COMPANIES ACT 2013 WITH CASE LAWS IN BRIEF

By  K. Sivaraman , Advocate  Chennai

 

The Author of this Article is Kuppuswami Sivaraman, an Advocate in Chennai, having done Master’s degree in Business Administration in Finance from a  reputed University and   fully acquainted with Company Law and in Insolvency & bankruptcy law under IBBI, Delhi. The Author has also travelled extensively like USA, Europe, Dubai, Muscat. Singapore, Bangkok And with these qualifications coupled with  extensive experience in a senior managerial position and practice as Advocate  I  thought it fit to write this Article for the use of Law Students and those aspiring to become an Company Secretary and an Insolvency professional. 

 

INTRODUCTION;

Definition of Company

Section 2 (20) of the Company Act 2013 defines a Company as follows:

 "Company means a company incorporated under this Act or any previous Company Law." In general, a company is an artificial person, created by law that has a separate legal entity, perpetual succession, and common seal and has limited liability

A Company can also been  defined as a “voluntary association of persons formed for the purpose of some business for the benefit with capital divisible into transferable shares, limited liability, a distinctive name having a  corporate body, a personality separate distinct from its Members and a common seal.”

Common seal means the metallic seal of a company which can be affixed only with the approval of the Board of directors of the company only with a Resolution of the Board of Directors.  It is the signature of the company to any document on which it is affixed and binds the company for all obligations undertaken in the document.

 

As   explained above a Company is a legal person .separate from the Members   Once a Company is incorporated, it becomes a corporate personality.and a separate legal identity. The Company can sue and be sued    A member  cannot be held liable for the acts of the Company even if the Member holds 99% of the shares of the Company  You cannot even call him a de-facto Owner of the Company .  If  he holds virtually all the shares, it becomes a one Man Company.

A typical example of this position has been explained in detail in a leading well known case law namely

SALOMON VS SALOMON Company LIMITED

FACTS IN issues in SALOMON -VS -SALOMON

 

This is a famous British Law   initiated in 1897.  This is being widely quoted in various Company law cases inconformity with   which., the Indian Company law was initiated in 1913.

 

Brief facts of the case”

 

SALOMON was a boot manufacturer.  He established/incorporated a Company in the name and style of SALOMON COMPANY LIMITED.  He transferred the personal his business lock stock an barrel to this new Company.  There were seven members – all from his family.  The Company  had an investment of # (British Sterling Pounts of 40,000.  Salomon invested 20,000 pounts and debentures of 10,000 pounts.  The Company had a Debt of 7,000 pounts.  The  assets value of the Commpany as per valuation stood at 6,000 pounts for himself.  The company had to wind up within a year of incorporation as the business did not do well and started incurring losses.   The creditors moved the Court contending that that the Company had no independent   existence  and it was in fact his own business  They further claimed that Corporate veil should be lifted and the man behind the Company should be held responsible. The case was referred to Appeal Court.  On appeal was heard by the House of Lords who held that Salomon was entitled Salomon was entitled to get the whole assets of the Company since he had fulfilled all the requirements for legally valid Company.

 

Facts of the case are explained below.

 

The case concerned claims of certain unsecured  creditors in the liquidation process of Salomon Ltd., a company in which Salomon was the majority shareholder, and accordingly, was sought to be made personally liable for the company’s debt. Hence, the issue was whether, regardless of the separate legal identity of a company, a shareholder/controller could be held liable for its debt, over and above the capital contribution, so as to expose such member to unlimited personal liability.

The Court of Appeal, declaring the company to be a myth, reasoned that Salomon had incorporated the company contrary to the true intent of the then Companies Act, 1862, and that the latter had conducted the business as an agent of Salomon, who should, therefore, be responsible for the debt incurred in the course of such agency.

 

 

The House of Lords, however, upon appeal, reversed the above ruling, and unanimously held that, as the company was duly incorporated, it is an independent person with its rights and liabilities appropriate to itself, and that “the motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are”.³ Thus, the legal fiction of “corporate veil” between the company and its owners/controllers⁴ was firmly created by the Salomon case.

March back to the Salomon rule

While the Salomon rule appears to have been eroded substantially, a reversal in the judiciary’s approach, commencing with the Adams case, is now visible.

For instance, in Bank of Tokyo v Karoon,23 the Court of Appeal rejected the “single economic unit” theory arguing that “we are concerned not with economics but with law. The distinction between the two is, in law, fundamental and cannot here be abridged”. Further, in the case of VTB Capital Plc v Nutritek International Corporation,²⁴ the court reiterated the restricted scope of veil piercing as only a limited equitable remedy.

On a similar note, in the most recent judgment of Prest v Petrodel, Sumption J. confined the lifting of veil to only two situations, namely, (a) the “concealment principle”, akin to the sham or façade exception; and (b) the “evasion principle”, being the fraud exception.²⁶ Deciding not to pierce the corporate veil on the facts, this case once again reinstated the Salomon rule.

Conclusion of the ruling

COMMENCING from Salomon case, number of other cases came up for adjudication

Macaura v Northern Assurance Co Ltd [1925] AC 619

It may be noted that Members have no direct interest or stake in the ownership of a Company except in Equity shares.

 

The owner of a timber estate sold all the timber to a company which was owned almost solely by him. He was the company’s largest creditor. He insured the timber against fire, but in his own name. After the timber was destroyed by fire the insurance company refused the claim.

The House of Lords held that in order to have an insurable interest in property a person must have a legal or equitable interest in that property. The claim failed as “the corporator even if he holds all the shares is not the corporation… neither he nor any creditor of the company has any property legal or equitable in the assets of the corporation.” (per Lord Wrenbury)

 

CASE NAME : 

 

CATHERINE LEE V LEE’S AIR FARMING LIMITED

 

FACTS OF THE CASE

 

In 1954 the appellant’s husband Lee formed the company named LEE’S AIR FARMING LTD. for the purpose of carrying on the business of aerial top-dressing with 3000 thousand share of 1euro each forming share capital of the company and out of which 2999 shares were owned by Lee himself. Lee was also the director of the company. He exercised unrestricted power to control the affairs of the company and made all the decision relating to contracts of the company. Company entered into various contract with insurance agencies for insurance of its employees and few premiums of the policies were paid through companies bank account for the personal policies taken by Lee in its own name but it was debited in the account of lee in companies book. Lee apart from being the director of the company was also a pilot. In March, 1956, Lee was killed while piloting the aircraft during the course of aerial top-dressing. Lee’s wife who is appellant claimed worker compensation under New Zealand Workers’ Compensation Act, 1922 as she claimed that Lee during work as employee of the company. The New Zealand Court of Appeal declined the claim of appellant as it refused to hold that Lee was a worker, holding that a man could not in effect, employ himself.

All in all, the Salomon ruling remains predominant and continues to underpin English company law. While sham,

 Initially, there were 470 sections under 29 chapters with seven schedules in the Companies Act 2013.

 

 

CONCEPT OF SEPARATE LEGAL ENTITY as enshrined in the Companies Act

 

Companies act, 2013 mentions following features of a company incorporated under the act:

1.     Separate Legal Entity

2.     Perpetual Succession

3.     Limited Liability

4.     Common Seal

5.     Separate property

 

As per Companies Act, 2013 separate legal entity means that a company which is registered under this act as Non profit organization , private limited company, public company , government company and chit fund company shall have legal identity of its own and will have rights under law and will treated as separate entity from its shareholder. It can own property in its own name  and can enter into contracts with other person and can represent itself in court of law through its representative.

Separate legal entity also act as veil between company and its member. Which means that assets of the company shall be used only for the objective of the company as set out in the  Memorandum of association and its liabilities should be paid by itself and not from personal asset of the member of the company.

 

TYPES  OF COMPANIES

 

Under the Companies Act 2013 there are for types of Companies namely

 

1)    Public Limited Company

2)    Private Limited Company

3)    Section 8 Company.

4)    One Man Company

 

 

The basic documents for an incorporated Company are: MEMORANDUM & ARTICLE OF ASSOCIATION.  These are considered to be the bye-laws of a Company

 

LET US KNOW DISCUSS what these documents are;

MEMORABNDUM OF ASSOCIATION

This  document read with Article of Association  is the charter of a Company like Constitution.

Memorandum regulates the external affairs of a Company in relation to outsiders.   It is the domain within which a Company  can operate

WHAT ARE THE PRIME CONTENTS IN A MEMORANDUM

1)    The name of the Company with the word suffixed “LIMITED’ In case of Public Limited Company and PRIVATE LIMITED” in the case of a private limited Company Name is the symbol of the Company’s existence

 

2)    The State in which the Registered Office is situated

3)    The Objects of the Company namely

(a)  Main Object

(b)  Incidental objects

(c)  Other objects

 

 

 

4)    If the area of operations / business is beyond that State and extend to other States, the names of such States must be specified

5)    It must be clearly stated that the liability of Members is limited if the Company is limited by shares or guarantee.

6)    The share capital specifying the shares like Equity, Preference shares etc including the nominal value of each shares should be clearly indicated

 

In addition, the following must be mandatorily and clearly stated:

 

 

1)    The name should not resemble the name of already in existence. Even remotely similar symbol or name.  Deceptively similar name should not find a place.  In other words,

2)    The name stated in the memorandum should not be identical with or resemble too nearly to the name of an existing company or any other provisions of any law like Copy Right Act

3)    Be such that its use by the Company

4)    (a) will not constitute an offence under any law for the time in force.

5)    Is undesirable in the opinion of Central Government

6)    Any word or expression which is likely to give an impression that the Company is in any connected with Central or State Government or any local body or authority, Corporation or body constituted by Central or State Government

7)    A Company shall not be registered which contains a name (s)

8)    The name should  not be misleading.  Any Company who feels affected by such name may apply to the Court and obtain an injunction against such company restraining the use of already existing name

Section 4(1) of the Act states as under:

9)     A name applied for shall be deemed to resemble too nearly with the name of an existing company, if, and only if, after comparing the names applied for with the name of an existing company by disregarding the matters set out in sub-rule (2), the names are same

LOCATION OF REGISTERED OFFICE

 

10) As mentioned earlier, every Company must have a Registered Office in the State in which the Company is incorporated within 10 days of its incorporation.

