BCOM (H)-304 --Question

BCOM (H)-304 --Question - Answer Bank

Question 1.: What is a company? What are the characteristics of a company form of business?

The term "Company" was originally derived from 2 latin words: Com (means together) and Panis (means bread/meal).

Thus the term "Company" was originally used for that group of person who took their meal together. From here we can say that "company" means that group of persons who get associated for common lawful purpose.

Definition of Company under Companies Act, 2013

According to Section 2(20) of Companies Act, 2013, “company means a company incorporated (formed and registered) under this Act or under any of the previous companies laws.”

According to Section 9 of Companies Act, 2013, from the date of incorporation mentioned in the certificate of incorporation, subscribers to the Memorandum of Association (MOA) and all other members of the company shall be a body corporate (by the name contained in the memorandum), capable of exercising all the functions of an incorporated company under this Act
having: perpetual succession, ~~a common seal~~ (by Companies Amendment Act, 2015) and power to acquire, hold and dispose of property, both movable and immovable, tangible and intangible in its own name, power to contract in its own name, power to sue and be sued in its own name.

Further, according to Section 44 of the Act, the shares or debentures or other interest of any member in a company shall be movable property, transferable in the manner provided by the articles of the company.

So following are the main characteristics of company form of business:

1. Corporate personality

2. Limited liability

3. Perpetual Succession

4. Separate Property

5. Transferability of Shares

6. Capacity to sue and be sued

7. Contractual Rights

8. Demutualization (separation of management and ownership)

Corporate personality

Being an artificial person, a company is a legal entity different and separate from its promoters, members, directors, and other stake holders. It has its own corporate name and work under that name. It

· can hold its assets in its own name,

· can sue or be sued in its own name,

· can borrow/lend funds, open bank accounts, enter into contracts in its own name

Any of its shareholders or directors or other officers cannot be held liable for the acts of the company even if he/it holds the entire share capital. Further, the shareholders or individual directors are not the agents of the company and so they cannot bind company by their personal acts. company means a company incorporated (formed and registered) under this Act or under any of the previous companies laws (like Companies Act, 1956).

Limited liability

According to Section 3(2), a company may be

· a company limited by shares

A company limited by shares means the liability of the members towards the company is limited to amount unpaid on their shares only.

· a company limited guarantee

A company limited guarantee means the liability of the members towards the company is limited to the amount of guarantee prescribed in the MOA. Further, in such companies the members can be made liable only in the event of winding up of the company.

· an unlimited company

An unlimited company means here the liability of the members is unlimited towards company.

But, in none of the above cases, members can be made liable to anyone else except company for any act of the company or directors.

Perpetual Succession

Perpetual Succession means existence forever. According to Section 9, from the date of incorporation mentioned in the certificate of incorporation, every company has perpetual succession. A company is an artificial person created by law; therefore it can be dissolved or wind up by law. In other words, members may come and go, but company can go forever.

Separate Property

A company is separate legal entity having its own corporate name. It can hold properties in its own name. No member can claim himself to be the owner of the company’s property during its existence. In other words, the property of a company is not the property of the individual members.

Transferability of Shares

According to Section 44 of Companies Act, 2013

· the shares or debentures or other interest of any member in a company shall be movable property, transferable in the manner provided by the articles of the company.

According to Section 2(68)(i) of Companies Act, 2013, private company may restricts the right to transfer its shares through its AOA. But a generally, a public company cannot restrict the transfer of its shares.

Capacity to sue and be sued

A company is separate legal entity having its own corporate name. Therefore, according to Section 9, company may sue or may be sued in its own name (not in the name of its directors or members).

Contractual Rights

A company is an artificial person created by law. Therefore like natural person, it can enter into contract in its own name through its agent (directors or other authorised persons).

Demutualization

Demutualization means separation of management and ownership. Under company form of business, management (directors) is different from owners (members). Members of the company do not get engaged into day-to-day business of the company. Members appoint directors who run company on their behalf. Such directors may or may not be members of the company.

Common Seal

On incorporation, a company may have a common seal. Since a company has no physical existence, therefore it has to act through its agents only. To put restriction on the misuse of the powers of those agents, contracts entered into by anyone on behalf of the company may be under the common seal of the company. Thus common seal acts as official signature of the company. Now, after Companies (Amendment) Act, 2015, it is not compulsory for the company to have common seal. Thus a company may or may not have common seal.

Question 2.: What do you mean by lifting of corporate veil? In what circumstances the corporate veil can be lifted?

Lifting of corporate veil:

A company is an artificial person different for its members and directors. In the eyes of law it has a separate corporate personality. It has its own corporate name. It works under that name. In normal circumstances company cannot be considered as agent or trustee of its members. Therefore members and directors of a company cannot be held liable for any act of that company. This concept is known as Corporate Veil. It means only company can be held liable for an act done in the name of the company. But, as per company laws, a company can be created for lawful purpose only. If a company is created for- dishonest use, fraudulent purpose, unlawful purpose, evading taxes or any other purpose which is against the public interest then law can identify the persons who are behind it and are responsible for any fraud/unlawful act.

Concept is very simple. Company cannot work or think on its own. Its directors and members are its mind and body. Therefore, company can’t do anything wrong own its own. Thus, for any wrong act in the name of company, members/directors can be held liable. This concept is called “Lifting of Corporate Veil”. It is in the interest of the members in general and in public interest to identify and punish the persons who misuse the medium of corporate personality.

In the following circumstances different courts found it necessary to lift the corporate veil and punish the actual persons who did wrong or unlawful acts under the name of company:

Protection of Revenue	The Court may ignore the Separate Legal Entity status of a Company, where it is used for tax invasion or circumventing tax obligation. (Sir Dinshaw Maneckjee Petit)
Determination of enemy character of the Company	Company being an artificial person cannot be enemy or friend. But during war, it may become necessary to lift the corporate veil and see the persons behind it to determine whether they are friends or enemy. This is due to the reason that though a company enjoys Separate Legal Entity but its affairs are run by individuals. (Daimler Co. Ltd. Vs Continental Tyre & Rubber Co. Ltd.)
Prevention of fraud	Where a Company is used for committing frauds or improper conduct, Court may lift the corporate veil and look at the realities of the situation. (Jones vs Lipman)
Protection of public policy	The Court shall lift the Corporate Veil without any hesitation to protect the public policy and prevent transaction opposed to public policy.
Company mere sham or cloak	Where the Company is a mere sham and was really a ploy used for committing illegalities and to defraud people, the Court shall lift the Corporate Veil. (Gilford Motor Company vs Horne)
Where a Company acts as an agent of its shareholders	If there is an arrangement between the shareholders and a Company to the effect that the Company will act as agent of shareholders for the purpose of carrying on the business, the business is essentially of that of the shareholders and will have unlimited liability.
Avoidance of Welfare Legislation	Where a Company tries to avoid its legal obligations, the corporate veil shall be lifted to look at the real picture. (Workmen of Associated Rubber Industry Ltd. Vs Associated Rubber Industry Ltd.)
To punish for contempt of Court	Company being an artificial person cannot disobey the orders of the Court. Therefore, the persons at fault should be identified.

Question 3.: Explain the different types of companies.

Joint stock company can be of various types. The following are the important types of company:

(A) On the basis of incorporation:

(i) Chartered companies

(ii) Statutory companies

(iii) Registered companies

(i) Chartered companies:

The crown in exercise of the royal prerogative has power to create a corporation by the grant of a charter to persons assenting to be incorporated. Such companies or corporations are known as chartered companies. Examples of this type of companies are Bank of England (1694), East India Company (1600). The powers and the nature of business of a chartered company are defined by the charter which incorporates it. After the country attained independence, these types of companies do not exist in India.

(ii) Statutory companies:

A company may be incorporated by means of a special Act of the Parliament or any state legislature. Such companies are called statutory companies; Instances of statutory companies in India are Reserve Bank of India, the Life Insurance Corporation of India, the Food Corporation of India etc. The provisions of the Companies Act 1956 apply to statutory companies except where the said provisions are inconsistent with the provisions of the Act creating them. Statutory companies are mostly invested with compulsory powers.

(iii) Registered companies:

Companies registered under the Companies Act 1956, or earlier Companies Acts are called registered companies. Such companies come into existence when they are registered under the Companies Act and a certificate of incorporation is granted to them by the Registrar.

(B) On the basis of liability:

(i) Companies limited by shares

(ii) Companies limited by guarantee

(iii) Unlimited companies.

(i) Companies limited by shares:

When the liability of the members of a company is limited to the amount if any unpaid on the shares, such a company is known as a company limited by shares. In a company limited by shares the liability of the members is limited to the amount if any unpaid on the shares respectively held by them. The liability can be enforced during existence of the company as well as during the winding up. Where the shares are fully paid up, no further liability rests on them.

(ii) Companies limited by guarantee:

It is a registered company in which the liability of members is limited to such amounts as they may respectively undertake by the memorandum to contribute to the assets of the company in the event of its being wound up. In the case of such companies the liability of its members is limited to the amount of guarantee undertaken by them. Clubs, trade associations, research associations and societies for promoting various objects are various examples of guarantee companies.

(iii) Unlimited companies:

A company not having a limit on the liability of its members is termed as unlimited company. In case of such a company every member is liable for the debts of the company as in an ordinary partnership in proportion to his interest in the company. Such companies are not popular in India.

(C) On the basis of number of members:

(i) Private company:

A private company means a company which by its articles of association:

(i) Restricts the right to transfer its shares

(ii) Limits the number of its members to fifty (excluding members who are or were in the employment of the company) and

(iii) Prohibits any invitation to the public to subscribe for any shares or debentures of the company.

(iv) Where two or more persons hold one or more shares in a company jointly, they are treated as a single member. There should be at least two persons to form a private company and the mximum number of members in a private company cannot exceed 200. A private limited company is required to add the words “Private Ltd” at the end of its name.

(ii) Public company:

A public company means a company which is not a private company. There must be at least seven persons to form a public company. It is of the essence of a public company that its articles do not contain provisions restricting the number of its members or excluding generally the transfer of its shares to the public or prohibiting any invitation to the public to subscribe for its shares or debentures. Only the shares of a public company are capable of being dealt in on a stock exchange.

(D) According to Domicile:

(i) Foreign company:

It means a company incorporated outside India and having a place of business in India.

According to Section 591 a foreign company is one incorporated outside India:

(a) Which established a place of business within India after the commencement of this Act or (b) Which 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.

(ii) Indian Companies:

A company formed and registered in India is known as an Indian Company.

(E) Miscellaneous Category:

(i) Government Company:

It means any company in which not less than 51 percent of the paid up share capital is held by the Central Govt, and/or by any State Government or Governments or partly by the Central Government and partly by one or more State Governments. The subsidiary of a Government company is also a Government company.

(ii) Holding and subsidiary companies:

A company is known as the holding company of another company if it has control over another company. A company is known as subsidiary of another company when control is exercised by the latter over the former called a subsidiary company. A company is to be deemed to be subsidiary company of another

(a) If the other:

(a) Controls the composition of its Board of directors or

(b) Exercises or controls more than half of its total voting power where it is an existing company in respect where of the holders of preference shares issued before the commencement of the Act have the same voting rights as the holders of equity shares or

(b) If it is a subsidiary of a third company which is subsidiary of the controlling company.

(iii) One man Company:

This is a company in which one man holds practically the whole of the share capital of the company and in order to meet the statutory requirement of minimum number of members, some dummy members hold one or two shares each. The dummy members are usually nominees of principal shareholder. The principal shareholder is in a position to enjoy the profits of the business with limited liability. Such type of companies are perfectly valid and not illegal. In Company Act 2013, One man company provision has been approved as a private company.

Question 4.: What is a private company? What are the exemptions and privileges given to a private company?

Private Company: According to Sec. 3(1) (iii) of the Indian Companies Act, 1956, a private company is that company which by its articles of association :

i) limits the number of its members to fifty, excluding employees who are members or ex-employees who were and continue to be members;

ii) restricts the right of transfer of shares, if any;

iii) prohibits any invitation to the public to subscribe for any shares or debentures of the company.

Where two or more persons hold share jointly, they are treated as a single member. According to Sec 12 of the Companies Act, the minimum number of members to form a private company is two. A private company must use the word “Pvt” after its name.

Characteristics or Features of a Private Company. The main features of a private of a private company are as follows :

i) A private company restricts the right of transfer of its shares. The shares of a private company are not as freely transferable as those of public companies. The articles generally state that whenever a shareholder of a Private Company wants to transfer his shares, he must first offer them to the existing members of the existing members of the company. The price of the shares is determined by the directors. It is done so as to preserve the family nature of the company’s shareholders.

ii) It limits the number of its members to fifty excluding members who are employees or ex-employees who were and continue to be the member. Where two or more persons hold share jointly they are treated as a single member. The minimum number of members to form a private company is two.

iii) A private company cannot invite the public to subscribe for its capital or shares of debentures. It has to make its own private arrangement.

Special privileges and exemptions of a Private Company:

1. A private company may be formed with only two persons as member. [Sec.12 (1)]

2. It may commence allotment of shares even before the minimum subscription is subscribed for or paid (Sec. 69).

3. It is not required to either issue a prospectus to the public of file statement in lieu of a prospectus. (Sec 70 (3)]

4. Restrictions imposed on public companies regarding further issue of capital do not apply on private companies. [Sec 81 (3)]

5. Provisions of Sections 114 and 115 relating to share warrants shall not apply to it. (Sec. 14)

6. It need not keep an index of members. (Sec. 115)

7. It can commence its business after obtaining a certificate of incorporation. A certificate of commencement of business is not required. [Sec. 149 (7)]

8. It need not hold statutory meeting or file a statutory report [Sec. 165 (10)]

9. Unless the articles provide for a larger number, only two persons personally present shall form the quorum in case of a private company, while at least five member personally present form the quorum in case of a public company (Sec. 174).

10. A director is not required to file consent to act as such with the Registrar. Similarly, the provisions of the Act regarding undertaking to take up qualification shares and pay for them are not applicable to directors of a private companies [Sec. 266 (5) (b)]

11. Provisions in Section 284 regarding removal of directors by the company in general meeting shall not apply to a life director appointed by a private company on or before 1st April 1952 [Sec. 284 (1)]

12. In case of a private company, poll can be demanded by one member if not more than seven members are present, and by two members if not more than seven members are present. In case of a public company, poll can be demanded by persons having not less than one-tenth of the total voting power in respect of the resolution or holding shares on which an aggregate sum of not less than fifty thousand rupees has been paid-up (Sec. 179).

13. It need not have more than two directors, while a public company must have at least three directors (Sec. 252)

14. The provisions of Sec. 85 to 90 as to kinds of share capital, new issues of share capital, voting, issue of shares with disproportionate rights, and termination of disproportionately excessive rights, do not apply to an independent private company.

15. A transfer or transferee of shares in an independent private company has no right of appeal to the Central Government against refusal by the company to register a transfer of its shares.

16. Sections 171 to 186 relating to general meeting are not applicable to an independent private company if it makes its own provisions by the Articles. Some provisions of these Sections are, however made expressly applicable.

