he subscribed to, unless and until he has given in writing, either before or after alteration, his willingness to take on more liability.
6. The alteration cannot enable conversion of a public company into a private company unless such alteration is approved by the Central Government.
7. The alteration cannot sanction anything that will lead to a breach of contract entered into with an outsider.
8. The alteration must not sanction anything illegal.
9. The alteration must not oppose public interests and policies.
10. If the court has amended the Memorandum or Articles in cases of oppression and mismanagement, the company cannot, at a later date, alter its articles and make it inconsistent with the court orders.
11. Alteration must not negatively affect the activities carried out by the company in the past.
12. The alteration must not make the articles unalterable.
According to Section 39, if a member requires, the company shall send to him within seven days of the requirement and on paying a fee of one rupee, a copy each of the following documents as in force for the time being -
a. The memorandum;
b. The articles, if any;
If the company makes default in complying with the requirement of this section, the company, and every officer of the company who is in default, shall be punishable, for each offence, with a fine which may extend to fifty rupees.
LEGAL EFFECT OF MEMORANDUM AND ARTICLES
When the memorandum and articles are registered, it shall bind the company and each member and they shall be bound to observe all the provisions of the memorandum and the articles.
The memorandum and articles bind:
a. The members to the company
b. The company to the members
c. The members inter se
d. The company to the outsiders.
Members bound to the company: Every member is bound to observe the various provisions of the memorandum and articles as though he were a signatory to the same. Each member is bound not only to the originally framed memorandum and articles, but also to any alterations that have taken place. The shareholders themselves cannot enter into any agreement that is inconsistent with the articles.
Company bound to the members: A company can exercise it rights against any member of the company only in accordance to the provisions laid down in its memorandum and articles. However, if the company has taken an action that will prevent a member from exercising his right as a member, then he can sue the company for breach of the articles. For example, chairman of a company meeting trying to deprive a member his right to vote.
Members inter se: Though the memorandum and articles do not constitute an express agreement between the members, yet each member is bound to one another on the basis of an implied contract. The articles regulate the rights of members inter se, but these rights can be enforced only through the company. For example, if any member brings a complaint for breach of terms of articles by another member, a law suit can be filed against the offending member, not by the grieved member, but by the company.
Company bound to outsiders: Outsiders are persons who are not members of the company. Members who are solicitors or directors are also treated as outsiders under certain circumstances. The articles do not constitute a contract between the company and outsiders and they cannot enforce any provision of the articles against the company.
CONSTRUCTIVE NOTICE OF MEMORANDUM AND ARTICLES
Since every company is required to register its memorandum and articles with the Registrar of Companies, whose office is a public office, these documents are also considered as public documents, which are made available for public reading on payment of a nominal fee. Thus, every member and outsider is considered to have read the two documents and have knowledge of its contents. This deemed knowledge of the contents of the memorandum and articles of a company by a member or outsider dealing with the company is termed as constructive notice of memorandum and articles. These persons are expected to have not only read the documents but to also have understood the meaning.
Thus, if a person enters into a contract with the company and the transaction is ultra vires the memorandum or articles or beyond the powers of the company itself, such person will have to suffer the consequences of the transactions.
DOCTRINE OF INDOOR MANAGEMENT
The doctrine of indoor management is an exception to the rule of constructive notice. Normally, a person dealing with the company is expected to have a knowledge of the memorandum and articles of the company and cannot hold the company liable and bound for transactions entered into which are ultra vires the company and its documents. However, if the transactions appear to be proper when compared with its memorandum and articles, it would be grossly unfair if the company is allowed to escape its obligation to the other party, on the grounds that there was some irregularity in the conduct of the company’s affairs leading to the transaction. In other words, the outsider is not expected to assume that there were irregularities in the conduct of the company’s internal affairs. Therefore, the doctrine of indoor management assumes that the company’s internal management is in order and the outsider has the right to presume that internal affairs are regularly and properly done and he does not lose his rights in a transaction for irregularities he was not aware of and had no means of discovering.
This doctrine has its origin in the leading case of Royal British Bank vs. Turquand (1856)
The directors of the bank issued a bond to Mr. Turquand. The articles provided that the directors had the power to issue bonds if authorised by a proper resolution of the company. No such resolution was passed.
It was held that Turquand could sue on the bond as he was entitled to assume that the resolution must have been passed. It was observed that persons dealing with the company are bound to read the registered documents and to see that the proposed dealing is not inconsistent. But they are not bound to do any more than that; they need not inquire into the regularity of internal proceedings.
EXCEPTIONS TO THE DOCTRINE OF INDOOR MANAGEMENT
1. If any person dealing with the company has knowledge of irregularities in its internal management, then such person cannot claim ignorance of internal proceedings, and obtain the benefit of the doctrine of indoor management.
2. If the person dealing with the company could have exercised proper care and diligence and made inquiries to find irregularities in internal management, he too cannot claim the benefits of the Turquand case.
3. This doctrine will also not apply if the document used in the transaction is forged, or if signatures and seals are forged or if an agent signs in a document where he has no authority to do so.
4. A person who has entered in a contract with an official of a company who does not have any authority from the company to do so, then such person will not be protected by the doctrine of indoor management.
5. A person who has not read the memorandum or articles of the company, and has no idea of its contents, and enters into contract with a company cannot claim ignorance of the documents and avail of protection.
Distinction between memorandum and articles of association
Contents and scope Memorandum is the charter of the company and defines the scope of its activities. Articles regulate the internal management and aids in carrying out the objectives laid out in the memorandum.
Relationship between company, members and outsiders Memorandum defines the relationship of the company with the outside world. Articles deal with the relation of members inter se and establish the relationship of the company with its members.
Alteration Memorandum cannot be altered other than in the manner and to the extent provided in the Act. Articles can be altered by passing a special resolution.
Supremacy Memorandum is the supreme document of the company. Articles are subordinate to the memorandum.
Adoption Every company needs to have its own memorandum. Companies limited by shares can adopt Table A, and need not register its own articles.
Ultra-vires Acts Any activity done beyond the powers of the memorandum is considered ultra vires the company and hence invalid. Anything done against the provisions of the articles, but which is within the powers of the memorandum, can be ratified by altering the articles.
References
13. Kapoor, N.D., ‘Elements of Mercantile Law’, Sultan Chand & Sons, 13th revised edition, 2008.
14. Saravanavel, P. & Sumathi, S., ‘Company Law’, Himalaya Publishing House, 2006.
15. Garg, K.C. & Gupta, Vijay, ‘Company Law and Secretarial Practice, Kalyani Publishers, 2nd revised edition, 2006.
16. Companies Act 1956, Gazettes released by Government of India and the Ministry of Corporate Affairs.
17. www.wiziq.com
REVIEW QUESTIONS
Section A
1. What is a memorandum of association?
2. Briefly explain the requisites of the memorandum.
3. List out the principles for selecting the name of the company.
4. State the clauses of the memorandum of association.
5. What does the term ‘ultra vires’ mean?
6. Can an ultra vires act be ratified?
7. Define articles.
8. List out the contents of the articles of association.
9. Describe the doctrine of constructive notice.
10. What do you understand by the doctrine of indoor management?
11. What is the legal effect of articles of association between the members and company?
12. Is it necessary for every company to have and articles of association of its own?
13. Can the articles of association be made unalterable?
14. Can the articles be altered to go beyond the powers of the memorandum?
Section B
1. Briefly explain the various types of ultra vires acts.
2. What are the purposes of the memorandum of association?
3. Briefly explain the contents of the memorandum.
4. Explain briefly the alteration of the objects clause of the memorandum.
5. Explain briefly the alteration of the registered office clause of the memorandum.
6. ‘The objects clause is the most important clause in the memorandum of association of a company.’ Why?
7. Define articles of association and give the contents thereof. Is it necessary for every company to have articles of association of its own?
8. ‘The power of altering the articles is wide, yet it is subject to a large number of limitations.’ Explain.
9. Explain the doctrine of indoor management and state the exceptions to the doctrine.
10. Discuss the effect of registering the memorandum and articles with the Registrar of Companies.
11. ‘The doctrine of indoor management is a silver lining to strangers dealing with the company.’ Comment.
Section C
1. What is a memorandum of association? Describe its contents. Discuss the importance of the objects clause.
2. Discuss the doctrine of ultra vires.
3. Explain the necessity of setting out clearly the objects in the memorandum. To what extent may a company lawfully undertake business and perform acts not expressly mentioned in its objects clause?
4. When and how does a company alter its capital clause?
5. Write a note on the alteration of the registered office clause of a company.
6. ‘The power of altering the articles is wide, yet it is subject to a large number of limitations.’ Explain.
7. Distinguish articles from memorandum.
Chapter IV – SHARE CAPITAL AND MEMBERSHIP
LEARNING OBJECTIVES
1. To have a thorough knowledge of the manner in which share capital can be raised by companies, and the legal framework within which it can be raised.
2. To be aware of statutory provisions and SEBI rules with regard to raising of capital.
3. To have a knowledge of the concepts of transfer and transmission of shares and how it is affected.
4. To enable students to know the importance of a prospectus in a public issue, the types of prospectus and the statutory norms to be followed in the issue of a prospectus.
5. To know of the liabilities of officers of a company with reference to omission and misstatements in the prospectus.
6. To know who a member is and to distinguish between shareholders and members and to be aware of the rights, duties and liabilities of members.
Meaning
Share capital is the capital raised by a company by the issue of shares. Share capital can be raised either at the time of starting a business, or at a later date for the purposes of expansion and diversification of a business. Share capital becomes the permanent liability of a company and cannot be returned or repaid except at the time of winding up of companies. However, this does not apply to redeemable preference shares.
CLASSIFICATION OF SHARE CAPITAL
The memorandum of every company limited by shares must state the amount of share capital with which it is registered and the division of shares.
1. Nominal Capital: Companies which are limited by shares or limited by guarantee and having a share capital, need to have a nominal capital with which it is registered. This nominal capital is also known as registered or authorised capital and this is the capital the company is authorised to issue during its lifetime. Nominal capital is divided into shares of a fixed amount that has to be clearly mentioned in the memorandum. The nominal capital can be increased or decreased according to the requirements of the company.
2. Issued Capital: It is that part of the nominal capital which is issued for public subscription. The entire nominal capital is not issued to the public for subscription, but only a part of it is issued as and when required. The difference between the nominal capital and issued capital is termed as unissued capital.
3. Subscribed Capital: It is that part of the issued capital which is actually taken up by the public. If all of the issued capital has been subscribed for, then the issued capital and subscribed capital is the same.
4. Called-up Capital: It is the amount of the nominal value of shares subscribed for and which the company has asked its shareholders to pay by means of calls.
5. Paid-up Capital: The amount of money received by the company on each share as a result of calls is termed as paid-up capital. The paid-up capital cannot exceed the issued share capital.
6. Uncalled Capital: This is the amount which remains unpaid on shares. The company can call upon the shareholders to pay the uncalled capital at any time that it desires.
7. Reserve Capital: A company can, by passing a special resolution, decide that either a part or whole of its uncalled capital will not be called up, except at the time of winding up. This amount is called reserve capital or reserve liability. The reserve capital cannot be converted into ordinary capital without direction of the court, nor can it be dealt with by the directors. This capital is made available to the creditors at the time of winding up.
Publication of authorised, subscribed and paid-up share capital
According to Section 148, if any notice, advertisement, official publication, or any business letter of a company contains a statement of the amount of the authorised capital of the company, then such notice, advertisement, official publication, or such letter shall also contain a clear and visible statement of the amount of the capital which has been subscribed and the amount paid up.
If any default is made in complying with the above requirements of, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to one thousand rupees.
Definition of a share
Section 2(46) defines a share as ‘a share in the share capital of a company and includes stock except where a distinction between stock and shares is expressed or implied.’
A share is the interest of a shareholder in a portion of the company’s capital. Holding shares make a shareholder enjoy ownership rights in the company, though he does not own the assets of the company.
The shareholder becomes entitled to a share of profits of the company while it is a going concern, and at the time of winding up, if any assets remain after distribution to creditors, the shareholders can have a stake in these assets. Shares are movable property and can be sold, mortgaged or pledged. Shares issued by a company are numbered to distinguish one share from another, and share certificates are prima facie evidence of the title of the member to these shares. Though shares are movable property, share certificates are non-negotiable instruments.
CLASSES OF SHARE CAPITAL
The share capital of a company limited by shares shall be of two types:
1. Equity share capital
a. with voting rights
b. with differential rights to voting and dividend
2. Preference share capital
Preference Shares: These shares have a preferential right as to payment of dividend at a fixed rate, and at the time of winding up preference shareholders enjoy preferential right to the repayment of paid up capital. Preference shareholders may or may not enjoy other preferential rights such as receipt of arrears dividend, additional dividend from surplus profits, and share in surplus assets at the time of winding up, etc.
Equity Shares: All those shares which are not preference shares are called equity shares. Equity shareholders enjoy residual rights in the company, i.e., they enjoy greater dividend than preference shareholders if the company has been successful in any year, and nothing in years when the company does not do well. Also, at the time of winding up, they are entitled to the surplus assets remaining after paying off liabilities.
Hence, equity shareholders are residual claimants to the assets and income of the company. Since the risk also is great, equity share capital is known as ‘risk capital’.
KINDS OF PREFERENCE SHARES
1. Cumulative and non-cumulative Preference Shares: In the case of cumulative preference shares, if in a particular year, there does not exist sufficient profits for distribution of dividend to preference shareholders, this deficiency must be made up for by the company in the subsequent years when there are sufficient profits. Whereas, in the case of non-cumulative preference shares, this provision is not applicable and the shareholders cannot claim dividend from the profits of the subsequent years for a deficiency in dividend that they suffered in any financial year.
2. Participative and non-participative Preference Shares: Shareholders holding participative preference shares enjoy the right to participate in the surplus profits of the company along with the equity shareholders, in addition to their fixed rate of preference dividend. These shareholders also get to enjoy the right to share in the surplus assets that remain after meeting the liability of creditors at the time of winding up. Whereas, non-participative preference shareholders do not enjoy any of these benefits. They are entitled to only the fixed rate of preference dividend.
3. Convertible and nonconvertible Preference Shares: Convertible preference shares are those shares which enjoy the benefit of being converted into equity shares after a period of time. Non-convertible preference shares cannot be converted into equity shares.
4. Redeemable Preference Shares: These are shares which may be redeemed after a fixed period or earlier at the option of the company. The conditions for redeeming preference shares are that they must be fully paid-up, they will be redeemed either out of the distributable profits of the company or out of a fresh issue, any premium to be paid on redemption shall be paid either out of profits or out of the share premium account and if these shares are redeemed out of profits, then an amount equivalent to the nominal value of the redeemed shares shall be transferred to the Capital Redemption Reserve Account.
5. Guaranteed Preference Shares: When a private company is converted into a public limited company or when an amalgamation or absorption takes place, the seller of preference shares guarantees a particular rate of dividend on preference shares for a period of time. These type of shares on which such guarantee is made is termed as guaranteed preference shares.
6. Cumulative Convertible Preference Shares: These types of preference shares can be issued by companies for raising capital to set up new projects, for purposes of diversification and expansion of existing projects, for purposes of modernization and for meeting working capital requirements.
Deferred or Founder’s shares
A private company can issue shares other than those mentioned above, i.e., deferred shares. These shares are issued to promoters and directors and hence are also known as founder’s shares. These shares are of a smaller denomination than ordinary shares, example a face value of Re 1. They carry voting rights similar to equity shares and dividends are a fixed percentage of profits that remain after declaration of dividends to preference and equity shareholders. Therefore, higher the profits, higher are the dividends on these shares.
STOCK
Stock is the total or aggregate of fully paid up shares that have been legally consolidated. Fully paid up shares can be consolidated and broken into fractions, if needed, and converted into stock. Partly paid up shares cannot be converted into stock. Stock of shares simply means that the company has recognised the fact that the shares have been fully paid up. Companies are permitted to reconvert their stock into fully paid up shares of any denomination.
When shares are converted into stock, the Register of Members and the company’s Annual Return must show the amount of stock held by each member. Stocks are freely transferable and the stockholders enjoy the same rights and privileges as ordinary shareholders.
Differences between shares and stocks
Differences Share Stock
Fully paid up Shares may or may not be fully paid up. Stock must always be fully paid up.
Nominal value Shares have a fixed nominal value. Stocks do not have a fixed nominal value.
Division into fraction Shares are individual units which cannot be divided into fractions. Stocks are consolidations of fully paid up shares and can be divided into fractions.
Issue to public Shares can be issued directly and originally to the public. Stocks cannot be issued directly to the public; however they can be reconverted into fully paid shares.
Formality for issue The Board of directors can make the decision for issue of shares. Stocks can be issued only if the Articles permit and by passing an ordinary resolution to the effect.
Numbering Shares are numbered. Stock need not be numbered.
Registration It is necessary to get the shares registered with the Registrar, before issuing them to the public. Stocks can be issued only after passing an ordinary resolution and if the articles permit. If the articles do not permit, then a special resolution should be passed to alter the articles. Moreover, a notice of conversion has to be filed with the Registrar.
Member A share certificate is a prima facie evidence that a shareholder is a member. A stockholder need not necessarily be a member.
ISSUE OF SHARES AT PAR, AT PREMIUM AND AT A DISCOUNT
Issue at par
Shares are considered to have been issued at par when the subscribers are expected to pay only the face value or nominal value of the shares issued. For example, if the face value of one share is Rs. 10, the buyer needs to pay only Rs. 10, and he will be holder of shares issued at par. Companies with demat shares can issue shares at par values of their own choice.
Issue of shares at a premium (Section 78)
A company may issue shares at a premium, i.e., at a value above its par value. The following conditions must be satisfied in connection with the issue of shares at a premium:-
1. The amount of premium must be transferred to an account called ‘share premium account’.
2. Share premium account can be used only for the following purposes :-
a. In issuing fully paid bonus shares to members.
b. In writing off preliminary expenses of the company.
c. In writing off public issue expenses such as underwriting commission, advertisement expenses, etc.
d. In providing for the premium payable paid on redemption of any redeemable preference shares or debentures.
e. In buying back its shares
Issue of shares at a discount (Section 79)
A company may issue shares at a discount, i.e., at a value below its par value. The following conditions must be satisfied in connection with the issue of shares at a discount:-
1. The shares must be of a class already issued.
2. Issue of the shares at a discount must be authorised by a resolution passed in the general meeting of the company and sanctioned by the National Company Law Tribunal.
3. The resolution must specify the maximum rate of discount at which the shares are to be issued.
4. Not less than one year must have elapsed from the date on which the company was entitled to commence the business.
5. The shares to be issued at discount must be issued within 2 months from the date on which the issue is sanctioned by the National Company Law Tribunal.
6. The discount must not exceed 10 percent unless the National Company Law Tribunal is of the opinion that the higher percentage of discount may be allowed in special circumstances.
BUY BACK OF SHARES
Buy back of its own shares by a company is nothing other than the reduction of share capital. After the recent amendments in the Companies Act, 1956 buy back of its own shares by a company is allowed without sanction of the Court. It is a process which enables a company to go back to the holders of its shares and offers to purchase from them the shares that they hold.
There are three main reasons why a company would opt for buy back:-
1. To improve shareholder value, since with fewer shares earning per share of the remaining shares will increase.
2. As a defense mechanism against hostile take-overs since there are fewer shares available for the hostile acquirer to acquire.
3. Public signaling of the management’s policy.
A company may purchase its own shares or other specified securities out of:-
i. Its free reserves; or
ii. The securities premium account; or
iii. The proceeds of any shares or other specified securities.
No buy-back of any kind of shares or other specified securities can be made out of the earlier proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.
No company can purchase its own shares or other specified securities unless:-
a. The buy-back is authorized by its articles;
b. A special resolution has been passed in general meeting of the company authorizing the buy-back;
c. The buy-back is of less than twenty five per cent of the total paid-up capital and free reserves of the company;
d. The buy-back of equity shares in any financial year shall not exceed twenty five per cent of its total paid-up equity capital in that financial year;
e. The ratio of the debt owned by the company is not more than twice the capital and its free reserves after such buy-back;
f. All the shares or other specified securities for buy-back are fully paid-up;
g. The buy-back of the shares or other specified securities listed on any recognized stock exchange is in accordance with the regulations made by the Securities and Exchange Board of India;
The notice of the meeting at which special resolution is proposed to be passed shall be accompanied by an explanatory statement stating:-
a. A full and complete disclosure of all material facts;
b. The necessity for the buy-back;
c. The class of security intended to be purchased under the buy-back;
d. The amount to be invested under the buy-back; and
e. The time limit for completion of buy-back.
