COMPANY LAW

Unit-1
Legislative History:
Important legislations and events→ The Company Law, 2013
The first legislation dealing with companies→ Joint Stock Companies Act, of 1850
regulated Joint Stock companies. Based on English Laws.
The Act was based on the English Companies Act 1844.
The first legislation to give a separate legal title to companies. Recognised the separate
legal entity. An artificial person; has individuality, responsibilities, duties and liabilities
different from members and shareholders. (a company).
(Can sue, can get sued)
Companies Act, of 1857 based on the English Companies Act of 1856
Companies Act, 1866 → Comprehensive: Incorporation, registration and winding up of
companies. 1882 had an amendment.
Companies Act, 1913
Companies Act, 1956 (major amendment):
It was adapted based on HC Bhaba Committee recommendations (formed in 1950). 1952 the
report containing recommendations was submitted. The Company Law Board was the
adjudicating body.
Important Amendments:
1. 2000
2. 2001
3. 2002
4. 2006
2013 Act:
a. NCLT (National Company Law Tribunal) and appellate NCLAT (National Company
Law Appellate Tribunal) replaced Company Law Board.
b. CSR (Corporate Social Responsibility) was made mandatory under this Act for certain
classes of companies. Definition, percentage of profits, and activities are defined.
c. One person company concept was introduced in this. (Different from sole
proprietorship)
d. Pvt Companies: Min requirement is 2
OPC: only 1
Public Companies: Min is 7
e. Class-action suits: A whole category of minority shareholders can file a case in a court
of law. Violation of rights and protection of interests. Was introduced in this Act.
Specific to companies.
Amendments post-2013:
Company:
- Voluntary Association of Persons.
- Two different types of association of persons: Partnerships and Companies
- Legal Liability (except LLP). If partnerships are registered (not mandatory) they can
be considered to be separate legal entities. Indian Partnership Act, 1932 and Limited
Liability Partnership Act, 2008.
- Section 2(20) defines a Company: A company incorporated under this Act or previous
legislations.
- Prof. Haney: A company is an artificial person created by law having a separate entity
with a perpetual succession (it doesn’t matter if the members subsist company will
continue to exist) and a common seal (authorisation and identification).

Characteristics:
1. An Incorporated Association
2. It is mandatory for it to be registered.
3. Two Types: Public (min req is 7 members) and Private (min req is 2 members)
Sec-13
4. Profit-making need not be the primary motive of a company. (Section 8 of CA,
2013 and S-25 of 1956 Act). Charitable objectives are given priority over
shareholders in the profit division.
Cases:
1. Soloman v. Soloman (1895):
2. Lee v. Lee: Lee was the sole director. Company’s business of aerial cropping.
Aircraft are used to fertilise crops. He was the chief pilot. Met with an accident
and his wife claimed compensation from the company.
Based on his being an employee of the company, the wife can claim
compensation, as a company is a separate legal entity from an employee.
3. A Director transfers his property to the company. The moment he transfers all his
rights over it ceases to exist. It becomes the company’s property.
Artificial persons
Separate property
Transferability of shares
Articles of Association/ MOA
An MOA is a legal document that every company needs to file during its registration.
It consists of the basic details of the company with its purpose of incorporation. On
the other hand, an AOA is a document that lays down the guidelines on which the
company will operate.
The Doctrine of Lifting the Corporate veil:
By applying this doctrine, the court ignores the separate legal entity of the company
and imposes the liability on the members for fraud and misconduct
Grounds:
1) Where the company is a mere sham
Gilford Motor co vs Horne
2) Protection of revenue or tax evasion
In re Sir Dinshaw maneekjee petite 1927

3) Determination of the enemy character of the company

Daimler company vs Continental tyres and rubber company ltd:
A suit for debt recovery. Company incorporated in England selling tyres manufactured
by a German Company. The majority of shareholders and directors were German.
During 1st WW, the company filed a suit for debt recovery from the German company
in an English Court. The company has an alien character and it would result in a trade
with the enemy. The corporate veil was lifted to check the character of the company.

4) Prevention of fraud on Misconduct:

Jones v. Lipman:
Lipman and Jones entered an agreement to sell a property for 5000 pounds. Lipman
incorporated a company and sold it to that company that was supposed to be sold to
Jones for a lesser price. Jones filed a suit for specific performance against Lipman and
the company. The suit was made applicable to both.

Different Types of Companies:

Not a natural person and hence not a citizen. Fundamental rights do not apply to
companies.
Section 3 states that a company may be incorporated for a lawful purpose in any of
these forms.
A. Public Company:
Minimum directors are 3 to 15 (S-149)
Minimum members are 7
Maximum is n
Definition: 2(71): A public company is a company which is not a private company
and has a minimum paid-up capital as may be prescribed through subsequent
amendments. (Were 5 lakhs in the previous act. Now removed)
Public Offerings are the way shares are offered to the public.
 Process:
1. Issue a prospectus (gist or details of the company) Mandatory for a public
company.
2. Listing in the stock exchange
3. Promoters

Distinction:
Pvt Company Public Company
Minimum members: 2 to 200 7 to any number
Minimum directors: 2 to 15 3 to 15
Transfer of shares: Restrictions Freely Transferable
Issuance of Prospectus: No issue Mandatory
Public Deposits: Not free Free to accept deposits from the public
All meetings are mandatory in both companies
Financial statements need to be registered with the Registrar

Conversion of a Private Company to a Public Company:

S-13, 14 and 18 of the Companies Act;
The Companies (Incorporation) Rules, 2014;
1. MoAs and AoAs need to be altered- Alteration (as the nature of the company is
mentioned there)
2. Call for a Board of Directors Meeting for this alteration (before the alteration)
3. BoD will discuss → strategies for alteration
4. Extraordinary General meeting of shareholders; they have to pass a special resolution
for converting a private company to a public company.
5. Notified to the Registrar of Companies. In each Jurisdiction, there is a registrar. Form
INC-27; has to be filed with the Registrar within 15 days of passing the special
resolution.
6. Registrar if satisfied, the company will be incorporated as a new company and a new
certification of incorporation will be issued. (Issue of Certificate of Incorporation)
Conversion of a Public Company to a Private Company:
S-13, 14 and 18 of the Companies Act;
The Companies (Incorporation) Rules, 2014;
1. Alteration
2. BoD Meeting
3. Extraordinary General Meeting of Shareholders → special resolution
4. Ordinary resolution (more than 50% present and voting should agree) while special
resolution (2/3rd present and voting).
5. Notified to the Registrar of Companies. In each Jurisdiction, there is a registrar. Form
INC-27; has to be filed with the Registrar of Companies within 15 days of passing the
special resolution.
6. INC-28 needs to be filed with the Regional Director;
7. Publication: Advertisement in the newspaper or the official website of a company
about the conversion.
8. Issuance of fresh Certificate of Incorporation→ As a private limited company
9. Regarding shares the Board will decide what to do with it

B. Private Company: Shareholders are private entities. Shares are not offered to the
public.
S 2(68) defines a private company.
Certain conditions:
A company that has a minimum paid-up capital (Different types of capital.
Authorised or Nominal Capital, is the initial amount with which you start a
company that will be prescribed in MOA. Upto the company how much they can
issue the nominal capital up for shares. The payment of the shares is done. This is
called paid-up capital. Subscribed capital is when a person agrees to subscribe to a
share but has not paid yet.) as may be prescribed (now it has been removed after
the 2015 amendment) and
a. Has restriction on transfer of shares: Easily transfer the rights over shares.
Limit, consent and procedure need to be followed.
b. Restriction on invitation from the public for the subscription of shares: Shares
are always offered to a group of people. This is called Private Placement. Has
a different procedure from a PPO.
c. The maximum limit of the number of members (shareholders) is 200. (except
for OPC)
d. The count of the number of members is based on share-holding. If A and B are
holding 1 share, A and B will be considered as 1 member.
e. Mandatory to mention “ABC Pvt Ltd.” while registering.
Privileges and Exemptions:
a. Minimum Directors and Maximum Directors are 2 and 15 respectively. (S
149)
b. At a time, a person can become a director of 20 companies at a time
c. Grounds for disqualification of Directors (statutory). Additional grounds can
be made by the company in their Articles of Association. S-164(1) and (2) deal
with disqualification. Sub-clause 3 deals with the special powers of the
company to make additional grounds.
d. Appointment of an Independent Director (does not have any relationship with
the company) In the case of a private company it is not mandatorily
 applicable. S-149 deals with the appointment of Independent Directors in the
case of certain companies.
e. Audit Committee: Mandatory for certain companies to have an audit
committee. It is not mandatory for private companies. (S-177)
f. Annual General Meeting, General Meeting and extraordinary general meeting
are required for Private Company

C. One-Person Company: Also, a private company. All the characteristics of a pvt

company apply to one person company as well.
Section 2(62) deals with the definition of OPC.
Introduced in the 2013 Amendment. Recommended by J.J Irani Committee. To
promote business enterprises.
1 member in the Company. Initially OPC, OPC was converted into a private
company.

Section 3(1) all requirements needed for a private company are needed for an
OPC as well.
Mandatory naming: ABC (OPC) Pvt. Ltd.

Privileges and Exemptions:

a. Minimum 1 director is required. S-149(1)(a)
b. Annual General Meetings are not mandatory (S-96). 3 types of meetings in the
Companies Act; General Meeting, Extraordinary General Meeting, and Annual
General Meeting. (S-111). All are not applicable for OPC.
c. Financial Statements have to be filed within 6 months from the closure of a
financial year.