17. Many provisions relating to directors of a public company are not applicable to an independent private company, e.g.

a) it need not have more than 2 directors.

b) The provisions relating to the appointment, retirement, reappointment, etc. of directors who are to retire by rotation and the procedure relating, there to be not applicable to it.

c) The provisions requiring the giving of 14 days’ notice by new candidates seeking election as directors, as also provisions requiring the Central Government’s sanction for increasing the number of directors by amending the Articles or otherwise beyond the maximum fixed in the Articles, are not applicable to it.

d) The provisions relating to the manner of filing up casual vacancies among directors and the duration of the period of office of directors and the requirements that the appointment of directors should be voted on individually and that the consent of each candidate for directorship should be filed with the Registrar, do not apply to it.

e) The provisions requiring the holding of a share qualification by directors and fixing the time within which such qualification is to be acquired and filing with the Registrar of a declaration of share qualification by each director are also not applicable to it.

f) It may, by its Articles, Provide special disqualifications for appointment of directors.

g) It may provide special grounds for vacation of office of a director.

h) Sec. 295 prohibiting loans to directors does not apply to it.

i) An interested director may participate or vote in Board’s proceedings relating to his concern of interest in any contract of arrangement.

16. The restrictions as to the number of companies of which a person may be appointed managing director and the prohibition of such appointment for more than 5 years at a time, do not apply to it

17. The provisions prohibiting the subscribing for, or purchasing of, shares or debentures of other companies in the same group do not apply to it.

18. The provisions of Section 409 conferring power on the Central Government to present change in the Board of directors of a company where in the opinion of the Central Government such change will be prejudicial to the interest of the company, do not apply to it.

Although the changes have been made in Company Act 2013 for private company,which are given asfollows:

Impact of Companies Act, 2013 on Private Companies regarding exemptions and privileges

Companies Act, 2013 has brought massive changes for private companies as barring a very few, all the exemptions which were available to private companies under the Companies Act, 1956 have been withdrawn in the Companies Act, 2013. In this article, we attempt to throw light on the impact of Companies Act, 2013 on private companies by means of comparison of the significant provisions relating to Private Companies under the Companies Act, 1956 and Companies Act, 2013.

Comparison of provisions relating to private companies under CA, 1956 and CA, 2013

Basis of Comparison	Companies Act, 1956	Companies Act, 2013
Definition	Maximum number of members restricted to 50. Express clause in the definition was there “prohibits any invitation or acceptance of deposits from persons other than its members, directors or their Relatives” [Section 3(1)(iii)]	Maximum number of members restricted to 200. No specific clause on prohibition of acceptance of deposits is there in the definition. [Section 2(68)]
Commencement of Business	Under Companies Act, 1956, a Private company can commence its operations immediately after incorporation. Only public companies have to seek certificate of commencement of business. (Section 149)	Under Companies Act, 2013, even a Private Company cannot commence its business or make any borrowings unless it files with ROC a statement that the subscription money and minimum paid up capital has been brought in. (Section 11)
Further issue of shares	Provisions relating to rights issue and Preferential allotment are not applicable to a private company. [Section 81 and 81(1A)]	A private company can make further allotment only by means of Rights Issue, ESOP or Private placement/preferential allotment and needs to comply with the all the provisions relating to these types of allotment. [Section 62]
Acceptance of Deposits from relatives of directors	A Private Company can accept deposits/loans from relatives of directors by virtue of exemption available in the definition of private company. [Section 3(1)(iii)]	A private company is prohibited to accept unsecured loans/deposits from relatives of directors. [Section 73 read with draft rules issued thereunder]
Shares with differential voting rights	Provisions relating to issue of shares with differential voting rights are not applicable to a private company [Section 86]	A private company has to comply with the provisions contained in Section 43 read with the rules issued there under to issue shares with differential voting rights. [Section 43]
Appointment of KMP	Under CA, 1956, irrespective of the capital, Private Companies are not mandated to appoint MD/WTD/Manager etc. except Whole Time Company Secretary in case of companies having paid up capital of Rs. 5 Crores or more. [Section 269 & 383A]	All companies, including private companies, having paid up capital of Rs. 5 Crores or more are required to have the following whole time KMP: 1. MD/CEO/Manager/WTD; 2. Company Secretary; and 3. CFO [Section 203]
Loans to Directors	Restrictions relating to giving of loans, advances or providing securities, guarantees to directors and other interested entities are not applicable to a private company. [Section 295]	All companies, including private companies, are restricted from giving loans, advances or providing securities, guarantees to directors and other interested entities barring few exceptions. [Section 185]
Resident Director	No requirement to have director resident in India.	All companies, including private companies, must have atleast one director who has stayed in India for a minimum period of 182 days during the previous calendar year. [Section 149]
Consent to act as director	In case of private companies, consent to act as director is not mandatory to be filed with ROC. [Section 264]	A person appointed as a director shall not act as a director unless he gives his consent to hold the office as director and such consent has been filed with the Registrar within thirty days of his appointment [Section 152]
Appointment of 2 or more directors by single resolution	Provision relating to appointment of directors to be voted on individually is not applicable to a private company which is not a subsidiary of a public company. [Section 263]	At a general meeting of a company, a motion for the appointment of two or more persons as directors of the company by a single resolution shall not be moved unless a proposal to move such a motion has first been agreed to at the meeting without any vote being cast against it. [Section 162]
Limit on number of directorship	Private Companies are not counted for the purpose of determining the limit of 15 companies in which a person can act as a director at any given time. [Section 275]	A person can act as director in a maximum of 20 companies at any given point of time out of which not more than 10 should be public companies. [Section 165]
Corporate Social Responsibility	No requirement to spend on CSR activities.	All companies, including private companies, who are meeting eligibility criteria fixed in this regard, are required to constitute a CSR committee consisting of at least 3 directors out of which atleast 1 must be independent director and spend at least 2% of average net profits on CSR activities. [Section 135]
Contents of Financial Statements	a. Balance Sheet b. Statement of Profit & Loss c. Cash flow Statement (applicable only to listed companies and companies having Turnover in excess of 50 crores or borrowings in excess of 10 crores) AS 3 and listing agreement	a. Balance Sheet b. Statement of Profit & Loss c. Cash Flow Statement (Except for OPC and Small Company) d. Statement of Changes in Equity e. Notes to accounts
Consolidation of Accounts	Consolidation is not mandated under the Companies Act, 1956 for any company. Listing agreement requires consolidation for listed companies having subsidiaries. (Clause 32 of Listing agreement and AS 21)	a. All companies having subsidiary (s) need to prepare consolidated accounts. b. Subsidiary includes associate and joint ventures. (Section 129)
Maximum term of auditor	Appointment of auditor happens on yearly basis at AGM. No limit on maximum number of years. (Section 224)	a. Appointment of auditor will be for 5 years term in each appointment subject to ratification every year in AGM. b. Individual auditor can serve maximum 5 years and Firm for maximum 10 years followed cooling off period of 5 years. (Section 139)
Number of Companies an auditor can audit	For Private Companies, no limit is there as Section 224(1B) is not applicable to private companies.	a. 20 Companies in total. b. Private companies cannot appoint a person as auditor if he is already auditor for 20 other companies. (Section 141)
Signing of Annual Return	Director + CS/Manager If no CS/Manager, then MD + Director If no MD, then 2 directors (Section 161)	Private Company being a Small Company –CS, If no CS, then 1 Director Private Company, other than Small Company – CS + Director If no CS, then PCS + Director (Section 92)
Provisions regarding general meetings	Private companies can exempt themselves from the applicability of Sections 171 to 186 by mentioning so in its AOA. These sections deal with length of notice for General Meetings, explanatory statement etc.	All requirements regarding general meetings as specified in the Act are applicable to Private Companies. No exemption can be sought basis of AOA.
Authentication of financial statements of the company	By two directors including Managing Director , if there is one and Company Secretary , if there is one (Section 215)	Chairperson, if he is authorized by board or 2 Directors out of which one shall be Managing Director The Chief Executive officer, if he is a Director of the company, The chief financial officer and the company secretary of the company, wherever they are appointed. (Section 134)
Inter Corporate Investment/Loans/Guarantee	Provisions of Section 372A regarding Inter Corporate Investments/Loans/Guarantee are not applicable.	Except subsection (1) of Section 186, other provisions on Inter Corporate Investments/loans/Gurantees are applicable.
Signing of Director’s Report	By Chariman of the Board if he is authorized by board or by such number of directors of the board as are required to sign the balance sheet and the profit and loss account of the company by virtue of sub- sections (1) and (2) of section 215 (Section 217)	Chairperson, if he is authorized by board or 2 Directors out of which one shall be Managing Director or by the Director where there is one Director (Section 134)

Question 5.: What is a public company? Differentiate between private company and public company.

Public company

According to Section 3 (1) (iv) of Indian Companies Act. 1956 “A public company which is not a Private Company”,

If we explain it, we note the following :

i) The articles do not restrict the transfer of shares of the company

ii) It imposes no restriction no restriction on the maximum number of the members on the company.

iii) It invites the general public to purchase the shares and debentures of the companies

Differences between a Public Company and a Private company:

1. Minimum number: The minimum number of persons required to form a public company is 7. It is 2 in case of a private company.

2. Maximum number: There is no restriction on maximum number of members in a public company, whereas the maximum number cannot exceed 50 in a private company.

3. Number of directors. A public company must have at least 3 directors whereas a private company must have at least 2 directors (Sec. 252)

4. Restriction on appointment of directors: In the case of a public company, the directors must file with the Register a consent to act as directors or sign an undertaking for their qualification shares. The directors or a private company need not do so (Sec 266)

5. Restriction on invitation to subscribe for shares: A public company invites the general public to subscribe for shares. A public company invites the general public to subscribe for the shares or the debentures of the company. A private company by its Articles prohibits invitation to public to subscribe for its shares.

6. Name of the Company: In a private company, the words “Private Limited” shall be added at the end of its name. Public company will use only ‘Ltd’.

7. Public subscription: A private company cannot invite the public to purchase its shares or debentures. A public company may do so.

8. Issue of prospectus: Unlike a public company a private company is not expected to issue a prospectus or file a statement in lieu of prospectus with the Registrar before allotting shares.

9. Transferability of Shares: In a public company, the shares are freely transferable (Sec. 82). In a private company the right to transfer shares is restricted by Articles.

10. Special Privileges: A private company enjoys some special privileges. A public company enjoys no such privileges.

11. Quorum: If the Articles of a company do not provide for a larger quorum. 5 members personally present in the case of a public company are quorum for a meeting of the company. It is 2 in the case of a private company (Sec. 174)

12. Managerial remuneration: Total managerial remuneration in a public company cannot exceed 11 per cent of the net profits (Sec. 198). No such restriction applies to a private company.

13. Commencement of business: A private company may commence its business immediately after obtaining a certificate of incorporation. A public company cannot commence its business until it is granted a “Certificate of Commencement of business”.

14. Minimum Capital: Minimum capital is one lac in case of private company and it is 5 lac for a public company.

Question 6.: Explain the procedure of formation of a company.

Company is an artificial person created by following a legal procedure. Before a company is formed, a lot of preliminary work is to be performed. The lengthy process of formation of a company can be divided into four distinct stages: (I) Promotion; (ii) Incorporation or Registration; (iii) Capital subscription; and (iv) Commencement of business. However, a private company can start business as soon as it obtains the certificate of incorporation. It needs to go through first two stages only. The reason is that a private company cannot invite public to subscribe to its share capital. But a public company having a share capital, has to pass through all the four stages mentioned above before it can commence business or exercise any borrowing powers (Section 149). These four stages are discussed as follow :

Promotion:

The term ‘promotion’ is a term of business and not of law. It is frequently used in business. Haney defines promotion as “the process of organizing and planning the finances of a business enterprise under the corporate form”. Gerstenberg has defined promotion as “the discovery of business opportunities and the subsequent organization of funds, property and managerial ability into a business concern for the purpose of making profits there from.” First of all the idea of carrying on a business is conceived by promoters. Promoters are persons engaged in, one or the other way; in the formation of a company. Next, the promoters make detailed study to assess the feasibility of the business idea and the amount of financial and other resources required. When the promoters are satisfied about practicability of the business idea, they take necessary steps for assembling the business elements and making provision of the funds required to launch the business enterprise. Law does not require any qualification for the promoters. The promoters stand in a fiduciary position towards the company about to be formed. From the fiduciary position of promoters, the following important results follow:

1. A promoter cannot be allowed to make any secret profits. If any secret profit is made in violation of this rule, the company may, on discovering it, compel the promoter to account for and surrender such profit.

2. The promoter is not allowed to derive a profit from the sale of his own property to the company unless all material facts are disclosed. If he contracts to sell his own property to the company without making a full disclosure, the company may either rescind the sale or affirm the contract and recover the profit made out of it by the promoter.

3. The promoter must not make an unfair or unreasonable use of his position and must take care to avoid anything which has the appearance of undue influence or fraud.

Promoter’s Remuneration

A promoter has no right to get compensation from the company for his services in promoting it unless the company, after its incorporation, enters into a contract with him for this purpose. If allowed, remuneration may be paid in cash or partly in cash partly in shares and debentures of the company.

Promoter’s Liability

If a promoter does not disclose any profit made out of a transaction to which the company is a party, then the company may sue the promoter and recover the undisclosed profit with interest Otherwise, the company may set aside the transaction i.e., it may restore the property to promoter and recover its money.

Besides, Section 62 (1) holds the promoter liable to pay compensation to every person who subscribes for any share or debentures on the faith of the prospectus for any loss or damage sustained by reason of any untrue statement included in it. Section 62 also provides certain grounds on which a promoter can avoid his liability. Similarly Section 63 provides for criminal liability for misstatement in the prospectus and a promoter may also become liable under this section.

Promoter’s Contracts

Preliminary contracts are contracts made on behalf of a company yet to be incorporated. Following are some of the effects of such contracts;

1. The company, when it comes into existence, is not bound by any contract made on its behalf before its incorporation. A company has no status prior to its incorporation.

2. The company cannot ratify a pre-incorporation contract and hold the other party liable. Like the company, the other party to the contract is also not bound by such a contract.

3. The agents of a proposed company may sometimes incur personal liability under a contract made on behalf of the company yet to be formed.

Kelner v Bexter (1886) L.R. 2 C.P.174. A hotel company was about to be formed and promoters signed an agreement for the purchase of stock on behalf of the proposed company. The company came into existence but, before paying the price, went into liquidation. The promoters were held personally liable to the plaintiff.

Further, an agent himself may not be able to enforce the contract against the other party. So far as ratification of a pre-incorporation contract is concerned, a company cannot ratify a contract entered into by the promoters on its behalf before its incorporation. The reason is simple; ratification can be done only if an agent contracts for a principal who is in existence and who is competent to contract at the time of the contract by the agent.

Incorporation:

This is the second stage of the company formation. It is the registration that brings a company into existence. A company is legally constituted on being duly registered under the Act and after the issue of Certificate of Incorporation by the Registrar of Companies. For the incorporation of a company the promoters take the following preparatory steps:

i) To find out form the Registrar of companies whether the name by which the new company is to be started is available or not. To take approval of the name, an application has to be made in the prescribed form along with requisite fee;

ii) To get a letter of Intent under Industries (Development and Regulation) Act, 1951, if the company’s business comes within the purview of the Act.

iii) To get necessary documents i.e. Memorandum and Articles of Association prepared and printed.

iv) To prepare preliminary contracts and a prospectus or statement in lieu of a prospectus.

Registration of a company is obtained by filing an application with the Registrar of Companies of the State in which the registered office of the company is to be situated. The application should be accompanied by the following documents:

1. Memorandum of association properly stamped, duly signed by the signatories of the memorandum and witnessed.

2. Articles of Association, if necessary.

3. A copy of the agreement, if any, which the company proposes to enter into with any individual for his appointment as managing or whole-time director or manager.