11) The company is required to furnish to the Registrar verification of its registered office in eForm INC22  (previously it was Form No. 18)within a period of thirty days from the date of its incorporation. The company can also specify the address of registered office at the time of filing incorporation eForms.

12) All communications should be addressed to the Registered Office as communicated to ROC which is public domain

 

Object Clause

Objects of the Company be clearly  spelt out in the Memorandum without any ambiguity

The object clause defines and restricts the power of the Company. The subscribers know how the money invested by them will be utilized   The creditors and other stake holders like suppliers money lenders etc  know the limits of the Company and the range of the Company’s activities

The main object of the Company is very important: 

When the very main purpose of the Company mentioned in the Memorandum is not achieved, or materialised, then that becomes a ground  for winding up the Company by the appropriate Court order.

This was held in Re-German Date Coffee Company  in which case the Court held if there was a loss of substratum, then the Company is bound to windup.

Capital clause

This clause specifies the Authorised capital and divisions of such capital, the value of each share like Equity shares, preference shares, etc but cannot have disproportionate  rights

 It is also known as Nominal Capital.

What is very important is that the Company cannot issue share exceeding its Authorised Capital.

However a private company which is not a subsidiary of a public company may, if needed, issue shares with disproportionate rights

Association clause

A company itself is an association of persons and this association is formed by Memorandum. The individuals who want to be part of this association needs to sign Memorandum of the company, this part where such signatures are affirmed is called association clause

 

The clause reads as under:

 

‘We,  the several persons whose names and addresses are subscribed herein are desirous of being formed into a Company in pursuance of this Memorandum of Association and we respectively agree to take the number of shares in the capital of the Company put opposite our respective names’  The names and addresses are described by each of them at the end of the document of Memorandum of Association.

 

In the case of a ONE MAN COMPANY, the name of the person who, in the event of death of the subscriber shall become the Member of the Company

INCORPORATION OF A COMPANY

Seven or more persons in the case of Public Company and two or more persons in the case of a Private Limited Company may come together and decide to incorporate a company with or without liability.   They will subscribe their names in the Memorandum of Association and comply with certain formalities to get the name of the Company incorporated.  Before doing so, they will apply for availability of the name of the Company  They will suggest three names in the application indicating the significance of the names so suggested.  The application should be made to the concerned Registrar of Companies  to ascertain the availability of name in eForm1 A by logging in to the portal. A fee of Rs. 500/- has to be paid alongside and the digital signature of the applicant proposing the company has to be attached in the application. (Digital Signature is a must) This is secure and authentic way to submit a document electronically. As such, all filings done by the companies/LLPs under MCA21(Ministry of Corporate Affairs) e-Governance program are required to be filed using Digital Signatures by the person authorised to sign the documents.

 

Once the Registrar approves the name, the Memorandum will be printed and signed by the subscribers in  the Non judicial stamp paper and presented to the ROC along with the Articles of Association.  In the absence of Articles of Association, the Companies Act prescribes Table A (format of AA) may be adopted.

The following documents must be submitted:

1)    Memorandum of Association

2)    Articles of Association

3)    Capital Structure of the Company

4)    The State in which the Registered Office will be located

5)    Names & address of the Directors

6)    Consent from the persons proposed as Directors to act as Director in the prescribed form. (  Form DIR – 2) is a document in which an individual declares his consent to be appointed as a Director of a certain company. It is documented proof of this effect. The form contains the name, address, occupation, and contact details of the individual. The DIN and PAN details too are provided in the consent letter

7)    Qualification shares of Directors (if applicable)

8)    A statement known as Declaration by the Promoters that all the requirements have been complied with. This must be attested by a practising Advocate of High Court or Supreme Court or by a Chartered Accountant or by a Director or Manager or a Company Secretary of the Company.

 

ON FILING THESE DOCUMENTS WITH THE ROC, if ROC is satisfied all the formalities are complied with, HE will issue a Certificate of Incorporation with his seal and date quoting registration number/CIN No. (Company Identification Number)

Such Certificate of Incorporation is the conclusive evidence / proof of registration that all requirements have been met with regard to registration.

This Certificate should be carefully maintained / preserved

A Bank account can be opened only with a certified copy of such Certificate of Registration along with a Board Resolution authorising somebody to operate the account

Copies of memorandum & Articles to be given to Members

If a Member asks for a copy of the Memo & Articles, a Company shall furnish  to him within 7 days of receipt of his request subject to his payment of the fee as may be prescribed by the Company

a)    Copy of the memorandum &

b)    Copy of the Articles

c)    Every agreement and resolution referred to in subsection (1) of Section 117 which  states as under:

d)     A copy of every resolution or any agreement, in respect of matters specified in sub-section (3) together with the explanatory statement under section 102, if any, annexed to the notice calling the meeting in which the resolution is proposed, shall be filed with the Registrar within thirty days of the passing of the Resolution

e)    If a Company makes any default in complying with this requirement, the Company and every officer  of the Company (connected with this requirement) shall be liable  for each  default and a penalty of Rs 1,000 for each day during which the default continues or Rs one lakh whichever is less

This means every Company should print sufficient copies of Memorandum & Articles

 

EFFECT OF REGISTRATION

1.    Once a registration of Memorandum of a Company  is completed, the ROC certifies that the Company has been incorporated and  in the case of a limited company the Company is limited.

2.    The subscribers to the Memorandum and other persons becomes Members of the Company.  The Company then becomes a corporate body and a separate legal entity.  It will have perpetual succession with a common seal with power to acquire, hold and dispose of the properties (immovable and movable and intellectual property

3.    On filing the documents with ROC, if the Registrar is convinced he registers the Memorandum, & Articles of Association filed with him and a Certificate of Incorporation is issued by him.  The Certificate of incorporation is a conclusive evidence of registration of the  Company.

4.    It is the date, which is borne in the Certificate of Incorporation  is the date on which a Company would have been registered and not the date the certificate is issued by ROC.

In this connection it is relevant to quote the case law “Jubilee Cotton Mills Vs Lewis  where the Court held that the certification of incorporation is the conclusive evidence .

 

Certificate of incorporation is a conclusive and final proof of registration that all the requirements of Companies Act have been complied with regarding registration.  Even if there are some errors in the documents, the Certificate of Registration stands and will remain in force until and unless the said certificate is cancelled by ROC and name of the Company is removed from the Register of Companies.

In this connection, please refer to a leading case law ‘MOOSA GOOLAM ARIFF VS  EBRAHIM HOOLAM Ariff,.  In this case the Court ruled that once a certificate of incorporation is issued, it is final and conclusive proof for all intent and purposes and hence the validity cannot be called in question or challenged

 

 

The aforesaid case law is explained in brief below:

 

 The Record in this case is more than ordinarily confused and the story is somewhat complicated. But for the purpose of this appeal the material facts may be stated in a few sentences.

2. One, Hadjee Goolam Ariff, a wealthy Mahomedan merchant residing at Rangoon, being dissatisfied with the conduct of his two elder sons was minded to dispose of the bulk of his property for the benefit of his two junior wives and his five younger children, who were all minors at the time. With this object he applied for and obtained five separate orders under the Act of 1890 for the appointment of one and the same person as guardian of each of his minor children in order that the children by their guardian might accept the benefits which he intended to confer upon them. Being also desirous that his property should remain in one mass, intact and undistributed, he procured the registration of a Limited Company called the Goolam Ariff Estate Company, Limited. To this Company in return for shares there was transferred so much of his property as was retained by him together with the undivided shares in his estate which he had conveyed to his junior wives and his minor children.

3. Hadjee Goolam Ariff died on the 15th of May 1902, having made his will on the 19th of the previous month. It was proved by his eldest son, Ebrahim Goolam Ariff, one of the executors therein named, on the 23rd of June 1902. From that time to the present there has been continuous and persistent litigation in which Ebrahim Goolam Ariff has endeavoured to set aside the disposition which .his father made. In all these attempts Ebrahim Goolam Ariff failed except in his appeal in the present suit to the Chief Court of Lower Burma. On that appeal the order was made from which the present appeal to His Majesty has been brought.

4. The object of the present suit was to have it declared that the Goolam Ariff Estate Company, Limited, was not duly incorporated and that the property conveyed to the Company should be transferred " to the persons entitled to the same." The validity of the conveyances to the testator's junior wives and his minor children had been established in a suit, No. 146 of 1902, which ultimately came before this Board. But the validity of the incorporation of the Company had not been expressly determined.

5. The main grounds of defence to the present suit were: -

(1) that the certificate of incorporation of the Company was conclusive; and (2) that the question raised by the suit was "rest judicata."

6. The questions framed to meet these points were both answered by the Court of Appeal in favour of the plaintiffs. In their Lordships' opinion both ought to have been answered in favour of the defendants, who are the present appellants.

7. In dealing with the first question their Lordships will assume that the conditions of registration prescribed by the Indian Companies Act were not duly complied with, that there were not seven subscribers to the Memorandum of Association, and that the Registrar of Companies ought not to have granted a certificate of incorporation. As a matter of fact a certificate of incorporation was granted. In their Lordships' opinion the certificate of incorporation is conclusive for all purposes.

8. The provisions of the Indian-Companies Act of 1882 as regards the incorporation of Companies are the same as those contained in the Imperial Act of 1862, except that it is specially provided in Section 40 of the Indian Act that it is not the duty of the Registrar to require evidence as to whether the subscribers to the Memorandum are competent to contract. Probably this provision was introduced because, according to the Indian law, the contract of an infant is not voidable but void, and it would lead to endless confusion and expense if the Registrar were to take upon himself the duty of ascertaining whether the signatories to the Memorandum were or were not of full age.