D. Small Companies:
Introduced in 2013
Categories of companies whose turnover and paid-up capital are prescribed.
“Company other than the public company:
1. Whose paid-up capital does not exceed 4 crores or such higher amount as may
be prescribed which shall not be more than 10 crores.
2. Company whose turnover of which as per its last profit and loss account for
the immediately preceding financial year does not exceed 40 crores or such
higher amount as may be prescribed which shall not be more than 100 crores”

Privileges and Exemptions: (Different)

E. Statutory Companies: Established and Governed by a statute

Examples: LIC, BSNL, ONGC, SBI
 Companies that are incorporated under a special act of a Parliament or a state
legislature. These are also called registered companies. Registration is not
required for such companies as it is already established under a statute.

F. Limited and Unlimited Companies: Public Ltd, Unltd;

Private Ltd, Unltd.
Limited by shares S2(22) or guarantees. S2(21)

Companies Limited by Shares:

A company has a liability of its members limited by the amount prescribed in the
MoA if any unpaid on the shares respectively held by them.
Whatever percentage of shares I hold; I am liable to only those.

Companies Limited by Guarantee:

A company having the liability of its members limited by the memorandum to
such amount, as the members may respectively undertake to contribute to the
assets of the company at the time of winding up.
Debts and liabilities of the company during winding up, will be stated as a fixed
amount I can contribute as a shareholder in the MoA.

Unlimited→ Whatever may be the case, the shareholders will be liable.

S2(92): A company does not have any limit on the liability of its members.

G. Holding Companies: S2(46); is a company about one or more other companies, a

company of which such companies are subsidiaries. Is in a dominant position and
has control over the subsidiary company.

H. Subsidiary Companies: S2(87); Subsidiary company is a subsidiary of any other

company (that is to say, the holding company), which means a company in which
the holding company:
Provisions when a company becomes a subsidiary:
1. Controls the composition of the Board of Directors or
2. Exercises or controls more than one-half of the total voting power (equity
shareholders can vote so if the Holding Company can buy the equity shares and
handle voting power) either on its own or together with one or more of its
subsidiary companies.

Promoters:
Role of the promoter before the incorporation of a company. MoA and AoA, subscribers to
the shares need to be found, and who should be the Director? These are done by a person in
the initial stage and hence are done by a Promoter. It can be anyone. Once the company is
incorporated, these roles are passed on to the Board of Directors.
The term is not clearly defined in the Companies Act, 2013. 1956 no definition. These are the
first persons who have control or influence over the affairs of a company.
S2(69): If a person’s name appears as MoA, financial statements or AoA
Directly or indirectly controls affairs as a shareholder or as a director.
Initial Activities or the stage of promotion:
1. Promotion: Drafting MoA, AoA, obtaining finances for the company, future
shareholders of the company (subscription to MoA and AoA)
2. Registration: Drafts (Forms, MoA and AoA) are registered with the Registrar and
certification of incorporation is issued.
3. Floatation: More investments through shares and share capital are collected. (IPOs,
issuing prospectus and Private Placement)
4. Commencement of business: Not mandatory that the company should start
functioning at the date of incorporation.

Case Laws:
1. Twycross v. Grant (1877): Provided by Justice Cockburn
A promoter is a person who undertakes to form a company concerning a given
project and sets it going and who undertakes the necessary steps to accomplish
that purpose.
2. Whaley Bridge Printing Company v. Green (1880):
Definition
What is promotion
Whoever is into the promotion is called a promoter

Companies Act 2(69) any person acting in their professional capacity will not be
considered a Promoter. For instance, a lawyer (giving legal advice) or an
Accountant (who is helping with finances) who is helping in drafting MoAs or
AoAs will not be a Promoter.

1. Erlanger v. New Sombrero Phosphate Co.:

A syndicate (an organisation with a common interest) headed by Erlanger bought
an island having phosphate mines for an amount of 55,000 pounds. They
incorporated a company to work in the mines. Had 5 Directors, appointed by
Erlanger. 2 were abroad and 3 in India and were under the direct control of
Erlanger. The company through the 3 Directors bought the island having mines for
1 lakh 10 thousand pounds from Erlanger. AGM (Annual General Meeting) was
approved and the company functioned. When the company went into liquidation
(liquidator appointed by company or tribunal). The liquidator found out that the
transaction of selling back was bogus and Erlanger made a profit of over 50,000
pounds which he did not disclose to the company.
The liquidator filed a case and asked Erlanger was asked to give the profit to the
company.
 Held: Erlanger was a Promoter. He sold the property under the capacity of a
Promoter. Duties as a Promoter, interest in the transaction with a company,
promoter has to disclose it to the company and no secret profit should be made. If
not done, the promoter is liable.
a. Duty not to make a secret profit
b. Duty to disclose the secret profit made to the company
c. A company or firm can be a promoter as well

2. Gluckstein v. Barnes:
Gluckstein was part of a Syndicate. The syndicate bought a property worth 40,000
pounds for 20,000 pounds as a mortgage. Paid 140,000 pounds for the property
itself.
Later, the Syndicate formed a company called Olympia. The property was sold to
Olympia for 180,000 pounds. The company also bought the mortgage. A profit of
40,000 pounds was made and it was disclosed in the prospectus. However, the fact
that the mortgage was discounted by 20,000 pounds was not disclosed.
The liquidator of Olympia was able to recover the 20,000-secret profit.
Promoters failed to disclose all profits. Disclosure to the Board comprised of
other members of the syndicate was not sufficient. The disclosure must be to
the independent board or ultimate shareholders of the company.
Disclosure must be to an independent board.
Legal Position of a Promoter: Not an agent, not a trustee. No company is in existence
initially to define the relationship or role. Actual role is that of a fiduciary duty
towards the company and therefore, the dealings with the company should be open
and fair. One party is in a dominant position and is capable of influencing the other
party, there is an element of trust. Thus, there should be a disclosure and it must be
fair and open.
Duties of the Promoter:
a. Duty not to make any secret profit (Erlanger’s case)
b. Duty to disclose the secret profit made to the company (Gluckstein v. Barnes)
c. Whatever transactions a promoter makes, the promoter must transfer all of it to the
company after the incorporation else be personally liable for breach of trust and
misappropriation.
d. Disclosure has to be made to either
1. The independent director (not having any relationships or interests)
2. Existing and Intended (prospective) shareholders
3. Articles of Association or Prospectus
Remedies for Breach of Duties of a Promoter:
1. Rescission of Contract: A company can rescind all pre-incorporation agreements
(Ratify the contracts between the promoter and third parties after incorporation of
the agreement, the company must do due diligence before ratification) if there is
non-disclosure or secret profit made by the promoter.
 2. To recover secret profit: This happens when the promoter is not acting in a
fiduciary duty; acting in a fiduciary duty; or misappropriation. Remedy varies
with all these circumstances.
Liabilities of a Promoter:
1. Section 26 deals with misstatement in Prospectus (whoever made the Prospectus):
civil or criminal liability may be prescribed. S-35(c) deals with civil liability and
compensation of shareholders.
2. Section 34 prescribes criminal liability for misstatement in Prospectus and the
liability prescribed- S 447, Fraud under Companies Act.
3. Section 300 provides for the power of the Company Law Tribunal to order for
examination of promoters' and directors' activities. (Compulsory winding up. The
liquidator will be appointed. He or she reports fraud. The tribunal can order an
examination.)
4. Section 340 Power of the Company Law Tribunal to assess the damages, If the
promoter has misapplied or retained any company property the company can
proceed against the promoters for deceit or breach of duty.

Termination of Duty of a Promoter:

1. When the Board of Directors are formed after the incorporation of the
company all the assets are transferred to the company.

Pre-Incorporation Agreement: Before incorporation, when the company agrees with anyone it
is a PIA
Kelner v. Baxter:
The company did not have a legal entity before the incorporation while the contract was
entered upon and hence PIA does not have any validity. There is no binding effect.
Position before the enactment of the Specific Relief Act, 1963 and After 1963:
1. PIA not binding on the company as before incorporation of a company, the company
cannot enter into a contract. In such cases, the Promoters will be personally liable and
not the company. (B)
2. Subsequent ratification of the agreement by the company was not possible. (B)
Now it is possible.
3. (A) Section 15(h); states who may obtain specific performance of a contract if the
contract is warranted by the terms of the company, which includes a Promoter of
Specific Relief Act.
If A(promoter) and B(third-party) enter into a loan contract, the company may agree
to the contract based on its terms (AoA) after its incorporation. Specific performance
may be initiated against a company and a company may ratify it based on its terms.
Section 19(e); If a promoter, (specifically for the promoter) before the incorporation
of a company has entered into a contract and if the contract is warranted by the terms
of the company, the company may enforce such contracts.