4. A written consent of the directors to act in that capacity, if necessary.

5. A statutory declaration stating that all the legal requirements of the Act prior to incorporation have been complied with.

The Registrar will scrutinize these documents. If the Registrar finds the document to be satisfactory, he registers them and enters the name of the company in the Register of Companies and issues a certificate called the certificate of incorporation (Section 34).

The certificate of incorporation is the birth certificate of a company. The company comes into existence from the date mentioned in the certificate of incorporation and the date appearing in it is conclusive, even if wrong. Further, the certificate is ‘conclusive evidence that all the requirements of this Act in respect of registration and matters precedent and related thereto have been fulfilled and that the association is a company authorized to be registered and duly registered under this Act.

Once the company is created it cannot be got rid off except by resorting to provisions of the Act which provide for the winding up of company. The certificate of incorporation, even if it contains irregularities, cannot be cancelled.

Capital Subscription:

A private company can start business immediately after the grant of certificate of incorporation but public limited company has to further go through ‘capital subscription stage’ and ‘commencement of business stage’. In the capital subscription stage, the company makes necessary arrangements for raising the capital of the company.

With a view to ensure protection on investors, Securities and Exchange Board of India (SEBI) has issued ‘guidelines for the disclosure and investor protection’. The company making a public issue of share capital must comply with these guidelines before making a public offer for sale of shares and debentures.

If the capital has to be said through a public offer of shares, the directors of the public company will first file a copy of the prospectus with the Registrar of Companies.

On the scheduled date the prospectus will be issued to the public. Investors are required to forward their applications for shares along with application money to the company’s bankers mentioned in the prospectus. The bankers will then forward all applications to the company and the directors will consider the allotment of shares. If the subscribed capital is at least equal to 90 percent of the capital issue, and other requirements of a valid allotment are fulfilled the directors pass a formal resolution of allotment. However, if the company does not receive applications which can cover the minimum subscription within 120 days of the issue of prospectus, no allotment can be made and all money received will be refunded.

If a public company having share capital decides to make private placement of shares, then, instead of a ‘prospectus’ it has to file with the Registrar of Companies a ‘statement in lieu of prospectus’ at least three days before the directors proceed to pass the first share allotment resolution. The contents of a prospectus and a statement in lieu of a prospectus are almost alike.

Commencement of Business:

A private company can commence business immediately after the grant of certificate of incorporation, but a public limited company will have to undergo some more formalities before it can start business. The certificate for commencement of business is issued by Registrar of Companies, subject to the following conditions.

1. Shares payable in cash must have been allotted up to the amount of minimum subscription

2. Every director of the company had paid the company in cash application and allotment money on his shares in the same proportion as others.

3. No money should have become refundable for failure to obtain permission for shares or debentures to be dealt in any recognized stock exchange.

4. A declaration duly verified by one of directors or the secretary that the above requirements have been complied with which is filed with the Registrar.

The certificate to commence business granted by the Registrar is a conclusive evidence of the fact that the company has complied with all legal formalities and it is legally entitled to commence business. It may also be noted that the court has the power to wind up a company, if it fails to commence business within a year of its incorporation [Sec. 433 (3)]

Question 7.: What is the procedure of Company Registration?

Starting a company requires a lot of planning and activities and more than that a number of formalities needed to be complied. The detailed procedures and paper works related to starting or to register a company in India are summarized below –

1. Apply for DIN Online

All the existing and intending Directors have to obtain DIN within the prescribed time-frame as notified. File e-Form DIN-1 in order to obtain DIN.

The documents required for filing of eForm DIN-1 will be as follows -

§ Identity proof (any of the following): Permanent Account Number card, driver’s license, passport, or voter card;

§ Residence proof (any of the following): Driving license, passport, voter card, telephone bill, ration card, electricity bill, bank statement;

§ Photograph in .JPEG Format

§ Verification Letter by the applicant for applying for allotment of Director Identification Number (DIN) contain the Name, Father’s name, date of birth, present address, text of declaration and physical signature of the applicant.

2. Acquire and Register DSC

A DSC (Digital signature Certificate) is a very simple, secure, convenient, and a time saving way of signing electronic documents or authenticating certain online transactions. It is required to sign electronic documents, for example e-forms are required to be signed digitally using a digital signature certificate.

It is issued by the licensed Certifying Authority (CA) Certifying Authority (CA) means a person who has been granted a license to issue a digital signature certificate under section 24 of the Indian IT Act, 2000. The list of licensed CAs along with their contact information is available on the MCA portal. Go tohttp://www.mca.gov.in/

Documents required for acquiring the DSC

§ Identity proof (any of the following): Permanent Account Number card, driver’s license, passport, or voter card;

§ Residence proof (any of the following): Driving license, passport, voter card, telephone bill, ration card, electricity bill, bank statement;

§ Prescribed Application Form containing details like Applicant name, Address with Pin Code, DOB, PAN no., Validity for which the DSC is required, E-mail Id, Contact Details.

The CA will verify the details given in the prescribed form with that of Identity Proof and Address Proof attached and after verification will issue the DSC to the Applicant.

After receiving the DSC from CA, the director needs to register the DSC at the Ministry of Corporate Affairs Website .

3. Filing of ROC Form to Register Company

Filing of Form 1A for Name Approval

A good business name is unique and memorable; it reflects the core business purpose and it should not resemble name of any other company. When the application of the name for new company is certified by a practicing Chartered Accountant, Company Secretary or Cost Accountant, the form shall be processed and examined electronically under MCA 21 System and the name will be approved online.

Submission of an application in Form No. 1A with the Registrar of Companies (ROC) electronically and application is to be signed by any of the promoters using its DSC. The application will consist of the following details -

§ Six optional names for the proposed company should be mentioned therein. The proposed names should be indicative of the main objective of the company. Justification for the name also needs to be specified along with the application to take proper care for ‘same or deceptively similar names’

§ Names and full addresses of the promoters (Minimum 7 for a public company and 2 for private company)

§ Authorised Capital of the proposed company

§ Objectives of the proposed company

§ Names of other group companies (if any).

The ROC will scrutinize the same and issues an approval letter/objection within 10 days to the applicant.

The Circular is on “Availability of Name by System Online – Certified by Practicing Professionals” (General Circular No. 7/12) –

The summary of the circular is as follows –

§ The Certified Names by Professionals will go to STP Mode.

§ Application for Name Availability certified by Practicing Professionals will put to Online Check before name approval.

§ System will verify that any two words resembling with the existing names of other companies.

§ If name resembles with other companies, such applications will be put to Non-STP Mode. And if the name does not resemble with other companies, such applications will be put to Non-STP Mode.

§ Applications on Name (Form 1A) approved via STP Mode, Before 11.00 Hrs Form 1 (Incorporation Documents) to be filed after 19.00 Hrs same day

§ Applications on Name (Form 1A) approved via STP Mode, After 11.00 Hrs Form 1 (Incorporation Documents) to be filed after 19.00 Hrs on any Next Working Day.

Company Names without Private Limited / Limited to be processed via Non-STP Mode.

4. Draft – MOA & AOA

Memorandum of Association

Memorandum of Association is the purpose for which the company is formed. A company is not legally entitled to undertake any activity, which is beyond the objects stated in this clause. A duly drafted, verified, stamped and signed Memorandum of Association is required for registering a company.

Articles of Association

Articles of Association are the rules regarding internal management of a company. These rules are subsidiary to the Memorandum of Association and hence, should not contradict or exceed anything stated in the Memorandum of Association. A duly drafted, verified, stamped and signed Articles of Association is required for registering a company.

Inspection: Suspicious and serious inspection of Memorandum and Articles of Association is prudent before filing for registration as they define the intent and extent of the business. The future business prospects should be mentioned in Memorandum and Articles of Association in order to avoid modifications later stages. The Registrar of Companies can be consulted for the vetting process.

Note: The MOA and AOA should be subscribed by at least two persons in case of Private Limited Company and at least three in case of Limited Company.

The subscriber’s sheet consists of the details of the subscribers. Each subscriber needs to hold at least 1 share and shall write opposite to his name the number of shares taken by him. Further, he also needs to add his address, description and occupation (if any) along with a signature in presence of at least one witness who shall likewise add his address, description and occupation (if any).

As per the latest amendment, the subscribers and the witness need to fill their details in the subscriber’s sheet in their own handwriting. The printed details of the subscribers are no more accepted by the ROC.

5. Filing of Forms Required for Incorporation of Company

Ministry of Company Affairs has started the process of filing or uploading of forms completely online together with the attachment of required documents to the Registrar of Companies for initiating the Incorporation Process. An e-form can be signed by the authorized signatory/ representative using the Digital Signature Certificate (DSC). Payments can also be made electronically through credit card/Debit Cards or Internet Banking.

Form No. 1- Application and Declaration for Incorporation of a Company

Form No.1 is a declaration to be executed on a non-judicial stamp paper of Rs.20/- by one of the directors of the proposed company or others like Attorneys or Advocates. It states that all the requirements of the incorporation have been complied with.

Documents required to be attached in Filing of Form No. 1 are –

§ Memorandum of Association (MOA)

§ Articles of Association (AOA)

Note: Stamp Duties will be charged on Form No. 1, Memorandum of Association and Articles of Association.

Form No. 18- Notice of Situation or Change of Situation of Company

This is notice of location or change of location of the registered office. It is to be filed by one of the directors of the company informing the ROC about the registered office of the proposed company

Form No. 32- Particulars of Appointment of Managing Director, Directors, Manager and Secretary and the changes among them or consent of candidate to act as a Managing Director or Director or Manager or Secretary of a Company and/or undertaking to take and pay for qualification shares

This is a form stating the appointment of the proposed directors on the board of directors from the date of incorporation of the proposed company and is signed by one of the proposed directors.

Once the uploaded forms have been approved by the concerned official of the Ministry, then an email regarding the same will receive and the status of the form will get changed to Approved.

Registrar of Companies thereafter, will issue a generated Corporate Identity Number (CIN) and a Certificate of Incorporation to the company.

The Private Company can start its business immediately after receipt of the Certificate of Incorporation.

But the Public Limited Company has to complete certain legal formalities such as a statutory meeting within 6 months from incorporation, statutory report etc. On completion of the said formalities and on filing of the statutory report with the ROC, the ROC issues a Certification of Commencement of Business to the company. A Public Company can start their business operations on receiving the Certificate of Commencement.

To obtain Commencement of Business Certificate after incorporation of the company the public company is required to submit certain additional forms and documents (together with Form 1,18,32) to the Ministry of Corporate Affairs and Registrar of Secretaries.

eForm 20 – Filing of eForm 20, a declaration submitted by the director or company secretary, states the amount of the shares and share capital of the company and that the company has not issued a prospectus inviting the public to subscribe for its shares.

§ Attachment Required – Statement in lieu of prospectus (Schedule III)

eForm 19 – Filing of eForm-19, a declaration of amount of share capital to be offered to the public by the company.

§ Attachment Required – Copy of Prospectus (Schedule II)

Registrar of Companies thereafter shall process the documents and if all the documents are in order then it will issue a Certificate for Commencement of Business.

Then the Public Limited Company can start its business immediately after receipt of the Certificate for Commencement of Business.

Now, the Part IX Company also requires filing of some additional forms together with that of Form 1, 18, 32 for incorporation the company. The Additional Forms are eForm 37 & eForm 39.

eForm 37 - Application by an existing joint stock company or by an existing company (not being a joint stock company) for registration as a public limited or private limited or an unlimited company

§ Attachment Required: Copy of the instrument constituting or regulating the company

eForm 39 - Registration of an existing company as a limited company.

§ Attachment Required: A copy of resolution passed at the general meeting assenting to registration with limited liability.

Pattern of Filing – Firstly, the Part IX Company is required to file eForm 1 and then the Company can file all the other eForms (18, 32, 37 and 39) simultaneously or separately.

Then the Part IX Company can start its business immediately after receipt of the Certificate of Incorporation.

In Case of Section 25 Company, incorporation procedure will include filing of Form 24A. Since, there is a further requirement of obtaining a license for a Section 25 Company after the Name Approval (Form 1A).

Form 24A - Form for filing application to Central Government (Regional Director)

After obtaining license number, applicant can proceed further to incorporate a company by filing e forms 1, 18 and 32.

Then the Section 25 Company can start its business immediately after receipt of the Certificate of Incorporation.

The requirements for a Foreign company opening a branch in India:

A Foreign Company can open a Branch / Liaison office in India subject to the approval of Reserve Bank of India (RBI). Up on receipt of approval from RBI, the Branch / Liaison office has to be registered with the office of Registrar of Companies by filing necessary documents.

Question 8.: Define Memorandum of Association. What are the different forms and clauses of MOA?

The preparation of Memorandum of Association is the first step in the formation of a company. It is the main document of the company which defines its objects and lays down the fundamental conditions upon which alone the company is allowed to be formed. It is the charter of the company. It governs the relationship of the company with the outside world and defines the scope of its activities. Its purpose is to enable shareholders, creditors and those who deal with the company to know what exactly its permitted range of activities is. It enables these parties to know the purpose, for which their money is going to be used by the company and the nature and extent of risk they are undertaking in making investment. Memorandum of Association enable the parties dealing with the company to know with certainty as whether the contractual relation to which they intend to enter with the company is within the objects of the company.

Form of Memorandum (Sec. 14)

Companies Act has given four forms of Memorandum of Association in Schedule I. These are as follows :

Table B: Memorandum of a company limited by shares

Table C: Memorandum of a company limited by guarantee and not having a share capital

Table D: Memorandum of company limited by guarantee and having share capital.

Table E: Memorandum of an unlimited company

Every company is required to adopt one of these forms or any other form as near there to as circumstances admit.

Printing and signing of Memorandum (Sec. 15).

The memorandum of Association of a company shall be (a) printed, (b) divided into paragraphs numbered consecutively, and (c) signed by prescribed number of subscribers (7 or more in the case of public company, two or more in the case of private company respectively). Each subscriber must sign for his/her name, address, description and occupation in the presence of at least one witness who shall attest the signature and shall likewise add his address, description and occupation, if any.

Contents of Memorandum/ Various Clauses of MOA:

1. Name clause

Promoters of the company have to make an application to the registrar of Companies for the availability of name. The company can adopt any name if :

i) There is no other company registered under the same or under an identical name;

ii) The name should not be considered undesirable and prohibited by the Central Government (Sec. 20). A name which misrepresents the public is prohibited by the Government under the Emblems & Names (Prevention of Improper use) Act, 1950 for example, Indian National Flag, name pictorial representation of Mahatma Gandhi and the Prime Minister of India, name and emblems of the U.N.O., and W.H.O., the official seal and Emblems of the Central Government and State Governments. Where the name of the company closely resembles the name of the company already registered, the Court may direct the change of the name of the company.

iii) Once the name has been approved and the company has been registered, then a) the name of the company with registered office shall be affixed on outside of the business premises; b) if the liability of the members is limited the words “Limited” or “Private Limited” as the case may be, shall be added to the name; [Sec 13(1) (1)]: Omission of the word ‘Limited’ makes the name incorrect. Where the word’ Limited” forms part of a company’s name, omission of this word shall make the name incorrect. If the company makes a contract without the use of the word “Limited”, the officers of the company who make the contract would be deemed to be personally

liable [Atkins & Co v Wardle, (1889) 61 LT 23] The omission to use the word ‘Limited’ as part of the name of a company must have been deliberate and not merely accidental. Note the following case in this regard: Dermatine Co. Ltd. v Ashworth, (1905) 21 T.L.R. 510. A bill of exchange drawn upon a limited company in its proper name was duly accepted by 2 directors of the company. The rubber stamp by which the word of acceptance were impressed on the bill was longer that the paper of the bill and hence the word ‘Limited’ was missed. Held, the company was liable to pay and the directors were not personally liable. (c) the name and address of the registered office shall be mentioned in all letterheads, business letters, notices and Common Seal of the Company, etc. (Sec. 147). In Osborn v The Bank of U. A. E., [9 Wheat (22 US), 738]; it was held that the name of a company is the symbol of its personal existence. The name should be properly and correctly mentioned. The Central Government may allow a company to drop the

word “Limited” from its name.