Every buy-back must be completed within twelve months from the date of passing the special resolution.
The buy-back may be:-
a. From the existing security holders on a proportionate basis;
b. From the open market; or
c. From odd lots, that is, where the lot of securities of a listed public company whose shares are listed on a recognized stock exchange is smaller than such marketable lot as may be specified by the stock exchange;
d. By purchasing the securities issued to employees of the company pursuant to a scheme of stock option.
DEMATERIALISATION OF SHARES
Dematerialisation is the process of converting physical share certificates into electronic form i.e. crediting of equivalent number of shares to a depository account electronically.
Depository Account
For dematerialisation of shares the share applicant will have to open a depository account with a Depository Participant (DP) having connectivity with National Securities Depository Ltd (NSDL) / Central Depository Services (I) Ltd (CSDL).
Benefits of Dematerialisation
1. No risk of loss / misplacement / theft / damage of share certificates
2. No risk of bad deliveries
3. No stamp duty on transfer of shares
4. Faster transfer of shares
SEBI GUIDELINES (with regard to public issues (w.e.f. 27.1.2000))
Companies can make any issue of capital in any form they like, at any price and subject to terms and conditions they decide, provided they follow the SEBI guidelines called the ‘Guidelines for Disclosure and Investor Protection’. The guidelines are:
1. Appointment of Category-I Merchant Banker to manage an issue shall be compulsory.
2. Registrar to Issue must be appointed.
3. Partly paid shares must either be made fully paid or forfeited.
4. The company shall not make public issue where it has been prohibited by SEBI.
5. Draft prospectus shall be filed with SEBI at least 21 days before filing of the prospectus with the Registrar of Companies.
6. The company shall carry out the changes suggested by SEBI before filing of prospectus with the Registrar of Companies.
7. Public unlisted companies (other than banking companies) are allowed to make a public issue subject to the following conditions:
a. Track record of ability to pay dividend for at least 3 out of immediately preceding 5 years.
b. Minimum pre-issue net worth of the company should not be less than Rs.1 crore in the last 3 out of 5 years and also in the immediately preceding 2 years.
Unlisted or new companies which do not satisfy the above conditions may still make a public issue if it satisfies the following conditions:
a. Project has been appraised by a Public Financial Institution or a Scheduled commercial bank.
b. The Public Financial Institution or Scheduled bank is part financing the project to the extent of at least:
* 10% of project cost
* 5% of project cost in case of infrastructural companies.
c. The Public Financial Institution or Scheduled bank brings money at least 1 day before the opening of issue.
8. The company shall enter into an agreement with a depository. The members are given the option to choose between depository mode or share certificates.
9. If shares are allotted to promoters or management within 6 months prior to Public Issue, at a price less than offer price, then these shares are subject to a lock-in period of 6 months. (SEBI and Corporate Laws, 27 March, 2007).
10. A banking company shall be allowed to make a Public Issue at a price approved by the RBI.
11. Companies are free to decide on the pricing of their issue, that is, they can issue at par or at premium.
12. Listed companies are free to make a public issue. However, if net worth is greater than 5 times the net worth prior to issue, conditions applicable to unlisted companies apply.
13. Promoter’s contribution
a. In case of unlisted companies at least 20% of post issue capital.
b. In case of listed companies:
i. At least 20% of proposed issue, or
ii. At least 20% of post issue capital
In case of listed as well as unlisted companies:
i. Promoters must bring in full amount of contribution, including premium, at least one day before issue opens.
ii. Where contribution exceeds Rs. 100 crores, then Rs. 100 crores shall be brought before opening issue and the balance on pro-rata before calls are made to the public.
iii. Promoters are not allowed to acquire shares through private placement either directly or through intermediaries.
iv. Following are ineligible for computation of promoter’s contribution:
a. Shares acquired against revaluation of assets or capitalisation of intangible assets during 3 years before filing the offer document.
b. Shares acquired by way of bonus out of revaluation of reserves or reserves without accrual of cash reserves.
c. In case of unlisted companies shares acquired during preceding 6 months at a price lower than the price at which shares are offered to the public.
14. The promoters’ contribution shall be subject to a lock-in period of 3 years.
15. Reservations for allotment on firm or preferential basis for various categories, including promoters’ contribution should not exceed 75% of total issue amount.
Reservations in favour of employees should not exceed 10% of issue subject further to 5% of the paid-up capital of the company in any one year.
Reservations in favour of shareholders and merchant bankers should not exceed 10% & 5%, respectively.
Provision for buy-back of shares shall not exist for persons for whom securities ae reserved for allotment on firm basis. If any shares so allotted have been rejected, then these should be taken up by promoters.
Promoters cannot sell or transfer such shares acquired, for a period of 3 years.
16. Underwriting shall be optional.
17. Minimum number of shares for which application is allowed to be made is 200 shares @ Rs. 10 each. For issue at premium, minimum amount payable on application, allotment & calls to be not less than Rs. 2000.
18. As per Section 69, a minimum of 5% of nominal value is to be called as application money. As per SEBI guidelines application money cannot be less than 25% of issue price. Even 100% can be called as application money.
19. Issue must be kept open for at least 3 working days and not more than 10 working days. In case of infrastructure companies, public issue can be kept open for a maximum of 21 working days.
20. If 90% of issue is not received from public subscription along with accepted devolvement from underwriters or other sources (if issue is undersubscribed) is not received within 60 days of closure of issue, then the company must make full refund of subscription money to share applicants.
This clause is not applicable in case of offer for sale of securities, where the management is offering their shareholdings through public offer in order to convert a closely held company into a widely held company.
21. No retention of over-subscription shall be allowed except to the extent of maximum 10% necessitated by approximation while making proportionate allotment.
22. In case of over-subscription, allotment shall be made on proportionate basis subject to 50% of net public offer to be reserved for allotment to individuals applying for 1000 shares or less.
23. Issue must be fully paid up within 12 months except where total issue size exceeds Rs. 500 crores.
SHARE CERTIFICATE
A share certificate is a prima facie evidence that a shareholder is a member.
Differences between share certificates and share warrants.
Differences Share certificates Share warrants
Who can issue? Both public & private companies can issue share certificates. Only public companies can issue share warrants.
Original issue Can be issued in original. Cannot be issued originally.
Type of shares issued on Issued for fully or partly paid shares Issued only on fully paid shares.
Position of holder Holder is member. Holder not member unless Articles of Association provides so.
Negotiability Not a negotiable instrument. Negotiable instrument.
Registration of transfer Transfer requires ‘registration of transfer’ with company. Transfer complete through delivery; no registration is required.
Entitlement to shares Entitles ‘person named in the Certificate’ to number of shares specified. Entitles ‘bearer’ to specified number of shares.
Dividend Dividend paid through ‘Dividend warrants’. Dividend paid through ‘Bearer dividend coupons’
Qualification Share certificate can hold evidence of ‘qualification shares’ of directors. Shares included in Share warrants cannot include qualification shares of directors.
Approval Articles of Association and Central Government approval are not necessary for issue of share certificates. Approval of Articles and Central Government is necessary for issue of share warrants.
Petitioning right of holder Holder can petition for winding up of company. Holder cannot petition for winding up.
TRANSFER OF SHARES (Section 82)
The shares of a company can be transferred in a manner that is prescribed by the Articles of the company. Shares are personal property of shareholders and thus transfer is the willful act of transferring shares between the parties involved.
Certificate of transfer: When a shareholder, holding a large number of shares, desires to sell only a part of his shareholding, he hands over to the company his original share certificate consisting of the entire amount of his holding, along with a transfer form mentioning the number of shares that he intends to sell. The company stamps the transfer, along with his original shareholding. This is called ‘certification of transfer’ and the transfer is called a ‘certified transfer’.
Forged transfer: An instrument of transfer where the signature of the transferor is forged is called a ‘forged instrument’ and any transfer of shares using this forged instrument is termed as a ‘forged transfer’. A forged transfer is a nullity and legal title to the shares does not pass to the transferee.
Blank transfer: It is a transfer executed without the name of the transferee appearing in the transfer deed, i.e., the transferor hands over to the purchaser or pledgee his original share certificate along with the transfer instrument or form, but without the name of the transferee. The transferor only fills in his name and signs on the transfer deed. The benefit of a blank transfer is that the buyer can sell the shares later, and subsequent buyers can avoid stamp duty and transfer fees. In such a situation, the first seller is the transferor (the shareholder who originally held the shares) and the last buyer is the shareholder recognised by the company.
Transmission of shares: This is different from a transfer. Transfer of shares take place by a mutual act of the parties, whereas, transmission takes place by operation of law, for instance:
i. On insolvency of a shareholder, where the property in shares pass to his Official Receiver, who will become entitled to the shares.
ii. On death of the shareholder, where the property in shares pass to his legal representatives.
iii. On lunacy of the shareholder, where the property in shares pass to the administrator appointed by the court.
Differences between share transfer and share transmission
Differences Transfer Transmission
Nature of act Transfer is a deliberate act of the shareholder. Transmission occurs due to the operation of law.
Instrument of transfer Requires an execution of instrument of transfer. Requires only an evidence showing entitlement to shares.
Consideration Valid consideration in return for shares is needed. No need of consideration.
Stamp duty Stamp duty is payable. Stamp duty is not payable.
Registration of charges Company levies charges for registering a transfer. No charges for registration of a transmission.
Liability of the transferor Liability of transferor ceases as soon as transfer is complete. Liability on shares does not cease with transmission.
Lien on shares: It is the right to retain possession of something until satisfaction of a claim, i.e., a company can prevent a shareholder from transferring his shares until he pays his debts to the company (amounts outstanding on the shares he owns). This right of lien of the company can extend not only to partly paid shares, but also to fully paid shares and dividends payable on shares. Death of a shareholder does not destroy the lien.
Surrender of shares: When a shareholder gives up his shares voluntarily to the company, it is termed as a surrender of shares. The Articles of the company have to authorise the directors to accept a surrender of shares. Surrender of shares can be accepted by the company if it will avoid the company going through the formalities of forfeiture. Surrender of shares is voluntary, whereas, forfeiture is forced upon the shareholder by the company. Both takes place because the shareholder is not able to pay off his liabilities. However, surrender should not amount to a wilful purchase of shares from the shareholder, by the company, so as to help the shareholder overcome his liability.
PROSPECTUS
A prospectus is a legal document that is issued by a company wishing to list itself on the stock exchange. It provides the background, financial and management status of the company so that investors are able to make an informed decision about whether to invest or not. In most cases, a prospectus is a requirement to list on the stock exchange. In India, a copy of the prospectus must be filed with the Securities and Exchange Board of India (SEBI).
A prospectus is required to contain all information that investors and their advisers would require to make an informed assessment of:
• The assets, liabilities, financial position, profits and losses, and prospects of the organisation; and
• The rights attaching to the shares
According to Section 2(36) "prospectus" means any prospectus, notice, circular, advertisement or other document inviting offers from the public for the subscription on purchase of any shares in, or debentures of, a body corporate.
Thus, it is a circular or advertisement which is published by the promoters after the formation of the company, as a means to induce the public to subscribe to shares and debentures of the company.
Conditions for a prospectus
The following are the requirements to consider a document as a prospectus:
1. Invitation to the public: The prospectus is an invitation the general public at large to subscribe to the company’s shares and debentures. If the invitation is meant only for a small group of persons, it is not a prospectus at all.
2. Issued to the public: To be considered a prospectus, it has to be issued to the public. Thus, a document meant for private circulation is not a prospectus.
3. Issued as a prospectus: To be considered as a prospectus under the Act, the document should be described as a prospectus.
When prospectus is not required to be issued
Issue of a prospectus is not necessary in the following cases:
a. A private company is not required to issue a prospectus.
b. A public company whose promoters and directors feel that they can raise the required capital from private sources need not issue a prospectus, but needs to file a statement in lieu of prospectus with the Registrar of Companies.
c. Companies can issue application forms for shares or debentures, accompanied by a memorandum containing the salient features of a prospectus. However, a copy of the prospectus should be made available to any person who requests such.
d. If an offer is made to individuals to enter into an underwriting agreement with the company, then the invitation need not contain a prospectus.
e. When the application form is issued for shares or debentures not being offered to the public, it is not necessary to issue a prospectus.
f. Where the offer is being made to existing holders of shares and debentures.
g. Where the shares or debentures being offered are similar to shares or debentures already issued and dealt with on a recognised stock exchange, a prospectus is not compulsory.
h. Where an invitation has been made to the public for subscribing to shares or debentures in the form of an advertisement known as a ‘prospectus announcement’ a prospectus need not be issued.
Legal requirements for issue of prospectus
The following are the formalities and requirements involved in issuing a valid prospectus:
1. A prospectus can be issued only after incorporation of the company. However, a prospectus can be issued for companies which are intended to be set up.
2. If a company intends to raise capital from the general public by the issue of shares or debentures, then a draft prospectus has to be submitted to SEBI for approval, through a merchant banker, at least 21 days prior to filing the prospectus with the Registrar of Companies. If SEBI suggests any changes, then such changes will have to be made by the companies before filing the prospectus.
3. Every prospectus issued by a company shall be dated and that date shall be regarded as the date of publication of prospectus.
4. Before the draft prospectus is filed with the Registrar, it has to be approved by various agencies, such as lead managers, stock exchanges wherever the securities are listed and the underwriters to the issue.
5. A copy of the prospectus, signed by all the directors, or their agents, must be delivered to the Registrar on or before the date of publication. The prospectus issued to the public must clearly mention the fact that a copy of the prospectus along with required documents have been filed with the Registrar. The prospectus must be accompanied by the written consent of the auditor, attorney, banker, legal advisor, etc. who have agreed to act as such for the company.
6. The draft prospectus which is filed with SEBI has to be made public. Lead bankers and stock exchanges where the securities are listed can make copies of the prospectus available to the public, for a nominal fee.
7. Once 90 days pass from the date of registration of prospectus, then such prospectus must not be issued to the public. If even after 90 days of registration the prospectus is issued, then it will be considered as a prospectus which has not been delivered to the Registrar for registration.
8. Every application form for subscription to shares and debentures must be accompanied by a copy of the prospectus. However, this condition is not applicable only in cases which have already been discussed earlier.
9. If the prospectus contains statements made by experts, then these experts must in no way be connected either with the formation or management of the company. An expert includes an engineer, a valuer, an accountant or any person whose profession gives authority to the statements made by him.
10. If the prospectus contains statements made by experts, then the prospectus can only be issued if the expert has given his written consent to the statement and its appearance in the prospectus. This is necessary so as to protect prospective investors from the dangers of untrue statements.
11. Companies are not allowed to make any alterations to any contracts which are referred to in the prospectus or statement in lieu of prospectus. If at all any changes are to be made to these contracts, then the company must ensure that a resolution is passed to the effect at a general meeting of shareholders.
12. The share application form should be part of a memorandum containing the salient features of a prospectus. This memorandum is also termed as an ‘abridged prospectus’. This will enable the investor to understand the contents of the abridged prospectus, before submitting his application for shares.
13. Every application form and prospectus issued to the public must be accompanied by the provision of the Companies Act that details the consequences of acquiring shares in a fictitious name. Persons who try to acquire or induces others to acquire shares in a fictitious name are liable to be punished with imprisonment that may exceed to 5 years.
14. Every prospectus must disclose the matter as required under Schedule II of the Act.
CONTENTS OF PROSPECTUS
In order to protect the interests of investors, the Companies Act requires that companies follow certain rules and regulations that will ensure complete disclosure of material and essential facts in the prospectus. Every prospectus issued by the company must state the matters specified in Part I of the II Schedule of the Act and contain information and reports specified in Part II of the Schedule and that Parts I and II shall have effect subject to provisions contained in Part III of the Schedule. The main contents are given below:
PART I OF SCHEDULE II
1. General information
a. Name and address of registered office of the company.
b. Names of regional stock exchange and other stock exchanges where application made for listing of present issue.
c. Statement/declaration about refund of the issue if minimum subscription of 90% is not received within 90 days from closure of the issue.
d. Declaration about the issue of allotment letters/refunds within a period of 10 weeks and interest in case of any delay in refund at the prescribed rate.
e. Date of opening of the issue and date of closing of the issue.
f. Name and address of auditors and lead managers.
g. Name and address of trustee under debenture trust deed (in case of debenture issue).
h. Whether rating from CRISIL or any rating agency has been obtained for the proposed debenture/preference shares issue.
Names and addresses of the underwriters and the amount underwritten by them
2. Capital structure of the company
a. Authorised, issued, subscribed and paid-up capital.
b. Size of present issue giving separate reservation for preferential allotment to promoters and others.
c. Paid-up capital:
i. After the present issue
ii. After conversion of debentures
3. Terms of the present issue
a. Terms of payments.
b. Rights of the instrument holders.
c. How to apply - availability of forms, prospectus and mode of payment.
d. Any special tax benefits for company and its shareholders.
4. Particulars of the issue
a. Objects.
b. Project cost.
c. Means of financing (including contribution of promoters)
5. Company, management and project
a. History and main objects and present business of the company.
b. Subsidiaries of the company, if any.
c. Promoters and their background.
d. Names, addresses and occupation of manager, managing director and other directors including nominee- directors, whole-time directors (giving their directorships in other companies).
e. Location of project.
f. Plant and machinery, technology, process, etc.
g. Collaboration, any performance guarantee or assistance in marketing by the collaborators.
h. Infrastructure facilities for raw materials and utilities like water, electricity, etc.
i. Schedule of implementation of the project and progress made so far, giving details of land acquisition, civil works, installation of plant and machinery, trial production, date of commercial production, etc.
j. The products:
i. Nature of the product - consumer /industrial and end-users.
ii. Approach to marketing and proposed marketing set up.
iii. Export possibilities and export obligations, if any.
k. Future prospects - expected capacity utilisation during the first 3 years from the date of commencement of production, and the expected year when the company would be able to earn cash profits and net profits.
6. Particulars with regard to the company and other listed companies under the same management, which made any capital issue during the last 3 years:
a. Name of the company
b. Year of issue
c. Type of issue (Public/rights/composite)
d. Amount of issue
e. Date of closure of issue
f. Date of completion of delivery of share/debenture certificates.
g. Date of completion of the project, where object of the issue was financing of a project
h. Rate of dividend paid
7. Outstanding litigation pertaining to:
a. Matters likely to affect operation and finances of the company including disputed tax liabilities of any nature; and
b. Criminal prosecution launched against the company and the directors for alleged offences under the Companies Act, Indian Stamps Act, Central Excise Act, Foreign Exchange Management Act, etc.
c. Particulars of default, if any, in meeting statutory dues, institutional dues, and towards instrument holders like debentures, fixed deposits and arrears on cumulative preference shares, etc.
d. Any material development after the date of the latest balance sheet and its impact on performance and prospects of the company.
8. Management perception of risk factors:
These include the manner in which the management perceives risk, such as, sensitivity to foreign exchange rate fluctuations, difficulty in availability of raw materials or in marketing of products, cost/time overrun, etc.
PART II OF SCHEDULE II
A. General information
1. Consent of directors, auditors, solicitors/ advocates, managers to the issue, Registrar of issue, bankers to the company, bankers to the issue and experts.
2. Expert opinion obtained, if any.
3. Change, if any, in directors and auditors during the last three years, and reasons thereof.
4. Authority for the issue and details of resolution passed for the issue.
5. Procedure and time schedule for allotment and issue of certificates.
6. Names and addresses of the company secretary, legal adviser, lead managers, co-managers, auditors, bankers to the company, bankers to the issue and brokers to the issue.
B. Financial Information Reports: The financial reports that have to be set out:
1. A report by the auditors of the company with respect to:
a. Profits and losses, assets and liabilities and the rates of dividends paid and not paid by the company in respect of each class of shares for each of the five financial years immediately preceding the issue of the prospectus. If no accounts have been made for any part of the period of five years a statement of that fact along with a certificate from the auditors that such accounts have been examined and found correct by them. The same shall also apply with regard to assets and liabilities and accounts of its subsidiaries.
b. If the proceeds of the issue of shares or debentures are to be applied in the purchase of any business a report made by a Chartered Accountant of the profits or losses and assets and liabilities of the business for the previous five financial years immediately preceding the issue of the prospectus.
c. Principal terms of loan and assets charged as security.
C. Statutory and other information
1. Minimum subscription
2. Expenses of the issue giving separately fee payable to:
a. Advisors.
b. Registrars to the issue.
c. Managers to the issue.
d. Trustees for the debenture holders.