Incorporation Stage:
1. Decide what type of company needs to be incorporated.
2. Decide the liability of the shareholders (limited or unlimited).
3. File some documents with the Registrar of Companies: (S-7)
a. Memorandum of Association
b. Articles of Association
c. Application
d. Copy of agreements if any
e. Declaration (all particular specifications and conditions under the Companies
Act are fulfilled; that is the Declaration)
It needs to be signed by an Advocate, Chartered Accountant or Company
Secretary. A director too, if the director has been appointed.
f. Affidavit: Needs to be filed by each subscriber of MoA (prescribed
shareholders) and the proposed Directors (First Directors) of the company.
(sworn statement). All tentative. It can be altered later.
Content of the Affidavit:
• Whoever giving the affidavit is not convicted for any offence in
connection with the promotion, formation, or management of any
company, or is not found guilty of any fraud or misfeasance or any breach
of duty to any company under this Act or any previous company law
during the preceding 5 years.
g. Address for correspondence or communication: Registered Office (every
company shall have one once incorporated). It should be given once
incorporated.
The temporary address of the Promoter or proposed directors for
communication must be given.
h. Particulars of the First Directors: Name, address, identity proof, nationality
and other details of the Directors. Directors Identification Number (DIN) must
be obtained by a separate process and must be added to this document.
i. Post incorporation, the Company will receive a Company Incorporation
Number (CIN) given in the certificate of incorporation as well.
Punishment prescribed in S7(5) if the documents are false, then liable under Section
447.
→Certificate of Incorporation:
Once a company is registered with the Registrar, a certificate of incorporation is
registered. It is conclusive evidence. (Section 7)
The last stage of registration. The date of incorporation or commencement of life (the
business can commence at a later point) is mentioned in the certificate of
incorporation.
CIN (Company Identification Number) is mentioned.
#Moosa Gulam Ariff v. Ebrahim Gulam Ariff
The validity of a Certificate of Incorporation cannot be questioned on any grounds.
→Memorandum of Association:
Section 2(56) of the Act defines this.
“As originally framed or as altered from time to time in pursuance of any provision of
the previous company law or of this Act.”
#Ashbury Railway Carriage Company v. Riche
The definition of MOA is given: It is the charter (a document that gives authority to
perform a function) of a company and it defines the limitations of powers of a
company.
Different clauses of MOA:
1. Object Clause: What the company is empowered to do. The
company should function accordingly. If it is exceeding then such
acts are called “ultra-vires”.
2. Form and Content of an MOA: Form is prescribed in Schedule 1
of the Companies Act (Table A to Table E). The Draft must thus
be accordingly.
Printed, numbered.
3. Subscription: Done by the members (potential) (can be changed
before incorporation)
4. Contents: (Section 4)
Name clause: 4(1A) The name of the proposed company.
Important to add it to the register of the company. Conditions to
name a company are provided in S 4(2) as well as other rules and
legislations→ Companies (Incorporation) Rules, 2014; Rule 8
Provisions in Trademarks Act, 1999
The Emblems and Names (Prevention of Improper Use) Act,
1956
Conditions:
• In the opinion of the central government is undesirable (S 4
clause 2 and the Rules): A name which is identical or too nearly
resembles the name of another company.
• The use of such a name constitutes any offence under a law in
force in India (Emblems Act)
• The Trademarks Act states that a company cannot use the
registered name or trademark of another company.

Registered Office: MOA needs to have the reg—office details.

Only 1 will be there. Section 12; within 30 days of incorporation
of the company, the company has to decide the location of the
decided office.

#Asiatic Government Security Life Assurance Co Ltd. v. The

New Asiatic Insurance Co. Ltd.:
The plaintiff was already registered. The defendants were in the
process of incorporation. The new company was sued. The court
held that though few words are common, other words are not
common. One was spec on life the other was all kinds of
insurance.

#Society of Motor Manufacturers and Traders Ltd. v. Motor

Manufacturers and Traders Mutual Insurance Company Ltd.:

S13(4) and 13(6): Alteration of registered office clause

Procedure for alteration of registered office:
(a) Changing from one place to another in the same city, town or
village: Notify the ROC within 15 days of the change.
(b) Changing from one town to another town within the same
state: A special resolution needs to be passed in the General
Meeting of the shareholders and a copy of it has to be filed
with ROC. (within 15 days needs to be notified)
(c) From one state to another state: Special Resolution
o Confirmation has to be taken by the central government
o ROC needs to be notified in both states and an altered
MOA and copy of the resolution needs to be submitted
to both states ROC.
(d) Change of Office from one jurisdiction of ROC to another
jurisdiction of ROC in the same state: Give an application to
the Regional Director of Companies (will confirm within 30
days) and a copy of confirmation should be submitted to the
new Registrar of Companies within 60 days.

Object Clause: Section 4(1) c deals with Object Clause.

Objectives of the company

#Ashbury Railway Carriage Company v. Riche:

Ultra-vires act; if the acts of the company exceed the objects
clause, then, it will be an ultra-vires act and all such acts
performed by the members are null and void. Such acts cannot be
ratified by the Board. Such members will be held personally
liable.
The Doctrine of Ultra-Vires:
A Company registered under the 2013 Act or any previous law
cannot do anything beyond the powers expressly or impliedly
conferred upon it by the statute or the MoA.
Effects of Ultra-Vires:
1. The Act is void ab initio
2. Injunction: To get an injunction for the ultra-vires acts that
are about to take place but have not taken place yet.
3. Personal Liability of the Directors: If the Director is involved,
such directors are personally liable.
4. Breach of Warranty of Authority: Director to a 3rd party for an
act ultra-vires, that act will be null and void even though if he
represented the company and will be personally liable to the
third party.
5. Ultra-Vires Property: D is purchasing a property from a 3rd
party, for the company, that was ultra-vires (eg. Limit beyond
mentioned). Though it is ultra-vires, the company’s right over
the property will remain but he will be personally liable (he
used company funds).
6. Procedure of Alteration of Object Clause: Section 13(8)
A. Has not issued prospectus already-
i. Board of Directors meeting: Will reach a consensus
ii. General Meeting of the shareholders: Special
Resolution needs to be passed by poster ballot (Exc.
OPC and more than 200 members)
iii. Notify the ROC within 15 days

B. Has issued prospectus already-

i. Board of Directors meeting: Will reach a consensus
ii. General Meeting of the shareholders: Special
Resolution needs to be passed by poster ballot (Exc.
OPC and more than 200 members)
iii. Notify the ROC within 15 days
iv. Notification in the newspapers: The details of the
proposed resolution shall be published in one English
and one in Vernacular language.
 Liability Clause:
Limited, Unlimited, by guarantees or by shares will be stated
here. S 4(1)d deals with this clause. The nature of liability of the
members. No specific provision for alteration of this clause in the
company’s act.
Liability of the company of members can be increased if it is
given in writing with full consent.

Capital Clause:

Subscription Clause (Association and Subscription)

Section 4(1)e deals with the Capital Clause
Amount of Capital invested in a company.
In MOA; Registered Capital or Authorised Capital; Nominal
Capital is invested

Minimum amount of capital with which the company was

incorporated.

Alteration of Capital Clause:

Section 61 of the Companies Act deals with the Alteration of the
Capital Clause:

Increase of authorised Consolidation and sub

share capital by passing a spl division of share capital.
resolution in the general meeting. Consolidation where
The copy needs to be filed with 10 shares 10 rs each
Registrar in 30 days 1 share is 100 rs

. Spl resolution + 30 days

Conversion of shares into stock and vice versa:

Share is a piece; stock is a bunch of shares
1 stock can be 50 shares. Constitutes stock if it is fully paid up.
Shares to stock and vice versa are still considered alterations.
Same procedure.

Diminution
If 5 lakh is authorised capital, can take 3 lakh and
offer it for a share. If 5 lakh is share capital (get through shares) but it
is not fully paid up. There are unpaid shares and those who have subscribed won’t
be considered a shareholder. Where 5 lakh is reduced to 3 lakh as share capital.
2 lakh remains unpaid.
 Association and Subscription Clause:
Section 13(4) (1): Subscribers to MOA: Prescribe a few prospective
shareholders to a company. Min 2 req for private companies. All the
details are mentioned in this clause.
At the end of the MoA, there will be a declaration-association clause

Articles of Association:
Section 2(5): As originally framed or altered from time to time or applied in pursuance of any
provisions of the Company Law or any previous Company Law.
Rules and regulations of working, process and functioning of the company.
Strictly in compliance with the Companies Act and with MoA
Can apply other legislation
Can come up with regulations not mentioned in any.
MoA- details of the company

Section 5(1) clearly states that the articles of association of a company shall contain
regulations for the management of a company. AoA is considered a subsidiary of MoA.
Preference will always be given to MoA. MoA prevails over AoA.

Section 5(6) deals with the form and content of AoA: No clauses as such. Table F to J of
Schedule 1 prescribes forms for different companies.
Table F Company limited by shares
Whoever is a subscriber of MoA should sign AoA as well.
The signature must be attested by 1 witness at least. Address and details of both subscribers
and witnesses will be mentioned.

What are the details included in the Articles of Association?

Name of the company, registered office, liability.
Intent and Purpose
Power Distribution
Company Organisation
Share Capital
Shareholder Meeting

1. Share Capital
2. Transfer of share capital
3. Alteration of capital
4. General meetings
5. Adjournment of meetings
6. Voting rights of members
7. Board of directors
8. Role and Functions of CEO, company secretary, CFO,
 9. Dividends and reserve
10. Accounts
11. Winding up
12. Indemnity
13. Anything else needed for the smooth functioning of the company

Alteration of AoA:
Section 14 of CA, 2014.
AoA can be altered in the same manner as done by MoA.
Rules relating to Alteration or limitations to the power of AoA:
- Should not conflict with any provision of MoA.
- Alteration should not include anything illegal or opposed to public policy
- Alteration should not be constituting a fraud on the minority by the majority

#Brown v. British Abrasive Wheel Co. (1919)

Financial crisis. The majority shareholders (98%) wanted change in AoA to transfer
2% minority shareholders to help them through the financial crisis. Whether such an
alteration was valid?
Was coercive. Creating fraud by majority shareholders. Thus, not valid.