2. Registered Office Clause

Memorandum of Association must state the name of the State in which the registered office of the company is to be situated. It will fix up the domicile of the company. Further, every company must have a registered office either from the day it begins to carry on business or within 30 days of its incorporation, whichever is earlier, to which all communications and notices may be addressed. Registered Office of a company is the place of its residence for the purpose of delivering or addressing any communication, service of any notice or process of court of law and for determining question of jurisdiction of courts in any action against the company. It is also the place for keeping statutory books of the company. Notice of the situation of the registered office and every change shall be given to the Registrar within 30 days after the date of incorporation of the company or after the date of change. If default is made in complying with these requirements, the company and every officer of the company who is default shall be punishable with fine which may extend to Rs. 50 per during which the default continues.

3. Object Clause

This is the most important clause in the memorandum because it not only shows the object or objects for which the company is formed but also determines the extent of the powers which the company can exercise in order to achieve the object or objects. Stating the objects of the company in the Memorandum of Association is not a mere legal technicality but it is a necessity of great practical importance. It is essential that the public who purchase its shares should know clearly what the objects for which they are paying are. In the case of companies which were in existence immediately before the commencement of the Companies (Amendment) Act. 1965, the object clause has simply to state the objects of the company. But in the case of a company to be registered after be amendment, the objects clause must state separately.

i) Main Objects : This sub-clause has to state the main objects to be pursued by the company on its incorporation and objects incidental or ancillary to the attainment of main objects.

ii) Other objects: This sub-clause shall state other objects which are not included in the above clause. Further, in case of a non-trading company, whose objects are not confined to one state, the objects clause must mention specifically the States to whose territories the objects extend. (Sec. 13) A company, which has a main object together with a number of subsidiary objects, cannot continue to pursue the subsidiary objects after the main object has come to an end. While drafting the objects clause of a company the following points should be kept in mind.

i) The objects of the company must not be illegal, e.g. to carry on lottery business.

ii) The objects of the company must not be against the provisions of the Companies Act such as buying its own shares (Sec. 77), declaring dividend out of capital etc.

iii) The objects must not be against public, e.g. to carry on trade with an enemy country.

iv) The objects must be stated clearly and definitely. An ambiguous statement like “Company may take up any work which it deems profitable” is meaningless.

v) The objects must be quite elaborate also. Note only the main objects but the subsidiary or incidental objects too should be stated.

The narrower the objects expressed in the memorandum, the less is the subscriber’s risk, but the wider such objects the greater is the security of those who transact business with the company.

4. Capital Clause

In case of a company having a share capital unless the company is an unlimited company, Memorandum shall also state the amount of share capital with which the company is to be registered and division thereof into shares of a fixed amount [Sec. 13 (4)]. The capital with which the company is registered is called the authorized or nominal share capital. The nominal capital is divided into classes of shares and their values are mentioned in the clause. The amount of nominal or authorized capital of the company would be normally, that which shall be required for the attainment of the main objects of the company. IN case of companies limited by guarantee, the amount promised by each member to be contributed by them in case of the winding up of the company is to be mentioned. No subscriber to the memorandum shall take less than one share. Each subscriber of the Memorandum shall write against his name the number of shares he takes.

5. Liability Clause

In the case of company limited by shares or by guarantee, Memorandum of Association must have a clause to the effect that the liability of the members is limited. It implies that a shareholder cannot be called upon to pay any time amount more than the unpaid portion on the shares held by him. He will no more be liable if once he has paid the full nominal value of the share.

The Memorandum of Association of a company limited by guarantee must further state that each member undertakes to contribute to the assets of the company if wound up, while he is a member or within one year after he ceased to be so, towards the debts and liabilities of the company as well as the costs and expenses of winding up and for the adjustment of the rights of the contributories among themselves not exceeding a specified amount. Any alteration in the memorandum of association compelling a member to take up more shares, or which increases his liability, would be null and void. (Sec 38). If a company carries on business for more than 6 months while the number of members is less than seven in the case of public company, and less than two in case of a private company, each member aware of this fact, is liable for all the debts contracted by the company after the period of 6 months has elapsed. (Sec. 45).

6. Association or Subscription Clause

In this clause, the subscribers declare that they desire to be formed into a company and agree to take shares stated against their names. No subscriber will take less than one share. The memorandum has to be subscribed to by at least seven persons in the case of a public company and by at least two persons in the case of a private company. The signature of each subscriber must be attested by at least one witness who cannot be any of the subscribers. Each subscriber and his witness shall add his address, description and occupation, if any. This clause generally runs in this form : “we, the several person whose names and addresses are subscribed, are desirous of being formed into a company in pursuance of the number of shares in the capital of the company, set opposite of our respective name”. After registration, no subscriber to the memorandum can withdraw his subscription on any ground.

Question 9.: Explain the meaning, contents and forms of Articles of Association. Differentiate between MOA & AOA.

Every company is required to file Articles of Association along with the Memorandum of Association with the Registrar at the time of its registration. Companies Act defines ‘Articles as Articles of Association of a company as originally framed or as altered from time to time in pursuance of any previous companies Acts.

They also include, so far as they apply to the company, those in the Table A in Schedule I annexed to the Act or corresponding provisions in earlier Acts. Articles of Association are the rules, regulations and bye-laws for governing the internal affairs of the company. They may be described as the internal regulation of the company governing its management and embodying the powers of the directors and officers of the company as well as the powers of the shareholders. They lay down the mode and the manner in which the business of the company is to be conducted.

In framing Articles of Association care must be taken to see that regulations framed do not go beyond the powers of the company itself as contemplated by the Memorandum of Association nor should they be such as would violate any of the requirements of the companies Act, itself. All clauses in the Articles ultra vires the Memorandum or the Act shall be null and void.

Article of Association are to be printed, divided into paragraphs, serially numbered and signed by each subscriber to Memorandum with the address, description and occupation. Each subscriber shall sign in the presence of at least one witness who shall attest the signatures and also mention his own address and occupation.

Contents of Articles of Association

Articles generally contain provision relating to the following matters; (1) the exclusion, whole or in part of Table A; (ii) share capital different classes of shares of shareholders and variations of these rights (iii) execution or adoption of preliminary agreements, if any; (iv) allotment of shares; (v) lien on shares (vi) calls on shares; (vii) forfeiture of shares; (viii) issue of share certificates; (ix) issue of share warrants; (x) transfer of shares; (xi) transmission of shares; (xii) alteration of share capital; (xiii) borrowing power of the company; (xiv) rules regarding meetings; (xv) voting rights of members; (xvi) notice to members; (xvii) dividends and reserves; (xviii) accounts and audit; (xix) arbitration provision, if any; (xx) directors, their appointment and remuneration; (xxi) the appointment and reappointment of the managing director, manager and secretary; (xxii) fixing limits of the number of directors (xxiii) payment of interest out of capital; (xxiv) common seal; and (xxv) winding up.

Form of Articles

Different model forms of memorandum of association and Articles of Association of various types of companies are specified in Schedule I to the Act. The schedule is divided into following tables.

Table A deals with regulations for management of a company limited by shares.

Table B contains a model form of Memorandum of Association of a company limited by shares.

Table C gives model forms of Memorandum and Articles of Association of a company limited by guarantee and not having a share capital.

Table D gives model forms of Memorandum and Articles of Association of a company limited by guarantee and having a share capital. The Articles of such a company contain in addition to the information about the number of members with which the company proposes to be registered, all other provisions of Table A.

Table E contains the model forms of memorandum and Articles of Association of an unlimited company.

A Public Company may have its own Article of Association. If it does not have its own Articles, it may adopt Table A given in Schedule I to the Act. Adoption and application of Table A (Section 28). There are 3 alternative forms in which a public company may adopt Articles :

1. It may adopt Table A in full

2. It may wholly exclude Table A, and set out its own Articles in full

3. It may frame its own Articles and adopt part of Table A.

In other words, unless the Articles of a public company expressly exclude any or all provisions of Table A shall automatically apply to it.

DISTINCTION BETWEEN ARTICLES OF ASSOCIATION AND MEMORANDUM

OF ASSOCIATION

The difference between memorandum of association and articles of association is as under:

Memorandum of Association	Articles of Association
1. It is character of company indicating nature of business & capital. It also defines the company’s relationship with outside world.	1. They are the regulation for the internal management of the company and are subsidiary to the memorandum
2. It defines the scope of the activities of the company, or the area beyond which the actions of the company cannot go.	2. They are the rules for carrying out the objects of the company as set out in the Memorandum.
3. It, being the charter of the company, is the supreme document.	3. They are subordinate to the memorandum.
4. Any act of the company which is ultra-vires the Memorandum is wholly void and cannot be ratified even by the whole body of shareholders.	4. Any act of the company which is ultra-vires the articles can be confirmed by the shareholders if it is intra-vires the memorandum.
5. Every company must have its own Memorandum	5. A company limited by Shares need not have Articles of its own. In such A case, Table A Applies.
6. There are strict restrictions on its alteration. Some of the conditions of incorporation contained in it cannot be altered except with the sanction of Central Government.	6. They can be altered by a special resolution, to any extent, provided they do not conflict with the Memorandum and the Companies Act.

Question 10.: Discuss the circumstances and requirements of alteration of different clauses of Memorandum of Association.

Alteration of Memorandum of association involves compliance with detailed formalities and prescribed procedure. Alternations to the extent necessary for simple and fair working of the company would be permitted. Alterations should not be prejudicial to the members or creditors of the company and should not have the effect of increasing the liability of the members and the creditors. Contents of the Memorandum of association can be altered as under:

1. Change of name

A company may change its name by special resolution and with the approval of the Central Government signified in writing. However, no such approval shall be required where the only change in the name of the company is the addition there to or the deletion there from, of the word “Private”, consequent on the conversion of a public company into a private company or of a private company into a public company. (Sec.21)

By ordinary resolution: If through inadvertence or otherwise, a company is registered by a name which, in the opinion of the Central Government, is identical with or too nearly resembles the name of an existing company, it may change its name by an ordinary resolution and with the previous approval of the Central Government signified in writing. [Sec. 22(1) (a)].

Registration of change of name: Within 30 days passing of the resolution, a copy of the order of the Central Government’s approval shall also be field with the Registrar within 3 months of the order. The Registrar shall enter the new name in the Register of Companies in place of the former name and shall issue a fresh certificate of incorporation with the necessary alterations. The change of name shall be complete and effective only on the issue of such certificate. The Registrar shall also make the necessary alteration in the company’s memorandum of association (Sec. 23). The change of name shall not affect any right or obligations of the company or render defective any legal proceeding by or against it. (Sec. 23).

2. Change of Registered Office

This may involve :

a) Change of registered office from one place to another place in the same city, town or village. In this case, a notices is to be give within 30 days after the date of change to the Registrar who shall record the same.

b) Change of registered office from one town to another town in the same State. In this case, a special resolution is required to be passed at a general meeting of the shareholders and a copy of it is to be filed with the Registrar within 30 days. The within 30 days of the removal of the office. A notice has to be given to the Registrar of the new location of the office.

c) Change of Registered Office from one State to another State to another State. Section 17 of the Act deals with the change of place of registered office form one State to another State. According to it, a company may alter the provision of its memorandum so as to change the place of its registered office from one State to another State for certain purposes referred to in Sec 17(1) of the Act. In addition the following steps will be taken.

Special Resolution

For effecting this change a special resolution must be passed and a copy there of must be filed with the Registrar within thirty days. Special resolution must be passed in a duly convened meeting.

Confirmation by Central Government

The alteration shall not take effect unless the resolution is confirmed by the Central Government.

The Central Government before confirming or refusing to confirm the change will consider primarily the interests of the company and its shareholders and also whether the change is bonafide and not against the public interest. The Central Government may then issue the confirmation order on such terms and conditions as it may think fit.

3. Alteration of the Object Clause

The Company may alter its objects on any of the grounds (I) to (vii) mentioned in Section 17 of the Act. The alteration shall be effective only after it is approved by special resolution of the members in general meeting with the Companies Amendment Act, 1996, for alteration of the objects clause in Memorandum of Associations sanction of Central Government is dispensed with.

Limits of alteration of the Object Clause

The limits imposed upon the power of alteration are substantive and procedural. Substantive limits are provided by Section 17 which provides that a company may change its objects only in so far as the alteration is necessary for any of the following purposes:

i) to enable the company to carry on its business more economically or more effectively;

ii) to enable the company to attain its main purpose by new or improved means;

iii) to enlarge or change the local area of the company’s operation;

iv) to carry on some business which under existing circumstances may conveniently or advantageously be combined with the business of the company;

v) to restrict or abandon any of the objects specified in the memorandum

vi) to sell or dispose of the whole, or any part of the undertaking of the company;

vii) to amalgamate with any other company or body of persons.

An alteration in the objects is to be confined within the above limits for otherwise alteration in excess of the above limitations shall be void. A company shall file with the registrar a special resolution within one month from the date of such resolution together with a printed copy of the memorandum as altered. Registrar shall register the same and certify the registration. [Sec. 18].

Effect of non Registration with Registrar

Any alteration, if not registered shall have no effect. If the documents required to be filed with the Registrar are not filed within one month, such alteration and the order of the Central Government and all proceedings connected therewith shall at the expiry of such period become void and inoperative. The Central Government may, on sufficient cause show, revive the order on application made within a further period of one month [Sec. 19]

4. Alteration of Capital Clause

The procedure for the alteration of share capital and the power to make such alteration are generally provided in the Articles of Association If the procedure and power are not given in the Articles of Associational, the company must change the articles of association by passing a special resolution. If the alteration is authorized by the Articles, the following changes in share capital may take place :

1. Alteration of share capital [Section 94-95]

2. Reduction of capital [Section 100-105]

3. Reserve share capital or reserve liability [Section 99]

4. Variation of the rights of shareholders [Section 106-107]

5. Reorganization of capital [Section 390-391]

5. Alteration of Liability Clause

Ordinarily the liability clause cannot be altered so as to make the liability of members unlimited. Section 38 states that the liability of the members cannot be increased without their consent. It lays down that a member cannot by changing the memorandum or articles, be made to take more shares or to pay more the shares already taken unless he agrees to do so in writing either before or after the change.

A company, if authorized by its Articles, may alter its memorandum to make the liability of its directors or manager unlimited by passing a special resolution. This rule applies to future appointees only. Such alteration will not affect the existing directors and manager unless they have accorded their consent in writing. [Section 323].

Section 32 provides that a company registered as unlimited may register under this Act as a limited company. The registration of an unlimited company as a limited company under this section shall not affect any debts, liabilities, obligations or contracts incurred or entered into by the company before such registration.

Question 11.: Explain prospectus and its objects? What is Mis-statement in prospectus? Explain the civil and criminal liabilities for mi-statement in the prospectus of a company.