3. Underwriting commission and brokerage
4. Previous issue for cash
5. Previous public or rights issue (if any during last five years)
a. Date of allotment
b. Closing date
c. Date of refunds
d. Date of listing on the stock exchange
e. If the issue was at premium or discount and the amount thereof.
6. Commission or brokerage on previous issue
7. Issue of shares otherwise than for cash.
8. Debentures and redeemable preference shares and other instruments issued by the company outstanding as on the date of prospectus and terms of issue
9. Option to subscribe
10. The details of option to subscribe for securities to be dealt with in a depository
11. Where the proceeds of the issue is to be used in whole or part payment for purchase of property, the following particulars have to be given:
a. The names, addresses, descriptions and occupations of the vendors;
b. The amount paid or payable in cash, shares or debentures to the vendor(s), specifying separately the amount, if any, paid or payable for goodwill;
c. The nature of the title or interest in such property acquired or to be acquired by the company;
d. Short particulars of every transaction relating to the property completed within the two preceding years, in which any vendor, promoter or director had any direct or indirect interest.
12. The following information with regard to managerial personnel have to be provided:
a. Details of directors, proposed directors, whole-time directors, managing directors, their remuneration, appointment, interest, borrowing powers and qualification shares.
b. Any amount or benefit paid within the two preceding years to any promoter or officer.
c. The dates, parties to, and general nature of:
i. Every contract appointing or fixing the remuneration of a managing director or manager entered into within two years before the date of the prospectus;
ii. Every other material contract, not being a contract entered into in the ordinary course of the business.
A reasonable time and place at which any such contract or a copy thereof may be inspected shall be clearly specified.
d. Full particulars of the nature and extent of the interest, if any, of every director or promoter:
i. In the promotion of the company; or
ii. In any property acquired or proposed to be acquired by the company within two years of the date of the prospectus.
Where the interest of such a director or promoter consists in being a member of a company, the nature and extent of the interest of the company, with a statement of all sums paid or agreed to be paid to him or to the company in cash or shares by any person either to induce him to become, or to qualify him as, a director, or for services rendered by him or the company, in connection with the promotion or formation of the company.
13. Rights of members regarding voting, dividend, lien on shares and the process for modification of such rights and forfeiture of shares.
14. Restrictions, if any, on transfer and transmission of shares/ debentures and on their consolidation/ splitting.
15. Revaluation of assets, if any (during last five years).
16. Material contracts and inspection of documents and the time and place at which the contracts and documents will be available for inspection from the date of prospectus until the date of closing of the subscription list.
PART III OF SCHEDULE II
The provisions of this part apply to Parts I and II of Schedule II given above. A summarization of these provisions is given below:
1. Every person shall be deemed to be a vendor who has entered into any contract for the sale or purchase of any property to be acquired by the company, in cases where:
a. The purchase money is not fully paid at the date of the issue of the prospectus;
b. The purchase money is to be paid, wholly or in part, out of the proceeds of the issue offered for subscription by the prospectus;
c. The contract depends for its fulfilment on the result of that issue.
2. Where any property to be acquired by the company is to be taken on lease, "vendor" shall be the lessor, "purchase money" shall be the consideration for the lease, and "sub-purchaser" shall be the sub-lessee.
3. In the case of a company which has been carrying on business for less than 5 financial years, the accounts of the company shall be only for those years in which business was carried out, even if less than 5 years.
4. Any report by accountants shall be made by accountants qualified under the Companies Act for appointment as auditors of the company and not by any accountant who is an officer or servant, or a partner of the company or the company's subsidiary or holding company.
5. Inspection of documents must be in a reasonable time and place at which copies of all balance sheets and profit and loss accounts on which the report of the auditors is based.
6. The prospectus must state that all the relevant provisions of the Companies Act, 1956, and the guidelines issued by the Government have been complied with and no statement made in the prospectus is contrary to the provisions of Companies Act, 1956, and its rules.
Shelf prospectus (Section 60 A)
"Shelf prospectus" means a prospectus issued by any financial institution or bank for one or more issues of the securities or class of securities specified in that prospectus. An information memorandum shall be issued to the public along with shelf prospectus filed at the stage of the first offer of securities
Information Memorandum
According to the Amendment Act, Section 2(19) the term ‘information memorandum’ is a process undertaken (before the filing of a prospectus) to determine the demand, price and terms of issue for securities proposed to be issued by a company by means of a notice, circular, advertisement or document circulated to the public.
Book-building
Book building is basically the process of generating a book of investor demand for the shares during an Initial Public Offer for efficient price discovery. Usually, the issuer appoints a major investment bank to act as a book runner. The entire book building process is done on-line.
During the fixed period of time for which the subscription is open, the book runner collects bids from investors at various prices, between the floor price and the cap price. The investor bids for these shares within the price bands. Bids can be revised by the bidder before the book closes. The process aims at tapping both wholesale and retail investors. The final issue price is not determined until the end of the process when the book has closed. After the close of the book building period, the book runner evaluates the collected bids on the basis of certain evaluation criteria and sets the final issue price.
If demand is high enough, the book can be oversubscribed.
Red-herring prospectus
"Red Herring Prospectus" is a prospectus which does not have details of either price or number of shares being offered or the amount of issue. This means that in case the price is not disclosed, the number of shares and the upper and lower price bands are disclosed. On the other hand, an issuer can state the issue size and the number of shares are determined later.
Thus, a Red Herring Prospectus can be filed with the Registrar of Companies without the price band. Only on completion of the bidding process, the details of the final price are included in the offer document. The offer document filed thereafter with ROC is called a prospectus.
Statement in Lieu of Prospectus (Section 70)
A public limited company which intends to raise capital from private sources such as owners and promoters, it must file a statement in lieu of prospectus. It gives the same information as a prospectus and is signed by directors and proposed directors. If a company has not filed its statement in lieu of prospectus with the Registrar, it cannot allot its shares or debentures. It contains information such as name of the company, statement of capital, description of the business, names, addresses and occupation of directors, initial expenses, and names of vendors, details of property, directors’ interest, material contracts and minimum subscription.
Prospectus by implication (Section 64)
If a company allots or agrees to allot any shares or debentures of the company with a view to offering these for sale to the public, then, any document by which the offer is made shall be deemed, by implication of law, to be a prospectus issued by the company.
Abridged Prospectus
"Abridged Prospectus" means a prospectus which contains all the salient features of a prospectus. It accompanies the application form of public issues.
Prospectus in terms of newspaper advertisement (Section 66)
Where any prospectus is published as a newspaper advertisement, it shall not be necessary in the advertisement to specify the contents of the memorandum or the signatories or the number of shares subscribed for by them
LIABILITY FOR MIS-STATEMENTS OR OMISSION IN A PROSPECTUS (Golden rule for framing prospectus Section 62-63)
What is an untrue statement?
According to Sec. 65(1), a statement included in the prospectus is untrue:
• If statement is misleading in the form and context in which it is included (material fact); and
• If omission of any matter (material fact) is calculated to mislead.
The leading case on this point is Greenwood vs. Leather Shod Wheel Co. (1900)
A company manufacturing leather tyre wheels for trolleys issued a prospectus stating in large type, ‘Orders have already been received from the House of Commons, to be followed by large orders later.’ In fact, the person who supplied refreshments to the House of Commons had one trolley with these wheels and no customer had yet expressed any intention to buy on a large scale.
It was held that the prospectus was misleading as it contained a mis-statement to a material fact, i.e., the mis-statement that orders have been received from the House of Commons would induce the general public to subscribe to shares of the company.
Liability for mis-statements in prospectus can be categorized as follows:
CIVIL LIABILITY
A person who has subscribed for shares in a company, on the strength of a mis-stated prospectus, has the following remedies.
Remedies against the company:
a. Rescission of contract
Rescission of a contract takes place where the investor returns back to the company the shares allotted and gets back the purchase money he paid for the shares, with interest. He also has his name removed from the register of members.
Rescission is available only to first-time subscribers who subscribed to shares and debentures after trusting the misleading statements given in the prospectus. The shareholder will have to exercise this right within a reasonable time of subscribing to shares and before the company goes into liquidation. This facility of rescission of contract is not available to subsequent subscribers.
Conditions to exercise the right to rescind a contract:
a. The prospectus must contain untrue or misleading statement of a material fact, which need not necessarily be fraudulent in nature. It can also be an innocent misrepresentation of facts, but it should be untrue and misleading.
Example: A prospectus of a company said that a company had paid a dividend every year between 1921 and 1927 – years of depression, thus giving the impression of a financially stable company. However, the company had in each of those years incurred considerable financial losses on trading account and was only able to pay a dividend out of reserves accumulated in previous years. This fact was suppressed. The court held that the prospectus was false in a material particular and conveyed a false impression. (Rex vs. Kylsant (1932)).
b. The statement must be a mis-statement of a material fact, that is, it should not be an opinion or expectation or misrepresentation of law. For example, in the case given above, if it was mentioned that orders may come in from public and private enterprises, for trolleys, in the near future, it would not be misrepresentation of a material fact, but where it was clearly mentioned that orders have already been received from the House of Commons, when it was not so, it was a material misrepresentation – material to the forming of decision-making by investors.
Example: A prospectus of a company stated that the directors and their friends have subscribed a large portion of the capital and they now offer to the public remaining shares. In reality, the directors had subscribed only ten shares each. It was held that the subscriber could rescind the contract, because the prospectus contained a false statement. (Henderson vs. Lacon (1857))
c. The mis-statement induced the shareholder to take shares, i.e., he relied on the mis-statement to invest, in the hope that he is investing in a company that will make good returns.
d. Rescission can be granted only to an investor buying shares directly from the company on a fresh issue (as he is under no compulsion to verify the authenticity of statements, but subsequent buyers buy at their own risk).
This was proved in the leading case of Peek vs. Gurney (1873). The facts of the case are as follows:
A prospectus containing false statements was issued by the defendants on behalf of a company. No shares were allotted to the plaintiff at that time. Several months afterwards the plaintiff bought 2000 shares on the stock exchange. The company went into liquidation and the plaintiff had to pay nearly £ 1, 00,000 as a contributory.
His action against the directors for deceit was rejected.
e. The omission of a material fact must be misleading before rescission is granted, i.e., if a statement which is untrue at the time of issuing the prospectus becomes true by the time of application for shares, then rescission need not be granted.
Example: There was a statement in the prospectus to the effect that more than half of the shares had already been subscribed for and that the list would remain open only for a few days. This statement at the time of the issue of the prospectus was untrue but before the plaintiff had applied for shares the whole issue had been applied for. Nobody could say that the plaintiff had been deceived. (Ship vs. Crosskill (1870))
f. The proceedings for rescission should start immediately as the shareholder becomes aware of the misrepresentation.
Loss of right to rescind
1. If the shareholder, knowingly fully well of the misrepresentation in the prospectus, affirms his contract for purchase of shares, either expressly or impliedly, he cannot rescind the contract. Affirmation takes place in the following manner:
(i) The shareholder attempts to sell his shares;
(ii) He executes a transfer deed;
(iii) Pays calls or receives dividends;
(iv) Attends or votes in general meetings personally or by proxy.
2. Where the shareholder, even after becoming aware of the misrepresentation, exercises his right to rescind after an unreasonable delay, the shareholder loses his right to rescind the contract for purchase of shares.
Example: An allottee became fully aware of misrepresentation in the company’s prospectus in the month of July. However, he moved to have his name removed from the register of members in December. It was held that the un-explained delay of five months precluded him form obtaining relief. (Re Christineville Rubber Estates Ltd. (1911))
3. Where the parties cannot be put back to their original positions, rescission cannot take place. Ex: right to rescind exercised after procedure for winding up has started.
b. Claim for damages
In situations where a mis-statement in the prospectus is of a fraudulent nature, the shareholder can claim for damages for deceit, provided that he has rescinded his contract immediately on becoming aware of the misrepresentation. The shareholder will have to prove that the mis-statement or omission was:
(a) One of fact and not of law, nor an expression of opinion;
(b) Material;
(c) Acted upon by him in good faith;
(d) Those acting on behalf of the company were aware of the fraudulent misrepresentation;
(e) Those acting on behalf of the company were authorised to issue the prospectus with the fraudulent misrepresentation; and
(f) The shareholder suffered loss / damages.
ii. Against the directors, promoters & experts
Where a person has subscribed for shares or debentures on the faith of a mis-stated prospectus, and he has suffered any loss or damage, the following persons can be sued and shall be held liable to pay compensation:
a. Every person who is a director of the company at the time of the issue of the prospectus;
b. Every person who has authorised himself to be named in the prospectus as a director (proposed director);
c. Every person who is a promoter of the company;
d. Every person who has authorised the issue of the prospectus; and
e. The company.
a. Compensation for untrue statement (sec. 62)
Every director, promoter and others who induced an investor to subscribe to shares on debentures on the faith of a misrepresented prospectus, whose issue they have authorised, will have to compensate the subscriber for damages sustained by him. Compensation payable is the difference between the price paid for the shares or debentures and their value at the date they were allotted to the subscriber.
However, Section 62(2) provides certain defenses available to directors, by which they can plead for escape from damages:
i. If the director or promoter can prove that he had withdrawn his consent to act as such before the prospectus was issued and that the prospectus was issued without his consent, then he can escape liability.
ii. If the director can prove that he was ignorant of the misrepresentation and that after issue of the prospectus, but before allotment, on becoming aware of the misrepresentation, he withdrew his consent and gave a public notice of his withdrawal and reasons for it, he can escape liability.
iii. If the director can prove that the prospectus was issued without his consent or knowledge and on becoming aware of the same, he issued a public notice to the effect, he can escape liability.
iv. If the director can prove that until the time of allotment he had reasonable grounds to put his belief in the fraudulent statement, he can escape liability.
v. If the director can prove that he made his statement based on the authority and report of an expert, which he had reasonable grounds to believe, he can be relieved of his liability.
vi. The director will be relieved of his liability if he can prove that the statement was a true and correct copy of an official document.
The expert will not be held liable if he can prove that:
a. He withdrew his consent to the prospectus before it was submitted to the registrar for registration.
b. After delivery of prospectus to registrar, but before allotment of shares, on being aware of the misrepresentation, he withdrew his consent and gave a public notice of the same.
c. He was competent to make the statement and up to the date of allotment of shares he firmly believed in the validity of the statement.
b. Damages for non-compliance with sec. 56
Section 56 requires that a prospectus shall state the matters specified in Part I of Schedule II. If this has not been complied with and an omission takes place, any shareholder can claim for damages, even though such omission does not make the prospectus misleading or false. However, the director, promoter or such other person will not be liable if he can prove that:
i. He had no knowledge of the matter not disclosed in the prospectus;
ii. The non-compliance arose from honest mistake of fact on the part of the directors or experts; and
iii. The non-compliance was not material and the court also feels so.
c. Damages for fraudulent misrepresentation under general law
Directors and other officers of the company can be held liable under the common law if it is proved that they made a false statement with absolute knowledge of its false nature, or that they acted recklessly or without adequate care. However, they can be exempted if the officer acted in good faith and believed that they had acted honestly and had sufficient and reasonable grounds to believe that the statement they were making was true.
B. CRIMINAL LIABILITY
Every person who authorised the issue of a prospectus with an untrue statement shall be punishable with penalty for fraudulently inducing persons to invest money. This penalty may be in the form of 2 years’ imprisonment or a fine of Rs. 50,000, or both.
The accused person may not be liable, if he is able to prove that:
a. The statement was immaterial; or
b. He had reasonable ground to believe and did believe up to the time of the issue of the prospectus that the statement was true.
If any officer of the company is party to an issue and allotment of shares under a fictitious name, the penalty shall amount to an imprisonment for 5 years or a fine of Rs. 1,00,000, or both.
MEMBERSHIP IN A COMPANY
Definition
• Section 41 of the Companies Act of 1956, defines a member as a person who has signed the Memorandum of Association and every other person who agrees in writing to become a member and whose name is entered in the Register of Members.
• According to the Depositories Act, 1996, a member is every person holding equity share capital of a company and whose name is entered as beneficial owner in the records of the depository.
Share holders not being members
The following are not members, though they may be shareholders:
• Holder of a share warrant
• Transferee or the Legal Representative of a deceased shareholder.
Members not being Shareholders
The following are members though they are not shareholders:
a. A company limited by Guarantee, not having share capital can have only members and not shareholders.
b. A transferor of shares continues to be a member until his name is replaced in the Register of Members with the name of the transferee.
c. Signatories to the Memorandum become members just because they have signed the memorandum. Their names are entered in the Register of Members even before allotment of shares.
d. A person misrepresenting himself to others, by acting as though he were a member, when he is actually not one, is stopped from denying his position later on and is held liable as a member, though he is not a shareholder. This is termed as ‘membership by Acquiescence or estoppel’.
e. Persons, who cease to be members 12 months before winding up, are held liable as List B contributories to pay the unpaid portion of the share capital on default by present transferee shareholders.
f. A person may become a member, though he does not hold shares, by an order or decree of a court of law.
Modes of Acquiring Membership
1. Every person by subscribing to the Memorandum of Association of a company registered under the Indian Companies Act, 1956, is decreed to be a member and his name is placed in the Register of Members, even before shares are allotted.
2. Every director of the company who gives his agreement in writing to the Registrar of Companies, agreeing to take up qualification shares and pay for them, become members on registration of the company.
3. When members of the public make an application for shares, which is accepted by the company when it makes a subsequent allotment, the subscriber’s name is entered in the Register of Members after the shares are registered in his name.
4. A person may purchase shares and apply to the company to register him as a member. Thus, a transferee of shares can also acquire membership in a company.
5. On the death of a shareholder, his legal representatives can become shareholders, though not members. They have the power to dispose off the shares. They can become members, if they choose to, by registering the shares acquired in their name. On the insolvency of a shareholder member, the Court may appoint an Official Assignee, who acquires membership by operation of law.
6. If a person allows his name to appear in the Register of Members without any agreement to the same between him and the company, or if he acts as though he were a member, when he actually is not, it is termed as acquiring of membership by holding out / Estoppel. At the time of winding up, he too will be held liable as a contributory.
Who may become a member?
1. A minor cannot become a member, because every contract entered into with a minor is a nullity and hence void. If by any mistake, a minor’s name has been entered in the Register of Members, then the company can remove his name on becoming aware of this fact. The minor can also repudiate the contract of share allotment any time during his minority. However, if on attaining majority, he is aware of the fact that he is a member of a company, and this happened when he was a minor, then he must repudiate the contract immediately on obtaining knowledge of the same. But, if he does not repudiate the contract on attaining majority, and receives dividend or pays calls, etc., the company can stop him from denying that he is a shareholder.
The above rules do not apply if the minor has acquired shares by transmission, as the legal heir of a shareholder member.
2. A company can become the member of another company, if its articles allow it to do so.
3. A subsidiary cannot be the member of its holding company. However, it can be a member if shares have been transferred to it in the position of a legal representative.
4. A partnership firm, since it does not have a separate legal identity, cannot own shares in its own name in a company. However, partners can own shares either individually or jointly.
5. Foreigners can be members of an Indian company and own shares, subject to the FEMA Act, 1999 and approval of the RBI.
6. A person who takes shares under a fictitious person is liable as a member, but can be punished for impersonation.
7. A Hindu Undivided Family can own shares in the name of its ‘karta’.
8. An insolvent can be a member of a company, but all beneficial interest in the shares will lie with the Official Assignee.
9. A trustee cannot be a member.
10. A registered society can hold shares in its own name.
11. Shares in a company can be held jointly. In a public company each joint holder will be treated as a separate member. Generally, not more than 4 persons at a time can be joint holders. The provisions relating to joint shareholding are as follows:
Only one share certificate will be issued;
All the shareholders are jointly as well as individually liable to make payments on shares;
Each joint holder of a public limited company is treated as a separate member.
In case of a private company, joint holders are treated as a single member.
The joint holder whose name appears first in the Register of Members shall receive company circulars and notices.
The joint holder whose name appears first in the Register of Members shall be entitled to vote.
The names of the joint holders may be entered in the Register of Members in the order that they appear in the application form or in the share transfer form.
Payment of divided can be made by the company to the joint holder whose name appears first in the Register of Members, unless there is a joint instruction to the contrary.
In order to calculate the number of members required for signing a requisition, the signature of any one joint holder shall be treated as the signatures of all of them.
Joint shareholding for director, with another person, will be considered as sufficient for qualification shares, unless the Articles provide otherwise.