- Alteration must not be in such a manner that it amounts to a breach of contract with
an outsider
#Southern Foundaries v. Shirlaw (1926)
Mr Shirlaw was appointed as a managing director for 10 years. Was an employment
contract. Company amalgamated. New rules stated that the company has the right to
dismiss any employee including the Managing Director at any point in time. If such
an alteration happens there will be a breach between the old company and the
employee. I was questioning the validity of the alteration. The court held that the
alteration was completely against the contract against Mr Shirlaw. There should
ideally be no breach.

- #Hutton v. Scarborough Cliff Hotel Co Ltd.

Binding Effect of MoA and AoA: (on whom)

Section 10 of the Act
The MoA and AoA of a company are binding on the company and its members. The
binding effect is according to the shares they hold or the guarantee they have given.
The company is bound to the members. The members are bound to the company and
members are bound to other members.
Outsiders are not bound by the provisions of MoA or AoA about articles the company
and the members are not bound to the outsiders.
 The doctrine of Constructive Notice:
Section 399 of the Companies Act→ Once a company is incorporated, MoA and AoA
(only) are submitted to the ROC, certificate is received. These documents become a
public document. (applicable to the public). Done to ensure that transactions become
easy and people are aware of the provisions. Whoever gets into a transaction is
presumed to have been aware of the company and the functioning of the company.
That knowledge regarding the company is called the Doctrine of Constructive Notice.

Section 17 of the Companies Act→

Rule 34 of Companies (Incorporation) Rules, 2014→

Any member of the company by paying a prescribed fee to the company can get a copy of the
MoA, AoA, every agreement and copy of any resolution passed and within 7 days a copy has
to be given to the member.
Every person dealing with the company is presumed to know the content of MoA and AoA
and this imputation of knowledge is known as the Doctrine of Constructive Notice.
#Kotla Venkataswamy v. Ramamoorthy (1934)
In AoA it was clearly stated that all the deeds should be signed by 3:
o CS
o Managing Director
o Working Director
The plaintiff in this case entered into a mortgage deed. It was signed only by CS and WD.
Not MD. When executed, the company denied the execution stating that it was not signed by
MD. The plaintiff sued the company stating denial in execution. The company took the
defence; 3rd party should have read the AoA and done due diligence. DCN.

Limitation to this Doctrine→ Doctrine of Indoor Management (as they would escape liability
by citing internal matters)
Also called the Rule in Turquand’s case: However, the company cannot presume that a third
party knows the internal affairs of the company. Persons dealing with the company must read
the registered documents of the company and they should have knowledge about the contents
also they should confirm that there is no inconsistency between MoA and AoA. However,
they need not look into the irregularity of the internal proceedings.
#Royal British Bank v. Turquand (1856):
Turquand was a director of the company and borrowed a certain amount from Royal British
Bank. In an AoA, up to how much amount a borrower can borrow and he exceeds the limit.
The bank issues a bond for the company through Turquand. Royal British Bank was unaware
of this fact. If the director wants to borrow exceeded, introduce it in the general meeting and
pass a spl resolution must be passed. That wasn’t followed as well. When the bank asked to
pay back the company held that the Bank should have known as it has been mentioned in the
AoA. The court held that the Doctrine of Constructive defence cannot be taken as it is not
w.r.t content but w.r.t internal matters. Whether a special resolution is passed or not, the third
party cannot be concerned.
Even though they knew that the amount was exceeded, the passing of a special resolution was
considered to be an internal matter.
Exceptions to the rule of indoor management: (knowledge of an internal proceeding)
1. Knowledge of irregularity: Know that the procedure has not been followed regularly.
#Howard v. Ivory Patent Company:
One of the directors borrowed an amount for a particular company that exceeded the
AoA limit. If at all the Director wants to borrow shareholders consent must be
obtained. The director took indoor management stating that he was unaware. Only 3rd
party can avail. Directors should know.
2. Suspicion of irregularity:
#Anand Behari Lal v. Dinshaw Company
An accountant of a company sold the company’s property to a third person and the
third party accepted it. Whether the accountant was authorised to do it or not he
wasn’t unaware. Any prudent person would have a suspicion.
3. Fraud or Forgery:
#Ruben v. Great Fingall Consolidated (1906)
Secy of the company forged the Director sign and issued a share certificate. The
document was held invalid. Not an internal irregularity. Will be held under crime.
This doctrine will not apply.
 Unit 2

Prospectus:
• Public companies (mandatory to issue prospectus)
• Private companies can advertise, can offer to a group of people
• Two ways to issue shares

Prospectus Private placements (a category

(public) already decided)

Section 2(70) definition of Prospectus:

To raise the capital by the issue of shares. Prospectus described and issued as which includes
a red herring prospectus, shelf prospectus and any circular, advertisement or other documents
inviting offers from the public for subscription or purchase of any securities of a body
corporate (shares and debentures).
Need to know more about the company. All details needed for the investor are in the
prospectus. The format is of 3 types:
• Red Herring
• Shelf
• Circular/advertisement

Issue of Prospectus (Particulars of Prospectus as per Companies Act and SEBI): (S 26)
• Date of publication of prospectus and original issue of shares date
• Signature of every Director or proposed director (if the Board has not been decided
yet) and a copy of this has to be filed with the Registrar of Companies before
publication
• On the face of the prospectus, it has to be specified that one copy of the prospectus
has been delivered to the Registrar of Companies also all the documents related to the
registration are attached along with the prospectus.
• Prospectus has to be issued within 90 days from the date on which the copy is served
to the ROC.
Section 26(9)- Contravention if in case the company is not following the above provisions
(the penalty for the person involved in the contravention and the company)

Imprisonment Fine
Up to 3 years
Or fine 50,0000 upto 3,00,000 or both Min 50,000 upto 3,00,000
 Contents of Prospectus:
No clause as it is dependent on the company. Misstatement attracts civil and criminal
liability. Full disclosure too (including liabilities, litigation)

Generally,
• General information (name, name of registered office, stock exchange on
which it is listed, details of Company Secretary, Auditors, Legal Advisors,
Auditors)
• Capital Structure: What is the authorised capital of the company, issued
capital, subscribed capital (in case it is already incorporated and has had
previous IPOs) New prospectus has to be issued for every IPO.
• Terms and Conditions of Issue:
o Tax benefits
o How to subscribe
o Any other conditions
• Company Management and Projects: Already stated in the MoA, but objects,
subsidiaries, affiliates, new ventures, new projects, joint-venture with the other
company and other relevant details will be given.
• Outstanding Litigation
• Risk Factors: Can negatively affect the company. Potential scarcity and other
risk elements.

Types of Prospectuses:
1. Shelf Prospectus: General rule; new prospectus whenever it goes for IPO. Not
much change, which has a validity of up to 1 year from the date of opening the first
issue of securities under that prospectus. Later submit an Information Memorandum
that will have the info regarding new changes. If in case a company is going for
frequent IPOs in one year. Section 31. Only notified companies (by SEBI) that
include scheduled banks and NBFCs.
2. Red-Herring: Section 32. Does not have all the details. The number of shares and
the price of each share are not mentioned. Very general and basic details and not every
detail. When a private company is converted to a public company this is done.
Conversion is taking place but in need of immediate capital. Number and Price will be
given later. A separate prospectus will be issued at a later stage. 3 days before the
offer and opening of the subscription list the red herring prospectus must be issued.
After the closing of the offer and list, a detailed prospectus will be issued.
3. Deemed or Prospectus by Implication: Section 25(1).
1956 Act→ provision, Issuing House was given the task of issue of shares, advertising
and publication of tasks. If there is an intermediary, they will be responsible and not
the company.
2013→Issuing House won’t but company will.
Advertisement, circular, notification→ prospectus. The company will be liable—
primary liability to the company for misstatement.
An invitation made by or on behalf of a company
Issuing House invites subscriptions from the public through their offer
documents. The document issued by an Issuing House is deemed to be a
prospectus issued by a company.
4. Abridged:
Section 2(70)
A summary of the original prospectus. And later a detailed one. SEBI guidelines have
a prescribed format.
Misstatement in Prospectus:
Non-disclosure also amounts to misstatement
Untrue facts as well.
S 17 of the Contracts Act
Amounts to fraud if a material fact is not disclosed. A duty to speak and concealment.