Section 2(36) defines a prospectus an “any document described as issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting orders from the public for the subscription or purchase of any share in, or debentures of, a body corporate”. In simple words, a prospectus may be defined as an invitation to the public to subscribe to a company’s shares or debentures. By virtue of the Amendment Act of 1974, any document inviting deposits from the public shall also come within the definition of prospectus. The word “Prospectus” means a document which invites deposits from the public or invites offers from the public to buy shares or debentures of the company.

Any document to be called a prospectus must have the following ingredients:

I. There must be an invitation offering to the public;

II. The invitation must be or on behalf of the company or in relation to an intended company;

III. The invitation must be to subscribe or purchase.

IV. The invitation must relate to shares or debentures.

OBJECTS OF PROSPECTUS

The main objects of a prospectus are as follows :

1. To bring to the notice of public that a new company has been formed.

2. To preserve an authentic record of the terms of allotment on which the public have been invited to but its shares or debentures.

3. The secure that the directors of the company accept responsibility of the statement in the prospectus.

MIS-STATEMENT IN THE PROSPECTUS

A prospectus is an invitation to the public to subscribe to the shares or debentures of a company. Every person authorizing the issue of prospectus has a primary responsibility to seed that the prospectus contains the true state of affairs of the company and does not give any fraudulent picture to the public. People invest in the company on the basis of the information published in the prospectus. They have to be safeguarded against all wrongs or false statements in prospectus. Prospectus must give a full, accurate and a fair picture of material facts without concealing or omitting any relevant fact. The true nature of company’s venture should be disclosed. The statements which do not qualify to the particulars mentioned in the prospectus or any information is intentionally and willfully concealed by the directors of the company, would be considered as mis-statement.

Thus, the term ‘venture statement’ as ‘mis-statement’ is used in a broader sense. It includes not only false statements which produce a impression of actual facts. Concealment of a material fact also comes within the category of misstatement. A statement included in a prospectus shall be deemed to be untrue, if

• The statement is misleading in the form and context in which it is included; and

• the omission from a prospectus of any matter is calculated to mislead (Section 65).

If there is any misstatement of a material fact in a prospectus as if the prospectus is wanting in any material fact, this may arise-

1. Civil Liability

2. Criminal Liability

1. Civil Liability

A person who has induced to subscribe for shares (or debentures) on the faith of a misleading prospects has remedies against the company, directors, promoters, and experts. Every person who is a director and promoter of the company, and who has authorized the issue of the prospectus [Section (2)] can be imposed with civil liability as follows:

a) Compensation

The above persons shall be liable to pay compensation to every person who subscribes for any shares or debentures for any loss or damage sustained by him by reason of any untrue statement included therein [Section 62(1)].

b) Recession of the Contract for Misrepresentation

Avoiding the contract is recession. Any person can apply to the court for recession of the contract if the statements on which he has taken the shares are false or caused by misrepresentation whether innocent or fraudulent. The contract can be rescinded if the following conditions are satisfied:

1) The statement must b a material misrepresentation of fact

2) It must have induced the shareholder to take the shares.

3) The deceived shareholder is an allottee and he must have relied on the statement in the prospectus.

4) The omission of material fact must be misleading before recession is granted.

5) The proceedings for recession must be started as soon as the allottee comes to know of a misleading statement.

c) Damages for Deceit as Fraud

Any person induced to invest in the company by fraudulent statement in a prospectus can sue the company and person responsible for damages. The share should be first surrendered to company before the company is used for damages. Fraud occurs when any statement is made without belief in the truth or carelessly. A statement made with knowledge that it is false, will constitute fraud or deceit.

d) Liability for non-compliance

A director or other person responsible shall be liable for damage for noncompliance with or contravention of any of the matters to be stated and reports to be set out in the prospectus as provided [by Section 56(41)].

e) Damages for Fraud under General Law

Any person responsible for the issue of prospectus may be held liable under the general law or under the Act for misstatements or fraud.

f) Penalty for Contravening Section 57 & 58

If any prospectus is issued is contravention of Section 57, (experts to be unconnected with formation or management of company), or Section 58 (expert’s consent to issue of prospectus containing statement by him) the company and every person who is knowingly party to the issue thereof, shall be punishable with fine which may extend to Rs. 5,000/-.

g) Penalty for issuing the Prospectus without Registration

If a prospectus is issued without a copy of thereof being delivered to the Registrar, the company and every person who is knowingly a party to the issue of the prospectus shall be punishable with fine which may extent to Rs 5,000 [Section 60(5)].

Defense against Civil Liability

Every person made liable to pay compensation for any loss or damages may escape such liability by proving that :

I. Having consented to become a director of the company, he withdrew his consent before the issue of the prospectus and that it was issued without his authority or consent.

II. The prospectus was issued without his knowledge or consent and that on becoming aware of its issue he forth with gave reasonable public notice that it was issued without his knowledge or consent.

III. After the issue of prospectus, and before allotment there under he, on becoming aware of any untrue statement therein withdrew his consent to the prospectus and gave reasonable public notice of the withdrawal.

IV. If a director, etc., has reasonable ground to believe that the statement was true and he, in fact, believed it to be true up to the time of allotment, he is not liable. But it is not enough for a director to say that he was honest, he has to show that his honest belief was based on reasonable grounds.

V. If statement is a correct and fair representation or extract or copy of the statement made by an expert who is competent to make it and had given his consent and had not withdrawn it, the director, etc., is not liable. Likewise, if the statement is a correct and fair representation or extract or copy of an official document or is based on the authority of an official person, no liability attaches to the director etc.

2. Criminal Liability

Every person who authorized the issue of prospectus shall be punishable for untrue statement with imprisonment for a term which may extend to 2 years or with fine which may extend to Rs. 5,000/- or with both [Section 63(1)].

Penalty for fraudulently inducing Persons to Invest Money [Section 68]

Any person who either knowingly or recklessly makes any statement, promises or forecast which is false, deceptive or misleading or by any dishonest concealment of material facts, induces or attempts to induce another person to enter into;

• Any agreement with a view to acquiring, disposing of, subscribing for, or underwriting shares or debentures;

• An agreement to secure to any of the parties from the yield of shares or debentures; or by reference to fluctuation in the value of shares or debentures; shall be punishable for a term which may extend to 5 years of with fine which may extend to Rs. 10,000/- or with both.

Defense against Criminal Liability

Any person made criminally liable can escape the same as proving that

• the statement was true [Section 63(i)]. Statement was immaterial; or

• he had a reasonable ground to believe and did upto the time of the issue of prospectus that the statement was true [Section 63(i)].

Question 12. Who is a member? What are the different modes of acquisition and cessation of membership?

A company is composed of certain persons who constitute it as a corporate body. However, the identity of the company is different from the persons composing it. The persons composing the company are the 'members' or 'shareholders' of the company. A member is a person who has signed company's memorandum of association. Any other person who agrees in writing to become a member and whose name is entered in company's register of members is also a member of the company [Section 41].

MODES OF ACQUIRING MEMBERSHIP

A person may become a member in a company in any of the following ways :

1. Membership by Subscribing to Memorandum (Section 41)

All the subscribers to the memorandum are deemed to have agreed to become members of the company and on the registration of the company their names are automatically entered as members in the company's register of members. Thus, the signatories to the memorandum become members of the company simply by reason of their having signed the memorandum. Neither an application form nor allotment of shares is necessary for becoming a member in their case. A person who signs the memorandum enters into a contract with the company to take the number of shares written opposite his name and be cannot repudiate his contract on the ground of misrepresentation.

2. Membership by Qualification shares

Before a person can be appointed a director of a public company, he must take, or sign an undertaking to take and pay for the qualification shares. He thus becomes a member and is in the same position as a subscriber to the memorandum of the company is.

3. Membership by Application and Allotment

A person may become a member of a company by an application for shares subject to formal acceptance by the company. The ordinary law of contracts applies to the agreement to take shares in a company. An application for shares may be absolute or conditional. If it is absolute, a

simple allotment and notice thereof to the applicant will constitute the agreement. If it is conditional, the allotment must be made on the basis of the conditions specified. Where there is a conditional application for shares and an unconditional allotment, there is no contract constituted.

4. Membership by Transfer

Where a transfer of share is made and the transfer is registered with the company, the transferee becomes entitled to be placed on the company's register of members in the place of the transferor in respect of the shares so transferred.

5. Membership by Transmission

On the death of a member his shares rest with his legal representative. The legal representative is entitled to be registered as the holder of the shares and to get his name entered as member in the register of members provided there is no provision in the articles of the company and for the purpose no instrument of transfer is required to be delivered by him to the company. If a company unduly refuses to accept a transmission, the same remedies are available to the legal representative as in the case of transfer.

6. Membership by Estoppel

If a person holds himself out in writing or allows his name to be on the register of members, he is deemed to be a member of the company. Thus if a person’s name is improperly placed on the register of members, and he knows and assents to it, he cannot afterwards say that he is not a member. Estoppel is simply a rule of evidence which prevents a person from denying the legal implications of his conduct.

CESSATION OF MEMBERSHIP

A person may cease to be a member of a company :

(a) if he transfers his shares to another person.

(b) by the sale of his shares by the company in exercise of right of lien over his shares.

(d) by a valid surrender of his shares.

(e) by the death of a member. The estate of the deceased remains liable until the shares are registered in the name of his legal representative.

(f) by his insolvency.

(g) by his rescission of contract to take shares on the ground of misrepresentation or fraud.

(h) by the winding-up of the company, of course he remains liable as a contributory.

(i) by redemption of redeemable preference shares.

(j) by issue of share warrants to him in exchange of fully paid shares.

Question 13.: Differentiate between a member and a shareholder. What are the duties, liabilities and rights of the members of a company?

It is important to note here that the terms 'member' and 'shareholder' are used inter-changeably in the Companies Act. A shareholder means a person who holds the shares of the company. A part from a few exceptional cases, the terms member and shareholder are synonymous. In these exceptional cases, a person may be a member but not a shareholder, or he may be a shareholder but not a member. In the following cases, a person is a member, but not a shareholder:

(a) A person who signs company's memorandum of association, immediately becomes the member on registration of the memorandum before any shares are allotted to him.

(b) A person who transfers his shares, continues to be the member of the company until his name is replaced by the name of the transferee. But he is no more a shareholder.

(c) A person who has ceased to be a shareholder by reason of forfeiture, surrender or transfer of shares, may be held liable as member, for the payment of unpaid amount on shares in case of default by the present shareholder.

(d) A company limited by guarantee or an unlimited company having no share capital will have only members but no shareholders.

In the following cases, a person is a shareholder, but not a member:

1. A person having a share warrant is a shareholder but he is not a member [Section 115 (1)]. However, he may be treated as member for specific purpose if company's articles so provide.

2. A legal representative of a deceased shareholder is the shareholder even if his name is not entered in the register of members. He becomes a member only when his name is entered in the register.

DIFFERENCE BETWEEN MEMBERS AND SHAREHOLDERS

The terms 'member' and 'shareholder' have been used interchangeably in the Companies Act. The word 'shareholder' is used in relation to a company having a share capital and there can be no membership except through the medium of shareholding. A holder of shares becomes a member only when his name is entered on the register of members. But the term 'member' is wider in scope and may be used in relation to all types of company. A person may become a member of a company without holding any shares. Companies limited by guarantee or unlimited companies having no share capital can have no shareholders but do have members. The following are the points of distinction between members and shareholders:

1. A holder of a share warrant is a shareholder but not a member as his name is struck off the register of members immediately after the issue of such share warrant.

2. Every registered shareholder is a member but every registered member may not be a shareholder because the company may or may not have share capital.

3. The transferor or the deceased person is a member so long as his name is on the register of members whereas he cannot be termed as shareholder.

4. Similarly, a shareholder by transfer is not a member until his name is entered in the company's register of members.

5. A person who mispresents himself to be a member is estopped from denying his position subsequently. He is said to have become a member by estoppel.

6. A person may become a member by an order or decree of a court.

DUTIES, LIABILITIES AND RIGHTS OF MEMBERS

Duties

It is the duty of a shareholder :

(a) as a subscriber of the memorandum, to take the share written opposite his name direct from the company and pay for them ;

(b) to take shares when they are duly allotted to him and pay for them according to the terms of issue of the shares ;

(d) to abide by the decisions of the majority of members unless the majority acts vindictively, oppressively, mala fide or fraudulently;

(e) to contribute to the asset of the company when it goes into liquidation.

Liability

The liability of the members of a company depends upon the nature of the company.

Company limited by shares. In the case of a company limited by shares, the liability of a member of company is the amount, if any unpaid on his shares. If his shares are fully paid, his liability is nil for all purposes.

Company limited by guarantee. The liability of the members of a company limited by guarantee is limited to the amount they undertook to contribute to the assets of the company in the event of winding up.

Company with unlimited liability. Every member of an unlimited company is liable in full for all debts contracted by the company during the period he was a member.

RIGHTS OF MEMBERS

When a person becomes a member of a company he is entitled to exercise all the rights of a member until he ceases to be a member in accordance with the provisions of the Act. The rights of a member can be classified under the following heads:

(A) Statutory Rights

Statutory rights are those which are given to the members by the statute, i.e. the Companies Act, 1956. No document of the company can take away or modify such rights. Such rights, for example, are:

1. Right to receive copies of the Balance Sheet and Profit and Loss Account of the company along with the auditor's report.

2. Right to obtain a copy of the contract for the appointment of managing directors/managers of the company.

3. Right to receive notice of the general meetings of the company.

4. Right to get the copies of the Memorandum and the Articles of the company on payment of the prescribed fees.

5. Right to inspect the register of members, and debenture holders and index registers, annual returns etc. and get copies thereof on payment of the prescribed fee.

6. Right to inspect the debenture trust deed and get copies thereof on payment of the prescribed fees.

7. Right to inspect the register of charges and get copies thereof on payment of the prescribed fees.

8. Right to receive a copy of the statutory report.

9. Right to apply to the Central Government to call the annual general meeting when default is made by the company in holding annual general meeting (AGM).

10. Right to attend the AGM.

11. Right to appoint a proxy to attend the AGM and vote in his place and right to inspect the proxy register.

12. Right to receive a share certificate in respect of his share holding and a certificate of stock within a prescribed time.

13. Right to transfer shares.

14. Right to receive dividend when declared by the company.

15. Preemptive right i.e. right to have the rights shares on any further issue of shares.

16. Right of participation in the appointment the directors who are to retire by rotation by taking part in the AGM.

17. Right of participation in appointing the auditors and fixing their remuneration.

18. Right to have a share in the surplus of assets, if any, on the winding up of the company.

19. Right of dissident shareholders to apply to the court to have any variation of their rights cancelled.

20. Right to have notice of any resolution requiring a special notice in the meeting.

21. Right to inspect the shareholders' minutes’ book and get copies thereof on payment of the prescribed fees.

(B) Documentary Rights

There rights are the rights given by the two basic documents i.e. memorandum of association and articles of association. The company may also give certain rights to its members by expressly providing for them in the memorandum or the articles of the company.

(C) Legal Rights

These rights are given to members under general law. For example, a person who has taken shares of a company on the faith of a misleading prospectus can avoid the contract and claim damages under the general law.

Question 14.: Discuss the borrowing powers of a company? What are the restrictions on its borrowing powers?