All the holders will have to jointly appoint a proxy.
In order to transfer shares, all the joint holders will have to individually sign the transfer deed, without which the transfer will not be considered valid.
On transmission of shares, the legal heir becomes liable along with the surviving joint holders.
Any one joint holder can represent the other holders at a general meeting. If voting is by show of hands, one person’s vote will be counted as all the other joint holders. However, in a vote by poll, all the joint holders will have to be personally present to vote.
For purposes of a quorum, joint holders will be counted as one member.
TERMINATION OF MEMBERSHIP
A person ceases to be a member of a company when his name is removed from the Register of Members and this can come about either because of some act of the member himself, which is voluntary, or because of an operation of law, which is involuntary.
Cessation of membership by act of parties
A person can lose his privilege of membership in a company when he transfers his shares and the transferee registers himself with the company, or when his shares are forfeited by the company, or when he surrenders his shares to the company or when the company exercises its right of lien over his shares and sells them.
Cessation by operation of law
The law comes into force to put an end to a person’s membership in a company under various circumstances such as death of the member shareholder, on insolvency of the member, where the court orders that his shares be bought by the company or another person, on the winding up of the company, on repudiation of allotment contract because of mis-statements in the prospectus, on redemption of redeemable preference shares, or when share warrants are issued to him on his fully paid shares.
Expulsion of a member
Certain members, who cause trouble either to the company or to the interests of the minority shareholders, can be expelled. They can be expelled if there is a malafide exercise of powers by majority shareholders that inhibit the rights of minority shareholders or affect the management and running of the company. At the same time this right to expulsion can be exercised bona fide to protect the interests of the company.
Rights of a member
Rights of members are conferred on them either by the Companies Act or by the Articles of Association and the Memorandum of Association.
1. Members enjoy certain statutory rights which are conferred on them by the Companies Act.
2. They enjoy documentary rights through provisions of the Articles and the Memorandum.
3. Members also enjoy legal rights under the General Law.
(i) Individual rights: These are rights enjoyed by members in their individual capacity, conferred on them by the Companies act, and are hence statutory rights. These rights can be enforced by them in their own names. A few of these rights are as follows:
Sec 113: right to receive a share certificate
Sec 155: right to have name in Register of Members as well as to have the register rectified.
Sec 82: right to transfer shares
Sec 171: To attend meetings, receive notice and vote
Right to participate in declaration of dividends
Sec 16: To inspect company’s registers, indexes, etc
Sec 39: to request and obtain copies of Memorandum and Articles of Association.
Sec 81: to have first option on new & further issue
Sec 165 (1)&(2): to obtain copy of statutory meeting
Sec 196(2): right to receive notice of resolution requiring special notice
Sec 191(2): right to obtain minutes of proceedings at general meeting
Sec 284: right to remove directors
Sec 210, 219: right to obtain copies of P&L a/c, Balance Sheet, auditor’s report, etc.
Sec 235, 237: right to make an application for appointment of Government inspectors
Sec 224: right to appoint auditors at Annual General Meeting
Sec 230: right to receive auditor’s report at Annual General Meeting
Sec 399: right to petition court for prevention of mismanagement and oppression
Right to petition court for order of injunction restraining directors
Right to share in company’s capital and surplus assets at the time of liquidation
Sec 433, 484(1)(b): right to participate in passing special resolution for winding up of company
Sec 490, 492: right to participate in the appointment and remuneration of liquidators
(ii) Corporate membership rights: These are rights exercised by majority shareholders. The majority shareholders, as a group exercises their rights and these rights are usually exercised with regard to framing company policy and exercising control over management affairs. However, if misuse of these powers by the majority shareholders, in the form of oppression of minority shareholders or creating company policies that are against law and the Act, action can be taken by the minority shareholders.
In case of oppression by majority, an application for relief can be made by at least 100 members or not less than 1/10th of total members, whichever is less; or any member or members holding not less than 1/10th of issued share capital of the company. In the case of a company not having share capital, application can be made by not less than 1/5th of total members.
In case of oppression and mismanagement by majority shareholders, an extraordinary general meeting can be requisitioned by members holding not less than 1/10th of paid up share capital. In companies not having share capital, members having not less than 1/10th of total voting power can make requisition.
Liabilities, obligations and duties of a member
The liabilities of members depend upon the nature of the company. In case of companies with unlimited liability, the members are liable for all the debts incurred by the company, incurred during the period of membership. In the case of companies limited by guarantee, the member’s liability is limited to the extent of amount guaranteed, and in the case of companies limited by shares the member’s liability is restricted to the amount remaining unpaid on the shares held by him. An individual can also be a B List contributory, where he will be liable, as a past member, on the unpaid amount on shares he had held a year prior to winding up of company, and if the A List contributories, i.e., the present members are unable to pay the amount outstanding on shares.
Members also have certain duties and obligations, implied by the Articles of Association. They are:
a. Take shares that have been allotted to them, without delay.
b. To pay for shares allotted when calls are made.
c. Abide by doings of majority members.
d. Contribute at winding up when shares are partly paid.
e. Individually liable for debts of the company if membership falls below statutory minimum.
Register of members
Every company has to maintain a register of members containing the following particulars:
• Name, address & occupation of each member.
• Number of shares subscribed for and the amount paid or yet to be paid.
• Date of entering each member’s name
• Date of ceasing to be member
• Amount of stock held by member
• In case of default a fine of Rs. 500 is charged on the company and every officer for every day of default
Index of members
• According to Sec 151 every company having more than 50 members will have to maintain a Index of members.
• Any alteration in the register of members is to be entered in the index within 14 days.
• The index has to be kept at the same place where the register of members is maintained.
• Any default will attract a fine extending to Rs. 50.
Location of register of members and right of inspection (sec 163)
• The register and index of members must be maintained at the registered office of the company.
• It may also be kept at any place within the city where the registered office is situated. To do this a special resolution has to be passed in the general meeting and a copy of the proposed resolution has to be sent to the registrar before holding the meeting.
• Any shareholder or debenture holder may inspect the register and index of members free of cost.
• If an outsider wants to inspect the register or index he will have to pay a fee of Rs. 10 for 2 hours.
• The company can send copies of the register or index, within 10 days, on requisition by an applicant.
• The court can sanction or compel an immediate inspection of the register or index.
• Any default will attract a fine of Rs. 500 for every day of default.
References
1. www.sebi.gov.in
2. Companies Act 1956, Companies Amendment Act 2006, Gazettes released by Government of India and the Ministry of Corporate Affairs.
3. Kapoor, N.D., ‘Elements of Mercantile Law’, Sultan Chand & Sons, 13th revised edition, 2008.
4. Saravanavel, P. & Sumathi, S., ‘Company Law’, Himalaya Publishing House, 2006.
5. Companies Act 1956, Gazettes released by Government of India and the Ministry of Corporate Affairs.
6. www.hinduonnet.com
REVIEW QUESTIONS
Section A
1. What is a prospectus?
2. Write a brief note on statement in lieu of prospectus.
3. Is the issue of prospectus necessary?
4. State the objects of underwriting.
5. List out the objects of issuing a prospectus.
6. Briefly explain the conditions for a prospectus.
7. Define shelf prospectus.
8. What do you mean by information memorandum?
9. State the various kinds of capital.
10. What is subscribed capital?
11. Define reserve capital.
12. State the various methods of raising capital.
13. What is meant by alteration of capital?
14. What is reduction of capital?
15. Define shares. State the various types of shares that may be issued by a company.
16. What are cumulative preference shares?
17. Distinguish between shares and stock.
18. What is deferred share?
19. What is ‘allotment of shares’?
20. Define share certificate.
21. What is a share warrant?
22. Who is a member?
23. Can a minor be a shareholder in a company?
24. Give two points of difference between a shareholder and a member.
Section B
1. What is a prospectus? What are its requirements?
2. State the objects of issuing a prospectus.
3. What are the remedies available for any mis-statement made in the prospectus?
4. What is meant by statement in lieu of prospectus?
5. What is underwriting? What are its objects?
6. What do you mean by capital? What are the various kinds of share capital?
7. What are the various methods of raising capital?
8. Briefly explain the procedure for issue of shares.
9. What are the various ways in which share capital can be altered?
10. Explain the various methods of reduction of share capital.
11. Define shares and distinguish it from stock.
12. What are preference shares? State its kinds.
13. What are equity shares? List out its advantages.
14. Briefly explain what you mean by buy-back of shares?
15. What are the different methods through which membership can be acquired in a company?
16. Write a brief note on register of members.
Section C
1. What is a prospectus? Is the issue of a prospectus compulsory on the part of a company?
2. What is a prospectus? What amounts to a mis-statement in a prospectus? What are the remedies available to a subscriber who has taken shares on the basis of a mis-statement in a prospectus?
3. Discuss the liability of a company for untrue statements or omissions in its prospectus.
4. Discuss the civil as well as criminal liability of persons who authorise the issue of a false prospectus.
5. Explain the legal provisions relating to issue and registration of a prospectus.
6. What are the remedies open to an allotee of shares who have had applied for them on the faith of a false and misleading prospectus and what are the defences available to the directors of the company who have issued such a prospectus?
7. Discuss in detail the contents and the form of a prospectus.
8. Who is deemed to be an expert in relation to the prospectus of a company? What conditions must be satisfied before a report by an expert can be published therein? Is there any remedy available to the allotee of the shares who has been induced to take shares on the faith of an untrue statement of an expert in the prospectus?
9. Write short notes on: (a) Statement in lieu of prospectus, (b) Prospectus by implication, (c) Registration of a prospectus
10. Write short note on underwriting of shares.
11. What are shares? Distinguish shares from stock.
12. Explain the various kinds of shares along with their merits and demerits.
13. Define preference shares. What are its various kinds?
14. Distinguish share certificates from share warrants.
15. What is transmission of shares? What are the regulations regarding transmission of shares?
16. Write short notes on: (a) Certification of transfer, (b) Blank transfer, (c) Forged transfer
17. Explain the rights, duties and liabilities of members.
Chapter V – MANAGEMENT OF COMPANY
LEARNING OBJECTIVES
1. To enable students to have a clear understanding of the term ‘directors’, the duties and liabilities involved, their rights and powers in a company and their eligibility requirements.
2. To have knowledge of the parties who can appoint directors, how the office of directors come to an end and the legal position of directors.
3. To understand what board meetings are, how and why they are held and the duties and disabilities of directors with regard to board meetings.
4. To draw a distinction between whole time directors, part time directors, mangers and managing directors.
5. To have an understanding of who a company secretary is, the importance of a company secretary, the qualifications required for appointment to such office, the rights, duties and liabilities of company secretaries and the extent to which they can exercise their powers.
Directors – meaning and definition
According to Section 2(13), ‘any person occupying the position of director by whatever name called’, is termed as a director. The position of a director can be held only by an individual person. Moreover, it is the director who controls the affairs of the company. According to the Companies (Amendment) Act, 2006, no person can be appointed or re-appointed as director, unless he has been allotted a Director Identification Number by the Central Government.
Number of directors
According to the Companies Act, 1956, every public limited company must have a minimum of 3 directors and every private limited company a minimum of 2 directors.
According to the Companies (Amendment) Act, 2000, a public company with a paid up capital of Rs. 5 crores or more and 1000 or more shareholders shall have at least 1 director elected by small shareholders.
A ‘small’ shareholder is a shareholder who holds shares with a nominal value of Rs. 20,000 or less.
The articles of a company decide on the maximum and minimum number of directors that would constitute its board. However, alteration of number of directors is possible by alteration of Articles and passing an ordinary resolution. If the maximum number of directors exceed 12, then central government permission is required.
Eligibility to be a director
1. As per Section 253, only individuals can become company directors, i.e., a company, firm or association cannot become directors. This makes it easier to fix responsibility for actions committed.
2. Section 275 of Companies Act limits the number of directorships a person may hold. It states that no person can be a director in more than fifteen companies.
3. A person appointed as director should be competent to enter into contracts on behalf of the company. The qualifications required by law which makes an individual eligible to be a director are that:
a. He should be a major
b. He should be a person of sound mind
c. He should not have been disqualified from being a director.
3. If the articles stipulate so, then those appointed as directors must take up qualification shares within 2 months of appointment, where the nominal value of these qualification shares must not exceed Rs. 5000.
Disqualifications of directors (Section 274)
A person is disqualified from being appointed as director of a company, if:
1. He has been found to be of unsound mind by a court.
2. He is an undischarged insolvent.
3. He has applied to be declared an insolvent, and this application is pending.
4. He has been convicted and sentenced to imprisonment for not less than 6 months, for having committed a moral offence and 5 years have not elapsed since expiry of such sentence.
5. He has not made payment on calls in respect of shares held by him even after 6 months from the last date fixed for payment.
6. He has been disqualified by a court for an offence involving fraud or mismanagement of company affairs.
7. He has been held guilty for not filing of accounts and returns for more than 3 years.
Ceiling on number of directorships
No person shall hold office at the same time as director in more than fifteen companies.
For example, where a person already holding the office of director in fourteen companies is appointed as a director in two more companies, making the total number of his directorships to sixteen, he shall choose the directorships which he wishes to continue to hold so that the total number of the directorships, old and new, held by him shall not exceed fifteen.
No new appointments of director shall take effect until such choice, is made; and all the new appointments shall become void if the choice is not made within fifteen days.
In calculating the number of companies of which a person may be a director, the following companies shall be excluded:-
a A private company which is neither a subsidiary nor a holding company of a public company;
b An unlimited company;
c An association not carrying on business for profit or which prohibits the payment of dividend;
d A company in which such person is only an alternate director.
Any person who holds office, or acts, as a director of more than fifteen companies shall be punishable with fine which may extend to fifty thousand rupees in respect of each of those companies in excess of the first fifteen.
APPOINTMENT OF DIRECTORS
Directors may be appointed in the following manner:
1. First directors: First directors of a company may be appointed by subscribers to the memorandum. These first directors are usually named in the Articles of Association. If the articles are silent as to the appointment of directors, the subscribers to the memorandum may be deemed as directors and they will hold office until directors are appointed in the first annual general meeting.
2. Subsequent directors: The subsequent directors of a company may be appointed in the following manner:
a. Appointment by company in general meeting where not less than two-thirds of the total number of directors must retire by rotation. The remaining one-third of the directors is not subject to retirement by rotation. The tenure of a director is 3 years. Out of the two-third directors who retire by rotation one-third must retire every year.
b. Appointment by Board of Directors where they have the power to appoint:
i. Additional directors, who may be appointed from time to time as long as the strength of the board does not exceed the maximum strength fixed by the articles. They can hold office until next the next AGM.
ii. Casual vacancy, where an individual may be appointed instead of a director whose office has become vacant before the expiry of his term because of death, resignation, bankruptcy, etc. The period of office is till the end of the term of the director in whose place he was appointed.
iii. Alternate director, where an individual is appointed as director for a temporary period in place of a director who is absent for more than 3 months from the state in which board meetings are held. He has to vacate the director’s office on the return of the original director.
c. Appointment by third parties where third parties such as financial institutions who have provided loans and debenture holders can nominate directors to the board, which must not exceed one-third of the total strength of the board. These directors are not liable to retire by rotation. They may be of the following types:
i. Nominee directors, where a nominee or representative of financial institutions that have provided loans are appointed. The Articles must grant permission to the company to enter into such agreements with lenders.
ii. Special directors, where the directors are appointed by the Board for Industrial and Financial Reconstruction. This takes place when net worth of the company shows negative figures and an erosion of share capital takes place. This appointment of special directors is in accordance with the Sick Industrial Companies (Special Provisions) Act, 1985. These directors also need not retire by rotation and they are immune from restrictions and prosecutions.
iii. Persons appointed to replace the Board of Directors, where the National Company Law Tribunal may suppress the entire board and appoint persons or agencies to run the affairs of the company. This usually happens when there is a case charged against the company for oppression and mismanagement. The order to take over the affairs of the board is valid only for a period of one year and renewal not exceeding 1 year at a time. Maximum period during which the order for take over of management can be in force is 8 years.
d. Appointment by proportional representation where not less than 2/3rd of the total number of directors shall be appointed according to the principle of proportional representation. For example, a method wherein a shareholder holding majority shares can elect a majority of the directors, or where quotas are fixed when votes are cast, and individuals who get greater or equivalent votes to the quota fixed are appointed as directors. Appointment of directors by proportional representation shall take place once in three years and any interim casual vacancies shall be filled in the manner laid down in the articles.
e. Appointment by the central government where the Central Government can exercise its powers and appoint any number of directors as it thinks fit, on the board of directors of a public limited company. The purpose is to prevent oppression and mismanagement and protect interests of share holders and the public. These directors can be appointed for a period not exceeding 3 years and shall be made on the application of not less than 100 members or members holding not less than 1/10th of the voting power. These directors need not hold qualification shares nor do they need to retire by rotation.
f. Deemed director where any person according to whose instructions the members of the board act is deemed to be a director.
LEGAL POSITION OF DIRECTORS
The directors of a company are trustees of the company and they act in a fiduciary position towards the company in respect of their powers and the capital under their control.
• Directors are not employees of the company. However, they can hold a salaried position in the company on the basis of a special contract, in addition to their office as director of the company. Under such a situation, he will have all the rights of an employee, but they will be separate from his rights as a director.
• Directors as officers of the company are liable to penalties if the provisions of the Companies Act are not complied with.
• Directors are trustees of the company’s money and property, i.e., they enter into contracts on behalf of the company and represent the company.
• Directors of a company control the affairs of the company as its agents. The acts of a director within the scope of authority granted to him are deemed as acts of the company. Directors are agents of the company and not of shareholders. As agents they can enter into contracts and create negotiable instruments on behalf of the company.
• Since directors are the elected representatives of the shareholders, they are managing partners and their legal liability is limited to the value of shares held by them. However, a director cannot bind other directors and shareholders through their actions.
• The company deals with the outside world and carries out its activities through directors. Hence, directors are the organs of the company. The directors are considered to be the brain of the body, which is the company.
CESSATION OF DIRECTORSHIP
A person can cease to be the director of a company in any of the following manners or methods:
1. Resignation
2. Retirement
3. Acquiring a disqualification
4. Vacation of office
5. Removal
6. Withdrawal of nomination
1. Resignation: Since being a director is a voluntary act, the person being appointed as director must communicate his consent to act as director, in writing and this communication must be filed with the Registrar of Companies. If the person so desires, he may, any time after his appointment, withdraw his consent to act as director and resign from his post. A director’s resignation need not be approved or accepted by the board. It becomes effective on the date specified in his resignation letter. If no date is specified by him in his resignation letter, then it becomes effective on the day the letter is received by the company.
The Registrar will have to be informed of a director’s resignation. The company will have to file a return relating to changes in the board. The director who has resigned must either get a proof of change from the Registrar, or intimate the fact of his resignation to the Registrar through a letter.
The Companies Act does not provide any provisions for resignation by directors, however, based on various cases, there are a few practices, namely:
1. If the Articles permit resignation by a director at any time, then resignation will come into effect without the acceptance of the board or of the company.
2. Acceptance of resignation either by the board or by the company is needed if the resignation or the Articles state that such acceptance is necessary for resignation to come into effect.
3. If the Articles are silent regarding provisions of resignation, then a director may resign by giving a notice to the company, and the resignation will come into immediate effect.
4. Resignation once made cannot be withdrawn except with the consent of the company or the board of directors.
5. Oral resignation tendered at the time of a general meeting can be accepted by the meeting.
2. Retirement: Every director is liable for retirement by rotation, unless he is appointed as a non-rotational director. Every director has tenure of 3 years. The procedure for retirement is that the director intimates the company of his intention of not continuing in the post of director. If at an annual general meeting, the post of a retiring director is not filled, the meeting shall be adjourned to the same time, same place and same day of the next week. If even at the adjourned meeting, the place of the retiring director cannot be filled, then the retiring director will be reappointed.
However, such a reappointment is not applicable under the following circumstances:
1. The meeting has specifically resolved not to fill the vacancy.
2. The resolution proposing reappointment lost when it was put to vote, either in the previous meeting or in the adjourned meeting.
3. The retiring director expresses his unwillingness to be reappointed.
4. The director has been disqualified.
5. The articles require that a special resolution needs to be passed for appointment or reappointment.
Completion of tenure
Circumstances and dates under which a director’s tenure is completed:
• An Additional director’s tenure ends on the date of the next Annual General Meeting.
• For directors appointed on a casual vacancy, tenure ends on the date on which the original director should have retired.