Golden Rule of Prospectus (Drafting):

#New Brunswick & Canada Railway & Land Co. v. Muggeridge (1860): Justice
Kindersley laid down this rule in this case.
Whatever is said in a prospectus is true and cannot be false. Non-disclosure of
material facts amounts to fraud.
Section 34(1) of the Act defines misstatement. S-35(c) deals with civil liability and
compensation of shareholders. Section 34 prescribes criminal liability for
misstatement in Prospectus and the liability prescribed- S 447, Fraud under
Companies Act.
34(1) is a statement included in a prospectus shall be deemed to be untrue if:
a. the statement is misleading in the form or content
b. any inclusion or omission from a prospectus is likely to mislead
Wilful misstatement- fraud
Not wilful-civil
 Liability for misstatement

Civil Liability Criminal Liability

1. Recession of contract (Ross v. Estate Investment S-34
Company) S-447
The company was negotiating with a 3rd party to buy a Wilful
Property. Negotiation was positive. Stated that the
company had bought the property. The contract between
3rd party and company were terminated. The contract
between shareholders and the company stands
terminated as well.
2. Damages for deceit (Derry v. Peek)
Can be cited for MoA as well. The company had the
Business of operating trams. Was notified in the MoA.
The company applied for approval from the Board of Trade
for authorisation of running trams using steam power.
The application was pending. In that process, they issued
a prospectus stating they could run trams.
Shareholders alleged fraud. The court held deceit and
not criminal liability.
3. Suit against Directors for Civil Liability:
If Directors are involved in drafting the Prospectus
they will be held personally liable.
Members of a Company:
Section 2(55) defines the term member. Persons holding the shares. Subscribers of MoA.
1. Subscribers to MoA
2. Every person who holds shares in a company
3. Every other person who agrees in writing to become a member of a company.
4. Any person whose name is entered as Beneficial Owner in the records of a depository.
Depositories Act 1996, equity shareholders are called Beneficial Owners.
Once a person becomes a member of a company, it has to be added to the Register of
Members.
#Balakrishnan Gupta v. Swadeshi Polytex (1985)
Court held there are 2 conditions to become a member:
a. Agreement to become a member
b. Entry of the name of that person in the Register of Members

Who can become a Member of a Company?

Same as specified under S 11 of the Indian Contracts Act.
Except: Shares can be allotted to a Minor.
Liability of the Minor: The name will be maintained in the Register. But will not incur any
liability during his minority. After the minority needs to be proved that they are continuing to
be members of the company.
#Palaniappa Mudaliar v. Official Liquidator
#Fazulbhouy Jaffar v. Credit Bank of India Ltd.
If a minor decides not to continue as a member after attaining majority, it should be given in
writing. Otherwise, it is presumed that the minor is a member even after the majority.
2. Company can become a member of another company
Section 19 states that a subsidiary company cannot become a member of a parent or holding
company.
Doctrine of Single Economic Reality: If there is a parent company and subsidiary company,
the entire unit is considered as one group or one entity. As one single economic reality
#Dow Chemical v. Isover Saint Gobain- laid the doctrine, which can be added to the
arbitration agreement.
3. Partnership as a member of the other company
Partnership is not a legal entity as it is not mandatory. Registration of partnerships can be
registered as companies, societies etc. Partnership firms cannot take membership in another
company. Partner of a partnership firm can take the membership of another company.
4. Capacity of Foreigners to become a member of a company: Yes. They can become
members.
FEMA (recent) and FERA→ investments of foreigners in Indian companies.
If war is declared→ becomes the alien enemy. Membership of the foreign member can be
cancelled.
5. Capacity of a Trade Union to become a member:
#All India Bank Officers Confederation v. Dhanalakshmi Bank Ltd. (1997):
A registered TU is considered a corporate entity and it can become a member of a company.

Modes of Acquisition of Membership of a Company:

1. Buy shares (by application and allotment)
2. By Subscription to MoA
3. By transfer (already shareholder transfers the share) S 44
Shares are considered as movable property and hence the provision of transfer is given.
• Procedure for transfer needs to be followed
• Name should be added to the Register
4. Transmission S 56: Succession
On succession, the legal heirs can inherit the shares of a company. No procedure is involved.
It is automatic.
Fraud under S 447 if a person acquires shares under a fictitious name
5. Register of Members: S 88 Separate registers for equity and preference shareholders and
debenture holders, other securities.
Contents of the Register:
• Name, address and occupation of the member
• Number of shares they are holding
• Date of entry
• Date of cessation (when the membership is terminated)
• Amount of guarantee
Cessation of Membership:
• Death of the Member
• Transfer
• Forfeiture of shares
• Non-payment of shares
• Or any other grounds as stated in the AoAs
• Insolvency
• Redemption→ Redeemable preference shares if a person has preference shares and
the amount is redeemed towards the company
• Winding Up of a company

Shares:
Section 2(84):
Share means a share in the share capital of the company and includes stock.
The capital of a company can be divided into certain indivisible units of a fixed amount and
such a unit is called a share. Two or more persons can own 1 share.
#Buccha F Guzdar v. Commissioner of Income Tax (1955)
“Share is a right to participate in a company, the profit and the assets during winding up”
#Borland Trustees v. Steel Bros Co Ltd.

Nature of Shares:
Shares and debentures are movable property and hence can be transferred. Given in Section
44.
Section 45- Share is a single indivisible unit. And each share has a unique number.

Types of Share Capital:

Raise capital for the company through the issue of shares. Such capital is called share capital.
• Authorised Share Capital or Nominal Share Capital or Registered Share Capital:
Section 2(8)- MoA has the capital clause. The maximum amount the company can
raise through the issue of shares. The maximum that can be raised by a company
through the issue of shares.
• Issued Capital: Section 2(50)
Maximum amount 5 lakh
First IPO→ 1 lakh
1 lakh is issued shares. From authorised shares what is being issued?
The part of authorised capital that the company issues for subscription of shares.
• Subscribed Capital S 2(86)→ 1 lakh issued. Out of which the shares are subscribed by
public or private entities. That part of capital that is subscribed by public or private
entities (private placement).
• Called-up Capital S 2(15)→ If a few shareholders have subscribed and have not paid,
the company can call them up to pay the amount. If they do then they become paid-up
capital. Otherwise, they are rejected as shareholders. Their subscription fees won’t be
returned.
That part of the capital has been called for payment.
• Paid-up Capital S 2(64)→ That part of subscribed capital which is paid up by the
shareholders.
• Based on Type of Shares:
Equity and Preference Share Capital: (S 43) Capital raised through equity shares and
preference shares.

1. PREFERENCE SHARES: Shareholders have no voting rights. Certain

preferences over the profit of the company. Preference over dividend, preference over
repayment of capital during winding up.

i. Cumulative preference shares: The percentage of profit that shareholders receive

is called a dividend.
If 50 crores are a profit of the company a percentage will be declared by the BOD and
will be distributed as a dividend.
Dividends are conditional on the profit that they make.
If they do not make any profit in that FY, it will be carried over to the next year.

ii. Non-cumulative preference shares: No carry forward of non-payment of profit to

the next year.

iii. Participating shares: Not just entitled to a fixed dividend. They also have the
right over the surplus profit a company makes. It will be distributed to participating
preference shareholders.

iv. non-participating shares: Entitled to only the fixed dividend and not the surplus.

2. EQUITY SHARES: Shareholders have voting rights. Owners of the company.

They participate in the management and decision-making of the company.
Can be issued with 2 conditions:
• Voting Rights: Based on the number of shares, the number or percentage of votes will
depend.
1 share=1 vote; 10 shares=10 votes.

• Differential Voting Rights:

Wherein 10 shares=1 vote. But the number will be fixed by the company.
1 vote=5 shares or 1 vote=10 shares
In 2008, Tata Motors came up with Equity shares→ If a person is taking 10 equity shares then
1 vote but 5% more dividend.
The distinction between Equity and Preference Shares:

Have voting rights Do not have voting rights (except a

Meeting to discuss their rights, they
Can vote, thus right is restricted)
Depends on the company.

Dividend depends on profit Fixed dividend. Percentage is fixed

by BOD.
Winding up re-payment of capital is not First repayment
First.

Right to participate in the management of No such rights

a company.

Can be traded in the stock market Cannot be traded. Can be

transferred.

Section 46: Share Certificate:

Given by the company to acknowledge the title over shares.
Contents:
• Company Name
• Corporate Identification Number
• Address of the registered office
• Name and address of the shareholder
• Number of shares held by the shareholder
• Amount paid on each share
• Date of issue
Section 2(88) Sweat Equity Shares: Equity shares issued by the company to the employees or
Directors at a discount or for consideration other than cash for providing know-how or
making available rights like Intellectual Property Rights based on the performance of the
employees.
Conditional Issue of Sweat Equity Shares (Section 54):
• Special Resolution needs to be passed in the general meeting.
• Resolution must clearly state the number of shares that are issued, the current market
price of the shares, consideration and the class or classes of employees or directors to
whom the issue is made.
• Right of issue is available to only those companies who have completed 1 year of
commencement of business.
• Rights and liabilities of Equity shares apply to Sweat Equity Shares

Lien (right to retain) on Shares:

(If a person has liability towards the company, the company has a lien on those shares. Such
shares cannot be transferred.)

Regulations 9 to 12 of Table F in Schedule 1

This right is not inherent. Only if it is prescribed in the AoA, the company can exercise this
right
The company can sell the shares if after the prescribed 14-day notice the liability is not
discharged.

#Canara Bank Ltd. v. Tribhuvandas Jetha Bhai (1957)

Only if it is prescribed in AoA it can be exercised. Not an inherent right.

Forfeiture of Shares: The company cancels the rights of a shareholder. When a person to
whom the shares are allotted fails to pay any calls on his shares, the company may proceed to
sue him for not making the payment or forfeit the shares (preferred solution). A special
Resolution has to be passed only if this power has been prescribed in AoA.
Bona-fide power
Regulation 28- 34 of Table F Schedule 1

#In re London & Provincial Starch Co. (1868):

The power of forfeiture cannot be used to relieve the shareholder from any liability. Only
when they are shareholders they can sue.
Misstatement of the prospectus, forfeit of the shares, company still liable.

Surrender of Shares: The company instructs the shareholder to surrender the rights.
Shareholders do it.
Only if AoA permits, let go of shares.
Forfeiture has a procedure. If the company does not want to do it, it can instruct the
shareholders to do it. Special Resolution need not be passed.