Capital is necessary for the establishment and development of a business and borrowing is one of the most important source of the capital, but unfortunately there is no express provision in the Companies Act as to the borrowing powers of the company. Every trading company, unless prohibited by its memorandum or articles, has an implied power to borrow money for the purpose of its business, and to give security for the loan by creating a mortgage or charge on its property even though such power is not expressed in the memorandum of the company. On the other hand, a non-trading company has no implied power to borrow money and, therefore, it cannot borrow unless such power is expressly provided in the memorandum. If the memorandum does not contain such a power, the memorandum have to be amended before the company can exercise its borrowing powers. Again a public company having a share capital cannot exercise the borrowing powers unless a certificate of commencement of business has been obtained by it (Section 149).

In General Auction Estate and Monetary Co. v. Smith (1891)3ch. 432 case the company had among its objects the sale and purchase of estates and property, loans on deposits of securities and discounting of bills. The Memorandum of the company did not expressly give it any power to borrow money. The company borrowed money from one of the directors on the security of some of its estates to pay off some depositors and creditors. The company was wound up within six months. The liquidator wanted to set aside the security as it was beyond the powers of the company. Held, being a trading company, it had an implied power to borrow money for its business and to give security to the person making the advance (loan). Where a company has express or implied power to borrow it can raise, borrow or secure the payment of any sum of money for the purposes of business subject to the limits set by its Memorandum or Articles.

The Board's Powers

The borrowing power is exercised by the board of directors subject to the provisions in the memorandum and articles of the company. The memorandum or articles generally specify the maximum limit of borrowing power allowed to the Board of Directors and may impose restrictions upon the exercise of such power. Section 293(1)(d) also limits the directors' power to borrow. It provides that the Board of Directors of a public company or of a private company which is a subsidiary of a public company, shall not except with the consent of such public company or its subsidiary in a general meeting borrow moneys, where the moneys to be borrowed together with the moneys already borrowed by the company (apart from the temporary loans obtained from the company's bankers in the ordinary course of business) will exceed the aggregate of paid-up capital of the company and its free reserves (that is to say, reserves not set apart for any specific purpose). Thus, the power of directors to borrow is subject to two main limitation :

1. Statutory limitations and

2. Limitations enumerated in the memorandum and articles.

Question 15.: What is a share certificate ? When can a company renew a share certificate or issue a duplicate? Distinguish between a share certificate and a share warrant.

Share Certificate

The holder of share or shares is issued a share certificate by the company. A certificate under the common seal of the company, signed by one or more of directors, specifying shares held by the member and the amount paid up on the shares shall be prima facie evidence of the title of the member to such share or shares.

Every company shall deliver the certificates to the allottee within three months from the date of allotment and to the transferee within two months of making of the application for the registration of the transfer of shares, debentures or debenture stock. If default is made, the company and every officer of the company who is in default, shall be punishable with fine which may extend to Rs. 5,000/- for every day during which the default continues. The person may make an application to the court if default is not made good by the company within 10 days after the service of the notice. The court may order the company and any officer of the company to make good the default.

Duplicate Certificate

Section 84(2) provides that a company may renew or issue a duplicate certificate if it is proved to have been lost or destroyed or having been defaced, mutilated or torn; is surrendered to the company. The articles may provide other terms and conditions like requiring the allottee to give an indemnity bond (Clause 89 Table A). If a company with the intent to defraud renews a certificate or issues a duplicate thereof, the company shall be punishable with fine which may extend to Rs. 10,000 and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to Rs. 10000 or with both [Sec.84(3)]. The Central Government may prescribe rules regarding the issue or renewal of certificates and duplicates, fees, etc. (Sec. 84(4)). The rules so made override the provisions in the articles.

Share Warrants

A public company limited by shares may issue share warrants under its common seal in the following circumstances :

(i) if it is authroised by its articles ;

(ii) shares are fully paid up ; and

(iii) previous approval of the Central Government is obtained.

A share warrant is a document which shows that the bearer of the warrant is entitled to the shares specified therein. It is a substitute for the share certificate. A shares warrant may have coupons attached to it to provide for the payment of future dividends on the shares specified in the warrant. A shares warrant shall entitle the bearer thereof to the shares specified therein. The shares may be transferred by delivery of the warrant.

On issue of a share warrant, the company shall strike out of its register the name of the member then entered therein as holding the shares specified in the warrant as if he had ceased to be a member. The following particulars shall be entered in the register :

(i) the fact of the issue of the warrant ;

(ii) a statement of the shares specified in the warrant, distinguishing each

share by its number ; and

(iii) the date of the issue of the warrant.

The bearer of a share warrant shall subject to the articles of the company be entitled to have his name entered as a member in the register of members on surrendering the warrant for cancellation and paying such fee to the company as the Board of Directors may from time to time determine. The bearer of the share warrant may, if the articles of the company so provide, be deemed to be a member of the company.

DIFFERENCE BETWEEN A SHARE CERTIFICATE AND A SHARE WARRANT

1. The holder of a share certificate is a registered member of the company whereas the bearer of a share warrant is not. The bearer of a share warrant can be a member only when the Articles so provide and only for the purposes defined in the Articles.

2. A share certificate may be issued in respect of partly or fully paid shares, whereas a share warrant can be issued only when shares are fully paid up.

3. Only public companies are authorised to issue share warrants but share certificates are issued by both public and private companies.

4. A share warrant is transferable by delivery only and no transfer deed and registration of transfer with the company is required. But a share certificate is transferred only in pursuance of a transfer deed along with the delivery of the share certificate. The transfer of a share certificate must be registered with the company.

5. A share warrant is a negotiable instrument as it is transferable by delivery only. But a share certificate is not a negotiable instrument.

6. Stamp duty is payable for the transfer of a share certificate but no stamp duty is payable in the case of transfer of a share warrant.

7. The permission of the Central Government is not necessary for the issue of share certificates but share warrants can be issued only if allowed by the Articles and with the prior permission of the Central Government.

8. The holder of a share warrant does not qualify to become a director of the company (where qualification share are required for directorship). But the holder of a share certificate is so qualified.

9. The petition for the winding up of the company can be presented by the holders of share certificates only. Holders of shares warrants cannot do so.

10. Payment of dividend on a share warrant is made by way of coupons attached with it. But in the case of share certificates, the company issues dividend warrants to the holders by name.

Question 16.: Define a share. What are the different types of shares? Explain the procedure of issuing a share.

A “share” has been defined by the Indian Companies Act, under sec.2(46) as “A share is the share in the Capital of the Company”.

TYPES OF SHARES: A Company can issue two types of shares – Equity and Preference.

(a) Equity Shares: Equity shares means that part of the share capital which is not a Preference share capital. It means all such shares which are not Preference shares. Equity shares are also called as Ordinary Shares.

(b) Preference Shares: Preference shares are those shares which fulfill both the following two conditions: (i) They carry preferential share right in respect of dividend at a fixed rate, (ii) They also carry preferential right in regard to payment of capital on winding up of the company. Preference shares can be further classified as follows:

(1) Cumulative and Non – Cumulative : If in any year the profits are insufficient to pay the preference dividend then in case of cumulative preference shares this dividend can be paid in the subsequent year before any other dividend is paid. In other words the right to receive the dividend goes on accumulating till it is paid. In case of Non – cumulative preference shares the dividend can be paid only in that year. If there are insufficient profits then such preference shareholders do not get any dividend for that year.

(2) Participating & Non-Participating Preference Shares: Participating preference shares are entitled to participate in the surplus profits remaining after the payment of (a) Fixed dividend to Preference shareholders and (b) Dividend to the equity shareholders. They are also entitled to participate in the surplus funds remaining at the time of winding of the company after payment of (a) Preference share capital & (b) Equity Share Capital. Non – participating preference share are not entitled to participate in the surplus profits or surplus funds left over at the time of winding off.

PROCEDURE FOR ISSUE OF SHARES:

(a) Issue of Prospectus: Whenever shares are to be issued to the public the company must issue a prospectus. Prospectus means an open invitation to the public to take up the shares of the company thus a private company need not issue prospectus. Even a Public Company issuing its shares privately need not issue a prospectus. However, it is required to file a “Statement in lieu of Prospectus” with the register of companies. The Prospectus contains relevant information like names of Directors, terms of issue, etc. It also states the opening date of subscription list, amount payable on application, on allotment & the earliest closing date of the subscription list.

(b) Application of Shares: A person intending to subscribe to the share capital of a company has to submit an application for shares in the prescribed form, to the company along with the application money before the last date of the subscription mentioned in the prospectus.

Over Subscription: If the no. of shares applied for is more than the no. of shares offered to the public then that is called as over Subscription.

Under Subscription: If the no. of shares applied for is less than the no. of shares offered to the public then it is called as Under Subscription.

(c) Allotment of Shares: After the last date of the receipt of applications is over, the Directors, Proceed with the allotment work. However, a company cannot allot the shares unless the minimum subscription amount mentioned in the prospectus is collected within a stipulated period. The Directors pass resolution in the board meeting for allotment of shares indicating clearly the class & no. of shares allotted with the distinctive numbers. Then Letters of Allotment are sent to the concerned applicants. Letters of Regret are sent to those who are not allotted any shares & application money is refunded to them.

Partial Allotment: In partial allotment the company rejects some application totally, refunds their application money & allots the shares to the remaining applicants.

Pro-rata Allotment: When a company makes a pro-rata allotment, it allots shares to all applicants but allots lesser shares then applied for E.g. If a person has applied for three hundred shares he may get two hundred shares.

(d) Calls on Shares: The remaining amount of shares may be collected in installments as laid down in the prospectus. Such installments are called calls on Shares. They may be termed as “Allotment amount, First Call, Second Call, etc.”

(e) Calls–in–Arrears: some shareholders may not pay the money due from them. The outstanding amounts are transferred to an account called up as “Calls-in-Arrears” account. The Balance of calls-in-arrears account is deducted from the Called-up capital in the Balance Sheet. (f) Calls–in–Advance: According to sec.92 of the Companies Act, a Company may if so authorized by its articles, accept from a shareholder either the whole or part of the amount remaining unpaid on any shares held by them, as Calls in advance. No dividend is paid on such calls in advance. However, interest has to be paid on such calls in advance.

TERMS OF ISSUE OF SHARES: A limited company may issue the shares on following different terms:

(a) Issue of Shares for Consideration other than cash or for cash or on capitalization of reserves. (b) Issue of Shares at par i.e. at face value or at nominal value.

(d) Issue of Shares at a Discount i.e. at less than the face value.

ISSUE OF SHARES AT A PREMIUM: When the shares are issued at a price higher than the nominal value of the shares then it is called as shares issued at a premium. The amount of premium is decided by the board of Directors as per the guide lines issued by SEBI. Such share premium collected by the company is credited to a separate A/c called as “Securities Premium A/c”. Although Securities Premium is a profit to the company, it is not a revenue profit, it is treated as capital profit, which can be utilized only for the following purposes as per sec. 78 of the Companies Act –

(a) Issue of fully paid bonus shares to the existing shareholders.

(b) Writing off the preliminary expenses of the company.

(d) Providing the premium payable on redemption of preference shares or debentures. The company can utilize the security Premium for any other purpose only on obtaining the sanction of the court.

ISSUE OF SHARES AT A DISCOUNT: The Companies Act, permits issue of shares at a discount subject to the following conditions. (sec. 79) –

(a) The issue must be of a class of shares already issued.

(b) Not less than 1 year has at the date of issue elapsed since the date on which the company became entitled to commence business.

(c) The issue at a discount is authorized by a resolution passed by the company in the general meeting & sanctioned by the company law board.

(d) The maximum rate of discount must not exceed 10% or such rate as the company law board may permit.

(e) The shares to be issued at a discount must be issued within two months of the sanction by the company law board or within such extended time as the company law board may allow.

Question 17.: Define the director. Who can not be the director of a company? Discuss the modes of appointment of the directors.

A company is an artificial person having no physical existence and as such can act only through human agency i.e. directors. Hence the person who is in-charge of the management of the affairs of the company is known as director. They are collectively known as Board of Directors.

According to section 252 of Company Act 1956, every public company must have at least three directors and a private company shall have minimum two directors.

Section 2(13) of the Companies Act, 1956 defines the term director as” any person occupying the position of a director by whatever name called.” Thus director is a person who is occupying the position of a director.

Persons Who cannot be Appointed Directors

(i) Share Qualification

If the articles provide for a share qualification, director must obtain this within two months.

(ii) Over-age Persons

No upper age limit for private company unless articles so provide. Person cannot be appointed as director of a public company if he has reached the age of 70

(iii) Undischarged Bankrupts

(iv) Persons Disqualified by the Court: it is a criminal offence to act as director of a company while under a disqualification order. Court may make a disqualification order where a person is convicted of an indictable offence in relation to the company. Person has been in persistent default in filing returns or documents with the Registrar. Company is being wound up and person has apparently committed fraud in relation to the company

- Person has been found liable for wrongful trading under Insolvency Act. The court must make a disqualification order where a person is director of a company which has become insolvent and that person’s conduct makes him unfit to be concerned in the management of a company.

(v) Auditors and Secretaries

- Auditor of a company cannot also be a director of it.

- Secretary of a company cannot also be the sole director of it.

Directors can be appointed in following ways:

By articles as regard first directors.
By the company in general meeting
By the directors
By third parties
By the principle of proportional representation
By the central government
By the small shareholders

Question 18.: Discuss the powers, rights, duties and liabilities of the directors.

According to section 252 of Company Act 1956, every public company must have at least three directors and a private company shall have minimum two directors.

Powers of Directors

The provisions of Companies Act and the articles of association of the company spell out rights, duties powers and responsibilities of Directors. Section 291 of the Act provides that subject to the provisions of the Act, the board of directors shall be entitled to exercise all such powers and to do all such acts and things as the company is authorized to exercise and do.

Powers to be exercised only at Board meeting (Section 292)

· Power to make calls on shareholders in respect of money unpaid on their shares

· Power to issue debentures

· Power to borrow moneys otherwise than on debentures

· Power to invest the funds of the company

· Power to make loans

Certain restrictions can be imposed on general powers of the Board and invariably they have to seek the approval of shareholders in the General meetings in such cases. The sections which deal with restrictions are 293, 294AA etc. There are certain powers which can be exercised only with the approval of the shareholders and also Central Government for eg: Sec.294AA (appointment of sole selling agents), Section 295 (Loans to Directors) etc.

Board can also exercise its powers by passing a resolution by circulation (Section 289) in respect of matters other than those mentioned in Section 292.

Rights of Directors

Rights can be categorized into individual and collective rights.Individual rights are such as right to inspect books of accounts {Section 209(4)},Right to receive notices of board meetings (Section 285),right to participate in proceedings and cast vote in favour or against resolutions(Section 300),right to receive circular resolutions proposed to be passed.(Section 289),right to inspect minutes of board meetings.

Collective rights are as follows:-

· Right to refuse to transfer shares: According to Section 111 of the Act, directors of private companies and deemed public companies are entitled to refuse registration of transfer of shares to a person whom they do not approve.

· Right to elect a Chairman: Regulation 76(1) of Table-A provides that the directors are entitled to elect a chairman for the board meetings.

· Right to appoint a Managing director: The Board has the right to appoint the managing director/ manager (as defined in the Act) of the company.

· Right to recommend dividend: The Board is entitled to decide whether dividend is to be paid or not. Shareholders cannot compel the directors to pay dividend. However they can reduce the rate of recommended dividend. Payment of dividend is the prerogative of the board

Duties of Directors

Directors as individuals have a duty to attend board meetings and contribute to the deliberations of the board and ultimately to the decision making leading to formulation of policies. Directors are under obligation to disclose their interest whether directly or indirectly in contracts or arrangements with the company (Section299). They are also duty bound to disclose their directorships in other companies within 20 days of appointment or relinquishment of his office in other companies (Section 305).As per Section 308, directors are also required to disclose their shareholding in the company.