• The tenure of an Alternate director ends on the return of the original director.
• A Nominee director’s tenure ends on the date specified by the nominating authority.
3. Vacation of office (sec 283)
The office of a director becomes vacant if:
1. Qualification shares of the company required to be taken up by the director are not taken by him within the stipulated time.
2. A court finds the director to be of unsound mind.
3. The director applies to be declared insolvent.
4. The director is adjudged an insolvent.
5. He has been convicted and imprisoned for not less than 6 months for a moral offence.
6. He is guilty of non payment of calls within six months from date fixed for payment.
7. He absents himself from 3 consecutive Board meetings or for a continuous period of 3 months, whichever is longer.
8. He accepts loan or guarantee for loan from the company in which he is a director.
9. He does not disclose to the board his interest in a contract.
10. He has been restrained by a court for fraud or misfeasance in relation to the company.
11. The director has been removed by company from his position in a General Meeting.
12. He held office of director on the virtue of having been in the employment of the company, and when he ceases to be the employee of the company, he will have to vacate the office of director.
If a person lets himself be appointed to the office of director, inspite of being aware of his disqualification, then he is in default and will have to pay a fine of Rs. 5000 for each day of the default.
4. Removal of Director
a. A director can be removed by shareholders by passing an ordinary resolution, before the completion of his tenure, other than in the following cases:
1. A director appointed by the Central Government can be removed only by the Central Government.
2. A director of a private company, appointed for life on 1st April 1952.
3. Directors appointed in accordance with the principle of proportional representation. This ensures that the majority shareholders do not remove directors appointed by minority shareholders.
4. Directors appointed by IDBI, IFCI, debenture holders, etc. can be removed only by them.
5. Directors appointed by Board for Industrial and Financial Reconstruction.
b. A director can be removed by the Central Government, on the recommendation of the National Company Law Tribunal, on the following grounds:
1. The director has been found guilty of fraud, misfeasance, negligence or default in carrying out his duties.
2. The director has been found guilty of carrying out the business against sound business principles and practices.
3. The company is carried on in such a manner so as to cause injury to the industry or trade to which it belongs.
4. The directors have been carrying on trade with the intent of defrauding creditors.
Removal by National Company Law Tribunal
• The terminated director cannot serve as manager to a company for a period of 5 years from date of order of termination.
BOARD MEETINGS
The place where the directors of a company exercise their powers jointly is termed as a meeting of the board. Meetings of board of directors must be held at least once in every three months and in a year, at least 4 such meetings must be held.
The notice of board meetings must be given to every director in writing and to his address in India. If any default is made in this matter, then every officer of the company in default is punishable with a fine of Rs. 100. The quorum for a board meeting shall be one-third of the total strength, or two directors, whichever is higher. If, for want of a quorum, the board meeting cannot be held, then it is adjourned to the same day of the next week.
Powers exercised by the Directors at Board meetings
The following powers can be exercised by the Board, by passing resolutions at board meetings:
1. Power to make calls
2. Power to issue debentures
3. Power to borrow money
4. Power to invest funds of the company
5. Power to make loans
DUTIES OF DIRECTORS
1. Duty of reasonable care: Directors must exercise skill and care in carrying out their duties. They are expected to act in a manner that is reasonably expected of a person with their knowledge and experience.
2. Duty to act honestly: Directors have a duty to act in a manner that is in the best interests of the company. He should ensure that he does not enter into any transaction in the name of the company that will lead to a personal gain.
3. Attend meetings: A director is not compelled or bound to attend all meetings of the board.
4. Inspect books of accounts: A director need not examine each transaction entered into the books of accounts.
5. Act personally: A director will have to carry out his duties personally and cannot delegate his powers to an agent.
6. Duty of disclosure of interest: A director cannot enter into any contract with the company for the purchase or sale of goods and services or for underwriting shares and debentures. If he does so, he shall disclose his interest in the subject matter.
Civil Liabilities of directors
The liabilities of directors are categorized under the following heads:
A. Liability to outsiders: The directors are not personally liable to outsiders if they act within the scope of their authority. However, the directors are personally liable in the following circumstances:
1. If the director has contracted with an outsider in his personal capacity, and not in his capacity as director of the company, then he will be personally liable.
2. If the director contracts as agent of an undisclosed principal, then too, he will be personally liable.
3. If the director has entered into a contract on behalf of a prospective company, then also he is held personally liable.
4. If the contract entered into by the director, on behalf of the company, is ultra-vires the company, then too, he will be personally liable.
5. Directors will be held personally liable to the outsider in case of any mis-statements in the prospectus.
6. In case of any irregularities in the allotment of shares, outsiders can hold directors personally liable.
7. If directors make any default in repayment of application money on shares which are not dealt with on a stock exchange, subscribers to these shares can hold each director involved with the issue personally liable.
B. Liability to company: The directors shall be held liable to the company in the following circumstances:
1. Where the directors have acted ultra-vires the company, such as paying dividend out of capital, pursuing objectives which are outside the scope of the memorandum, etc. the company can hold the directors liable.
2. If any director has acted negligently, and not in the best interests of the company, so that it has created a liability for the company, the director is liable to the company.
3. Where a director has not acted carefully in his capacity as trustee to the company, not taking into consideration the interests and benefits of the company, but has put the properties of the company to use, for his own benefit, then, he is held guilty of breach of trust and is liable to the company.
4. Where a director has been wilfully negligent or has committed any act of misconduct, that has destroyed the trust of the outsider or creditor on the company, then he is guilty of misfeasance in relation to the company.
C. Criminal liability: If directors are held guilty of fraud, not carrying out their duties as directors, omitting to comply with provisions of the Companies Act, etc. they can be penalized either with a fine or an imprisonment
If a director can prove to the court that he acted honestly, in good faith and for the benefit of the company, then he may be relieved from prosecution and default.
Directors with Unlimited liability
If provided by its Memorandum of Association, a limited liability company can have a director, managing director or manager, whose liability is unlimited. For this, a notice in writing has to be given to the person by the promoters, directors or managers of the company, and his consent obtained. If the original memorandum does not permit appointment of directors with unlimited liability, then if the articles permit so, the memorandum can be altered by passing a special resolution to make liability of managerial personnel unlimited.
DISABILITIES OF DIRECTORS
In order to protect the interests of the company and its shareholders, the Act has attached a few disabilities to the office of directors, and they are as follows:
1. A person cannot hold the office of directorship in more than twenty companies at the same time.
2. A director is prohibited from assigning his duties and office to another person.
3. A director cannot claim any exemption from indemnity on any liability which he has incurred because of an act of negligence, fraud, misfeasance, breach of trust, etc. on his part.
4. A director cannot delegate his powers to any other person, unless the articles permit so.
5. An individual who is an undischarged insolvent cannot be appointed as director in a company, nor can he take part in managing the affairs of a company.
6. A director cannot receive any loan or guarantee to a loan without approval from the Central Government.
7. No director can enter into a contract with the company, without the prior consent of the Board. This consent can extend to contract for the purchase or sale of any goods or for underwriting of shares or debentures of the company.
8. If the Board of Directors grants permission, then a director may hold any office of profit carrying a total monthly remuneration of Rs. 5,000 or more. This can extend to a relative of the director, but does not apply to managing directors, managers, bankers, legal and technical directors.
9. In certain cases such as sale of a company’s property, investment of the company’s funds in securities, extension of time for payment of debt due from director, etc. the board can act only with the consent of the company in a general meeting.
10. No company or its Board of Directors can make a contribution to any political party or person for political purposes. Any default can lead to a fine of up to Rs. 50, 000 and imprisonment of 3 years.
Managing director
According to Section 2(26), a managing director is a director who is entrusted with substantial powers of management which he would not be able to exercise otherwise.
A managing director can be appointed by:
• An agreement with the company
• Resolution by company in a general meeting
• Passing a resolution by Board of Directors
• Inserting a clause in the Memorandum or Articles of the company
Substantial powers do not include
• Power to affix common seal on any document
• Draw and endorse cheque
• Draw and endorse any Negotiable Instruments
• Sign any certificate to share or direct registration of transfer of any share
A public limited company or a private company which is a subsidiary of a public company cannot appoint a managing director unless the central government grants permission to do so. However, the Central Government shall not grant approval, unless
• It is in the best interest of the company to appoint a managing director.
• The person appointed as managing or whole time director is a fit and proper person and the appointment is not against public interest.
• The terms and conditions of appointment are fair and reasonable.
The following persons cannot be appointed as managing director:
1. A person who is an undischarged insolvent or who is adjudged insolvent.
2. A person who has suspended payment to creditors.
3. A person who has been convicted by the court for an offence involving moral turpitude.
4. The person cannot be in office as managing director of more than two companies at the same time.
In order for companies to appoint managing or whole time directors, the company must have a paid up share capital equivalent to Rs. 5 crores or more.
Any appointment and re-appointment of managing directors can be made only with Central Government approval. The tenure of a managing director is 5 years. Removal of a managing director can be made only by the Board of Directors, by the Central Government or by the National Company Law Tribunal.
Distinction between a Director and Managing Director
Distinction Director Managing director
Election Elected by shareholders Elected by directors
Tenure Tenure is 3 years Tenure is 5 years
Retirement Retirement by rotation at end of 3 years Exemption from retirement by rotation
Remuneration Receives honorarium Office of profit / salary
Powers No individual powers; only collective powers Special powers delegated by BOD
Eligibility May or may not be a shareholder Must be a director and then only a Managing Director
Duties No charge of routine management; only guide, adviser / consultant Charge of routine management, CEO & Head of Company.
Agent of Agent of shareholders / company. Agent of Board of Directors
Responsibilities In charge of overall supervision & control In charge of executive and admin work
Distinction between a Whole-time director and Managing Director
Distinction Whole-time director Managing director
Appointment Special resolution by shareholders Member consent not necessary
Tenure Tenure period has no restriction Tenure 5 years
Limit Cannot manage more than one company Manage maximum 2 companies
Status Ordinary employee Substantial powers and not ordinary employee
Existence Can be appointed along with MD and manager MD and manager cannot exist simultaneously
Manager (Section 2(4))
A manager is an individual subject to the superintendence, control and direction of the Board of Directors, has the management of whole or substantially whole of company affairs. The term ‘manager’ includes a director holding the position of manager.
Distinction between Manager and Managing Director
Distinction Manager Managing Director
Requirement Need not be company director Must be company’s director
Limit on company Company cannot have more than one manager Company can have more than one Managing Director
Appointment Appointed under contract of service Appointment by Board in a General Meeting as per agreement with company, or authority of Memorandum and Articles
Disqualification Grounds of disqualification remain effective only for 5 years Grounds of disqualification remain effective life – long
Court conviction Conviction by foreign court does not disqualify Any conviction, whether from home or abroad is a disqualification
Powers Has management over whole affairs of company; has more power than Managing Director Has substantial powers of management
Remuneration Maximum remuneration cannot exceed 5 % of net profits If more than one Managing Director is appointed, then maximum remuneration cannot exceed 10 % of net profits
References
1. Kapoor, N.D., ‘Elements of Mercantile Law’, Sultan Chand & Sons, 13th revised edition, 2008.
2. Saravanavel, P. & Sumathi, S., ‘Company Law’, Himalaya Publishing House, 2006.
3. Garg, K.C. & Gupta, Vijay, ‘Company Law and Secretarial Practice, Kalyani Publishers, 2nd revised edition, 2006.
4. www.vakilno1.com
5. www.sebi.gov.in
6. Companies Act 1956, Companies Amendment Act 2006, Gazettes released by Government of India and the Ministry of Corporate Affairs.
REVIEW QUESTIONS
Section A
1. Define the term ‘director’.
2. Who is eligible to become a director?
3. Who are first directors?
4. What is the ceiling on number of directors in a company?
5. When does a director’s office become vacant?
6. Who is a managing director?
Section B
1. What is the requirement to be eligible to be appointed as director?
2. Who can remove a director?
3. Explain in brief the circumstances under which the office of a director becomes automatically vacant.
4. Briefly explain the extent of powers of directors.
5. Elucidate on the duties of directors.
6. Describe the scope and extent of liability of directors.
7. Distinguish between manager and manager director.
Section C
1. Define the term ‘director’. Explain clearly how directors may be appointed.
2. What does the Companies Act, 1956 say about the appointment of a person as director, other than a retiring director? Explain.
3. Discuss as to how the resignation of a director becomes effective.
4. What is the procedure for removing a director (a) by shareholders; (b) by the Central government; (c) by the court?
5. Illustrate with examples, the extent of the board’s powers?
6. Who can be a manager? Distinguish between manager and managing director.
Chapter VI – MEETINGS AND RESOLUTIONS
LEARNING OBJECTIVES
1. To enable students to know the procedures for holding a company meeting.
2. To be aware of resolutions and the types.
Meaning
Since a company is an association of persons, these persons must discuss their views and opinions on various matters, on which there might be disagreements and unanimous solutions have to be found. This involves holding of meetings.
According to the Oxford Dictionary, “a meeting is a gathering or assembly of 2 or more persons for purposes of conversing, entertainment, discussion or the like.”
Meetings include:
Meetings of Members / Shareholders
Meetings of Directors
Meetings of Creditors
Other meetings held by auditors, company secretary, liquidators, etc.
MEETINGS OF SHAREHOLDERS
The meetings of shareholders can be classified into the following categories, namely:
a. Mandatory meetings, such as Statutory Meeting and Annual General Meeting.
b. Optional meetings, such as Extra Ordinary General Meetings.
c. Contingent meetings, when emergencies or contingent circumstances arise.
Statutory meeting
These meetings are required by public companies limited by shares and guarantee companies having a share capital. Statutory meeting is the first meeting of shareholders immediately after commencing of business. This meeting is held only once in the lifetime of the company, and it has to be held within a period of not less than 1 month or within a period of 6 months from the date on which it is entitled to commence business. A notice of the statutory meeting has to be made at least 21 days before the date of holding the meeting.
Private limited companies and companies not limited by share capital and unlimited companies need not hold a statutory meeting.
The object of holding a statutory meeting is:
a. To enable shareholders to discuss matters relating to the formation of the company and the carrying on of its business,
b. To approve contracts mentioned in the prospectus, and
c. To give shareholders information regarding number of shares allotted, preliminary expenses, implementation of underwriting agreements, etc.
A Statutory Report has to be prepared and filed with the Registrar and a copy of the same has to be sent to all the members for their approval at least 21 days before holding the meeting.
The Statutory Report gives details of preliminary expenses, the names and occupations of directors and auditors, details of underwriting contracts, amounts due and received on share allotment, calls due from directors, managers, etc.
Consequences of not holding the statutory meeting
If default is made in complying with the above provisions, every director or other officer of the company who is in default shall be punishable with fine up to Rs. 5000. The Registrar or a contributory may file a petition for the winding up of the company if default is made in delivering the statutory report to the Registrar or in holding the statutory meeting on or after 14 days after the last date on which the statutory meeting ought to have been held.
Annual General Meeting
These meetings are held every year in addition to any other meetings held by the company. According to the Indian Companies Act, 1956, an Annual General Meeting should be held at the earliest of 3 relevant dates, i.e., either within 6 months from the close of the financial year, or within 15 months from the date of the previous Annual General Meeting, or on the last day of the next calendar year. The first annual general meeting of the company must be held within 18 months from the date of its incorporation.
The Annual General Meeting enables members to exercise control over the affairs of the company & protect their interests. The businesses that are transacted in an Annual General Meeting may be classified as Ordinary business and Special business. Ordinary business includes appointment of directors and auditors in place of those retiring, declaration of dividend, etc. Special business includes removal of directors, issue of bonus shares, etc.
The authority to call for an annual general meeting rests with the board of directors. An AGM may also be called for by the secretary, manager, managing director or any other officer of the company, as long as it is ratified by the board.
The notice of the annual general meeting must be given to members at least 21 clear days before the meeting is to be held. It shall be held during business hours at the registered office of the company and on a day that is not a public holiday. It can also be held within any town or village in which the registered office of the company is situated. An annual general meeting for which a notice has been issued can also be cancelled or postponed by the board of directors for valid reasons. At the same time, an AGM being conducted may be adjourned by the chairman of the meeting, for bona fide reasons.
Consequences of not holding the Annual General Meeting
In case of default in holding an annual general meeting, the following are the consequences:-
a. Any member of the company may apply to the NCLT. The NCLT may call, or direct the calling of the meeting, and give such ancillary or consequential directions as it may consider fit in relation to the calling, holding and conducting of the meeting. The NCLT may direct that one member present in person or by proxy shall be deemed to constitute the meeting. A meeting held in pursuance of this order will be deemed to be an annual general meeting of the company. An application by a member of the company for this purpose must be made to the concerned Regional Bench of the NCLT by way of petition in Form No. 1 in Annexure II to the CLB Regulations with a fee of rupees fifty accompanied by (i) affidavit verifying the petition, (ii) bank draft for payment of application fee.
b. Fine which may extend to Rs. 50,000 on the company and every officer of the company who is in default may be levied and for continuing default, a further fine of Rs. 2,500 per day during which the default continues may be levied.
Extraordinary General Meeting
These meetings are convened to discuss urgent matters which cannot be postponed to the next Annual General Meeting. An extraordinary general meeting is held between two consecutive Annual General Meetings. It may be held for reasons such as issue of rights shares, increasing remuneration of director, managing director, etc. These meetings can be convened by the directors whenever they think fit, on requisition of shareholders and by the National Company Law Tribunal.
The notice informing the extraordinary general meeting must be accompanied by an explanatory statement, explaining as to the reasons for holding the meeting.
Class Meeting
These are meetings held by shareholders of a particular class. These meetings might be held to obtain the consent of that class of shareholders for altering their rights, or for converting one class of shares into another, i.e., converting Preference Shares into Equity Shares.
MEETINGS OF DIRECTORS
These meetings are convened and held by the Board of Directors. They are held in order to arrive at collective decisions for the proper management of company affairs.
There can be two types of board meetings, and they are:
a. Committee Meetings, where specific problems are discussed and the company investigates the problem and solutions are arrived at to solve the problem.
b. Board Meetings, where the Board of Directors of a company exercises most of their powers in a joint meeting held 4 times a year or once in every 3 months. The aim of board meetings is to frame policies for the easy running of the business.
The notice of board meeting must be given in writing to each director and it need not necessarily disclose the purpose of holding the meeting, however, it must be accompanied by a copy of the agenda of the meeting. The board meetings may be held at any place that is convenient to the members of the board. The quorum required to make a board meeting valid is at least 1/3rd of the total strength, or two directors, whichever is higher.
MEETINGS OF CREDITORS AND OTHER CONTRIBUTORIES
Meetings with creditors are held in order to discuss various arrangements with the company creditors. The scheme of arrangements with creditors must be as sanctioned by the Court, if the Court orders the company to hold the creditors meeting. This may be at the time of winding up of a company.
Meetings of debenture holders are held in order to discuss the variations in the terms of security or in order to discuss alteration of their rights, such as redemption or conversion of debentures which are specified in the Debenture Trust Deed.
(i) consideration of a/cs, B/S Explanatory statement annexed to notice
(ii) declaration of dividend
(iii) appointment of directors
(iv) appointment of auditors
(v) fixing of auditors remuneration
REQUSITES OF A VALID MEETING
1. To be a valid meeting, it must be called by a proper authority, such as the Board of Directors, the Central Government or the National Company Law Tribunal.
2. A notice of the meeting communicating the date, time and business of the meeting must be sent to all those who are concerned with the business of the meeting and are entitled to attend it, such as members, legal representatives, auditors, etc. The length of a notice is 21 days, which may be shortened if all members entitled to vote give their consent. The notice must give details of the place, day and time of the meeting and a statement of the business which is going to be transacted. If any special business is to be transacted at the meeting, then an explanatory statement shall be attached to the notice of the meeting. The notice of the meeting is usually signed by the Secretary under the authority of the Board. In case of companies not having a secretary, then the notice may be signed by a director or any officer of the company authorised to do so.
3. In order to transact the business of a meeting, an ‘Agenda Paper’ or ‘Agenda’, which is an itemized list of matters to be taken up in a meeting, has to be prepared. It is the duty of the Company Secretary to prepare the Agenda, after proper discussions with the Chairman of the company. The Agenda puts routine items first and complicated items later. Where any other business which is not specifically mentioned in the Agenda needs to be discussed, the secretary can add it as the last item in the agenda, and the agenda becomes known as a ‘loophole agendum’.