Both amount to the termination of membership of shareholders.

Re-issue of Shares:
Surrendered shares can be re-issued to others. Each share has a unique number, when it is
surrendered it becomes the company’s property. It can later be issued to anybody else. Can be
restricted in AoA. Up to the company to reissue or not.

Debentures
Debts on the company.
Section 2(30): An instrument issued by a company evidencing a debt. It includes debenture
stock and bonds of a company or any other instrument evidencing a debt whether constituting
a charge or not.
To whom it is issued- debenture holder
The debenture holder has certain rights to the assets of the company based on the assets of the
company. Hence a charge (a right on property) on such assets can be created.

#British India etc. Company v. IRC (1881):

#Levy v. Abercorriss Company (1888);

Definition of debentures

Nature of Debentures:
• Section 44: Debentures are movable property. It is transferrable.
• Debenture holders have no voting rights.
• Creates a charge over the assets of a company (movable or immovable; tangible or
intangible it includes IP)
Debenture Stock:
More number of debentures. As a bundle.
Issue of shares and debentures: Legislations governing them
• SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018
• Companies (Share Capital and Debenture) Rules 2014

Types of Debentures:
I. Based on Tenure: Time limit for repayment of debentures.
a. Redeemable Debentures: If tenure is prescribed and it is repaid. Such debentures are called
redeemable debentures.
b. Irredeemable Debenture (Perpetual Debentures): On happening of a particular event (for
instance winding up the company)
1956 Act Section 120: Even if time period is not prescribed for redemption, it is still
considered perpetual. Not in the 2013 Act. Thus, not valid now.
II. Based on Convertibility:
a. Conversion of debentures to shares: At the time of redemption, once the amount is paid
back, the debenture holder can buy shares (equity as well as preference shares) and become a
shareholder.
Converted wholly or partly.
Section 71 (1) of the 2013 Act prescribes the procedure for conversion. It is to pass a special
resolution.
b. non-convertible debentures: Cannot be converted to shares.

III. Based on Security:

a. A debenture may create a charge over the assets of the company. Such debentures are
called secure debentures. Any asset or property as collateral. Subsidiaries and affiliates can
also have a charge. Movable, immovable, tangible or intangible properties included.
b. Unsecured debenture

IV. Based on Negotiability (no set formalities involved in the transfer of an instrument):
Debenture certificates can be transferred for the transfer of debentures.
a. Bearer Debentures: Mere delivery of the debenture certificate indicates transfer of
debentures.
b. Registered Debentures: A procedure involved.

Debenture Trust Deed:

Trust is created when there is a need to take care of properties and assets. Benefit of a person
or a class of persons.
If a charge is created over the properties of a company, which asset to which debenture
holder?
For all the debenture holders, a trust is formed. Called the debenture trust. The debenture trust
deed appoints the trustee and creates the trust, with all terms and conditions in that deed. A
debenture trustee is appointed. This trustee will ensure that the charges created over the
company and the interest over debentures are paid. Make sure it is utilised properly.
Rule 18 of Companies (Share Capital and Debentures) Rules 2014 and Section 71(5) of the
Companies Act 2013 deals with the Debenture Trust Deed.
If a company has more than 500 debenture holders, then the trust must be created.
Appointment of Debenture Trustee:
• To protect the interest of the debenture holders and address their grievances
• Based on qualifications they are appointed.
• Should not be a member of the company
Disqualifications:
• Should not be a beneficiary shareholder in the company
• Should not be a promoter, director, key managerial personnel (CFOs, CEOs), or
employee of a holding and subsidiary company.
• He should not have any pecuniary relationship with the company (except
remuneration)

Dividends:
That part of the profit earned by the company in a financial year is given to the shareholders
as a return.
Interest is the return for debenture holders
Dividend refers to that portion of profit that is paid to the shareholders of a company.
Section 123 to 127 of the Companies Act, 2013
Rules relating to the issue of Dividend; Companies (Declaration and Payment of
Dividend) Rules 2014
Types: (S 2 clause 35)
A. Final Dividend: Not given anywhere. It is presumed. The dividend is said to be the final
dividend if it is declared at the Annual General Meeting of the company.
Section 96→ AGM time limit
April 1rst to March 31st
• The time gap between 2 AGMs should not be more than 15 months
• For a company that is newly incorporated within 9 months before the date of closing
their 1 FY (1rst AGM)
• Subsequent AGMs: 6 months before the date of closing their FY
• One of the agendas: Final dividend (needs consent of shareholders and is declared by
Board of Directors)
• Shareholders can sue the company for non-payment of the dividend or prescribed
amount as it becomes a debt on the part of the company
• Punishment prescribed for the non-payment: Company as well as Directors
B. Interim Dividend:
• The BOD declares it between 2 AGMs of the company
• Default of this payment is also punishable
Sources of Payment of Dividend:
Section 123(1)
o From current year’s profit
o Accumulative profit from the previous year
o Out of the money provided by the Central or State Governments for payment of
dividends in pursuance of the guarantee given
o Section 123(5): shareholder, to his banker or anybody on the order of the shareholder
Time Limits Prescribed:
Percentage declared. How the payment will be made? Bank details will be provided by
shareholders and it will be deposited.
Declaration: Time Limit for the payment of dividend. Within 30 days of the declaration of
the dividend, the amount has to be paid.
Separate bank account for paying dividends. Thus, after the declaration, a deposit to such
a bank needs to be made in 5 days. 30 days to make the payment and shareholders to
claim. The amount will be fixed for the distribution of dividends.
Shareholders need to claim for the dividend. Application or give the bank account details.
Unpaid dividend account. If the dividend declared is not paid, it will be accumulated in
this account. 7 days to open the unpaid dividend account. All the unpaid amount should
be deposited here. If within 7 years no claim has been made, the money will be
transferred Investor Education and Protection Fund.
Section 124(1): Timeline
Section 124(5): IEPF (7 years) Ads, camps and other programmes. Provide education and
awareness regarding investments.
Section 127: Default for making payment of dividend
Directors: Imprisonment up to 2 years and fine not less than 1000Rs per day of the
default
Companies: Amount with Simple Interest of 18% p.a. during the period of default
 Unit 3
Board of Directors, General Meetings, Accounts and Audits
Directors:
• Trustee of the company. Look after the assets and the benefits received by the
beneficiary. Done legally.
• Promoter will appoint usually.
• Section 2(34) defines who a Director is. A director is a director appointed to the board
of a company.
• Section 1(49) states that every company should have a Board of Directors and they
must be individuals (natural persons). Legal entities cannot become directors of the
company.
• Role of a Director:
o Agent
o Trustee
o Officer
o Servant
• Moriarty v. Regent’s Garage & Engg Co.
Directors are professional men hired by a company to direct its affairs yet, they are
not the servants of the company.
• Imperial Hydropathic Co. v. Hampson (1882)
Whether the Director of a company is an agent. Lord Justice Bowden describes
Directors as agents, sometimes as trustees or as managing directors. But each of these
expressions is not used to exhaust their powers and responsibilities.
• Ferguson v. Wilson (1886)
Lord Carins
The company itself cannot act in its person for it has no person. It acts through the
directors and the case is as regards those directors, merely the ordinary case of
principal and agent.
• Bhajekar v. Shinkar (1934)
Ratification of an ultra-vires act of a director.
If directors act beyond their powers but within the powers or objectives of the
company, the act may be ratified by the company by passing a resolution.
• Vineet Kumar Mathur v. Union of India:
Since they are agents, they must act on behalf and within the powers of the company.
If they exceed, they are personally liable.
Circumstances:
1. Entered into a contract in their name
2. The name of the company used should be proper; if not director will be personally
liable
3. If they exceed their authority
• Ramaswamy Iyer v. Brahmayya & Co. (1966)
 Whether the Director can be considered as a trustee, strictly a director can be called a
trustee. How he has the power to apply the funds of the company, determines if the
director is a trustee or not.
• Lee v. Lee Air Farming Ltd. (1961)
Whether the Director is an employee or not. If the directors are serving in an official
capacity they will be treated as employees. Depends on the capacity of the position
they are holding.

Qualifications: Not prescribed in the Companies Act.

1. AoA will have the qualifications needed as per the company’s preferences.
2. Section 153- Every director should have a Director Identification Number
3. Section 149- Natural persons or individuals. Not legal persons

Disqualifications: Section 164 prescribes the grounds for Disqualification of the

Directors.

Compulsory provision for women (at least 1) and independent directors: A

requirement for all listed companies as per the 2013 amendment.
The director can at a time be a director of 10 companies (public company) → S 165

Types of Directors:
1. Resident Director: S 149(3) prescribes that at least one director of a board of
directors should be a resident director (a person who has stayed not less than 182 days
in India) All the directors should not be foreign.
2. Women Directors: S 149 (1) read along with Rule 3 of Companies (Appointment
and Qualification of Directors) Rules 2014
3. Independent Directors: S 2(47) definition: An independent director means an
independent director referred to in S 149(5).
S 149(6): Who can be considered as an Independent Director
A director other than a managing director a whole-time director or a nominee director
who does not have any material or pecuniary relationship with the company or
directors.
Criteria for the appointment of an Independent Director:
1. Who in the opinion of the Board is a person of integrity and possesses relevant
industrial expertise and experience.
2. He should not be a promoter or related to the promoter company or its holding,
subsidiary or associate company.
3. Should not have any material or pecuniary relationship with the company
(promoter, director, holding and subsidiary company) during the 2 immediately
preceding financial years. Or during the current financial year.