The following are some of those duties exercised collectively:-

· Approval of annual accounts and authentication of annual accounts

· Directors report to shareholders highlighting performance of the company, transfers to reserves, investment of surplus funds, borrowings

· Appointment of First Auditors

· Issuance of Notice and Holding of Board meetings and shareholders meetings

· Passing of resolutions at board meetings or by circulation.

Directors are paid remuneration for their efforts in formulating policies and for devoting their valuable time for the company. Directors remuneration consists of sitting fees as per provisions in Articles of association, and Commission as a fixed percentage of net profits or as a fixed monthly sum as decided by the shareholders in the general meeting. As per the provisions in the new companies bill,2009 independent directors can not receive any remuneration other than sitting fees, expenses for attending board meetings and commission linked to profits.

Liabilities of Directors

Directors are liable for violation of the provisions of the Companies Act and other Acts which may expose them to punishment with fine or imprisonment or with both. The Hon’ble Supreme Court of India held in the case of Maksud Saiyed Vs State of Gujarat and others that the vicarious liabilities of the Managing Director and Director would arise provided any provision exists in that behalf in the statute. If directors are guilty of negligence or found to be misusing their position, they will be liable for civil as well as criminal liability. For e.g.; if directors make any untrue statements in the prospectus, or do not maintain books of account as per provisions of Section 209 or falsify accounts, criminal liability also arises. Even for cheque bouncing, Section 141 of the Negotiable Instruments Act imposes vicarious liability on the directors provided an averment is made to that effect in the complaint. The Directors of a company incur a personal liability, if they contract in their own names or where it is ambiguous as to capacity in which they signed the contract. However directors can seek protection against a liability for acts done in good faith. Director will also relieved of the offence, provided he is able to show that he was not in charge or control of the day to day affairs of the company or Offence in question was committed without his consent/knowledge/connivance and he was not negligent in ensuring that laws are complied.

Under the existing Act, all directors, including independent directors are held responsible for a company’s actions. However in the Companies Bill 2009, it is proposed to protect independent directors. An independent directors will be held responsible for any action only if motive and criminal intent is established in his actions. This is welcome otherwise highly qualified professional would be reluctant to Join the Board’s of company as independent directors.

Question 19.: Explain the meaning of oppression and mismanagement. Who can apply against oppression or mismanagement? What are the provisions to prevent oppression and mismanagement in a company? Discuss the powers of National Company Law Tribunal (NCLT) to prevent oppression and mismanagement.

Oppression
Oppression is the exercise of authority or power in a burdensome, cruel, or unjust manner. It can also be defined as an act or instance of oppressing, the state of being oppressed, and the feeling of being heavily burdened, mentally or physically, by troubles, adverse conditions, and anxiety.

The Supreme Court in Daleant Carrington Investment (P) Ltd. v. P.K. Prathapan, held that increase of share capital of a company for the sole purpose of gaining control of the company, where the majority shareholder is reduced to minority, would amount to oppression.

Prevention of oppression :

Section 397(1) of the Companies Act provides that any member of a company who complains that the affair of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members may apply to the Tribunal for an order thus to protect his /her statutory rights. Sub-section (2) of Section 397 lays down the circumstances under which the tribunal may grant relief under Section 397, if it is of opinion that :-

(a) the company’s affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members ; and

(b) to wind up the company would be unfairly and prejudicial to such member or members , but that otherwise the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound.

The tribunal with the view to end the matters complained of, may make such order as it thinks fit.

Who can apply?
Section 397 of the Companies Act states the members of a company shall have the right to apply under Section 397 or 398 of the Companies Act. According to Section 399 where the company is with the share capital, the application must be signed by at least 100 members of the company or by one tenth of the total number of its members, whichever is less, or by any member, or members holding one-tenth of the issued share capital of the company. Where the company is without share capital, the application has to be signed by one-fifth of the total number of its members. A single member cannot present a petition under section 397 of the Companies Act. The legal representative of a deceased member whose name is again on the register of members is entitled to petition under Section 397 and 398 of the Companies Act.

Under Section 399(4) of the Companies Act, the Central Government if the circumstances exist authorizes any member or members of the company to apply to the tribunal and the requirement cited above, may be waived. The consent of the requisite no. of members is required at the time of filing the application and if some of the members withdraw their consent, it would in no way make any effect in the application. The other members can very well continue with the proceedings.

Conditions for Granting Reliefs
To obtain relief under section 397 the following conditions should be satisfied:-
1. There must be “oppression”- The Punjab and Haryana High Court in Mohan Lal Chandmall v. Punjab Co. Ltd has held that an attempt to deprive a member of his ordinary membership rights amounts to “oppression”. Imposing of more new and risky objects upon unwilling minority shareholders may in some circumstances amount to “oppression”. However, minor acts of mismanagement cannot be regarded as “oppression”. The Court will not allow that the remedy under Section 397 becomes a vexatious source of litigation.

2. Facts must justify winding up- It is well settled that the remedy of winding up is an extreme remedy. No relief of winding up can be granted on the ground that the directors of the company have misappropriated the company’s fund, as such act of the directors does not fall in the category of oppression or mismanagement.To obtain remedy under Section 397 of the Companies Act, the petitioner must show the existence of facts which would justify the winding up order on just and equitable ground.

3. The oppression must be continued in nature – It is settled position that a single act of oppression or mismanagement is sufficient to invoke Section 397 or 398 of the Companies Act. No relief under either of the section can be granted if the act complained of is a solitary action of the majority. Hence, an isolated action of oppression is not sufficient to obtain relief under Section 397 or 398 of the Act. Thus to prove oppression continuation of the past acts relating to the present acts is the relevant factor , otherwise a single act of oppression is not capable to yield relief.

4. The petitioners must show fairness in their conduct-It is settled legal principle that the person who seeks remedy must come with clean hands. The members complaining must show fairness in their conduct. For ex-Mere declaration of low dividend which does not affect the value of the shares of the petitioner was neither oppression nor mismanagement in the eyes of law.

5. Oppression and mismanagement should be specifically pleaded- It is settled law that , in case of oppression a member has to specifically plead on five facts:-
a) what is the alleged act of oppression ;
b) who committed the act of oppression;
c) how it is oppressive;
d) whether it is in the affairs of the company;
e) and whether the company is a party to the commission of the act of oppression.

Prevention of Mismanagement
The present Company Act does provide the definition of the expression ‘mismanagement’. When the affairs of the company are being conducted in a manner prejudicial to the interest of the company or its members or against the public interest, it amounts to mismanagement.

Section 398(1) of the Companies act provides that any members of a company who complain:-
that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company; or a material change has taken place in the management or control of the company, whether by an alteration in its Board of directors, or manager or in the ownership of the company's shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company; may apply to the Company Law Board for an order of relief provided such members have a right so to apply as given below.

If, on any such application, the Company Law Board is of opinion that the affairs of the company are being conducted as aforesaid or that by reason of any material change as aforesaid in the management or control of the company, it is likely that the affairs of the company will be conducted as aforesaid, the court may, with a view to bringing to an end or preventing the matters complained of or apprehended, make such order as it thinks fit.

Right to Complain mismanagement-
1. The following members of a company shall have the right to apply as above:-

a) in the case of a company having a share capital, not less than one hundred members of the company or not less than one tenth of the total number of its members, whichever is less, or any member or members holding not less than one-tenth of the issued share capital of the company, provided that the applicant or applicants have paid all calls and other sums due on their shares;

b) in the case of a company not having a share capital, not less than one-fifth of the total number of its members.

2. Where any share or shares are held by two or more persons jointly, they shall be counted only as one number.

3. Where any members of a company, are entitled to make an application, any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them.

4. The Central Government may, if in its opinion circumstances exist which make it just and equitable so to do, authorize any member or members of the company to apply to the Company Law Board, notwithstanding that the above requirements for application are not fulfilled.

5.The Central Government may, before authorizing any member or members as aforesaid, require such member or members to give security for such amount as the Central Government may deem reasonable, for the payment of any costs which the Court dealing with the application may order such member or members to pay to any other person or persons who are parties to the application.

6. If the managing director or any other director, or the manager, of a company or any other person, who has not been impleaded as a respondent to any application applies to be added as a respondent thereto, the Company Law Board may, if it is satisfied that there is sufficient cause for doing so, direct that he may be added as a respondent accordingly.

Notice to be given to Central Government of application
The Company Law Board must give notice of every application made to it as above to the Central government, and shall take into consideration the representations, if any, made to it by that Government before passing a final order.

Right of Central Government to apply
The Central Government may itself apply to the Company law Board for an order, or because an application to be made to the Company Law Board for such an order by any person authorized be it in this behalf.

Powers of Tribunal
Under Section 402 of the Companies Act ,1956 the powers of the Tribunal under Sections 397 and 398 are very wide .These are :-
1. The regulation of the conduct of the company's affairs in future;

2. The purchase of the shares or interests of any members of the company by other members thereof or by the company;

3. In the case of a purchase of its shares by the company as aforesaid, the consequent reduction of its share capital;

4.The termination, setting aside or modification of any agreement, howsoever arrived at, between the company on the one hand, and any of the following persons, on the other namely:-
a) the managing director;
b) any other director;
c) the manager;

Upon such terms and conditions as may, in the opinion of the Company Law Board, be just and equitable in all the circumstances of the case ;the termination, setting aside or modification of any agreement between the company and any person not referred to in clause (d), provided that no such agreement shall be terminated, set aside or modified except after due notice to the party concerned and provided further that no such agreement shall be modified except after obtaining the consent of the party concerned; the setting aside of any transfer, delivery of goods, payment, execution or other act relating to property made or done by or against the company within three months before the date of the application, which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference. Any other matter for which in the opinion of the Company Law Board it is just and equitable that provision should be made.

Power of the Tribunals to prevent change in Board of Directors :
Where a complaint is made to the Company Law Board by the managing director or any other director or the manager of a company that, as a result of a change which has taken place or is likely to take place in ownership or any shares held in the company, a change in the Board of directors is likely to take place which (if allowed) would affect prejudicially the affairs of the company, the Company Law Board may, if satisfied, after such inquiry as it thinks fit to make that it is just and proper to do so, by order direct that no resolution passed or that may be passed or no action taken or may be taken to effect a change in the Board of directors after the date of the complaint shall have effect unless confirmed by the Company Law Board.

Powers of Central Government to prevent oppression or mismanagement:
The Central Government may appoint such number of persons as the Company Law Board may, by order in writing, specify as being necessary to effectively safeguard the interests of the Company or its shareholders or public interests, to act as directors thereof for such period not exceeding 3 years on any one occasions it deems fit if the Company Law Board:-

On a reference being made to it by the Central Government ; or on an application of not less than one hundred members of the company or of members of the company holding not less than one-tenth of the total voting power therein, is satisfied, after such inquiry as it deems fit to make, that it is necessary to make the appointment or appointments in order to prevent the affairs of the company being conducted either in a manner which is oppressive to any members of the company or in a manner which is prejudicial to the interests of the company or to public interest.

However, in lieu of passing order as aforesaid, the Company Law Board may, if the company has not availed itself of the option given to it of proportional representation to minority shareholders on the Board of the company, direct the company to amend its articles in the manner provided section 265 and make fresh appointments of directors in pursuance of the articles as so amended within such time as may be specified in that behalf by the Company Law Board.

In case the Central Government passes such an order it may, if thinks fit, direct that until new directors are appointed in pursuance of the order aforesaid, not more than two members of the company specified by the Company law Board shall hold office as additional directors of the company. The Central Government shall appoint such additional directors on such directions.

The person appointed as a director by the Central Government in accordance with the above provisions, need not hold any qualification shares or need to retire by rotation. However, his office as director may be terminated at any time by the Central Government and another person appointed in his place. No change in the constitution of the Board of Directors can take place after an additional director is appointed by the Central Government in accordance with these provisions unless approved by the Company Law Board. The Central Government in such cases may also issue such directions to the company as it may consider necessary or appropriate in regard to its affairs.

Conclusion
Oppression and mismanagement are part and parcel of business. During the course of business, oppression of small/minority shareholders takes place by the majority shareholders who are in control of the company. Similarly, mismanagement of business is not uncommon. When we talk of mismanagement we mean mismanagement of resources. Mismanagement could mean siphoning of funds, causing losses due to rash decision, not maintaining proper records, not calling requisite meetings. Finer version of mismanagement could arise where the management does not act/react to a business situation leading to downfall of business.

The concept of oppression and mismanagement is more relevant or common to family owned concerns. The reasons are very obvious. Family owned concerns are owned by family members who over time develop vested interest in business vested interest in their own heirs being the most common - thereby leading to oppression of other family members. Here typically, the controlling member of the family appropriates the family holdings by means of either a fresh issue or fraudulent transfers in his favor or reconstitutes the board in such a manner as to alienate the other family members. The result is the other family members get oppressed.

Secondly, the family owned concerns are not professional managed and their system of functioning is usually personal. They lack probity and fair play. They generally do business in a manner where they begin to benefit personally to the exclusion of other members. This leads to oppression of other family members/mismanagement of companies.

In order to check all these discrepancies the need was felt to have any measure to prevent the Oppression and mismanagement and thus under Chapter 6th of Part 6th of Companies Act , 1956 provides for the judicial as well as administrative remedies to check Oppression and mismanagement. It is a powerful tool which provides such power that even a singer member can approach Company Law Board if any of his right has been infringed or in order to prevent the Oppression and mismanagement in the company

Question 20.: What do you mean by winding up of a company? Who can apply for winding of a company? Explain the procedure of compulsory winding up.

Winding up (which is more commonly called liquidation in Scotland) is proceeding for the realisation of the assets, the payment of creditors, and the distribution of the surplus, if any, among the shareholders, so that the company may be finally dissolved. Professor Gover in his book Principles of Modern Company Law has described the winding up of a company in the following words : ‘‘Winding up of a company is the process whereby its life is ended and its property administered for the benefit of its creditors and members. An administrator called a liquidator is appointed and he takes control of the company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights.’’

Thus winding up is the last stage in the life of a company. It means a proceeding by which a company is dissolved. Winding up should not be taken as if it is dissolution of a company. The winding up of a company precedes its dissolution. Prior to dissolution and after winding up, the legal entity of the company remains and it can be sued in a Court of law. On dissolution the company ceases to exist, its name is actually struck off from the Register of Companies by the Registrar and the fact is published in the official Gazette.

PERSONS ENTITLED TO APPLY FOR WINDING UP

The Court does not choose to wind up a company at its own motion. It has to be petitioned. Section 439 of the Companies Act enumerates the persons those can file a petition to the Court for the winding up of a company. The petition for winding up may be brought by any one of the following :

1. Petition by Company

A company can make a petition only when it has passed a special resolution to that effect. However, it has been held that where the company is found by the directors to be insolvent due to circumstances which ought to be investigated by the Court, the directors may apply to the Court for an order of winding up of the company even without obtaining the sanction of the general meeting of the company.

2. Petition by Creditors

The word 'creditor' includes secured creditor, debenture holder and a trustee for debenture holder. A contingent or prospective creditor (such as the holder of a bill of exchange not yet matured or of debentures not yet payable) is also entitled to petition for a winding up of the company.

Notice that a creditor has a right to winding up order if he can prove that he claims an undisputed debt and that the company has failed to discharge it. When a creditors' petition is opposed by other creditors, the Court may ascertain the wishes of the majority of creditors.