9. In England the question, whether the Registrar's certificate is conclusive, was decided so far back as 1867 by Lord Cairns sitting in the Court of Appeal. In Peel's case (1867) L.R. 2 Ch. 674, after signature and before registration a proposed Memorandum of Association had been altered without the authority of the subscribers so materially that in the words of Lord Cairns, " the alteration entirely neutralised and annihilated the original execution and signature of the document." The Company, however, was registered and the Registrar gave his certificate of incorporation. It was objected that the Memorandum of Association had not been signed by seven or indeed by any subscribers and that the provisions of the Act had not been complied with. To that proposition Lord Cairns assented. But " the certificate of incorporation", he said, "is not merely a prima facie answer but a conclusive answer to such objection....When once the certificate of incorporation is given nothing is to be enquired into as to the regularity of the prior proceedings." That was a plain and direct decision on the point. The observations of Lord Chelmsford in Oakes v. Turquand (1867) L.R. 2 H.L. 325, 354, are to the same effect. "I think", said his lordship, " that the certificate prevents all recurrence to prior matters essential to registration, amongst which is the subscription of a Memorandum of Association by seven persons, and that it is conclusive in this case, that all previous requisites had been complied with." Undoubtedly Lord Cairns' decision has been cavilled at. For instance, in re National. Debenture Corporation [1891] 2 Ch. 505, a Judge of first instance declined to treat a certificate of incorporation as conclusive which had been, as supposed, subscribed by six persons only. On appeal, however, further evidence was admitted and it was found that the Memorandum had in fact been subscribed by seven persons. On that ground the Court of Appeal reversed the decision appealed from. But unfortunately the learned Judges of Appeal made some observations to the effect that if the learned Judge had been right as to the facts, his decision in point of law would have been correct. These observations were mere dicta and besides the Court of Appeal could have had no jurisdiction to reverse Lord Cairns' decision. In their Lordships' opinion, that decision is of unquestionable authority untouched by any subsequent decision and unimpared by any dictum in any Superior Court; although the Legislature thought fit, no doubt for good reasons, to set the matter at rest by the Imperial Act of 1900, which put the words of Lord Cairns and Lord Chelmsford in a legislative enactment repeated in the Imperial Act of 1908.

10. Their Lordships are prepared to go further and to say that, in their opinion, even if there were no authority to guide their decision, the matter would seem to them to be absolutely plain on the words of the Act. The use of the word " otherwise " in Section 6 shows that the statutory condition that the Memorandum of Association must be; signed by seven persons is as much a condition of registration as any other requisition to be found in the Act which is preliminary to registration, and apparently essential.

11. This view is sufficient to determine the case in favour of the appellants, but, inasmuch as the question of rest judicata was very fully argued, their Lordships do not think it right to abstain from dealing with it.

12. Section 13 of the Code of Civil Procedure of 1882 enacts that:-

No Court shall try any suit or issue in which the matter directly or substantially in issue has been directly and substantially in issue in a former suit between the same parties or between parties under whom they or any of them claim litigating under the same title in a Court of jurisdiction competent to try such subsequent suit or the suit in which such issue has been subsequently raised and has been beard and finally decided by such Court.

13. Then Explanation 2 of that section declares that:-

Any matter which might and ought to have been made ground of defence or attack in such former suit shall be deemed so have been a matter directly and substantially in issue in such suit.

14. It was admitted by the learned Counsel for the respondents that the alleged invalidity of the incorporation of the Goolara Ariff Estate Company, Limited, might have been made a ground of attack in the suit, No. 146 of 1902, in which the validity of the dispositions made by Hadjee Goolam Ariff was attacked.

15. That it ought to have been made a ground of attack in that suit appears to their Lordships to be equally clear. All the facts on which the present suit is based were known to the plaintiff and are stated at length in the proceedings of the former suit. No further evidence would have been needed. Nothing was wanting but the addition of an issue on the point. The case is plainly within the ruling of this Board in the case of Kameswar Pershad v. Rajkumari Ruttun Koer (1892) L.R. 19 I.A. 234.

16. Their Lordships, therefore, think that the question raised in the present suit is res judicata, and on that ground as well as on the ground that the certificate of incorporation is conclusive, their Lordships think that the suit fails and ought to be dismissed.

17. Their Lordships are, therefore, of opinion that the appeal ought to be allowed and the suit dismissed with costs both here and below, and their Lordships will humbly advise His Majesty accordingly

IN ANOTHER LEADING CASE, it was held

 

“The company allotted shares on January 6. It was objected that the allotment was void on the ground that it was made before the company came into existence. It was held that the allotment was valid. The certificate of incorporation was conclusive as to the date on which the company was incorporated”

Refer case law Jubilee Cotton Mils Ltd vs Dewis, the Court held that the Certificate of incorporation is conclusive evidence of all that it contains and the Company was formed on 6^th January and therefore the allotment of shares was valid

Issue of Certificate of Incorporation and CIN:

After going through the information and papers, if ROC is satisfied that the application for incorporation is in prescribed format, required documents are submitted in prescribed format and such company is authorized to be registered, he places the name of the company in the register of companies maintained by him and issues a Certificate of Incorporation in the prescribed form indicating the date of incorporation. The Registrar also allocates a Corporate Identity Number (CIN) to the company which is a distinct identity for the company. The allotment of CIN is on and from the company’s incorporation date. Thus the Certificate of Incorporation may be regarded as the birth certificate of the company because the company comes into existence on and from the date mentioned therein.

The legal effect of incorporation:

Conclusiveness of the Certificate of Incorporation:

The certificate of incorporation not only creates the company but also is the conclusive evidence that all the requirements of the act regarding registration have been complied with. ‘Conclusive evidence’ means:

1.      that the fact of incorporation and existence of the company as a legal person cannot be challenged

2.      And that the company is duly registered.

3.      And that the company came into existence on the date mentioned in the certificate.

In Moosa Goolam Arif v. Ebrahim Goolam Ariff, ILR 1913 40 Cal 1 case, where, out of the seven subscribers to the memorandum of association of a company five were minors. The guardians of the minors made separate signatures for each minor on the memorandum of association. The Registrar, however, issued the certificate of incorporation. The validity of the certificate of incorporation was challenged. It was held that though the Registrar should not have issued the certificate but the certificate was conclusive for all purposes. Thus the suit failed.

I

Who is` a promoter  of a Company and what is role in the Formation of a Company

Promoter is a person who does all the preliminary work incidental to or connected to the incorporation of a Company.  He undertakes to do all the necessary work to bring a Company into existence.

The first persons who initially manager/control of Company’s affairs are the promoters. He arranges the capital required for the Company at first stage, acquire land and other properties and conceive the idea of a business.   Once a company comes into existence and a separate legal entity is assigned to it, the Promoters will transfer the properties and business to the Company

“promoter” is defined as a person— (a) who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; or. (b) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise;

DUTIES AND FUNCTIONS OF A PROMOTER

1)    At first, the promoter identifies a suitable name for the proposed Company in consonance with the proposed business/object

2)    He then sends a request to Registrar of Companies in the prescribed form with 3 names  so that the Registrar can select a name and communicates it to the Promoter

3)    Thereafter, the Promoter causes a draft Memorandum of Association prepared and  submit the same to Registrar of Companies (RoC)

4)    He selects the first Directors, Advocates, Auditors, Bankers, Secretary, select a stock broker (in the event of his plan for going for IPO.

5)    Get the Memorandum & Articles of Association printed (sufficient copies) after incorporation

6)    Get a Common seal and keep them safely.

 

FIDUCIARY POSITION OF A  PROMOTER

 

1)    While he is not an Agent nor Trustee of the Company as there is no principal

2)    Since he does the functions of creation and moulding of  the Company, he is in a fiduciary position with the Company

3)    He must not make any profit directly or indirectly at the expense of the Company without the knowledge of facts and consent of the Company failing which he may be compelled to account and surrender such profits

4)    All benefits of contracts which he enters into must be given to the Company such as selling the property and selling it to the Company at a higher price. In such a case, the Company may rescind the contract  and recover the purchase money if he wants to sell his own property to the Company

5)    He is supposed to be transparent and fully disclose the profits he makes in that deal.

6)    Failure to disclose full facts of the profit may entail the Company suing the promoter for damages for breach of fiduciary duty

7)    Must avoid undue influence, coercion etc and must not use his position unfairly that would amount to misuse of his position unless contrary is proved.

 

POWERS OF THE COURT IN THIS ISSUE

 

The Court can suspend the Promoter in the following circumstances

a)    Where the Promoter has been convicted for an offence regarding promotion, formation or management of a company

b)    If he has been found guilty of fraudulent conduct of business or as an Officer of the Company , he is guilty or breach of his duty

The concerned Court having jurisdiction, may order that he shall not be a Director or participate in the Management or affairs of the Company for a period of five years without the consent of the Court.  He will be given an opportunity to be heard before passing any order under  the doctrine of “aadi alterm pattem”

 

WHAT IS THE POSTION OF PRE-INCORPORATION CONTRACT

Whenever a promoter proposes to incorporate a Company, he would have conceived an idea of a business for which suitable infrastructure is required. For this purpose, he would be entering into some contracts for acquiring some movable and immovable properties which ultimately would be transferred to the Company once incorporated.  He would also be incurring some expenses for incorporating the Company.  These expenses are called PRELIMINARY & PREOPERATIVE EXPENSES.

This is because a Company before incorporation has no legal status and naturally a non-entity in the eye of law.  Any contract entered into a Company which is yet  to be registered becomes void ab-anitio and a nullity,  In such cases, the promoters will be held personally  liable

This stems from the rule laid down in the case law “KELNER vs BAXTER”

In this case  a  group of  promoters of a proposed Company  for a new hotel business entered into a contract, purportedly on behalf of the company which was not yet registered, to purchase wine. Once the company was registered, it ratified the contract. However, the wine was consumed before the money was paid, and the company unfortunately went into liquidation. The promoters, as agents, were sued on the contract. They argued that liability under the contract had passed, by ratification, to the company and that they were hence not personally liable. It was held, however, that as the company did not exist at the time of the agreement it would be wholly inoperative unless it was binding on the promoters personally and a stranger cannot by subsequent ratification relieve them from that responsibility.

On the other hand, a promoter can avoid personal liability if the company, after incorporation, and the third party substitutes the original pre-incorporation contract with a new contract on similar terms. Novation, as this is called, may also be inferred by the conduct of the parties such as where the terms of the original agreement are changed.

A promoter can also avoid personal liability on a contract where he signs the agreement merely to confirm the signature of the company because in so doing he has not held himself out as either agent or principal. The signature and the contractual document will be a complete nullity because the company was not in existence.”