4. A minimum number of persons are required to be present at a meeting for transacting a valid business. These minimum numbers of persons are termed as ‘Quorum’. Absence of quorum makes any meeting invalid. In case of a public company, the quorum is five persons personally present and for a private company, two persons personally present. A quorum of members must be present at the time when the meeting proceeds to carry on business. One person can also constitute a quorum, especially where all the shares of a particular class are held by one person or when the meeting is called by the Central Government or by the National Company Law Tribunal. Quorum for board meetings can be decided by the directors or else as per Section 287, one third of the total strength of the board or two directors, whichever is higher.
5. One of the essentials of a valid meeting is that it must have a presiding officer who is the chief authority in the conduct and control of the meeting. The chairman is the head of the meeting. The chairman is elected at every meeting before it transacts it business. The chairman of a meeting may be the Chairman of the Board, or any director in case of the absence or unwillingness of Board’s Chairman or any member in the absence or unwillingness of the directors. The Chairman has the power to decide on all the questions and points discussed in the meeting and on the priority of speakers demanding poll. He can also adjourn a meeting, cast a vote, expel an unruly member and close a discussion. At the same time, he has the duty to act in the best interest of the company, to ensure that the meeting is duly convened, maintain sense, discipline and order of the meeting, consider questions arising in the course of decision making and ensure that all the members present at the meeting are given an equal opportunity to express their views and also that voting is fair.
6. All proceedings of general meetings and board meetings are recorded in a summarized manner, which later forms an official record of the meetings of a company. This is termed as ‘minutes’ of a meeting and the book is the Minutes Book. The minutes’ books of the general meetings are to be kept at the registered office of the company and members can inspect it during office hours.
7. A member, who is a shareholder in a company limited by shares or a guarantee company with a share capital, can appoint another person to represent him at the meeting and vote on his behalf. This person so appointed represent the member is termed as a ‘proxy’ and their relationship is that of an agent and principal. The proxy cannot speak at a meeting but he can demand a poll. The instrument appointing a proxy must be in writing and duly signed and must be deposited with the company at least 48 hours before the meeting is to be held. A proxy can be revoked any time before voting takes place or if the original member attends and votes at the meeting. Every member can inspect the proxies from 24 hours before the meeting until the meeting concludes. No officer of the company can canvass the members to appoint proxies from a list provided. If they do so, then they are liable to a fine of Rs. 10, 000.
8. Every member of the company has the right to vote on each share that he holds. In meetings, decisions are made by common consent or where it is not possible to reach a common consent, and then the decision made by the majority is accepted. The motion accepted by majority votes becomes a resolution. The persons entitled to vote are equity shareholders; preference shareholders based on rights granted on their shares; holders of share warrants if the articles permit; joint holders of shares; the legal representative of an insolvent or deceased member; representatives of companies, President or Governor; a public trustee; proxy; persons of unsound mind during periods of soundness. Voting can be by show of hands, by poll by ballot, etc.
9. Meetings can be adjourned, that is, dissolved or suspended and postponed to a later time or date which can be decided in the same meeting or at a later date. Meetings may be adjourned for a lack of quorum, if the chairman decides so, if sufficient information regarding a matter is not obtained, etc.
Methods of voting
The sense of the meeting is the mind or opinion of the people constituting the meeting. If the majority agrees on a topic, then it makes the sense of the meeting house. The sense of a meeting can be found out by the following methods of voting. They are as follows:
1. Acclamation: When approval or disapproval for a motion is obtained from the members who are present in a meeting either by clapping of hands, applause or cheering, then it is known as voting by acclamation.
2. Voice: Where a motion is put to vote by the Chairman of a meeting, by asking the members present to say either ‘yes’ or ‘no’ and he gauges the strength of the sound of ‘yes’ or ‘no’ and thus decides the sense of the meeting, it is known as voting by voice.
3. Show of hands: When a motion is put to vote, the chairman asks those who support the motion to raise their hands and takes a count, and does the same for those who are against a motion, and then decides the sense of the meeting, it is termed as voting by show of hands.
4. Division: In this method, the chairman asks members who are present to divide themselves into two groups – those for the motion and those against. He then makes a count and determines the sense of the meeting.
5. Standing vote: In this method of voting, members for a motion stand up in their seats, and the chairman takes a count. The same procedure is repeated to count those against a motion. At the end of the exercise, the verdict of the meeting is declared.
6. Ballot: in this type of voting, secrecy is maintained, i.e., the members do not know the identity of persons who voted for or against a motion put before the meeting. In this method, each member is handed a paper, called a ‘ballot’, which has a list of all the options, with a space provided for his vote. The member puts an ‘X’ mark against the option he has selected and hands the ballot paper back for counting. At the end of the count, the chairman gives the verdict, by declaring the number of votes obtained for each option. The option with the highest number of votes is considered as the verdict, based on which the motion may be passed or rejected.
7. Poll: In this method of voting, the member gets to vote on the strength of shares that he holds. Therefore, more the number of shares that he holds, greater are the votes that he can have. When a poll is conducted, the members present are given a polling paper, where each member will have to enter his name, the number of votes that he has, the number of votes he has by proxy, and whether he is for or against the motion. The polling papers are handed back to scrutineers appointed by the chairman, who will enter the details in a sheet called the polling list. The scrutineers after checking the polling list obtain the results and communicate the same to the chairman who will declare the result to the meeting.
Voting by proxies is not possible for vote by show of hands, vote by division and vote by standing.
MOTIONS
A proposal which is to be discussed at a meeting by the members is termed as a motion. These are matters which are kept before the meeting on which decisions have to be taken. A motion is a proposal, proposition or question that is moved by a member or any item relating to business which is submitted to the meeting for discussion and decision making.
In order for a motion to be discussed at a meeting, it has to be proposed by a member and seconded by another member. A motion that has been proposed by the chairman of the meeting need not be seconded by any one.
Characteristics of a valid motion
In order for a motion to be considered valid enough to be discussed at a meeting, it should fulfill the following conditions:
c. It must be in writing.
d. It must be dated and signed by the proposer of the motion.
e. It must be seconded by another person.
f. It must be introduced before the meeting with a prior notice.
g. It should not be lengthy but must be carefully worded to convey the meaning clearly and precisely.
h. The motion should be within the scope of the meeting and related to the business of the company.
i. It should be in a positive form and must start with the word ‘that’.
j. Motions must be handed to the chairman.
k. A proxy cannot move a motion, only the members can.
l. It must not contain an argument or use defamatory language.
A motion, once it has been put before the meeting, cannot be withdrawn without the unanimous consent of all members present.
The following are the different types of motions:
1. Original motion: A motion in its original form.
2. Substantive motion: When an original motion is altered, it is called a substantive motion.
3. Dropped motion: A motion which does not have a seconder, or which does not interest the meeting and hence has no support, is called a dropped meeting. The chairman allows such motions to lapse.
4. Formal motion: These motions do not affect the subject matter of the business, but the procedure of the meeting. These motions are passed in order to delay the discussions on motions.
When a motion is under discussion, it is termed as a debate and this debate may be interrupted by these formal devices:
a. Amendments
b. Points of order
c. Formal or dilatory motions
Amendment of Motions
Amendments interrupt the debate taking place on a motion at a meeting. These amendments are alterations proposed on the terms of the motion. These are the suggestions and opinions that arise at the time of discussion on the motion. Any amendments to be made will have to be done so after the chairman invites members to discuss the motion and before the closure of the motion, i.e., before it is put to vote.
The rules regarding amendment of motions are as follows:
1. It should be relevant to the motion.
2. It should be in writing.
3. It should not be a negative of the original motion.
4. It should be moved before putting the motion to vote.
5. It should be with a bona fide motive of amending the original motion.
6. An amendment can be moved and seconded by a member who has not spoken on the original motion.
7. The mover of an amendment can speak only once.
8. Any number of amendments can be moved to alter the original motion.
9. Amendments to the motion are put for discussion in the order in which they have been moved.
10. Each person can move only one amendment.
11. An amendment once moved cannot be withdrawn except with the unanimous consent of the meeting.
Points of order
This is a question regarding the procedure of a meeting. At the time of debate, if any member feels there is an irregularity in the manner in which the meeting is proceeding, then he may draw the attention of the chairman by raising a point of order. The chairman may allow the point of order to be discussed and debated and give his final ruling, which is binding. The points of order which are usually raised by member are based on the lack of quorum to start a meeting or a fall in the quorum because of members leaving during the meeting, the use of derogatory or abusive language during the meeting, or the lack of procedural formalities at a meeting.
Formal motions
These are also known as procedural or dilatory motions and are moved in order to delay, interrupt or speed up the discussions on a motion. Formal motions may be moved:
a. to close the discussion of a particular motion (closure),
b. to prevent further discussions on the main motion under discussion especially when its amendment motions have to be discussed (previous question),
c. to stop discussion of the present topic and move on to the next item to be discussed on the agenda,
d. to reject a motion being discussed and refer it back to a committee,
e. to break off a matter being discussed and adjourn it to another date and time in the near future, and
f. to postpone a meeting before the date of its arrival, to another date and time.
RESOLUTIONS
The formal decision of a meeting, taken on any motion placed before it for discussion, is termed as the resolution of the meeting. There are three types of resolutions, namely:
1. Ordinary resolutions
2. Special resolutions
3. Resolutions requiring special notice
An ordinary resolution is that which is passed at a general meeting of shareholders by a simple or bare majority, i.e., more than 50% of votes. These ordinary resolutions are sufficient for the approval of the statutory report, adoption of annual report, director’s report, etc., appointment of auditors, election of directors, declaration of dividends, etc.
A special resolution is one in which:
a. The notice for the meeting specifies that a special resolution is proposed to be passed,
b. The notice has been given 21 days before the meeting, and
c. At least 75% of the members entitled to vote, by person or proxy, have voted in favour of the resolution.
Special resolutions are needed to alter the registered office clause and name clause in the memorandum, to alter the articles of the company, to create reserve capital, to reduce the share capital of the company, to wind up the company, etc.
A resolution requiring special notice is one where the notice of the intention to move the resolution shall be given to the company not less than 14 days before the meeting at which it is to be moved. The company on receiving the notice shall give its members notice of the resolution in the same manner as it gives notice of the meeting. If that is not possible, the company may give a newspaper advertisement not less than 7 days before the meeting.
These types of resolutions are needed when an auditor other than a retiring auditor is to be appointed, when a retiring auditor shall not be reappointed, for removing a director before the expiry of his term, etc.
MINUTES
The term minutes refers to accurate official record of decisions taken at various company meetings. Every company must keep the minutes containing summary of all proceedings of general and Board meetings in books .Minutes should be brief and factual.
It should be so accurate as not to give room for misinterpretation. It should be free from superfluous words.
The following particulars should be present in the minutes.
1. Nature of meeting – Annual General, Extraordinary, Board, etc
2. Date, time and place of meeting
3. Names of chairman, directors, secretary, and number of members attending
4. Business of the meeting in the order set out in the agenda
5. Approval of the minutes of the last meeting
6. Resolutions passed in the meeting
7. Chairman’s signature with date
References
1. Kapoor, N.D., ‘Elements of Mercantile Law’, Sultan Chand & Sons, 13th revised edition, 2008.
2. Saravanavel, P. & Sumathi, S., ‘Company Law’, Himalaya Publishing House, 2006.
3. Garg, K.C. & Gupta, Vijay, ‘Company Law and Secretarial Practice, Kalyani Publishers, 2nd revised edition, 2006.
4. Appannaiah, Reddy, Prabhu Dev, Company Law and Secretarial Practice, Himalaya Publishing House, 2004.
REVIEW QUESTIONS
Section A
1. What is a ‘company meeting’?
2. State two essentials of a company meeting.
3. State the different kinds of meetings.
4. What is the significance of a statutory meeting?
5. What is an ordinary business of a meeting?
6. Define the term motion.
7. What is a resolution?
8. What are the three methods through which a meeting may be interrupted?
9. What is an amendment?
10. What is a point of order?
11. What is a special resolution?
Section B
1. What are the essentials of a company meeting?
2. Briefly explain the different kinds of meetings.
3. Write short notes on: (a) Board meetings (b) Extra ordinary general meetings and (c) Class meetings.
4. Explain the different types of resolutions.
5. Give a brief explanation on ‘interruptions in a meeting’.
6. What are the methods of voting?
7. Write a note on statutory meeting of a company.
Section C
1. Explain the various kinds of company meetings.
2. Discuss the legal provisions relating to board meetings.
3. Discuss the requisites of a valid meeting.
4. Enumerate on the essentials of a valid motion and a valid amendment.
5. What is a statutory meeting? List out the contents of a statutory report.
6. Write explanatory notes on: a) Annual General Meeting b) Board Meeting c) Extraordinary General Meeting
7. Discuss the different types of resolutions that can be passed in the meetings of a public limited company and the business transacted in each category.
8. Write explanatory notes on: a) Proxy b) Quorum c) Minutes
Chapter VII – WINDING UP OF COMPANIES
LEARNING OBJECTIVES
1. To have an understanding of the procedure for winding up to be followed by companies.
2. To understand the types of winding up.
3. To distinguish between winding up and dissolution.
4. To be aware of the secretarial duties with regard to winding up proceedings.
Definition
Winding up refers to the last stage in the life of a company. It is the legal process through which the company comes to an end. At the time of winding up, the property of the company is put at the disposal of its creditors and shareholders. A liquidator is appointed to take control of the company and its assets, profits and debts and to distribute any surplus that remains among the shareholders in proportion to their rights.
The main objectives of the companies winding-up are:
a. To ensure that all the company’s affairs have been dealt with properly;
b. To have the company dissolved.
Thus, the steps involved in winding up are:
a. Appointment of ‘liquidator’ in case winding up is voluntary, or ‘official liquidator’ if winding up is ordered by the National Company Law Tribunal.
b. Closure of the company’s business, conversion of its assets into cash which is used to pay of debts and liabilities.
c. If surplus remains after paying off liabilities, it is distributed among shareholders in accordance to their rights and interests in the company.
d. Dissolution of the company and the removal of its name from the Register of Companies.
Distinction between winding up and dissolution
Winding up Dissolution
This is the first step This is the final step
Realization of the assets and liabilities of a company Removal of the name from the Register of Companies
Legal entity continues Legal entity does not continue
Procedure carried out by Liquidator Procedure carried out by Court
Liquidator can represent the company Liquidator cannot represent the company
Creditors can prove their debts Creditors cannot prove their debts
Modes or types of Winding up
A. Compulsory Winding Up
When a company is bound up based on an order received from the NCLT, it is termed as a compulsory winding up. The grounds for a compulsory winding up are as follows:
1. On passing of a special resolution: In this case, the company must have passed a special resolution to the effect that it is resolved that the company be wound up by the Tribunal. Here, the Tribunal may not grant permission to wind up, if it affects the company’s interests or if winding up is opposed to public policy.
2. Failure to hold statutory meeting: If there is a default in holding the statutory meeting or in giving a copy of the statutory report to the Registrar, the court may, on petition of the Registrar or of a Contributory, order the winding up of the company. This petition for winding up can be made only after the completion of 14 days from the date on which the statutory meeting should have been held.
3. Failure of company to commence business: If a company does not commence its business within a year from its incorporation, or if it suspends its business for a whole year, the Tribunal may order that the company be wound up. The Tribunal may not wind up the company if it abandons only one of its several businesses, and not its main business. The Tribunal may wind up the company only if it has absolutely no intention of carrying on its business.
4. Reduction in number of members below minimum: The Tribunal may order the winding up of a company if the number of members is reduced below minimum, i.e., below 2 in case of a private company and below 7 in case of a public company.
5. Inability of the company to pay its debts: When a company is commercially insolvent, i.e., even though it has assets, it may not be in a position to meet its current obligations, the Tribunal may order for its winding up. A company is deemed to be unable to pay its debts in the following circumstances:
a. where a creditor to whom the company owes more than Rs. 1,00,000 has served a notice on the company and the company has been unable to pay the amount even after a period of 3 weeks;
b. the company is unable to pay public deposits on their due dates;
c. the company is unable to pay dividends declared
6. Winding up on just and equitable grounds: If the Tribunal feels that it is just and equitable that a company be wound up, then the Tribunal may order to do so. Just and equitable grounds may be of the following kinds, namely, where there is a deadlock in the management, where the company cannot carry on business in a profitable manner, where the company is carrying on an illegal activity, where there is oppression of the minority, where the company carries out activities that are against public policy, etc.
7. Default in filing financial statements: If the company is in default in filing up with the Registrar its balance sheet and profit and loss account for five consecutive financial years then the Tribunal may order that the company be wound up.
8. Threat to the nation: If the company has acted against the interests of the sovereignty and integrity of India or security of any state, friendly relation with foreign states, public order, decency and morality then the Tribunal can demand the winding up of the company.
The following are the persons who may petition the NCLT for winding up a company:
a. The company.
b. Any creditor or creditors.
c. Any contributory or contributories.
d. All of the above individually or together.
e. The Registrar.
f. The workers.
g. Any person authorised by the Central Government, such as an Official Liquidator.
Procedure for compulsory winding up
1. Application or petition to the court by persons who are eligible to do so, for winding up.
2. The court hears the disposition of the petition.
3. The court, in consultation with the NCLT appoints the Official Liquidator for winding up, and informs the Registrar of the winding up order.
4. The Official Liquidator takes care of winding up proceedings, such as taking authority to dispose assets of the company and pay off liabilities.
5. Dissolution of the company.
Secretary’s duties in connection with compulsory winding up:
1. Assist the director’s in winding up proceedings.
2. File with the Registrar a certified copy of the winding up order.
3. Submit to the Official Liquidator a statement of affairs of the company.
4. Furnish to the Official Liquidator any other information regarding the company.
5. Ensure that the words ‘The company is under liquidation’ is mentioned on every document issued by the company.
B. Voluntary Winding Up
A company may, voluntarily wind up its affairs, if it is unable to carry on its business, or if it was formed only for a limited purpose, or if it is unable to meet its financial obligation, or it has passed a special resolution to voluntarily wind up the company. A company may voluntarily wind itself up, under any of the two modes:
Member’s voluntary winding up.
Creditor’s voluntary winding up.
In case of voluntary winding up, the entire process is done without Court Supervision. When the winding up is complete, the relevant documents are filed before the Court for obtaining the order of dissolution. A voluntary winding up may be done by the members as it may be done by the creditors. The circumstances in which a company may be wound up voluntarily are: -
a. When the period fixed for the duration of the company in its articles has expired.
b. When an event on the happening of which the company is to be dissolved as per its articles happens.
c. The company resolves by a special resolution at a general meeting to be voluntarily wound up.
A voluntary winding up commences from the date of the passing of the resolution for voluntary winding up. This is so even when after passing a resolution for voluntary winding up, the Court presents a petition for winding up. The effect of the voluntary winding up is that the company ceases to carry on its business except so for as may be required for the beneficial winding up thereof.
Both types of resolution shall be passed in the general meeting of the company.
Once the resolution of voluntarily winding up is passed and the company may be wound up either by the members or by the creditors.
The only difference between the two is that in case of members voluntarily winding up the Board of Directors have to make a declaration to the effect that the company has no debts.
Distinction between compulsory winding up and voluntary winding up
Compulsory Winding up Voluntary Winding up
Can be wound up on order of court Can be wound up on desire of members or creditors
Is only of one type Is of two types – winding up by members and creditors
Liquidator is appointed by the court Liquidator is appointed by members
Can be adopted by all companies Unlimited companies cannot be wound up voluntarily
MEMBERS VOLUNTARILY WINDING UP
The directors of the company shall call for a Board of Directors Meeting, and make a declaration of winding up, accompanied by an affidavit, stating that;
a. The company has no debts to pay, or
b. The company will repay its debts; if any, within 3 years from the commencement of winding up, as specified in the declaration;
c. The declaration will be accompanied by a statement of assets and liabilities up to the date of declaration;
d. A copy of the auditor’s report on the P&L account and Balance Sheet immediately before making the date of declaration;
e. The declaration shall be filed with the registrar within 5 weeks of passing the resolution for winding up.