Appointment of Directors:
1. Appointment of first Directors: Subscribers of MoA who will be appointing the first
directors. Prospective shareholders will be the subscribers. Promoter also can appoint
the Directors (not an inherent right). Both can. S 152 and 149
2. Tenure of the first director will be till the first Annual General Meeting.
Shareholders will appoint the directors of the company who will comprise the Board
of the company.

Appointment by the shareholders in the Annual General Meeting:

S 152
Directors in the Board of Directors:
1. Qualifications
2. S 164 Disqualifications
3. DIN
4. Should have additional qualifications as per AoA.
5. Consent received from the Directors of the company
6. Consent has to be registered with the Registrar of the companies within 30 days of
the appointment.

Appointment of Directors made by Existing Board of Directors:

1. S 161 provides 2 circumstances:
a. Filling in casual vacancies: If there is a person appointed in BoD who has retired or
died or has some disqualification. They will appoint a director until the next Annual
General Meeting. The tenure should not exceed the tenure of the outgoing Director on
the Board. But in AGM is the time when a new Director shall be appointed.

#BR Kundra v. Motion Pictures Association

Unnecessarily to extend the tenure of a Director, the AGM shall not be prolonged.

b. Additional Directors: Maximum as prescribed by the Companies Act. Section 161.

Permanent directors.

c. Alternate Directors: If a director is not available in India for more than 3 months,
the BoD need to find an alternate director for that particular tenure.

Appointment by Third Parties:

In case of Operational Mismanagement Company Law Tribunal can appoint. But in
this case, it is a joint venture.
In the case of joint ventures (only for a new project or product they come together).
Will be serving as a permanent Director.
These directors are called nominee directors.

Tenure of Directors:
1. On annual rotation: prescribed tenure. Once the tenure ends new director will be
appointed. Can have a provision wherein 1/3rd is permanent and the rest are on
rotation basis.

(In the book)

Meetings:
1. Meeting of shareholders: AGM, Extraordinary GM, Meeting by the Tribunal
2. Meeting of Board of Directors
3. Meeting of Creditors
4. Meeting of Debenture Holders

The basic requirements of a valid meeting: This should be followed. Otherwise, decision
taken in that meeting will not be valid.
• Should be convened by a proper authority (Board of Directors, shareholders or the
Company Law Tribunal if AGM has not been conducted in a year)
• Notice: Proper notice has to be sent to all those who are entitled to attend the meeting.
S 101
• Time Period for sending notice: If not sent within the prescribed time limit it is invalid
For AGM, EGM: Notice has to be sent before 21 days of the meeting.
• Quorum: Minimum number of persons required to attend the meeting. If not, the
meeting will be postponed. S 103
• Chairman: A moderator for that particular meeting. Whoever is present, the members
will nominate a chairman for that particular chairman.
Business of the Meeting: (S 102)→ The categories
A. Ordinary Business: If the agenda is for 4 particular things.
▪ Financial statements, balance sheets, board reports, audit reports,
▪ Declaration of dividends
▪ Appointment of Directors
▪ Appointment and fixing the remuneration of the auditors of the company.

B. Special Business: If it is for any other purpose it is considered as a special business.

Resolutions:
When there is a decision-making is involved:
S-114; Types of Resolution:
A. Ordinary Resolution: Simple majority of shareholders, present and voting.
B. Special Resolution: 3/4ths of the present and voting shareholders. Important meetings and
decisions they use special resolutions.
1. Meeting of Shareholders:
▪ Annual General Meeting: Section 96
Every company other than OPC shall hold a GM as its AGM each year in
addition to other meetings.
Newly incorporated company before 9 months of the closure of the financial year.
Subsequent should be before 6 months of closing FY. Not more than 15 months
between 2 AGMs.
Ordinary business
Quorum is 1/3rd of the members presents and voting

- Notice prior 21 days of the meeting

- Time (between 9am and 6pm), date (not be a national holiday), place (registered
office or any other place within the registered office location), agenda needs to be
specified.
- Section 99 prescribes a penalty of 1,00,000 rupees and 5,000 rupees for each day of
default of not conducting an AGM.

▪ Extraordinary General Meeting:

Special business

▪ Meeting by the Tribunal:

▪ Extra-ordinary gen meeting
▪ Section 100
▪ • Gen meeting other than annual GM is called as EOGM
▪ • Special business is dealt with in this meeting.
▪ • It can be convened by BOD of by an application by shareholders
▪ • Ex- Ex-shareholders may want to resolve issues
▪ • 21 days’ notice must be sent
▪ • For shareholders - every shareholder does not have the right to convene a meeting
▪ • All SH who possess 1/10th of the paid-up capital of the company
▪ • If the SH has 1/10th power of voting they can ask for a meeting - for companies
without share capital
▪ • BOD should convene the meeting within 21 days of receiving the application
▪ 3. Meeting by the tribunal
▪ Every company must hold meeting every financial year. If it isn't convening a
meeting, a shareholder or BOD can approach the tribunal to order to hold the meeting.
▪ Section 98
▪ The tribunal may on its own motion or upon the application made by any director or
members having voting rights convene a meeting. It can give instruction to the
company.
▪
▪ ⁠Case - United Shippers Ltd. v. Aluminum Industries Ltd.
▪ 2007
▪ Conditions laid down where a company law tribunal can convene meetings
▪ 1. The applicant must be a director or a member of the company who is entitled to
vote at the meeting
 ▪ 2. There is an impracticability (Ex- deadlock) to convene a meeting

(GET NOTES)
3. Meeting of the Board of Directors:
• S 173 and 174
• In a year there must be at least 4 meetings
• Within 30 days of incorporation of the company
• Meetings can be physical or audio-visual meetings
• Proceedings must be maintained with date and time
• Minutes of the meeting book will be signed by the directors in the subsequent meeting
The quorum of General Meeting- 1/3rd of the total strength of the directors or 2 directors,
whichever is higher. Up to 15 directors. (S 174)
Notice of the meeting:
7 days prior notice should be given in case of meeting

4. Meeting of Creditors and Debenture Holders with the BOD:

Meeting with the BOD
S 230 of companies act
Circumstances:
• Winding up the Tribunal’s order or voluntary
• To approve the proposed scheme of arrangement and compromise (in case of mergers
and acquisitions or joint ventures or corporate restructuring-defined actions; public to
private won’t affect the structure.)
• S 240 to 245 corporate restructuring (amalgamation, consolidation and compromise)
• For reduction in share capital: Will approach the company law tribunal, the CLT will
order for convening a meeting of creditors and debenture holders
• Alteration of rights of debenture holders
• Release charge over the property by paying off the debenture interests that needs to be
conveyed to the debenture holders and hence the meeting- Secured debentures and
debenture-holders.

Accounts and Audit:

Section 2 (12) and 2(13)
2(12) Books and papers
Penalties are prescribed if it is not maintained
2(13) Books of account
Ledger and journal day-to-day transactions
Profit and loss yearly/monthly
Balance sheet yearly
An audit of all these will be done
S 148
S 134 (8) penalty prescribed
S 128 mandates that every company should prepare and keep the books of account and
other relevant books and papers and financial statements at its registered office.
• Financial statements: 2 (40)
• Balance sheet prepared at the end of every financial year
• Profit and loss account (Income and expenditure account needs to be shown for
companies with non-profit companies)
• Cash flow statement, yearly
• Statement of changes in equity is applicable
• OPC, a small and dormant company have only 1 exemption. Need not maintain
cash flow statements.
• Other entries should maintain proper and correct statements need to be maintained
• S 129 states that financial statements shall give a true and fair view of the state of
affairs of the companies. Schedule 3 format is provided.
• Not prepared as per the format or wrong entries are made then that is punishable
under S 134 (8). For contravention of S 128 and 129.
• 2020 amendment: Penalty increased
The company is liable to pay 3 lakh rupees (for the company) and every officer in
charge gets a penalty of 50,000 Rs.

Auditors:
Chapter 10
S 139 to 148
Deals with auditors
The examination of books of accounts by an authorised person is called an audit.
The authorised person is the auditor
Should be a CA or CS

S 139: Prescribes appointment of an auditor; can be an individual or a firm. It also

includes LLP.
The first auditor of the company should be appointed within 30 days of registration
Written consent must be given by an appointed person
Notice of appointment should be filed with the register of companies within 15 days
of the meeting in which the appointment of auditors is made.
Qualification:
S 139
S 138 talks about internal audit. He should be either a Chartered Accountant or Cost
Accountant or such other professionals as may be decided by the board.
Tenure is for 5 years (S 139 clause 2)
Auditor need not be a person. Can be a person as well. Auditors cannot be
reappointed. As they have a tenure of consecutive 5 years. The financial statements
need to be unbiased.

Removal of auditors: S 140

Prior approval from the central government for the removal (Ministry of Corporate
Affairs)
A special resolution needs to be passed within a company

Resignation:
Prescribed format to give a statement of resignation to companies and the registrar of
companies. → for non-government companies
For government companies → Additional notice needs to be sent to the comptroller
and auditor general of India.