 

The Court  held the promoters were personally liable. He said the following.^[1]

The Judge observed “I agree that if the Gravesend Royal Alexandra Hotel Company had been an existing company at this time, the persons who signed the agreement would have signed as agents of the company. But, as there was no company in existence at the time, the agreement would be wholly inoperative unless it were held to be binding on the defendants personally. The cases referred to in the course of the argument fully bear out the proposition that, where a contract is signed by one who professes to be signing “as agent,” but who has no principal existing at the time, and the contract would be altogether inoperative unless binding upon the person who signed it, he is bound thereby: and a stranger cannot by a subsequent ratification relieve him from that responsibility. When the company came afterwards into existence it was a totally new creature, having rights and obligations from that time, but no rights or obligations by reason of anything which might have been done before. It was once, indeed, thought that an inchoate liability might be incurred on behalf of a proposed company, which would become binding on it when subsequently formed: but that notion was manifestly contrary to the principles upon which the law of contract is founded. There must be two parties to a contract; and the rights and obligations which it creates cannot be transferred by one of them to a third person who was not in a condition to be bound by it at the time it was made. The history of this company makes this construction to my mind perfectly clear. It was no doubt the notion of all the parties that success was certain: but the plaintiff parted with his stock upon the faith of the defendants' engagement that the price agreed on should be paid on the day named. It cannot be supposed that he for a moment contemplated that the payment was to be contingent on the formation of the company by the 28th of February.’

 

 

 

Under the Incometax Act read with Companies act, preliminary expenses can be amortized and written of over a period of five years

 

 Amortization of preliminary expenses incurred prior to the commencement of business, extending an existing business, setting up a new unit etc. are eligible to be amortized under section 35D of the Income Tax Act, 1961 in 5 equal instalments

 

It is important to note that a Company cannot ratify a contract entered into by the promoters on its behalf before incorporation

 

Ratification can only be done  if an Agent contracts on behalf of the principal in existence and competent to contract at the time of the contract by an Agent.

Under Section of 5 of  Recovery of specific immovable property a person entitled to the possession of specific immovable property may recover it in the manner provided by the Code of Civil Procedure, 1908 (5 of 1908).

So, where promoters of a Company enters into a contract for the Company, specific performance can be enforced under the said Section,

 

If contracts are entered into after incorporation but before the certificate of commencement of business is received in case of public limited companies are not binding on the Company until the Company commences its business and on the date of commencement, it becomes binding.  However this is not applicable to Private Limited Companies.  Private limited companies can start business immediately after incorporation and do not need certificate of commencement of business.

To sum up, in the case of Public limited Companies, contracts made after the receipt of commencement of business contracts entered into by private limited Companies immediately on incorporation are binding on the Company

 

IT IS VERY IMPORTANT TO NOTE here that a Company can do acts as authorised by the Memorandum of the Company.  A Company cannot enforce any act not authorised by its Memorandum  which are considered intra vires the Company and are valid and binding in law

HOW TO GET THE REGISTRATION CANCELLED

 

 

As per Section 560 of the Act

 

When a Company is incorporated and a certificate of incorporation has been issued, the ROC has no power to deregister the Company and the name of the Company cannot be removed from the Register of Companies.  The only option is to go in Winding up.

Section 560 deals with cancellation of registration of a Company

Section 560, Of Companies Act, 2013

The provision for wrapping up the defunct companies under Fast Track Exit (FTE) mode is mentioned under Section 560, of the Companies Act, 2013^]. As per the said Act, the company seeking cancellation of registration certificate under FTE has to apply e-form 61 to Registrar of company. The applicant is also required to fill all pending statutory returns along with the said form. Also, the form cannot be submitted to the concerned authority in the absence of the Director’s signature. 

The authority would charge a prescribed application fee for this process. Similarly, the Registrar of Company can discard the name of the companies in the presence of a reasonable cause. Though, before passing any judgement, an equal chance is given to the defunct company to clarify their stands in the purview of due procedure under section 560

What does Section 560 say

560. Power of Registrar to strike defunct company off register. (1) Where the Registrar has reasonable cause to believe that a company is not carrying on- business or in operation, he shall send to the company by post a letter inquiring whether the company is carrying on business or in operation. If the reply is in the negative, ROC can strike of the Company’s name from the Register of Companies.

Objection raised from  other parties

Upon receiving the application, the ROC would show the company’s name on its online portal for 30 days of the timeline. Such relaxation is given to confront any objection raised from the other parties in the given timeline.  Once this timeline is over without dispute or conflict, the registrar will grant their approval by conferring the certificate for the closure to the applicant. 

What  documents are required to cancel company registration?

The following documents shall be required to cancel company registration. Keep in mind that these documents would go along the Form FTE: 

Approval letter from BOARD OF directors regarding the closure of the company: Before applying for cancellation, the company must get cancelled all the active certificates and license as well as bank accounts as it is a mandatory requirement which should be met without avoidance. Upon passing of board resolution, all the directors ought to furnish  an affidavit in the prescribed format  on stamp paper individually stating the following details:-

• The director’s declaration ensuring that they are working as an active employer and have applied for closure. 
• The company has got rid of all the active bank accounts related to the company. 
• The declaration ensuring that the company has no longer possesses any asset and liability. 
• Declaration that company remains inactive and doesn’t involve with any sort of activities for the past year. 
• The legitimate reasons for not being operative for the given period. 
• Stating that organization has no pending charges or legal disputes against anyone. 

After that, an Indemnity Bond should be executed by the company’s directors in the presence of the two witnesses on a stamp paper and agree to do the below: 

• To indemnify any person for any financial losses that may happen to strike off the company’s name. 
• To address all the legal claims that probably come into existence in the future after then cancelling the company’s name. 
• To settle the legal claims that hasn’t been the highlight so far. 

This is also dealt with the Insolvency Bankruptcy Code 2016 Under 55 Fast track resolution process.

Apart from the inability to pay debts, there is another mode of winding up a company under IBC called “Voluntary Winding Up.” Section 59 of IBC, 2016 provides that “A corporate person who intends to liquidate itself voluntarily and has not committed any default may initiate voluntary liquidation proceedings under this Chapter

 Dormant status:

 This mode comes in handy when one has a registered company for a future project. A Dormant company is primarily non-functional and has the following traits:

• No functional business or operation. 
• Free from any financial transaction 
• Not address any financial and tax liabilities. 

It is wise to opt for ‘dormant status’ as it reduces the maintenance cost for such a company. Such a company rejoices relaxation on account of maintaining compliance for holding a meeting. Keep in mind that such a company has this status for five years only.  

To sum up,

One has to address various requirements to cancel company registration. Be cautious while drafting the documents for the same because most of the error occurs on this account only. In case you wish to opt for a hassle-free way to cancel the company registration then let experts advisors

A cable includes multiple wires which are twisted, bonded, or braided together to form an assembly& blog

 

COMING TO ARTICLES OF ASSOCIATION

As explained above, while the Memorandum specifies the main objects of a company, the Articles will spells out as to how the objects will be achieved

Articles contain certain provisions relating to Share Capital, Call on shares, transfer of shares, forfeiture of shares, conversion of the shares into stock, voting rights of members, dividends, reserves & surpluses, winding up, merger, amalgamation, etc

Currently the total number of sections increased to 484 (470-43+57) under 42 chapters in this Act.

 All 484 sections are notified by the Ministry of Corporate Affairs (MCA) including 47 sections of new Chapter-XXIA (Sections 378A-378ZU) inserted w.e.f. 11-Feb-2021 by the Companies (Amendment) Act, 2020 and 61+

Rules made to the various Chapters/Sections of the Companies Act, 2013.

The first amendment to this Act has received the assent of the President on May 25, 2015 and may be called the Companies (Amendment) Act, 2015 (21 of 2015).

Thereafter, the Companies (Amendment) Act, 2017 enacted by Parliament in the Sixty-eighth Year of the Republic of India after receiving the assent of the President on the 3rd January, 2018.

 

 The Companies (Amendment) Act, 2019 received the assent of the President on the 31st July, 2019. The Companies (Amendment) Act, 2020 (29 of 2020) received the assent of the President on the 28th September, 2020 and enacted by Parliament in the Seventy-first Year of the Republic of India.  All sections of the Companies Act, 2013 here have been combined as amended by the Companies (Amendment) Act, 2020 for easy and ready reference. This may help Law Students and Company Secretary  aspirants  to   understand briefly the provisions contained in all the sections  ( 484 sections )covered under the Companies Act, 2013.

 Students pursuing LLB or CS  are advised to read all Sections of Companies Act 2013 [The above list updated on monthly basis]

 Chapter I Preliminary

(Sections of the Companies Act are briefly mentioned below.    For ready and immediate reference of students)      

  Section 1: Short title, extent, commencement and application

Section 2: Definitions Chapter II Incorporation of Company and Matters Incidental Thereto (Sections 3-22)

Section 3: Formation of company Section 3A: Members severally liable in certain cases

Section 4: Memorandum

 Section 5: Articles Section

Section 6: Act to override memorandum, articles, etc. Section

Section 7: : Incorporation of company Section

Section 8: Formation of companies with charitable objects, etc.

Section 9: Effect of registration

Section 10: Effect of memorandum and articles

 Section 10A: Commencement of business etc.