The procedure for members’ voluntary winding up
a. The Company shall appoint one or more liquidators, in a general meeting, who shall look after the affairs of winding up procedure and distribution of assets.
b. The liquidator so appointed shall be paid remuneration for his services, which shall also be fixed in the general meeting.
c. The Company shall also give notice of appointment of liquidator to the registrar within ten days of appointment.
d. Once the company has appointed the liquidator the powers of the Board of Directors, Managing Director, and Manager shall cease to exist.
e. The liquidator is generally given a free hand to carry out the winding up procedure in such a manner as he thinks best in the interest of the creditors and the company.
f. In case the winding up procedure takes more than one year then the liquidator will have to call a general meeting at the end of each year and he shall present a complete account of the procedure and position of liquidation.
g. When the affairs of the company are fully wound up, the liquidator shall call a general meeting of the members of the company and make a complete account of winding up and show how the proceedings have been conducted and how the property of the company has been disposed off. The meeting shall be called by an advertisement specifying the time, place and object of the meeting.
h. The liquidator shall send to the Registrar and Official Liquidator appointed by the court a copy of the account, within one week of the meeting.
i. If, from the report, the Official Liquidator comes to the conclusion that the affairs of the company have not been carried on in a manner prejudicial to the interest of its members or public, then the company shall be deemed to be dissolved from the date of report to the court. However, if the Official Liquidator comes to a finding, that the affairs of the company have been carried in a manner prejudicial to the interest of members or public, then the court may direct the liquidator to investigate further.
CREDITORS VOLUNTARILY WINDING UP
Where the declaration of solvency is not made the winding up is referred to as a creditors’ voluntary winding up. Hence, a creditors’ voluntary winding up takes place when the company is insolvent.
The procedure for creditors’ voluntary winding up
a. Where the resolution for winding up has been passed, but the Board of Directors is not in a position to give a declaration on the liability of the company, they may call a meeting of creditors for the purpose of winding up. In this meeting, the creditors may appoint a liquidator. They may either agree on one liquidator, or if two names are suggested, then liquidator appointed by creditor shall act.
b. It is the duty of the Board of Directors to present a full statement of the company’s affairs, and a list of creditors along with their dues, before the meeting of creditors.
c. Whatever resolution the company passes in creditor's meeting shall be given to the Registrar within 10 days of its passing.
d. Any director, member or creditor may approach the court, for direction that the Liquidator appointed in general meeting shall act individually, or he shall act jointly with liquidator appointed by creditor, or for appointing Official Liquidator, or that some other person be appointed as liquidator.
e. The remuneration of the liquidator shall be fixed by the creditors, or by the court.
f. On appointment of the liquidator all the powers of the Board of Directors shall cease.
g. In case the winding up procedure takes more than one year then he will have to call a general meeting and a meeting of creditors at the end of each year and he shall present a complete account of the procedure and the status or position of liquidation.
h. The liquidator shall take the following steps when the affairs of the company are fully wound up:
Call a general meeting and meeting of creditors and lay before it a complete picture of accounts, winding up procedure and how the properties of company are disposed of.
The meeting shall be called by advertisement specifying the time, place and object of the meeting.
The liquidator shall send to the Registrar and official liquidator a copy of accounts within one week after the meeting.
If, from the report the official liquidator comes to the conclusion that the affairs of the company are not being carried in a manner prejudicial to the interest of its members or public, then the company shall be deemed to be dissolved, from the date of report to the court.
However, if official liquidator comes to a finding, that affairs have been carried in a manner prejudicial to intent of members or public then the court may direct the liquidator to investigate further.
The Central Govt. shall keep a cognizance over the functioning of the official liquidator and may require him to answer any inquiry.
DISTRIBUTION OF PROPERTY OF COMPANY ON VOLUNTARILY WINDING UP
Once the company is fully wound up, and assets of the company sold or distributed, the proceedings collected are utilised to pay off the liabilities. The proceedings so collected shall be utilised to pay off the creditors in equal proportion. Thereafter any money or property left may be distributed among members according to their rights and interests in the company.
PRIORITY IN DISPOSING LIABILITIES
When the company is wound up by any mode, the liabilities shall be discharged in the following priority:
a. Workmen’s dues.
b. Debts due to secured creditors in case of insolvency.
c. All taxes, cesses and rates due from the company to the central government or a state govt.
d. All wages and salary of any employee due within four months.
e. All holiday remuneration becoming payable to any employee.
All such debts shall be paid in full. If assets are insufficient to meet them, they shall abate in equal proportions.
Secretary’s duties in connection with voluntary winding up:
a. Arrange for the preparation and audit of final accounts.
b. Convene a meeting of the board of directors.
c. Pass notice in the extraordinary general meeting.
d. File copy of the resolution with the Registrar.
e. See that the liquidator is properly appointed.
f. Any notice, order and business letter issued by the company during this period of winding up should indicate that the company is under liquidation.
Distinction between members’ voluntary winding up and creditors’ voluntary winding up
Members’ Voluntary Winding Up Creditors’ Voluntary Winding Up
Resorted by solvent companies Resorted to by insolvent companies
Declaration of the solvency of the company by its directors Declaration of the solvency of the company is not possible
Liquidator will be able to pay off all the liabilities Liquidator will not be pay off all the liabilities
Liquidator is appointed by the members Liquidator is appointed by the creditors
Remuneration of liquidator is fixed by members Remuneration is fixed by creditors or committee of inspection
Members have the dominant control over the winding up process Creditors have the dominant control over the winding up process
C. The Registrar may petition for winding up in the following circumstances: -
a. If default is made in delivering statutory report or holding the statutory meeting.
b. If the company does not commence its business within one year from its incorporation or suspends its business for a whole year.
c. If it appears to him either from the financial position of the company as disclosed in the balance sheet of the company or from the report of a special auditor or an inspector that the company is unable to pay its debts.
d. Where the Registrar is authorized by the Central Government to petition for winding up the company.
e. Where the number of members of the company falls below the statutory minimum.
f. Where it is just and equitable that the company be wound up.
D. Any person authorised by the Central Government.
Under section 243, any person authorised by the Central Government may demand winding up of a company. This may be done so, if any report of an inspector appointed to investigate the affairs of the company discloses: -
a. That the business of the company is being conducted to defraud its creditors or members or for a fraudulent or unlawful purpose.
b. That the persons concerned in the formation or management have been guilty of fraud, misfeasance, and it appears to the Central Government from such report that it is true, then the Central Government may authorize any person including the Registrar to petition for winding up the company on the ground that it is just and equitable to do so.
References
1. Kapoor, N.D., ‘Elements of Mercantile Law’, Sultan Chand & Sons, 13th revised edition, 2008.
2. Saravanavel, P. & Sumathi, S., ‘Company Law’, Himalaya Publishing House, 2006.
3. Garg, K.C. & Gupta, Vijay, ‘Company Law and Secretarial Practice, Kalyani Publishers, 2nd revised edition, 2006.
4. www.ministryofcorporateaffairs.com
5. www.linexlegal.com
REVIEW QUESTIONS
Section A
1. Define the term ‘winding up’ of a company.
2. Who all may petition the NCLT for winding up?
3. What are the various circumstances under which a company may be wound up voluntarily?
4. What is creditor’s voluntary winding up?
Section B
1. What is meant by winding up? Differentiate it from dissolution.
2. What are the different methods of winding up?
3. What do you mean by voluntary winding up? Explain the kinds briefly.
4. What are the kinds of voluntary winding up? State the points of distinction between the kinds.
Section C
1. Explain the various kinds of winding up briefly.
2. Enumerate the various grounds for compulsory winding up.
3. Discuss the procedure for members’ voluntary winding up.
4. Discuss the procedure for creditors’ voluntary winding up.
Chapter VIII - COMPANY SECRETARY AND SECRETARIAL PRACTICES
LEARNING OBJECTIVES
1. To understand the duties, power and liabilities of a company secretary.
2. To be aware of the role of a company secretary and his legal position.
3. To have an understanding of the qualifications needed by a company secretary.
4. To have a thorough knowledge of secretarial duties to be carried out at the time of incorporation, changes in memorandum and articles, holding company meetings, winding up, etc.
DEFINITION
The word ‘secretary’ has been derived form the Latin word ‘secretarius’, meaning confidential officer.
Section 2(45) of the Act defines a secretary as follows:
Secretary means a company secretary within the meaning of section 2(1) (c) of the Company Secretaries Act, 1980 and includes any other individual possessing the prescribed qualifications and appointed to perform the duties which may be performed by a secretary under this act and any other ministerial or administrative duties.
MEANING
A company secretary is the chief administrative officer of a company. He is the eyes, ears and hands of the company and ensures that policies of the management are executed as per directions and decisions taken by the directors in their board meetings.
A company secretary is appointed by the directors in a meeting of the board. The resolution passed for appointing the company secretary has to be filed with the Registrar of Companies.
The importance of a company secretary
As an officer of great importance, a secretary has extensive duties and responsibilities.
The success of the company depends upon his efficient functioning and capacity for a quick grasp of complicated situations.
1. Though he is chiefly concerned with the implementation of the policy framed by the company, he has authority to do many important things on behalf of the company. Though he is not an agent of the company, he is entitled to sign the contracts concerned with the administrative side of a company’s affairs.
2. With growing industrialisation the company administration has become more and more complex. Various legislative enactments which have bearing on a company’s functioning require a thorough understanding of law, accountancy, management, industrial relations, and the multitude of other aspects affecting administration. This has significantly changed the role and importance of company secretary. Hence the Companies Act has made it obligatory for every company having a paid up capital of Rs.50 lakh or more to appoint a duly qualified company secretary.
3. The importance of the role of a secretary also becomes clear when it is noted that Income Tax Act, 1961 and various other Acts consider the secretary to be the principal officer of the company. He is in fact the Chief Executive Officer and the principal co-coordinator.
4. Most of the important things are carried out only through resolutions passed at the Board meetings and other meetings of the company. It is the secretary who does all the work necessary for the successful conduct of any meeting.
5. He also acts as a spokesperson of the company, raising its image and reputation of the company through his personality, integrity, time sense and knowledge of business.
6. As an agent of the Board of directors, he serves as a link between the Board on the one hand and the staff, shareholders and customers on the other hand. Through his initiative, drive and enthusiasm, he removes misunderstandings and builds up smooth relationship.
The problems of giant companies of today are more complicated and the problems assume enormous proportions. While the services of a number of specialists are available to attend to this problem, it is the company secretary with his all-round expertise to co-ordinate the various activities ensures the smooth and successful functioning of the company. The company secretary is undoubtedly the pivot around which revolves the corporate machinery.
Qualifications of a Company Secretary
• The company must have a paid up share capital of not less than Rs. 50 lakhs, to appoint a whole time secretary.
• To be a whole time secretary, the person must be a member of the Institute of Company Secretaries of India.
• In case of companies not having a paid up share capital of Rs. 50 lakhs, the company may appoint any person as a whole time secretary, even though he is not a member of the Institute of Company Secretaries of India.
• Other than being a member of the Institute of Company Secretaries of India, a company secretary must also have the following qualifications, namely:
a. Pass in the intermediate examination of the Institute of Company Secretaries of India;
b. Post graduate degree in commerce or corporate secretaryship granted by any university in India;
c. Degree in Law;
d. Member of the Institute of Chartered Accountants of India;
e. Member of the Institute of Cost and Works Accountants of India;
f. Post graduate diploma in management sciences form any university;
g. Post graduate diploma in company secretaryship granted by the Institute of Commercial Practice, in New Delhi;
h. Post graduate diploma in Company Law and Secretarial Practice granted by the University of Udaipur; or
i. Membership of the Association of Secretaries and Managers, Calcutta.
• The statutory qualifications of a company secretary are not enough. The other qualifications that he needs are as follows:
a. Proficiency in Language. Secretary’s job requires a lot of correspondence, writing reports, etc. Therefore, he must have command over the specialized business language. It would be better if he has a working knowledge of one or more foreign language.
b. Wide Knowledge. He must have a wide general knowledge; only then he can render advice to directors. He must be well conversant with the particular industry or trade in which the company is engaged.
c. Knowledge of Company Law. He must have a thorough knowledge of company law. He must know the rules for convening various meetings. His knowledge must be up-to-date.
d. Knowledge of Other Laws. Besides company law, a secretary should also have the knowledge of other laws such as Contract Act, Sale of Goods Act, Negotiable Instruments Act and various labour laws.
e. Knowledge of Office Organization and Methods. A secretary should have sound practical knowledge of the methods of filing, use of office equipment and machinery and other labor-saving devices.
f. Knowledge of Economics, Banking and Finance. A secretary must have the basic knowledge of economics, law and practice of banking, working of money and capital markets, foreign exchange regulations, etc.
g. Good Personality. A secretary has to deal with the staff members, shareholders, traders and outsiders. By his personality and good behaviour, he can win them over and inspire confidence in them. He should be industrious and patient.
Appointment of Secretary
• The promoters of the company generally appoint the first secretary referred to as the pro tem secretary, who helps them in carrying out all preliminary work connected with the formation of the company. He may not be appointed as the regular secretary.
• A company secretary is generally appointed by the directors at their meeting in exercise of an express power conferred on them by the articles or of general powers of management which the articles usually give them.
• If the directors decide not to appoint the pro tem secretary after incorporation of the company, he cannot sue the company even if his name appears in the articles provided he is given proper notice in such a case. The following procedure must be followed in connection with the appointment:
a. A resolution must be passed at the meeting of the Board of Directors appointing the secretary and approving the terms and conditions of his appointment in the service agreement. The agreement must clearly state the whole of the terms of contract, such as, remuneration, duties, length of appointment, etc.
b. Any director interested in the appointment of the secretary must disclose his interest and must not take part in the discussion or voting on the resolution.
c. The particulars of the appointment must be filed in duplicate with the Registrar within 30 days of the appointment.
d. If the person appointed holds an appointment in any other company he must notify the same within 30 days of appointment.
e. If a director or his relative is appointed as the secretary then a special resolution has to be passed in the general meeting for such an appointment in accordance with the provisions of Sec. 314.
f. Lastly, the necessary particulars must be entered in the Register of Particulars of directors, managing director, manager, secretary, etc.
Duties of Company Secretary
a. Statutory duties
– Under the companies act: The company secretary can sign documents requiring the company’s authentication, make entries in the register of members of share warrants, sign the annual return, allow inspection of the register of members, file resolutions and agreements requiring registration with the registrar, send notice of general meetings to company members, make available for inspection books of general meetings, etc.
– Under income tax act: The secretary is considered as the principal officer of the company and he has to see to it that proper income tax is deducted from employees’ salaries, shareholders’ dividends and debenture holders’ interests’. He has to see that a certificate of income tax deducted at source is furnished to shareholders and debenture holders and income tax returns are filed with the IT department.
– Under stamp act: The secretary has to see that share certificates, share warrants, debenture certificate, transfer forms and other certificates are stamped as per the requirements of the Indian Stamp Act.
– Under other acts: The secretary will have to comply with provisions of various Acts such as The Factories Act, 1949, The Minimum Wages Act, 1948, Foreign Exchange Management Act, 1999, etc.
b. General duties
– Duties to the directors: The secretary will have to work as per the instructions given by the directors, handle and maintain their correspondence, issue notices and prepare agenda for board meetings and draft director’s reports. He has to advise the directors during their deliberations regarding the provisions of the various acts. He is a confidential clerk. He communicates the policies to the staff as well as the shareholders. He has to keep the board posted with all the developments relating to the company.
– Duties to the share holders and public: The secretary has to do all those things that are necessary in relation to shares and debentures, issue prospectus, handle transfer and transmission of shares and debentures, correspond with shareholders, creditors and public, give information about meetings, etc. He also should ensure that he does not make any secret profits, and he should not disclose any secret information regarding the company to outsiders. He must be tactful but at the same time courteous, friendly and helpful. He must be aware of all the important aspects of the company and has to function as the medium of communication between the directors and general public consisting of debenture holders, bankers, solicitors and prospective investors.
– Duties before incorporation: He must attend all the preliminary meetings of the promoters and prepare minutes of the proceedings of these meetings. He has to guide the promoters regarding the provisions of the Companies Act relating to incorporation. He must also help in the preparation of various documents like the Prospectus, Memorandum and Articles.
– Duties after incorporation: He has to arrange for the first board meeting and get the necessary resolutions passed. He must take the steps necessary to get the certificate of commencement. He must prepare a statutory report and arrange for a statutory meeting after getting the certificate.
– Duties towards organisation and office: He must ensure that the office works with maximum efficiency. He must supervise the various activities as well as co-ordinate the activities of the different departments. He has the overall duty to select, organize and guide personnel. This requires that he should devote particular attention to the terms and conditions of their service and also maintain personal contact with individual members of the staff.
Rights and Powers of a Company Secretary
• Right to supervise and control the secretarial department of the company.
• Right to sign documents as a principal officer of the company.
• Right to issue share certificates to shareholders on behalf of the company.
• Right to be indemnified by the company for any loss suffered by the secretary in the course of performing his official duties.
• Right to perform all acts of the company.
• Right to claim his salary from the company as a preferential creditor in the case of winding up of company.
Liabilities of a Company Secretary
a. Statutory Liability: If the company secretary fails to perform his statutory duties, he becomes liable to punishment or penalty prescribed under the Indian Companies Act. He may be held liable for:
– Default in filing a return of allotment
– Default in keeping ready for delivery share certificates
– Default in filing annual return
– Default in holding annual general meeting
– Default in circulation of members resolution
– Default in holding statutory meeting
– Failure to maintain following statutory books:
• Register of members
• Index of register of members
• Register of directors
• Register of director share holding
b. Contractual Liability: The company secretary has certain liabilities arising out of his service contract with the company, and he has to ensure that:
He performs his duties with due care and diligence
He does not do anything beyond his authority
He does not make any secret profits on account of his fiduciary position
He does not commit any fraud or wrong as an employee of the company
He does not reveal any secret or confidential information of the company to outsiders.
Removal of a secretary
He may be removed by the board of directors, under the power given expressly in the articles or under their general powers. Being a servant of the company, his suspension and dismissal are governed by the normal law applicable to employer and employee. The services may be terminated by giving him notice as per the agreements.
The services can be terminated without notice if he is making profits secretly. He may be dismissed for wilful disobedience, misconduct, moral turpitude, negligence, incompetence, etc.
Compulsory winding up of the company by court order translates into the termination of his services.
Legal Position of Company Secretary
• The legal position of a company secretary is that of an agent and servant.
• He is an officer of the company with extensive duties and responsibilities.
• He takes care of day to day activities of the company.
Role of Company Secretary
• As a Statutory Officer
• As a Coordinator
• As a Administrative Officer
As A Statutory Officer
• The Company Secretary is an officer responsible for compliance with the legal requirements under the Companies Act, 1956
• Some of the provisions are:
– He is authorised to sign any document for authentication
– He is authorised to sign and deliver to the Registrar the Annual Return of the company
As A Coordinator
• He is the link between the company and its share holders, society and government. He has duties in the following manner:
– Relating to personnel functions, such as recruitment and training of personnel, training of personnel, negotiations with employee organisations, etc.
– Relating to legal functions, such as acting as the internal legal advisor of the company, providing advice and interpretation of legal matters, preparing briefs and material for filing cases, appear before legal authorities, etc.
– Relating to finance functions, such as conducting internal audit, internal check, delegation of financial powers, etc.
Duties of a secretary with regard to incorporation of Private and Public Ltd. Cos.
Duties of a secretary before incorporation
The secretary must assist the promoters in performing preparatory work and in fulfilling many legal formalities. He has to assist the promoters in convening and conducting meetings, drawing up preliminary contracts and documents required for registration. The duties to be performed are:
a. To help the promoter make a detailed investigation of the proposed venture.
b. If necessary, on the advice of the promoters to secure the opinion of the experts in different fields on the proposed venture.
c. To help the promoters develop the financial plan of the proposed venture.
d. To attend to all the preliminary meetings of the promoter, keep a record of proceedings of the meetings and to help in the discussions.
e. To secure the approval of the Registrar for the proposed name of the venture.
f. Help in the preparation of the preliminary contracts.
g. Help in the drafting and finalizing of documents such as the memorandum of association and articles of association.
h. To follow the guidelines of issued by SEBI.
i. To see that all the requirements of the Act as to incorporation and registration are complied with and that documents such as the memorandum and articles, along with the required stamp duty, filing fees and registration charges are duly filed with the Registrar.
j. To collect the certificate of incorporation from the Registrar.
k. To send a notice of the registered address of the company to the Registrar within 30 days of the date of registration.