Duties and Powers of Auditors:

S 143
1. Duty to report fraud committed against the company by its officers or employees
2. Duty to make, sign the auditor’s book or sign or certify any other document of the
company
3. Duty to attend the general meeting (S 146) Notice should be provided to the
auditors as well
4. Duty to make a statement in the prospectus (S 26 (1b))
5. Duty to produce documents and evidence S 217
6. Duty to inquire whether loans and advances made by the company based on
security have been properly secured
7. Duty to inquire whether the transactions of the companies which are represented in
the books of accounts are not prejudicial to the interests of the company

Powers:
1. S 143 The right to access the books of account and also to see information from
other offices
 UNIT 4
Winding Up

Liquidation wrt. companies act it is synonymous with winding up

2 Methods:
1. Compulsory winding up/ by tribunal
2. Voluntary Winding Up
Ch 20 270 (gives types) to 365 deals with Winding Up

Before Company Law Tribunals were established, High Courts had the power to
dissolve
271 Grounds for compulsory winding up:
1. Inability to pay debts
a. Where the company fails to clear the debts of a creditor within 3 weeks
immediately preceding the date of the demand for payment
b. Where execution or other process issued on a decree or an order of a court in favour
of a company is returned unsatisfied in whole or in part
c. When it is proved to the satisfaction of the court that the company is unable to pay
its debts
d. By passing a special resolution

2. Against National Interest

3. Failure to approve the scheme of revival and rehabilitation
SICA (Sick Industrial Companies (Special Provisions) Act, 1985) is not in existence
now
Dealt under Companies Act Chapter 20
Once the company is declared as a sick industry, the government will take over and
provide a scheme to uplift it
The scheme has to be approved by the central government and scrutinised by the
company law tribunal
Section 271 (1) (d)

4. Fraudulent and unlawful affairs: Registrar can apply to front of a tribunal

5. Default in filing the financial statements
6. Financial statements or annual returns for immediately preceding 5 years
7. Just and equitable grounds
a. Deadlock in the management of a company
b. Loss of substratum (if the main objective of the company in itself is not being
achieved)
In re: German Date Coffee Company
The company was established to obtain a patent from the government of Germany
that involved the manufacturing of coffee from dates. The patent application was
rejected by the government. No object, hence should be winded up.
c. Operation and mismanagement: If minority shareholders are being infringed, they
can approach the CLT for winding up.
Foss v. Harbottle
Guidelines laid down in this case

Who can file a petition for compulsory winding up:

S 271
1. The company itself (when there is a special resolution is passed, the company can
apply for dissolution in the company law tribunal)
2. Any contributory (section 2 clause 26): Any person liable to contribute towards the
assets of a company in the event of winding up.
Shareholders are limited by guarantee. Debenture holder and even creditor if there is
an agreement with the company.
3. Not specifically mentioned in the section. But if specific provisions are mentioned
creditors can file for a petition.
4. If CLT receives information, the tribunal can file for dissolution
5. Registrar if they know about any fraudulent activity
6. Any person authorised by the central government in that regard.
7. The central government or state government when it is a case related to the
sovereignty or integrity of India.

Liquidators are appointed by the company from the list of liquidators given by the
central government.
In case of compulsory winding up, the tribunal can appoint a liquidator from the list.
The liquidator should submit a report to the tribunal. If the report states that the
company should be wound up, then they should.

Procedure for winding up:

S 273 Compulsory Winding Up:

1. Application filed.
2. Hearing by CLT: merits and needs of the case are decided. Can dismiss the petition
3. Appointment of the official liquidator from the list by the CLT.
4. Notice to the liquidator stating his/her appointment and role. Asking them to take
charge of the company.
5. Duty of the company to submit all relevant particulars of the company to the
official liquidator.
6. The liquidator is given 6 months to frame a report regarding the affairs and their
suggestions.
7. Further inquiry is needed instead of direct winding up.
8. If CLT is satisfied, they can appoint an investigating officer and then decide
whether to wind up or not.
9. Issue an order for dissolution of the company is passed by CLT in execution of the
liquidator’s report.
10. Once this order for liquidation is passed the tribunal will inform the registrar of
companies and liquidator about the order for winding up.
11. Once the company receives the order, the petitioner and company should file a
copy of this order to the registrar of companies.

Winding up order→ deemed notice of discharge for all employees

Voluntary Winding Up by the Company:

Initiated by the company. There were provisions regarding voluntary and compulsory
winding up. Now, the provisions for voluntary winding up are provided in the
Insolvency and Bankruptcy Code.
Compulsory→ provided under the Companies Act
Voluntary→ IBC, 2016

S 304 to 365 of the Companies Act WAS provided

Ch 5 S 59 of IBC deals with Voluntary winding up

With respect to procedure:

1. Declaration of solvency: Whether they are capable enough to pay off their debts.
The directors of the company have to make a declaration of solvency verified by an
affidavit, and it should contain certain particulars.

a. They have made a full enquiry into the affairs of the company
b. They are of the opinion that the company has not defaulted on any debts, or
repayments and the company is solvent and can pay its debts in full from the proceeds
of selling the assets in voluntary winding up.
c. The company is not getting liquidated to defraud any individual
d. Statement should be given by directors of a company

A few documents need to be submitted along with the declaration:

• The audited financial statements
• Records of the company’s operations for the preceding 2 years or for the
period after the incorporation
• A report of the valuation of assets of the company prepared by a registered
valuer
2. Calling for a vote:
Discussion about the procedures in the Board of Directors meeting. The appointment
of the liquidator and call for a general meeting wherein the decision needs to be
informed to the shareholders are the agendas.
• To authorise the voluntary liquidation of the company
• Appointment of company liquidator; does not have to be from the central
government list; an official liquidator who is qualified to be an insolvency
professional (S2 clause 23) under IBC.
 • To fix the date, venue and time for convening the company General Meeting
and issue notice. 21 days prior notice to shareholders must be given.
• The liquidator should be an expert in insolvency
o Specific time-period
o Event is prescribed; the ONLY two cases wherein voluntary winding up
happens

3. Within 4 weeks of the declaration of Solvency, the general meeting of shareholders

needs to be called. A liquidator should be appointed.
4. Liquidator takes charge of the company
5. Public announcement: Invitation to all stakeholders (beneficiary holder; creditors,
shareholders and employees) of the company to claim. This requires members'
consent. Within 5 days of approval from the members, the claim must be invited.
Announcement to be made in any of the newspapers or the official website. A
deadline should be specified. The liquidator should cross-verify the claims within 30
days. Up to him to accept or reject the claims. Should make a list of valid claims and
stakeholders. 45 days for that.
6. Filing a preliminary report to the CLT by the company law tribunal by the
liquidator.
7. Opening a bank account: Claims that need to be paid off, the creditors should be
paid the assets. Scheduled bank in the name of the company. The amount required to
pay off the claim will be deposited in the bank account.
8. Distribution of proceeds (selling off the assets): Based on stakeholder amount
9. Application to CLT for resolution or winding up: A voluntary winding-up
application is submitted by the Liquidator after the claims have been settled.
10. NCLT order for winding up: A copy has to be served to the Register. Date of
order, the company stands dissolved.
Appointment of Liquidator: S 275 compulsory winding up
S 59(3) voluntary winding up
Official Liquidator: S 2(23) of company act
Process of Appointment: compulsory winding up list of liquidators from the list
Voluntary winding up company, from IBC qualifications
Qualifications: S 275 (2) of Company Act:
Compulsory winding up: An insolvency professional registered under IBC.
Removal of Liquidator:
Grounds:
S 276 of companies act (grounds)
S 59
Removal was made by CLT, not the company in both cases
1. Misconduct
2. Fraud or Misfeasance
3. Professional Incompetence
4. Failure to perform and exercise due care and diligence in the performance of his
powers and functions
5. Inability to act as provisional (temporary) or official liquidator
6. Conflict of interest or Lack of independence during the term of appointment

Powers and Duties of Company Liquidator: S 290

1. (Bare Act)

Company Law Tribunal:

Established under the Companies Act 2013
The Constitution happened in 2016 (1rst June 2016)
Both Company Law Tribunal and Company Law Appellate Tribunal. Replaced
Company Law Board. Before that, the courts would handle it.
S 408 talks about the constitution of NCLT.
1. President
2. Judicial members and Technical members (count not provided)
The appellate tribunal has the count specified.
Qualifications prescribed for each under S 409
Tenure of the members: The President and the members serve the office for 5 years.
Retirement age for President (67 years) and members (65 years) prescribed: S 414 and
413
NCLAT: Provided under S 410
Provides that the Central Government makes the appointment
1. Chairperson
2. Other members
Should not exceed more than 11 members
Qualification- S 411
Removal by the central government in consultation with the Chief Justice of India.
Grounds for which is prescribed under 417
Resignation:
S 416 chairperson and other members of NCLT and NCLAT resignation. In writing
addressed to the central government.
S 408
S 410
Powers and Functions of NCLT:
1. Passing of winding up order
2. 2013 Act added S 245: Class action suits; a representative suit. CLT has the
jurisdiction to adjudicate such suits
3. Restricting the power of transfer of shares: If there is a valid ground, the CLT can
ask the company to restrict or cancel the transfer of shares.
4. Prosecution for the oppression of minority shareholders and mismanagement S 241
5. Power to convene annual general meeting: S 96 and 97: If annual general meetings
are not convened as per the guidelines, the CLT can be moved to convene the AGM.
BOD or shareholders can file.
6. Power of inquiry, inspection and investigation as given in Chapter 14 of the
Companies Act 2013: CLT calls for documents after the preliminary report is filed.
Financial statements and other documents can be inspected.
7. Conversion of Public to Private company prior approval of CLT is needed.