Section 11: Commencement of business, etc. [Omitted w.e.f. 29-05-2015] Section 12: Registered office of company

Section 13: Alteration of memorandum Section

Section 14: Alteration of articles

Section 15: Alteration of memorandum or articles to be noted in every copy Section 16: Rectification of name of company

Section 17: Copies of memorandum, articles, etc., to be given to members: Section 18: Conversion of companies already registered:

Section 19: Subsidiary company not to hold shares in its holding company: Section 20: Service of documents: Section

 Section 21: Authentication of documents, proceedings and contracts

 Section 22: Execution of bills of exchange, etc. Chapter III Part – I Prospectus and Allotment of Securities (Sections 23-41)

Section 23: Public offer and private placement: Section

24: Power of Securities and Exchange Board to regulate issue and transfer of securities, etc. Section

25: Document containing offer of securities for sale to be deemed prospectus:

Section 26: Matters to be stated in prospectus

Section 27: Variation in terms of contract or objects in prospectus

Section 28: Offer of sale of shares by certain members of company

Section 29: Public offer of securities to be in dematerialised form

Section 30: Advertisement of prospectus

Section 31: Shelf prospectus

 Section 32: Red herring prospectus Section 33: Issue of application forms for securities

Section 34: Criminal liability for misstatements in prospectus

Section 35: Civil liability for misstatements in prospectus

Section 36: Punishment for fraudulently inducing persons to invest money Section 37: Action by affected persons Section

Section 38: Punishment for personation for acquisition, etc., of securities

Section 39: Allotment of securities by company

Section 40: Securities to be dealt with in stock exchanges

 Section 41: Global depository receipt Chapter III Part – II The Companies (Private Placement)

Section 42: Offer or invitation for subscription of securities on private placement

CHAPTER IV: SHARE CAPITAL AND DEBENTURES (Sections 43-72)

Section 43: Kinds of share capital

Section 44: Nature of shares or debentures Section

Section 45: Numbering of shares

 Section 46: Certificate of shares

Section 47: Voting rights Section

 Section 48: Variation of shareholders’ rights

Section 49: Calls on shares of same class to be made on uniform basis Section 50: Company to accept unpaid share capital, although not called up Section 51: Payment of dividend in proportion to amount paid-up

 Section 52: Application of premiums received on issue of shares

Section 53: Prohibition on issue of shares at discount

Section 54: Issue of sweat equity shares Section 55: Issue and redemption of preference shares

 Section 56: Transfer and transmission of securities

Section 57: Punishment for personation of shareholder Section

Section  58: Refusal of registration and appeal against refusal

Section 59: Rectification of register of members

Section 60: Publication of authorised, subscribed and paid-up capital Section 61: Power of limited company to alter its share capital

Section 62: Further issue of share capital Section 63: Issue of bonus shares Section 64: Notice to be given to Registrar for alteration of share capital Section 65: Unlimited company to provide for reserve share capital on conversion into limited company

Section 66: Reduction of share capital Section 67: Restrictions on purchase by company or giving of loans by it for purchase of its shares

Section 68: Power of company to purchase its own securities

Section 69: Transfer of certain sums to capital redemption reserve account Section 70: Prohibition for buy-back in certain circumstances

 Section 71: Debentures

Section 72: Power to nominate

Chapter V Acceptance of Deposits By Companies (Sections 73-76A)

Section 73: Prohibition on acceptance of deposits from public

 Section 74: Repayment of deposits, etc., accepted before commencement of this Act

Section 75: Damages for fraud

Section 76: Acceptance of deposits from public by certain companies Section 76A: Punishment for contravention of section 73 or section 76.

Chapter VI Registration of Charges (Sections 77-87)

 Section 77: Duty to register charges, etc.

Section 78: Application for registration of charge

Section 79: Section 77 to apply in certain matters

Section 80: Date of notice of charge

Section 81: Register of charges to be kept by Registrar

Section 82: Company to report satisfaction of charge

Section 83: Power of Registrar to make entries of satisfaction and release in absence of intimation from company

Section 84: Intimation of appointment of receiver or manager

Section 85: Company’s register of charges
Section  86: Punishment for contravention

 Section 87: Rectification by Central Government in register of charges

Chapter VII Management and Administration (Sections 88-122)

Section 88: Register of members, etc.

Section 89: Declaration in respect of beneficial interest in any share

Section 90: Investigation of beneficial ownership of shares in certain cases Section 91: Power to close register of members or debenture holders or other security holders

Section 92: Annual return

Section 93: Return to be filed with Registrar in case promoters’ stake changes (Omitted)

Section 94: Place of keeping and inspection of registers, returns, etc. Section 95: Registers, etc., to be evidence

Section  96: Annual general meeting

Section 97: Power of Tribunal to call annual general meeting

 Section 98: Power of Tribunal to call meetings of members, etc.

 Section 99: Punishment for default in complying with provisions of sections 96 to 98

Section  100: Calling of extraordinary general meeting

Section 101: Notice of meeting

Section 102: Statement to be annexed to notice

 Section 103: Quorum for meetings

Section 104: Chairman of meetings

Section 105: Proxies

Section 106: Restriction on voting rights

Section 107: Voting by show of hands

Section 108: Voting through electronic means

 Section 109: Demand for poll

Section 110: Postal ballot

Section 111: Circulation of members’ resolution

 Section 112: Representation of President and Governors in meetings Section 113: Representation of corporations at meeting of companies and of creditors

Section 114: Ordinary and special resolutions

Section 115: Resolutions requiring special notice

Section 116: Resolutions passed at adjourned meeting

Section 117: Resolutions and agreements to be filed

 Section 118: Minutes of proceedings of general meeting, meeting of Board of Directors and other meeting and resolutions passed by postal ballot Section 119: Inspection of minute-books of general meeting

Section 120: Maintenance and inspection of documents in electronic form Section 121: Report on annual general meeting

Section 122: Applicability of this Chapter to One Person Company Chapter VIII Declaration and Payment of Dividend (Sections 123-127)

 Section 123: Declaration of dividend

Section 124: Unpaid Dividend Account

Section 125: Investor Education and Protection Fund

Section 126: Right to dividend, rights shares and bonus shares to be held in abeyance pending registration of transfer of shares

Section 127: Punishment for failure to distribute dividends

Chapter IX  Accounts of Companies (Sections 128-138)

Section 128: Books of account, etc., to be kept by company

Section 129: Financial statement

Section 129A: Periodical financial results

Section 130: Re-opening of accounts on court’s or Tribunal’s orders

 Section 131: Voluntary revision of financial statements or Board’s report Section 132: Constitution of National Financial Reporting Authority

 Section 133: Central Government to prescribe accounting standards Section 134: Financial statement, Board’s report, etc.

Section 135: Corporate Social Responsibility Section

136: Right of member to copies of audited financial statement

 Section 137: Copy of financial statement to be filed with Registrar Section 138: Internal audit

Chapter X Audit and Auditors (Sections 139-148)

 Section 139: Appointment of auditors Section

 140: Removal, resignation of auditor and giving of special notice Section 141: Eligibility, qualifications and disqualifications of auditors

 Section 142: Remuneration of auditors Section

Section 143: Powers and duties of auditors and auditing standards

Section 144: Auditor not to render certain services

Section 145: Auditor to sign audit reports, etc.

Section 146: Auditors to attend general meeting

Section 147: Punishment for contravention

Section 148: Central Government to specify audit of items of cost in respect of certain companies

Chapter XI Appointment and Qualifications of Directors (Sections 149-172)

Section 149: Company to have Board of Directors

 Section 150: Manner of selection of independent directors and maintenance of databank of independent directors

Section 151: Appointment of director elected by small shareholders Section

Section 152: Appointment of directors

 Section 153: Application for allotment of Director Identification Number Section 154: Allotment of Director Identification Number

Section 155: Prohibition to obtain more than one Director Identification Number Section

156: Director to intimate Director Identification Number

Section 157: Company to inform Director Identification Number to Registrar Section 158: Obligation to indicate Director Identification Number

Section  159: Punishment for contravention

Section 160: Right of persons other than retiring directors to stand for directorship

Section 161: Appointment of additional director, alternate director and nominee director

Section 162: Appointment of directors to be voted individually

Section 163: Option to adopt principle of proportional representation for appointment of directors

Section 164: Disqualifications for appointment of director Section 165: Number of directorships

Section 166: Duties of directors Section 167: Vacation of office of director Section 168: Resignation of director

Section 169: Removal of directors

Section 170: Register of directors and key managerial personnel and their shareholding

Section 171: Members’ right to inspect

 Section 172: Punishment Chapter XI I Meetings of Board and its Powers (Sections 173-195)

 Section 173: Meetings of Board Section

Section 174: Quorum for meetings of Board

Section 175: Passing of resolution by circulation

Section 176: Defects in appointment of directors not to invalidate actions taken

Section 177: Audit Committee

Section 178: Nomination and Remuneration Committee and Stakeholders Relationship Committee

Section 179: Powers of Board

Section 180: Restrictions on powers of Board

Section 181: Company to contribute to bona fide and charitable funds, etc. Section 182: Prohibitions and restrictions regarding political contributions Section 183: Power of Board and other persons to make contributions to National Defence Fund, etc.

Section 184: Disclosure of interest by director

 Section 185: Loan to directors, etc.

Section 186: Loan and investment by company

Section 187: Investments of company to be held in its own name

Section 188: Related party transactions

Section 189: Register of contracts or arrangements in which directors are interested

Section 190: Contract of employment with managing or whole-time directors

Section 191: Payment to director for loss of office, etc., in connection with transfer of undertaking, property or shares

Section 192: Restriction on non-cash transactions involving directors Section 193: Contract by One Person Company

Section 194: Prohibition on forward dealings in securities of company by director or key managerial personnel

Section 195: Prohibition on insider trading of securities

 Chapter XIII Appointment and Remuneration of Managerial Personnel (Sections 196-205)

Section 196: Appointment of managing director, whole-time director or manager

Section 197: Overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits

Section 198: Calculation of profits

Section 199: Recovery of remuneration in certain cases

 Section 200: Central Government or company to fix limit with regard to remuneration

Section 201: Forms of, and procedure in relation to, certain applications Section 202: Compensation for loss of office of managing or whole-time director or manager

Section 203: Appointment of key managerial personnel

Section 204: Secretarial audit for bigger companies

 Section 205: Functions of company secretary Chapter XIV Inspection, Inquiry and Investigation (Sections 206-229)

Section 206: Power to call for information, inspect books and conduct inquiries

Section 207: Conduct of inspection and inquiry

 Section 208: Report on inspection made Section 209: Search and seizure Section 210: Investigation into affairs of company

Section 211: Establishment of Serious Fraud Investigation Office

 Section 212: Investigation into affairs of Company by Serious Fraud Investigation Office

Section 213: Investigation into company’s affairs in other cases

 Section 214: Security for payment of costs and expenses of investigation Section 215: Firm, body corporate or association not to be appointed as inspector

Section 216: Investigation of ownership of company

Section 217: Procedure, powers, etc., of inspectors

 Section 218: Protection of employees during investigation

 Section 219: Power of inspector to conduct investigation into affairs of related companies, etc.