Duties of a secretary before incorporation
A private company can commence business immediately after incorporation, but a public company can commence business only after attaining the certificate to commence business from the Registrar. The duties of the secretary are as follows:
a. To make himself thoroughly conversant with the memorandum and articles of association.
b. To prepare the draft of prospectus and statement in lieu of prospectus.
c. To call the first board meeting and get the draft prospectus and the preliminary contracts approved by the board.
d. To see that his own appointment is made and confirmed at the first board meeting.
e. To get the necessary resolution passed for the appointment of bankers, legal advisors and other responsible officers of the company.
f. To arrange for the listing of the securities of the company.
g. To arrange for the opening of a bank account as per the directions of the board.
h. To secure the necessary forms and stationary and to arrange for the preparation of the common seal of the company.
i. To see that the prospectus or the statement in lieu of prospectus is filed with the Registrar and to arrange for the issue of the prospectus to the public.
j. To arrange with the bankers to receive the application money from prospective investors.
k. To arrange a board meeting as soon as the minimum subscription is reached and to get the necessary resolution passed for allotment of shares.
l. To arrange for the refund of the application money to those who have not been allotted shares.
m. To issue letters of allotment/regret to applicants as per the decision of the board.
n. To see that all the legal requirements for commencement of business are complied with.
o. To see that a declaration is filed with the Registrar by one of the directors or the secretary himself, stating that the conditions required to be fulfilled for getting the certificate of commencement of business have been complied with.
p. To collect the certificate of commencement of business from the Registrar.
Duties of the secretary when converting a private company into a public company
The secretary of a private company has to take the following steps to convert a private company into a public company:
a. To arrange a board meeting in consultation with the directors to consider and finalise the plan of conversion and to call the general meeting for passing the necessary resolution for converting the company.
b. To prepare a new set of articles or an altered set of articles in consultation with the board of directors.
c. To issue notices and circulars of the extraordinary general meeting as per the decision of the board.
d. To get the resolutions passed at the meeting, i.e., a special resolution for conversion and for adoption of a new set of articles and an ordinary resolution for increasing the share capital.
e. To file a prospectus or statement in lieu of prospectus with the Registrar.
f. To file with the Registrar, copies of the special resolution along with the explanatory statement within 30 days of passing the resolution.
g. To file with the Registrar notices of increase of share capital and the altered copy of the articles.
h. To get from the Registrar a new certificate of incorporation in the changed name.
i. To take steps to raise additional capital from the public, if needed for further expansion of business.
Duties of the secretary when converting a public company into a private company
The steps to be taken by the secretary of a public company when it comes to concerting a public company into a private one are as follows:
a. To arrange for the board meeting in consultation with the directors for the purpose of calling an extraordinary general meeting.
b. To issue notices and circulars of the extraordinary general meeting.
c. To get the special resolution passed for conversion and for altering the articles or adoption of a new set of articles, incorporating the compulsory provisions, i.e., restricting the right to transfer shares, limit the membership to 50 and prohibit public invitation to subscribe to shares and debentures.
d. To file with the Registrar copies of special resolutions with explanatory statements within 30 days of the date of the resolutions.
e. To apply to the Central Government with the necessary documents for approval of conversion within 3 months of passing the special resolution for conversion. The application to the Central Government must be sent through the regional director.
f. To publish a notice in a leading newspaper about the conversion, if the regional director so requires and send the newspaper clipping to the government.
g. After obtaining government approval, file with the Registrar within one month of the approval, a printed copy of the new or altered articles of association.
Secretarial duties for alteration of the memorandum
Alteration of name clause
The secretary has to ascertain form the Registrar whether the proposed name is acceptable.
If the Registrar informs him that the proposed name is acceptable, the secretary has to obtain a written consent from the Central Government for the change of name.
The secretary has to arrange a board meeting for the purpose of recommending the changed name to the members and to convene an extraordinary general meeting.
The secretary has to get a special resolution passed at the EOGM and get copies of the special resolution signed by the chairman of the meeting
The secretary has to file a copy of the special resolution with the Registrar within 30 days of passing of the resolution.
On filing of the resolution, the registrar makes the necessary change in the register and issues a fresh certificate of incorporation with the changed name.
The secretary has to arrange for the changing of name on all the documents of the company and for getting the new seal approved by the board. He should also notify all parties dealing with the company of the change of name.
Alteration of domicile clause
a. Passing of a special resolution at an EOGM.
b. Filing a copy of the resolution with the Registrar within 30 days of passing the resolution.
c. Getting a certificate of registration of transfer from the registrars of both states if it is an inter-state transfer.
d. Giving notice of location of the new office to the Registrar of the state to which the company is shifted within 30 days of the transfer.
Alteration of objects clause
a. Arrange a board meeting to discuss the proposed change and approve the explanatory statement which will be sent to the members along with the notice. The board will resolve to call for an EOGM to pass a special resolution.
b. Send notice of EOGM with explanatory statement to members, debenture holders, creditors and all those whose interests will be affected by the proposed change.
c. Get a special resolution passed and make a petition to the Central Government for sanction of change. A notice of the company’s petition should be sent to the registrar.
d. If any person objects to the alteration, either his consent to the alteration has to be obtained or his debt has to be discharged or secured by adequate provision of security. This arrangement should also be brought to the notice of the Central Government.
e. On receipt of the confirmation order from the Central Government, a copy of the order and a copy of the altered memorandum should be filed with the registrar within 3 months from the date of the board’s order.
Alteration of capital clause
Secretarial procedure for reduction of authorised capital
a. Arrange a meeting of the board of directors to consider the plan of reduction of capital, to fix the date of the EOGM and to approve the form of special resolution to be moved in the meeting and the explanatory statement which should be sent to members.
b. Send to the members’ notices of the EOGM along with the explanatory statement.
c. Get a special resolution passed at the EOGM for reduction of capital and get the minutes signed by the chairman of the meeting.
d. File a copy of the minutes with the registrar.
e. Make an application to the court along with the copy of the minutes for the confirmation order.
f. Make necessary steps for the settlement of the list of objecting creditors and satisfaction of their claims.
g. Receive the court order of confirmation for reduction of capital.
h. Notify the causes of reduction of capital to the general public, if the court directs so.
i. File a copy of the court order and the minutes describing the particulars of reduction with the registrar.
j. Obtain the certificate of registration of the court order and the minutes.
k. File altered copies of the memorandum and articles of association with the registrar.
l. Take necessary steps to execute the scheme for reduction of capital.
m. Insert the words ‘and reduced’ in the company’s name for a certain period if so directed by the court.
Secretarial procedure for increase of authorised capital
If the articles do not empower increase in the company’s capital, the secretary must arrange for a general meeting where a special resolution is to be passed for suitably altering the articles.
A board meeting will have to be arranged to consider the plan of the issue, the terms of the issue and the draft resolution to be passed ate the EOGM. The date of the EOGM will also have to be fixed.
The secretary will have to arrange for the closure of the register of transfers for preparing the list of members.
Get an ordinary resolution passed at the general meeting for increasing the authorised capital.
File with the registrar a notice of increase of capital specifying the amount of proposed increase and the class of shares affected within 30 days of passing the resolution and pay the necessary fees and capital duty.
Make necessary changes in the memorandum and articles of association, and file the altered copies of these documents with the registrar within 3 months of alteration.
Secretarial duties for alteration of the articles
a. Arrange a board meeting to decide on the alteration in the articles and to fix up the day for an extraordinary general meeting for passing a special resolution to effect a change in the articles.
b. See that the alterations do not violate any provision of the Companies Act, the general law or the company’s memorandum of association. Alteration should not also lead to a fraud on a small minority and it should be in the general interests of the members of the company.
c. Issue notices of the general meeting along with the proposed special resolution and an explanatory statement at least 21 days before the meeting.
d. Get the special resolution passed at an EOGM.
e. File a copy of the special resolution along with the explanatory statement with the registrar within 30 days of passing the resolution.
f. File with the registrar an altered or revised printed copy of the articles of association within 3 months of passing the resolution.
Secretarial duties relating to statutory meeting
a. Prepare a draft of the statutory report and the notice of the meeting in consultation with the directors.
b. Arrange for convening a board meeting and get the statutory report and the notice approved by the board.
c. Get the report certified by the auditors and at least by two directors, one of whom should be a managing director.
d. Get the notice and the report printed and send them to every member at least 21 days before the meeting is scheduled to be held.
e. File a copy of the statutory report with the registrar.
f. Prepare a detailed agenda for the meeting in consultation with the chairman and also a list of the members showing their names, addresses, occupations, number of shares held by each member, etc, for the purposes of producing it at the meeting.
g. Make necessary arrangements for holding of the meetings.
h. Ascertain the quorum of the meeting before the proceedings have commenced.
i. If the quorum is present, read the notice of meeting and also the statutory report.
j. Produce a list of members at eh meeting to supply necessary information and explanation to the meeting, if required.
k. Take down the notes of the proceedings during the meeting.
l. After the meeting, prepare the minutes of the meeting form the notes taken during the meeting and get the same approved by the board at its next meeting.
m. To implement the decisions arrived at the meeting.
Secretary’s duties in connection with annual general meeting
Since the annual general meeting is a recurrent affair in the life of a company, the company secretary is responsible for making all arrangements in holding this meeting in a successful manner. The entire secretarial work maybe divided into three parts. Namely:-
a. Secretarial work before the meeting
b. Secretarial work during the meeting
c. Secretarial work immediately after the meeting
Before the meeting
The following are the duties of a company secretary before the meeting:-
1. Arrange for the preparation of the P&L account, the balance sheet as per the provisions of the companies act.
2. Submission of the P&L account and balance sheet to the board for its approval.
3. Submission of the authenticated P&L account and balance sheet to the statutory auditors of the company.
4. Preparation of the annual report of directors and the chairman’s speech.
5. Fixture of the date of board meeting an issue of notice and agenda of the board meeting to all directors.
6. Arrange for the printing of the P&L account, balance sheet, directors report, auditors report and the notice of the meeting.
7. Give advice to stock exchange of the extent of dividend declared and the date on which shareholders registered with the company will be entitled to dividend.
8. Notice of the annual general meeting is to be sent to shareholders, directors, auditors and stock exchanges at least 21 days before the meeting.
9. Publish a notice of closure of the register of members and share transfer books in a local newspaper.
10. Prepare a list of and an attendance register for valid proxies which have been received at least 48 hours before the meeting.
11. Make arrangements for poll.
12. Prepare detailed agenda for the meeting.
13. Prepare dividend list from register of members.
14. Make necessary arrangements such as seating, lighting, etc for the meeting.
During the meeting
1. Arrange for the share holders to sign the attendance register.
2. Help chairman to ascertain quorum.
3. Read the notice of the meeting.
4. Read the auditors’ report and directors’ report.
5. Help the chairman to conduct the meeting.
6. Supply the chairman with information in connection with questions raised by shareholders during the meeting.
7. Take note of proceedings to prepare minutes of the meeting.
8. To keep before the meeting the register of directors shareholding, register of members, minutes book, copies of accounts, copies of memorandum and articles or association, etc.
After the meeting
Immediately after the meeting the secretary will have to ensure the following:-
1. Preparation of minutes of the meeting.
2. Approval of the minutes by the chairman and obtain his signature within 30 days of the meeting.
3. Inform directors and auditors of their appointment or reappointment.
4. Make necessary changes in the register of directors and a copy of the same has to be filed with the Registrar within 30 days of the meeting.
5. Copies of the balance sheet, P&L account, resolutions adopted at the meeting, etc have to be filed with the Registrar within 30 days of the meeting.
6. Open a separate bank account for dividends payable.
7. Obtain dividend warrants.
8. Dispatch to share holders within 42 days of dividend declaration the dividend warrants with the notice of dividends and tax deduction certificates.
9. Pay income tax deducted from dividend to the income tax office.
10. File annual return with the Registrar within 60 days of the meeting.
11. To brief the press about the meeting.
Secretarial duties relating to extra ordinary general meeting
1. If the meeting is convened on the board’s initiative, consult the chairman and convene the board meeting to fix the date, time and place of the meeting.
2. If the members have requisitioned to call for an EOGM, the secretary, after making a scrutiny of the requisition to ascertain whether it is in order, has to convene a board meeting in consultation with the chairman for fixing the date and time of the EOGM.
3. The secretary also prepares the draft resolution, explanatory statement and after getting them approved by the board, arranges for their printing.
4. The secretary issues notices to members along with an explanatory statement and will also advertise the notice in a local and national newspaper.
5. The secretary will scrutinise the proxies received, prepare a list of proxies and arrange for a poll, if demanded.
6. Arranges for seating of members and recording their attendance.
7. Arrange for checking the admission cards at the entrance.
8. Ascertain whether the required quorum is present at the meeting, and then read out the notice of meeting.
9. Assist the chairman in conducting the meeting, including supply of necessary information and documents if required by the meeting, taking of poll, counting of votes, etc.
10. Make notes of proceedings of the meeting.
11. After the meeting, draft the minutes of the meeting and get the approved by the chairman in the next board meeting.
12. Carry out the instructions and decisions of the meeting.
13. File a certified copy of the special resolution with the registrar within 30 days of passing of the resolution. Failure to do so will lead to a fine of Rs. 20 per day will be imposed on the company till default continues.
14. If any changes have been made in the memorandum or articles of association of the company, then the altered copies of these documents must be filed with the registrar within 3 months.
References
1. Kapoor, N.D., ‘Elements of Mercantile Law’, Sultan Chand & Sons, 13th revised edition, 2008.
2. Saravanavel, P. & Sumathi, S., ‘Company Law’, Himalaya Publishing House, 2006.
3. Garg, K.C. & Gupta, Vijay, ‘Company Law and Secretarial Practice, Kalyani Publishers, 2nd revised edition, 2006.
4. Appannaiah, Reddy, Prabhu Dev, Company Law and Secretarial Practice, Himalaya Publishing House, 2004.
REVIEW QUESTIONS
Section A
1. Define who a company secretary is.
2. State the qualification which a company secretary must possess.
3. List out the roles of a company secretary.
Section B
1. Discuss duties and responsibilities of a company secretary.
2. Detail the secretarial procedure for holding of the statutory meeting.
3. Enumerate the secretarial duties involved in holding an extraordinary general meeting.
Section C
1. Briefly explain the duties of a secretary before and after incorporation.
2. What are the secretary’s duties prior to incorporation and after?
3. Enumerate the secretarial duties before, during and after an annual general meeting.
APPENDIX – PRACTICAL PROBLEMS
1. S formed a company with a capital of £ 40,000. He sold his business to the company for £ 30,000. As a part payment for sale, he accepted 20,000 shares of £ 1 each. The balance of £ 10,000 was considered as loan and S secured the amount by the issue of debentures. His wife, daughter and four sons took one share each. Owing to strike the company was wound up. The assets of the company were valued at £ 6,000. The debts due to unsecured creditors were £ 7,000. S retained the entire sum of £ 6,000 as part payment of loan. The other creditors objected. Their contention was that a man could not own any money to himself, and the entire sum of £ 6,000 should be paid to them.
Examine the rights of S and other creditors. Who will succeed?
2. A public limited company has only seven shareholders. All the shares were fully paid up. The shares of one of the shareholders were sold in a court auction and were purchased by another shareholder of the company to the knowledge of all other shareholders. The company continued to carry on business thereafter. What would be its consequences?
3. A husband and wife, who were the only two members of a private limited company, were shot dead by dacoits. Does the company also die with them?
4. A Hindu undivided family, consisting of a father and five major sons and another family consisting of father, five major sons and one minor son carried on banking business, as owners thereof. Discuss if the organization requires registration under the Companies Act?
5. An association of 12 persons starts a banking business without being registered. Four members retire and thereafter a suit is instituted by one of the continuing members for the partition of the assets of the business. Is the suit competent?
6. A partnership consisting of four firms was formed. Each firm had six partners. The partnership was not registered under the Companies Act. The partnership sold certain goods valued at Rs. 10,000 to Mr. Tom. Tom refused to pay the money. Can the partnership recover by a suit?
7. The Bombay Stock Exchange has 200 members. It is not registered under the Companies Act. One of the members has filed a suit for declaring it illegal. Do you think the suit is maintainable?
8. Five people are the only members of a private company. All of them go in a boat on a pleasure trip into an open sea. The boat capsizes and all the five die being drowned. Is the private company no longer in existence?
9. In a Private Limited Company it is discovered that there are in fact 54 members. On an enquiry it is ascertained that 6 of such members have been employees of the company in the past and they acquired their shares while they were still employees of the company. Is it necessary to convert the company into a Public Limited Company?
10. Mahavir Traders Limited was registered as a public company. There are 64 members in the company as noted below.
(i) Directors and their relatives
(ii) Employees
(iii) Ex-Employees (Shares were allotted when they were employees)
(iv) 5 couples holding shares jointly in the name of husband & wife (5 x 2)
(v) Others
The Board of Directors of the Company proposes to convert it into a private company. Also advise whether reduction in the number of members is necessary.
11. The number of members in a Public Limited Company got reduced to six on 6th September 2003. The company incurs trade debts on 8th September 2003, 10th December 2003, 4th March 2004, 16th March 2004 and 4th April 2004. How far are the remaining six members liable for the debts?
12. The Memorandum and the Articles of Association of a company were delivered to the Registrar of companies for registration of January 6, 2003. On January 8, 2003 the Registrar issued the certificate of incorporation but dated it January 6, 2003. On that very day (January 6, 2003), the company made allotment of its shares. The allotment was challenged on the ground that it was made before the actual issue of the certificate of incorporation. How would you decide and why?
13. Six of the seven signatures to the memorandum of association of a company were forged. The memorandum was duly presented, registered and a certificate of incorporation was issued. The existence of the company was subsequently challenged on the ground that the registration was void. Decide.
14. X, a solicitor on the instructions of promoters who became the directors of the company, prepared the Memorandum and the Articles before its formation. X claims his costs and charges from the company. The company refuses to pay on the ground that it was not in existence when he was appointed. Will the contention of the company succeed?
15. P.K. Ltd. had its registered office in Lucknow. The company applied to the Registrar of Uttar Pradesh to seek permission to transfer its registered office to Patna. The Registrar of Uttar Pradesh granted such permission to P.K. Ltd. which accordingly transferred its registered office to Patna. Is the transfer of registered office valid?
16. A.K. Ltd. has its registered office in Calcutta. The company is mainly engaged in the production and distribution of films. The company passes a special resolution for shifting its registered office from Calcutta to Bombay. The move is opposed by the State of West Bengal on the ground that it will affect the revenues of the State. Decide giving reasons.
17. The directors of a company paid rupees one thousand out of the capital of the company as interest to ‘A’ on the shares held by ‘A’ in the company. The company later on went into liquidation. The liquidator asked the directors to refund rupees one thousand to the company. Can the liquidator compel the directors for the refund?
18. A telephone company did not have the powers to lay telephone lines in a particular area as per its M.O.A. The company laid down the lines and a miscreant X cut them down. Can the company sue X for the damages done to the wires?
19. A company has its registered office in Bombay. Due to some reasons favourable to the company, it wishes to shift its registered office to London. Can the company be permitted to shift its registered office?
20. A company had been formed to permit, assist and protect the use of bicycles, tricycles, and other similar vehicles on the public roads and for further objects connected with same road users. The company proposes to alter its objects clause to include motorists as well for benefits under the scheme of the company. Should the Tribunal confirm such an alteration?
MODEL QUESTION PAPER
Course: III B.Com Max Marks: 100
Subject: Company Law and Secretarial Practice Time: 3 Hours
SECTION A
1. Answer any 12 questions, in two or three sentences each. 2x12=24
Each question carries 2 marks.
a. Define company secretary.
b. What is table A?
c. What is listing?
d. What is a statutory report?
e. What is promotion of a company?
f. Define a company.
g. What is a blank transfer?
h. Give the meaning of agenda.
i. What is a motion?
j. Give two points of differences between a holding company and a subsidiary.
k. What are producer companies?
l. What is an ultra vires activity?
m. What is the NCLT and what is its role?
n. What is a prospectus?
SECTION B
Answer any 5 questions. 5x8=40
Each question carries 8 marks.
2. Write a note on any ten contents of the Articles of Association.
3. What is a memorandum of association? Explain its clauses.
4. Briefly discuss the different ways in which a person ceases to be a member.
5. Write a detailed note on the essentials of a valid meeting.
6. Discuss the role of promoters in the formation of a company.
7. What are the privileges enjoyed by a private company, in comparison to a public company?
SECTION C
Answer any 3 questions. 3x12=36
Each question carries 12 marks.
8. Discuss civil and criminal liability of directors, with regard to mis-statements in the prospectus. Support your answer with valid justifications and illustrations.
9. What is an annual general meeting? What are the duties of a secretary before, during and after the meeting? What are the consequences that a company may face for not holding the annual general meeting?
10. Explain in detail the different modes of winding up of a company.
11. Enumerate the various stages involved in the formation and commencement of a public limited company.