3. Contributory Petition

The term 'contributory' means every person who is liable to contribute to the assets of the company in the event of its being wound up. Section 428 makes it clear that it includes the holder of fully-paid shares. A fully-paid shareholder will not, however, be placed on the list of contributors, as he is not liable to pay any contribution to the assets, except in cases where surplus assets are likely to be available for distribution.

A contributory is entitled to present a petition for winding up a company if :

(a) the number is reduced, in the case of a public company below seven and in the case of private company below two; and

(b) the shares in respects of which he is a contributory either were originally allotted to him or have been held by him; and

(c) the shares have been registered in his name, for at least six months during the period of 18 months immediately before the commencement of the winding up; and

(d) the shares have been devolved on him during the death of a former holder [Sec. 439(4)].

4. Registrar's Petition

The Registrar can present a petition for winding up a company only on the following grounds, viz.,

(a) if a default is made in delivering the statutory report to the Registrar or in holding the statutory meeting;

(b) if the company does not commence its business within a year from its incorporation, or suspends its business for a whole year ;

(c) if the number of members is reduced, in the case of a public company below seven and in the case of a private company below two ;

(d) if the company is unable to pay its debts; and

(e) if the Court is of opinion that it is just and equitable that the company should be wound up.

Note that the Registrar can file a petition for winding up only with prior approval of the Central Government. The Central Government before sanctioning approval must give an opportunity to the company for making its represent actions, if any.

5. Petition by any Person Authorised by the Central Government

If it appears to the Central Government from any report of the inspectors appointed to investigate the affairs of the company, that it is expedient to wind up the company because its business is being conducted with intent to defraud creditors, members or any other person, or its business is being conducted for a fraudulent or unlawful purpose, or the management is guilty of fraud, misfeasance or other misconduct, the Central Government may authorise any person to present to the Court a petition for winding up of the company that is just and equitable that the company should be wound up.

WINDING UP BY THE COURT (Compulsory Winding Up)

A company may be wound up by an order of the Court. This is called compulsory winding up or winding up by the Court. Section 433 lays down the following grounds where a company may be wound up by the Court. A petition for winding up may be presented to the Court on any of the grounds stated below :

1. Special resolution

A company may be wound up by the Court if it has, by a special resolution, resolved that it be wound up by the Court. But it is to be noted that the Court is not bound to order for winding up merely because the company by a special resolution has so resolved. Even in such a case it is the discretion of the Court to order for winding up or not.

2. Default in filing statutory report or holding statutory meeting

If a company has made a default in delivering the statutory report to the Registrar or in holding the statutory meeting, a petition for winding up of the company may be presented to the Court. A petition on this ground may be presented to the Court by a member or Registrar (with the previous sanction of the Central Government) or a creditor. The power of the Court is discretionary and generally it does not order for winding up in first instance. The Court may, instead of making an order for winding up, direct the company to file the statutory report or to hold the statutory meeting but if the company fails to comply with the order, the Court will wind up the company.

3. Failure to commence business within one year or suspension of business for a whole year

Where a company does not commence its business within one year from its incorporation or suspends its business for a whole year, a winding up petition may be presented to the Court. Even if the business is suspended for a whole year, this by itself does not entitle the petitioner to

get the company wound up as a matter of right but the question whether the company should be wound up or not in such a circumstances entirely in the discretion of the Court depending upon the facts and circumstances of each case. Even if the work of all the units of the company has been suspended then too it will still be open to the Court to examine as to whether it will be possible for the company to continue its business. Before the order of winding up on this ground the Court is required to see what are the possibilities of resumption of the business of the company. The suspension of the business, for this purpose, must be the entire business of the company and not a part of it. The Court will not order for winding up on the grounds, if :

(a) suspension of business is due to temporary causes ; and

(b) there are reasonable prospects for starting of business within a reasonable time.

4. Reduction of membership below the minimum

When the number of members is reduced, in the case of a public company, below 7 and in the case of a private company, below 2, a petition for winding up of the company may be presented to the Court.

5. Company's inability to pay its debts

A winding up petition may be presented if the company is unable to pay its debt. 'Debt' means definite sum of money payable immediately or at future date. A company will be deemed to be unable to pay its loan in the following conditions (Section 434) :

(a) a creditor of more than Rs. 500 has served, on the company at its registered office, a demand under his hand requiring payment and the company has for three weeks thereafter neglected to pay or secure or compound the sum to the reasonable satisfaction of the creditor ; or

(b) execution or other process issued on a judgement or order in favour of a creditor of the company is returned unsatisfied in whole or in part ; or

(c) it is proved to the satisfaction of the Court that the company is unable to pay its debts, taking into account its contingent and prospective liabilities, i.e. whether its assets are sufficient to meet its liabilities.

6. Just and Equitable [Sec. 433(f)]

The Court may also order to wind up of a company if it is of opinion that it has just and equitable that the company should be wound up. What is 'just and equitable' depends on the facts of each case. The words 'just and equitable' are of wide connotation and it is entirely discretionary on the part of the Court to order winding up or not on this ground.

Thus the Court itself works out the principles on which the order for winding up under the section is to be made. Winding up by the Court on 'just and equitable' grounds may be ordered in the cases given below :

(a) (i) The object for which it was incorporated has substantially failed or has become impossible or (ii) it is impossible to carry on business except at a loss or (iii) the existing and possible assets are insufficient to meet the existing liabilities of the company.

(b) When there is oppression by the majority shareholders on the minority, or there is mismanagement.

(d) When there is a deadlock in the management of the company. When there is a complete deadlock in the management of the company, it will be wound up even if it is making good profits.

(e) When the company is a 'bubble', i.e. it never had any real business.

Question 21.: What are the different types of winding up? Explain the voluntary winding up.

MODES OF WINDING UP

A company can be wound up in two ways :

1. Compulsory winding up by the Court;

2. Voluntary winding up : (i) Members' voluntary winding up; (ii) Creditors' voluntary winding up;

VOLUNTARY WINDING UP

Winding up by the creditors or members without any intervention of the Court is called 'voluntary winding up'. In voluntary winding up, the company and its creditors are left free to settle their affairs without going to the Court, although they may apply to the Court for directions or orders if and when necessary.

A company may be wound up voluntarily under the circumstances given here under:

1. when the period fixed for the duration of the company by the articles has expired or the event has occurred on the occurrence of which the articles provide that the company is to be dissolved and the company in a general meeting has passed a special resolution to wind up voluntarily; or

2. the company has passed a special resolution to wind up voluntarily.

Thus a company may be wound up voluntarily at any time and for any reason if a special resolution to this effect is passed in its general meeting. When a company has passed a resolution for voluntary winding up, it must within 14 days of the passing of the resolution gives notice of the resolution by advertisement in the official Gazette and also in some newspaper circulating in the district where the registered office of the company is situated.

Commencement of Voluntary Winding up

A voluntary winding up is deemed to commence at the time when the resolution for winding up is passed [Sec. 486]. The date of the commencement of the winding up is important for several matters such as liability of past members and fraudulent preferences, etc..

Consequences of Voluntary Winding up

The consequences of voluntary winding up are :

1. From the commencement of voluntary winding up, the company ceases to carry on its business, except so far as may be required for the beneficial winding up thereof [Sec. 487].

2. The possession of the assets of the company vests in the liquidator for realisation and distribution among the creditors. The corporate state and powers of the company shall, however, continue until it is dissolved (Sec 456 and 487).

3. On the appointment of a liquidator, all the powers of the board of directors cease and the liquidator may exercise the powers mentioned in Sec. 512 including the power to do such things as may be necessary for winding up the affairs of the company and distributing its assets. The liquidator appointed in a members' voluntary winding up is merely an agent of the company to administer the property of the company for purposes prescribed by the statue.

Kinds of Voluntary Winding up

Voluntary winding up may be :

(a) A members' voluntary winding up; or

(b) A creditors' voluntary winding -up.

(A) Members' voluntary winding up

A members' voluntary winding up takes place only when the company is solvent. It is initiated by the members and is entirely managed by them. The liquidator is appointed by the members. No meeting of creditors is held and no committee of inspection is appointed. To obtain the benefit of this form of winding up, a declaration of solvency must be filed.

Declaration of solvency

Section 488 provides that where it is proposed to wind up the company voluntarily the directors or a majority of them, may, at a meeting of the board, make a declaration verified by an affidavit that the company has no debts or that it will be able to pay its debts in full within a period not exceeding 3 years from the commencement of winding up as may be specified in the declaration. Such declaration shall be made within five weeks immediately preceding the date of the passing of the resolution for winding up and shall be delivered to the Registrar before that date. It shall also be accompanied by a copy of the auditors on the Profit and Loss Account and the Balance Sheet of the company prepared upto the date of the declaration and must embody a statement of the company's assets and liabilities as on that date.

Where such a declaration is duly made and delivered, the winding up following shall be called members' voluntary winding up. Where the same is not duly made, it shall be called creditors' voluntary winding up. Sections 490-98 of the Act deal with provisions applicable to members' voluntary winding up. They are as follows :

1. Appointment and Remuneration of Liquidator

On the passing of the resolution for winding up, the company must in a general meeting appoint one or more liquidators and fix his or their remuneration. Any such remuneration cannot be increased at all, not even with the sanction of the Court and the liquidator cannot take charge of his office unless the remuneration is so fixed [Sec. 490].

2. Powers of the Board on Appointment of Liquidator

On the appointment of a liquidator, all the powers of the board and of a managing or whole-time director, and manager, if there be any of these, shall cease, except for the purpose of giving notice of such appointment to the Registrar or in so far as the company in a general meeting or the liquidator may sanction the continuance thereof [Sec. 491].

3. Office of the Liquidator Falling Vacant

If a vacancy occurs by death, resignation or otherwise in the office of any liquidator appointed by the company, the company in a general meeting may fill the vacancy [Sec. 492].

4. Notice of Appointment to Registrar

The company must, within 10 days of the appointment of the liquidator, or the filling up of the vacancy, as the case may be, give notice to the Registrar of the event. Default renders the company and every officer (or liquidator) who is in default liable to fine upto Rs. 100 for every day of default [Sec. 493].

5. Calling Meeting of Creditors

If the liquidator at any time is of opinion that the company is insolvent, he must summon a meeting of the creditors, and lay before the meeting a statement of the assets and liabilities of the company [Sec. 495]. Thereafter the winding up proceeds as if it were a creditors' voluntary winding up and not a members' voluntary winding up [Sec. 498].

6. Calling General Meeting at the End of one Year

In the event of the winding up continuing for more than one year, the liquidator must call a general meeting of the company at the end of the first year from the commencement of the winding up at the end of each succeeding year, or at the first convenient date within three months

from the end of the year or such longer period as the Central Government may allow, and must lay before the meeting an account of his acts and dealings and of the conduct of the winding up during the preceding year

[Sec. 496].

7. Final Meeting and Dissolution

As soon as the affairs of the company are fully wound up, the liquidator makes up an account of winding up, showing how the winding up has been conducted and how the property of the company has been disposed of. He then calls a general meeting, of the company and lays before it accounts showing how the winding up has been conducted. This is called the final meeting of the company.

The meeting must be called by advertisement :

(a) specifying the time, place and object of the meeting ; and

(b) published not less than one month before the meeting in the official

Gazette, and also in some newspaper circulating in the district where

the registered office of the company is situated.

Within one week after the meeting, the liquidator is required to send to the Registrar and the official liquidator a copy of the accounts. He must also make a report to each of them of the holding of the meeting and of the date thereof. On receipt of the accounts and the report, the Registrar will register them. On receipt of the accounts and report, the official liquidator will make a scrutiny of the books and papers of the company and make a report to the Court stating the result of the scrutiny. If the report shows that the affairs of the company have been conducted bonafide i. e. not in a manner prejudicial to the interests of its members or to the public interest, then from the date of the submission of the report to the Court, the company shall be deemed to have been dissolved. If the official liquidator in the report has stated that the affairs of the company have been conducted in a manner prejudicial to the interest of its members or to the public interest, the Court shall direct the official liquidator to make a further investigation of the affairs of the company and on the report of the official liquidator on such further investigation, the Court may either make an order that the company shall stand dissolved with effect from the date to be specified in the order of the Court or to make such other order as the circumstances of the case brought out in the report permit [Sec. 497].

(B) Creditors' Voluntary Winding up (Sections 500-509)

In creditors' voluntary winding up, it is the creditors who move the resolution for voluntary winding up of a company, and there is no solvency declaration made by the directors of the company. In other words, when a company is insolvent, that is, it is not able to pay its debts, it is the creditors' voluntary winding up.

Special provisions relating to Creditors' Voluntary Winding up

There are certain special provisions to be completed with creditors' voluntary winding up. They are :

1. Meeting of Creditors (Sec. 500)

The company must call a meeting of the creditors of the company on the same day or on the next following day on which the general meeting of the company is held for passing a resolution for voluntary winding up. The company must send the notice of the meeting to the creditors by post simultaneously with the sending of the notices of the meeting of the company. The company must also cause the notice of the meeting of the creditors to be advertised once at least in the official Gazettee and once at least in two newspapers circulating in the district where the registered office or principal place of business of the company is situated. At the creditors' meeting, one of the directors shall preside. The board of directors is required to lay before the meeting of the creditors (a) a full statement of the position of the company's affairs and (b) a list of creditors of the company with the estimated amount of their claims.

2. Notice of Registrar [Sec. 501]

Notice of any resolution passed at a creditors' meeting shall be given by the company to the Registrar within 10 days of the passing thereof.

3. Appointment of Liquidator (Sec. 502)

The creditors and the company at their respective meetings may nominate a person to be liquidator for the purpose of winding up the affairs and distributing the assets of the company. If the creditors and the company nominate different persons, the persons nominated by the creditors

shall be the liquidator. If no person is nominated by the creditors, the person, if any, nominated by the company shall be the liquidator.

4. Committee of Inspection

The creditors at their first or any subsequent meeting may, if they think fit, appoint a committee of inspection of not more than five members. If such committee is appointed, the company may, either at the meeting at which the winding up resolution is passed or at a later meeting, appoint not more than five persons to serve on the committee. If the creditors object to persons appointed by the company, then the matter will be referred to the Court for the final decision. The powers of such committee are the same as those of a committee of inspection appointed in a compulsory winding up.

5. Remuneration [Sec. 504]

The committee of inspection or if there is no such committee, the creditors may fix the remuneration to be paid to the liquidator or liquidators. Where the remuneration is not fixed, it will be determined by the Court. Any remuneration fixed by the committee of inspection or creditors or the Court shall not be increased.

6. Board's Power to Cease (Sec. 505)

On the appointment of a liquidator, all the powers of the board of directors shall cease, except in so far as the committee of inspection, or if there is no such committee, the creditors in a general meeting, may sanction the continuance thereof.

7. Vacancy in the Office of Liquidator (Sec. 506)

If a vacancy occurs by death, resignation, or otherwise in the office of the liquidator (other than a liquidator appointed by or by the direction of the Court), the creditors in a general meeting may fill the vacancy.

8. Final Meeting and Dissolution (Secs 508-509)

The liquidator must call a general meeting of the company and a meeting of the creditors every year within three months from the close of the liquidation year, if the winding up continues for more than one year. He must lay before the meeting an account of his acts and dealings and of the conduct of winding up during the preceding year and position of winding up. He must call, in the same manner, a final meeting when the affairs of the company are fully wound up and place the same statements before it, as he does in the case of a members' meeting in a members' voluntary winding up under Sections 496 and 497.

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