Section 220: Seizure of documents by inspector

 Section 221: Freezing of assets of company on inquiry and investigation Section 222: Imposition of restrictions upon securities

 Section 223: Inspector’s report

Section 224: Actions to be taken in pursuance of inspector’s report

 Section 225: Expenses of investigation

Section 226: Voluntary winding up of company, etc., not to stop investigation proceedings

Section 227: Legal advisers and bankers not to disclose certain information Section 228: Investigation, etc., of foreign companies

 Section 229: Penalty for furnishing false statement, mutilation, destruction of documents

 Chapter XV Compromises, Arrangements and amalgamations (Sections 230-240)

Section 230: Power to compromise or make arrangements with creditors and members

Section 231: Power of Tribunal to enforce compromise or arrangement Section 232: Merger and amalgamation of companies

Section 233: Merger or amalgamation of certain companies

Section 234: Merger or amalgamation of company with foreign company Section 235: Power to acquire shares of shareholders dissenting from scheme or contract approved by majority

Section 236: Purchase of minority shareholding

Section 237: Power of Central Government to provide for amalgamation of companies in public interest

Section 238: Registration of offer of schemes involving transfer of shares Section 239: Preservation of books and papers of amalgamated companies Section 240: Liability of officers in respect of offences committed prior to merger, amalgamation, etc.

 Chapter XVI Prevention of Oppression and Mismanagement (Sections 241-246)

Section 241: Application to Tribunal for relief in cases of oppression, etc.

Section 242: Powers of Tribunal

 Section 243: Consequence of termination or modification of certain agreements

 Section 244: Right to apply under section 241

 Section 245: Class action

 Section 246: Application of certain provisions to proceedings under section

Chapter XVII Registered Valuers (Section 247) S241 or section 245

Section 247: Valuation by registered valuers

Chapter XVIII Removal of Names of Companies from the Register of Companies (Sections 248-252)

Section 248: Power of Registrar to remove name of company from register of companies

Section 249: Restrictions on making application under section 248 in certain situations

Section 250: Effect of company notified as dissolved

Section 251: Fraudulent application for removal of name

Section 252: Appeal to Tribunal Chapter XIX Revival and Rehabilitation of Sick Companies (Sections 253-269)

Sections 253 to 269 has been omitted w.e.f. 15-Nov-2016 by enforcement of Section 255 of Insolvency and Bankruptcy Code 2016.

Chapter XX Winding Up (Sections 270-365)

Section 270: Modes of winding up

 Section 271: Circumstances in which company may be wound up by Tribunal

Section 272: Petition for winding up

 Section 273: Powers of Tribunal

 Section 274: Directions for filing statement of affairs

Section 275: Company Liquidators and their appointments

 Section 276: Removal and replacement of liquidator

Section 277: Intimation to Company Liquidator, provisional liquidator and Registrar

 Section 278: Effect of winding up order

Section 279: Stay of suits, etc., on winding up order

Section 280: Jurisdiction of Tribunal

Section 281: Submission of report by Company Liquidator

 Section 282: Directions of Tribunal on report of Company Liquidator Section 283: Custody of company’s properties

Section 284: Promoters, directors, etc., to cooperate with Company Liquidator

 Section 285: Settlement of list of contributories and application of assets Section 286: Obligations of directors and managers

Section 287: Advisory committee

Section 288: Submission of periodical reports to Tribunal

Section 289: Power of Tribunal on application for stay of winding up [Omitted w.e.f. 15.11.2016]

Section 290: Powers and duties of Company Liquidator

Section 291: Provision for professional assistance to Company Liquidator Section 292: Exercise and control of Company Liquidator’s powers

Section 293: Books to be kept by Company Liquidator

Section 294: Audit of Company Liquidator’s accounts

Section 295: Payment of debts by contributory and extent of set-off

Section 296: Power of Tribunal to make calls

Section 297: Adjustment of rights of contributories

Section 298: Power to order costs

Section 299: Power to summon persons suspected of having property of company, etc.

Section 300: Power to order examination of promoters, directors, etc. Section 301: Arrest of person trying to leave India or abscond

Section 302: Dissolution of company by Tribunal

Section 303: Appeals from orders made before commencement of Act Sections 304-323 are omitted w.e.f. 15.11.2016 by enforcement of Section 255 of Insolvency and Bankruptcy Code 2016.

Section 324: Debts of all descriptions to be admitted to proof

Section 325: Application of insolvency rules in winding up of insolvent companies [Omitted w.e.f. 15.11.2016]

Section 326: Overriding preferential payments

Section 327: Preferential payments

Section 328: Fraudulent preference

Section 329: Transfers not in good faith to be void

Section 330: Certain transfers to be void

Section 331: Liabilities and rights of certain persons fraudulently preferred Section 332: Effect of floating charge

 Section 333: Disclaimer of onerous property

Section 334: Transfers, etc., after commencement of winding up to be void Section 335: Certain attachments, executions, etc., in winding up by Tribunal to be void

Section 336: Offences by officers of companies in liquidation

Section 337: Penalty for frauds by officers

Section 338: Liability where proper accounts not kept

Section 339: Liability for fraudulent conduct of business

Section 340: Power of Tribunal to assess damages against delinquent directors, etc.

Section 341: Liability under sections 339 and 340 to extend to partners or directors in firms or companies

Section 342: Prosecution of delinquent officers and members of company Section 343: Company Liquidator to exercise certain powers subject to sanction

Section 344: Statement that company is in liquidation

Section 345: Books and papers of company to be evidence

Section 346: Inspection of books and papers by creditors and contributories Section 347: Disposal of books and papers of company

Section 348: Information as to pending liquidations

Section 349: Official Liquidator to make payments into public account of India

Section 350: Company Liquidator to deposit monies into scheduled bank Section 351: Liquidator not to deposit monies into private banking account Section 352: Company Liquidation Dividend and Undistributed Assets Account

Section 353: Liquidator to make returns, etc.

Section 354: Meetings to ascertain wishes of creditors or contributories

Section 355: Court, tribunal or person, etc., before whom affidavit may be sworn

Section 356: Powers of Tribunal to declare dissolution of company void

 Section 357: Commencement of winding up by Tribunal

Section 358: Exclusion of certain time in computing period of limitation

Section 359: Appointment of Official Liquidator

 Section 360: Powers and functions of Official Liquidator

Section 361: Summary procedure for liquidation

Section 362: Sale of assets and recovery of debts due to company

Section 363: Settlement of claims of creditors by Official Liquidator

 Section 364: Appeal by creditor

Section 365: Order of dissolution of company

 

 Chapter XXI Part I – Companies Authorised to Register Under this Act (Sections      366-374)

 Section 366: Companies capable of being registered

 Section 367: Certificate of registration of existing companies

Section 368: Vesting of property on registration

Section 369: Saving of existing liabilities Section 370: Continuation of pending legal proceedings

Section 371: Effect of registration under this Part

Section 372: Power of Court to stay or restrain proceedings

 Section 373: Suits stayed on winding up order

Section 374: Obligations of companies registering under this Part Chapter XXI Part II – Winding Up of Unregistered Companies (Sections 375-378)

 Section 375: Winding up of unregistered companies

Section 376: Power to wind up foreign companies, although dissolved Section 377: Provisions of Chapter cumulative

Section 378: Saving and construction of enactments conferring power to wind up partnership firm, association or company, etc., in certain cases

Chapter XXIA: Producer Companies (Sections 378A-378ZU)

 Section 378A: Definitions

 Section 378B: Objects of Producer Company

Section 378C: Formation of Producer Company and its registration:

 Section 378D: Membership and voting rights of Members of Producer Company Section 378E: Benefits to Members

Section 378F: Memorandum of Producer Company
Section 378G: Articles of association

Section 378H: Amendment of memorandum

 Section 378-I: Amendment of articles

 Section 378J: Option to inter-State co-operative societies to become Producer

Companies Section

 378K: Effect of incorporation of Producer Company

 Section 378L: Vesting of undertaking in Producer Company

 Section 378M: Concession, etc., to be deemed to have been granted to Producer Company

Section 378N: Provisions in respect of officers and other employees of inter-State co-operative society

Section 378-O: Number of directors

 Section 378P: Appointment of directors

 Section 378Q: Vacation of office by directors:

 Section 378R: Powers and functions of Board

Section 378S: Matters to be transacted at general meeting

Section 378T: Liability of directors

Section 378U: Committee of directors

Section 378V: Meetings of Board and quorum

Section 378W: Chief Executive and his functions

Section 378X: Secretary of Producer Company

Section 378Y: Quorum

Section 378Z: Voting rights

Section 378ZA: Annual general meetings

 Section 378ZB: Share capital

Section 378ZD: Transferability of shares and attendant rights

Section 378ZE: Books of account

 Section 378ZF: Internal audit

Section 378ZG: Duties of auditor under this Chapter

Section 378ZH: Donation or subscription by Producer Company

Section 378Z-I: General and other reserves Section 378ZJ: Issue of bonus shares Section 378ZK: Loan, etc., to Members Section 378ZM: Penalty for contravention Section 378ZN: Amalgamation, merger or division, etc., to form new Producer Companies

Section 378Z-O: Disputes

 Section 378ZP: Strike off name of Producer Company

Section 378ZQ: Provisions of this Chapter to override other laws

 Section 378ZR: Application of provisions relating to private companies Section 378ZS: Re-conversion of Producer Company to inter-State co-operative society

Section 378ZT: Power to modify Act in its application to Producer Companies Section 378ZU: Power to make rules Chapter XXII Companies Incorporated Outside India (Sections 379-393)

Section 379: Application of Act to foreign companies

Section 380: Documents, etc., to be delivered to Registrar by foreign companies

Section 381: Accounts of foreign company

Section 382: Display of name, etc., of foreign company

Section 383: Service on foreign company

Section 384: Debentures, annual return, registration of charges, books of account and their inspection

Section 385: Fee for registration of documents

Section 386: Interpretation

 Section 387: Dating of prospectus and particulars to be contained therein Section 388: Provisions as to expert’s consent and allotment

 Section 389: Registration of prospectus

 Section 390: Offer of Indian Depository Receipts

Section 391: Application of sections 34 to 36 and Chapter XX

Section 392: Punishment for contravention

Section 393: Company’s failure to comply with provisions of this Chapter not to affect validity of contracts, etc.

Section 393A: Exemptions under this Chapter Chapter XXIII Government Companies (Sections 394-395)

Section 394: Annual reports on Government companies

Section 395: Annual reports where one or more State Governments are members of companies

Chapter XXIV Registration Offices and Fees (Sections 396-404)

Section 396: Registration offices

 Section 397: Admissibility of certain documents as evidence

Section 398: Provisions relating to filing of applications, documents, inspection, etc.,   in electronic form

 Section 399: Inspection, production and evidence of documents kept by Registrar

Section 400: Electronic form to be exclusive, alternative or in addition to physical form

 Section 401: Provision of value added services through electronic form

Section 402: Application of provisions of Information Technology Act, 2000

Section 403: Fee for filing, etc.

Section 404: Fees, etc., to be credited into public account

Chapter XXV Companies to Furnish Information or Statistics

(Section 405) Section 405: Power of Central Government to direct companies to furnish information or statistics

Chapter XXVI Nidhis (Section 406)

 Section 406: Power to modify Act in its application to Nidhis Chapter XXVII National Company Law Tribunal and Appellate Tribunal (Sections 407-434)

 Section 407: Definitions

Section 408: Constitution of National Company Law Tribunal

Section 409: Qualification of President and Members of Tribunal
Section 410: Constitution of Appellate Tribunal

 Section 411: Qualifications of chairperson and Members of Appellate Tribunal

Section 412: Selection of Members of Tribunal and Appellate Tribunal

Section 413: Term of office of President, chairperson and other Members

Section 414: Salary, allowances and other terms and conditions of service of Members

Section 415: Acting President and Chairperson of Tribunal or Appellate Tribunal

 Section 416: Resignation of Members

 Section 417: Removal of Members Section 417A: Qualifications, terms and conditions of service of Chairperson and Member.

Section 418: Staff of Tribunal and Appellate Tribunal

Section 418A: Benches of Appellate Tribunal
Section 419: Benches of Tribunal

Section 420: Orders of Tribunal

 Section 421: Appeal from orders of Tribunal

Section 422: Expeditious disposal by Tribunal and Appellate Tribunal Section 423: Appeal to Supreme Court

Section 424: Procedure before Tribunal and Appellate Tribunal

Section 425: Power to punish for contempt

 Section 426: Delegation of powers

Section 427: President, Members, officers, etc., to be public servants Section 428: Protection of action taken in good faith

 Section 429: Power to seek assistance of Chief Metropolitan Magistrate, etc.

Section 430: Civil court not to have jurisdiction

Section 431: Vacancy in Tribunal or Appellate Tribunal not to invalidate acts or proceedings

Section 432: Right to legal representation
Section 433: Limitation

Section 434: Transfer of certain pending proceedings

Chapter XXVIII Special Courts (Sections 435-446B)   

  Section 435: Establishment of Special Courts

 Section 436: Offences triable by Special Courts

Section 437: Appeal and revision

 Section 438: Application of Code to proceedings before Special Court

Section 439: Offences to be non-cognizable

Section 440: Transitional provisions

Section 441: Compounding of certain offences

 Section 442: Mediation and Conciliation Panel

 Section 443: Power of Central Government to appoint company prosecutors

Section 444: Appeal against acquittal

Section 445: Compensation for accusation without reasonable cause Section 446: Application of fines

Section 446A: Factors for determining level of punishment

Section 446B: Lesser penalties for One Person Companies or small companies

Chapter XXIX Miscellaneous (Sections 447-470)

Section 447: Punishment for fraud

Section 448: Punishment for false statement

 Section 449: Punishment for false evidence

Section 450: Punishment where no specific penalty or punishment is provided

Section 451: Punishment in case of repeated default

 Section 452: Punishment for wrongful withholding of property

Section 453: Punishment for improper use of “Limited” or “Private Limited”

Section 454: Adjudication of penalties

 Section 454A: Penalty for repeated default.

Section 455: Dormant company

Section 456: Protection of action taken in good faith

Section 457: Nondisclosure of information in certain cases

Section 458: Delegation by Central Government of its powers and functions

Section 459: Powers of Central Government or Tribunal to accord approval, etc., subject to conditions and to prescribe fees on applications

 Section 460: Condonation of delay in certain cases

Section 461: Annual report by Central Government

Section 462: Power to exempt class or classes of companies from provisions of this Act

Section 463: Power of court to grant relief in certain cases

 Section 464: Prohibition of association or partnership of persons exceeding certain number

 Section 465: Repeal of certain enactments and savings

Section 466: Dissolution of Company Law Board and consequential provisions

 Section 467: Power of Central Government to amend Schedules
Section 468: Powers of Central Government to make rules relating to winding up

 Section 469: Power of Central Government to make rules

 Section 470: Power to remove difficulties July 2, 2022(refer  Suresh Prasad ‘s  book on Corporate Law Companies Act 2013

Commencing with the Salomon case, the rule of SLP has been followed as an uncompromising precedent⁵ in several subsequent cases  Macaura v Northern Assurance Co., Lee v Lee’s Air Farming Limited,⁷ and the Farrar case.

The legal fiction of corporate veil, thus established, enunciates that a company has a legal personality separate and independent from the identity of its shareholders. Hence, any rights, obligations or liabilities of a company are discrete from those of its shareholders, where the latter are responsible only to the extent of their capital contributions, known as “limited liability”. This corporate fiction was devised to enable groups of individuals to pursue an economic purpose as a single unit, without exposure to risks or liabilities in one’s personal capacity.¹¹ Accordingly, a company can own property, execute contracts, raise debt, make investments and assume other rights and obligations, independent of its members.¹² Moreover, as companies can then sue and be sued on its own name, it facilitates legal course too.¹³ Lastly, the most striking consequence of SLP is that a company survives the death of its members.¹⁴

^{What is Lifting / piercing the Corporate Veil?}

According to the ruling laid down in Salomon case, a Company is a legal person distinct from its Members

If However such separate corporate personality is misused  or abused, the corporate veil stands lifted in order to see that the corporate personality is not blatantly used as a tool to commit fraud on the public and particularly the Investors.  Wherever and whenever a fraudulent advantage pertaining to the legal setup is taken, the members will no longer be permitted to cover themselves with such corporate veil.

Since  the lifting of Corporate Veil is an evolving concept, there is no pre-defined or exhaustive list of the grounds or basis under which the veil g rounds for Lifting Or Piercing Of Corporate Veil prevail  Wherever and whenever a fraudulent advantage pertaining to the legal setup is taken, the members may demand lifting of the corporate veil.

The necessary authority will do away with the company's veil and hold the individuals accountable for commission of such an offence. This piercing of the veil is called the "Lifting of Corporate Veil" as per the Companies Act of

 

Exception to the rule of   Veil Piercing/LIFTING THE CORPORATE VEIL

 

Notably, similar to most legal principles, the overarching rule of SLP applies with exceptions, where the courts may look through the veil to reach out to the insider members, known as “lifting or piercing of the corporate veil“.

ONE MAN COMPANY CONCEPT

 Sec. 2 clause 62 of the Companies Act 2013 has introduced  the concept of ONE MAN COMPANY which means a Company which has only one person as its Member.

AVANTAGES OF A COMPANY AND CHARACTERICS

 

1)    The main advantage of a Company is its limited Liability.  The members of a Company are liable only to the extent of their shareholding in the Company and not beyond that.

2)    The shareholders’ personal properties cannot be touched’

3)    A Company once incorporated never has a death.  Members will keep changing but such changes will not affect the existence of a Company unless it is wound up either by voluntary winding up or by operation of law In other words it enjoys legal immortality.

4)    A Company is created by Law and so can be put to and end by process of Law only .  A death or insolvency of all members of the company cannot end the life a Company unless otherwise stated above.

5)    The Advantage of a Company is that the capital of a Company is divided by into parts called “Shares” These shares can be transferred easily. No cumbersome procedure.  Simply fill the transfer forms giving the Transferor’s name Share Certificate number , Distinctive numbers, Folio No.  along with original share certificate/s with endorsement in reverse of the Share Certificate.  The share certificate should bear the Company’s Common seal with a Witness.

ISSUE OF SHARE CERTIFICATE

 

6)     Normally a  printed share certificate is used for transfer of shares,  This is now replaced by computer print out in the prescribed form

7)    The share Certificate will be signed by Managing Director and one Director and Company secretary and in his absence by an duly authorised Secretary.

8)     Common seal of the Company is to be affixed by the Authority of Board Resolution. 

9)    A separate Register should be maintained showing the details of issue of certificate

REGISTER OF MEMBERS/SHARE HOLDERS

10) A separate register should be maintained showing the name and  address of each member, folio no. share certificate No. with distinctive members and wherever there is a transfer of shares, the transfer should also be entered with the names of the transferee and address

ALLOTMENT OF DIN NUMBER (Director’s Identification Number)

A person desirous of becoming a Director of a Company shall apply to Ministry of Corporate Affairs) seeking Director’s Identification number (known shortly as DIN NUMBER  This is like PAN NUMBER

Any person (not having DIN) proposed to become a first director in a new company shall have to make an application through eForm SPICe (Form No. DIR3). The applicant is required to attach the proof of Identity and address along with the application. DIN would be allocated to User only after approval of the form  For DIR-3 Form:

Supporting Documents:

Attach the photograph and scanned copy of supporting documents. i.e. proof of identity, and proof of residence as per the guidelines.
Physical documents are not required to be submitted at DIN cell.

 

Digital Signature

 

Form DIR-3 is mandatory to be signed by the Applicant and shall be verified digitally by a Company Secretary in full time employment of the company or by the Managing Director or Director or CEO or CFO of the existing company in which the applicant is intended to be appointed as a director

                                                  

Apply For DIN

The concept of a Director Identification Number (DIN) has been introduced for the first time with the insertion of Sections 266A to 266G of Companies (Amendment) Act, 2006. As such, all the existing and intending Directors have to obtain DIN within the prescribed time-frame as notified.

 

Forms for DIN application and modification thereof:

·         SPICe Form: Application for allotment of DINs to the proposed first Directors in respect of new companies shall be made in SPICe form only.

 

·         The  application should be  in eForm DIR-3 for allotment of DIN.

 

·         DIR-6 Form: Any changes in the particulars of the directors shall be filed in form DIR6.

 

 

SPICe Form:

 

Share Transfer:

Specimen given below:

 To

“LETTER OF OFFER”

” We would like to inform that __Shri _______________, a Shareholder of our Company proposes to transfer its 5,000  ( Six thousand Only) Equity Shares, held in the Company having face value of Rs.10/- each at a premium of Rs. 100 each, amounting to a total consideration of Rs. 6,0,000 (Rupees lakhs only) to the other existing shareholder of the Company. Pursuant to Article …   of the Articles of Association of the Company, the other existing Equity shareholders of   ABC Private Limited who are willing and wish to avail the said offer may accept by notice in writing. However, failing such acceptance, the offer shall be deemed to be declined and the Board of Directors may proceed to allow him to transfer this equity share to any person/(s) at the same or higher price. Certified True Copy For ……………. Private Limited ……….. (Director) DIN: ……………… Annexure-C Date: /……     To, ……………. ……………………..  Intimation for the transfer of shares This is in reference to dissent letters dated 15th March,     ; the Company would like to inform that none of the existing shareholder wishes to buy the shares offered by you. Therefore, as per Article     of the Articles of Association of the Company, you may transfer your 5,0000 Equity Shares to any other non-existing shareholder. For …………… Private Limited ……………… (Director) DIN: …………….. Annexure-D Form No. SH-4 Securities Transfer Form [Pursuant to section 56 of the Companies Act, 2013 and sub-rule (1) of rule 11 of the Companies (Share Capital and Debentures) Rules 2014] Date of execution: 01.10.2016

FOR THE CONSIDERATION stated below the “Transferor(s)” named do hereby transfer to the “Transferee(s)” named the securities specified below subject to the conditions on which the said securities are now held by the Transferor(s) and the Transferee(s) do hereby agree to accept and hold the said securities subject to the conditions aforesaid. – CIN: ……………. Name of the company (in full): ………………. PRIVATE LIMITED Name of the Stock Exchange where the company is listed, if any: N.A. DESCRIPTION OF SECURITIES: Kind/Class of Securities (1) Nominal value of each unit of security (2) Amount called up per unit of security (3) Amount paid up per unit of security (4) Equity Shares Rs.10/- Rs. 10/- Rs. 10/- – No. of securities being transferred Consideration received (Rs.) In figures In words In words In figures (In words) 2   – Distinctive Number From        To   Corresponding Certificate – Transferor’s Particulars– Registered Folio Number: 07 S.No Name(s) in full Signature(s) 1. Abhinav Leasing and Finance Limited     – I, hereby confirm that the Transferor has signed before me. Signature of witness: Name and address: Transferee’s Particulars- Name in full Father’s/Mother’s/Spouse name Address & Email ID Occupation Existing folio No., if any Signature (1) (2) (3) (4) (5) (6) …….. ……. ………… Business 14 Folio No. of Transferee: 14                           Specimen Signature of Transferee Value of stamp affixed: Rs.(      ) Stamps Enclosures: (1) Certificate of shares or debentures or other securities (2) If no certificate is issued, letter of allotment. (3) Others, specify For office use only Checked by…………….. Signature tallied by………………………. Entered in the Register of Transfer on …………….. vide Transfer No. ……. Approval Date ……………….. Power of attorney / Probate / Death Certificate / Letter of Administration Registered on ……………….. at No………………………….. On the reverse page of the certificate Name of the Transferor          Name of the Transferee                 No. of shares   Date of Transfer                     Signature of the authorized signatory Annexure-E Certified True Copy of the resolution passed at the     rd meeting of the Board of Directors of ….. Private Limited held on Wednesday, the 22^nd   of (Say June) March, 2022  at 11.00 A.M at a shorter notice at its Registered Office at ……………… TRANSFER OF SHARES

 

“RESOLVED THAT pursuant to the provisions of Section 56 of the Companies Act, 2013 and all other applicable provisions thereof read with the Articles of Association of the Company, transfer of 50000 Equity Shares of Rs. 10 /- each (Rupees Ten only) at a Premium of Rs. 000/- each (Rupees One Hundred Nin  only) of the respective shareholder as per the entries made in the Share Transfer Register produced at this Meeting be and is hereby approved as follows: Transfer No. Name of Transferor Name of Transferee No. of Shares Distinctive No.’s Transaction Value T-24 ……….. ………     ..

 

  RESOLVED FURTHER THAT any of the Directors of the Company be and is hereby authorized to make necessary endorsement on reverse of Share Certificates and to do all other necessary act in this regard to give effect to the aforesaid resolution.” Certified True Copy For ………… Private Limited …………  (Director)  DIN: ………… Tags: Companies Act, Companies Act 2013 Kindly Refer to Privacy Policy & Complete Terms of Use and Disclaimer. 138 Shares Share Author Bio Name:                                  Qualification: CS Company:  M/s .  Member Since:     May Jul 207 | Total Posts: founder of IURIS Consultants LLP & Read more at: 

  Misfeasance/ fraud primarily trigger the invocation of the veil piercing exception in limited circumstances, these grounds are not exhaustive, and much is left to the discretion and interpretation of the courts on case-to-case basis.

 

New PRIVISIONS OF COMPANIES ACT 2013

 

Under the new  the Companies Act 1956, an individual person cannot form a company, whereas in the Companies Act 2013, a person can form a company that is One Man Company.

 

According to Section 2 (20) of the Company Act 2013 "Company means a company incorporated under this Act or any previous Company Law." In general, a company is an artificial person, created by law that has a separate legal entity, perpetual succession, and common seal and has limited liability.

 

.

 Initially, there were 470 sections under 29 chapters with seven schedules in the Companies Act 2013.

 

Currently the total number of sections increased to 484 (470-43+57) under 42 chapters in this Act.

 All 484 sections are notified by the Ministry of Corporate Affairs (MCA) including 47 sections of new Chapter-XXIA (Sections 378A-378ZU) inserted w.e.f. 11-Feb-2021 by the Companies (Amendment) Act, 2020 and 61+

Rules made to the various Chapters/Sections of the Companies Act, 2013.

The first amendment to this Act has received the assent of the President on May 25, 2015 and may be called the Companies (Amendment) Act, 2015 (21 of 2015).

Thereafter, the Companies (Amendment) Act, 2017 enacted by Parliament in the Sixty-eighth Year of the Republic of India after receiving the assent of the President on the 3rd January, 2018.

 

 The Companies (Amendment) Act, 2019 received the assent of the President on the 31st July, 2019. The Companies (Amendment) Act, 2020 (29 of 2020) received the assent of the President on the 28th September, 2020 and enacted by Parliament in the Seventy-first Year of the Republic of India. I have compiled all sections of the Companies Act, 2013 as amended by the Companies (Amendment) Act, 2020.  This may help Law Students and Company Secretary  students  to   understand briefly the provisions contained in all the sections  ( 484 sections )covered under the Companies Act, 2013.

 

The concept of separate Corporate Personality has many significant advantages and important consequences

 

1)    The Member of a Company (I mean the Equity share shareholder has no insurable interest in the property of the company except their  equity shares

2)    Even when the Member dies, the Company continues to be in existence  In the event of his demise, his shares will automatically get transmitted to his/her legal heirs   His shares vest with his legal representatives and not the assets of the Company.

3)    The nationality does not depend on the nationality of the Member.

OTHER ADVANTAGES OF A COMPANY OVER A PARTNERSHIP FIRM

1)    The liability of members of a Company is limited whereas in partnership firm is  liability of partners is unlimited

2)    In a Company the  maximum number is not limited to 20 as in partnership

3)    In a private company, the transfer of shares is restricted, and the number of shareholders may range from a minimum of  two  to maximum of fifty. Public limited –liability companies must have a minimum of five  to maximum of unlimited shareholders

4)    Easy transferability of shares. The shares can be transferred very easy. It is like a movable property which can be sold in the open market. The transferable shares in a Company make a special distinction from partnership.  It is a special advantage of a Company without affecting its capital structure.

5)    The Company being a legal person with perpetuity can own and enjoy separate  property in its own name   No share holder can claim ownership over the a Company’s property as it is the property of a Company having separate  legal entity as dististinshed from that of  the property of share holders

6)    Capacity to sue and be sued      A Company can sue and be sued in its own.  It can even sue its Members, creditors, debtors and outsiders and vice versa.

7)    The Proprietor /Promoter of a Company can relieve himself of the Management of retaining his control of the business while it is not possible in the case of a Partnership.

8)    Loans between the members of a Company and the Company is possible  without difficulty as the company is a separate legal entity but in partnership firm loans between the firm and the partners pose problems as the firm is not a separate from partners

 

Let us now  briefly discuss other important sections of the Act along with case laws

 

DIFFERENCE BETWEEN A COMPANY AND PARTNERHIP

 

1)    A Company is a group  of persons associated together for attainment of common of common end, social or economic

2)    A Company in order to gain separate entity needs to be Registered with the Registrar (ROC) under the Companies Act 2013,  It is governed by the provisions of Companies Act 2013

3)    A Company is a legal body having legal status with distinct personality’

4)    The liability of a member is limited to the extent of their contribution towards equity.  The paid up share capital is alone liable to be attached towards company’s debt  and liabilities

5)    Another advantage is the shares of a Company are freely  transferable and consent of other share holders is not required

6)    A share holder is not an Agent of the Company

7)    The powers of the Company are exercised by the Boards of Directors /Managing Director

8)    The Memorandum of the Company spells out the object clause and powers of the Company are limited to the extent out specified in the Memorandum of Association .  A Member of a Company can enter into contract with the Company and vice versa

9)    A private Limited Company can have maximum 200 no. of share holders whereas a Public Limited Company there is no such limit.  The minimum No of Directors is 2 and maximum is 15

 

ABOUT PARTNERSHIP IN BRIEF

 

1.    A PARTNERSHIP IS A RELATION between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

2.    Unlike a Company which needs to be mandatorily registered with Registrar of Companies a partnership need not necessarily be registered.  It is governed by Partnership Act 1932.  However it is advisable to get Partnership deed registered with Registrar of Firms to get a legal effect.

3.    It is not a distinct person but made up of partners who compose it unlike a Company

4.    The liability of each partner is both joint and several and is unlimited.
Sometimes even private properties are liable to be attached to discharge the liabilities of a firm

5.    Every partner is both an agent a principal. 

6.    Unlike share transfer in a Company, the share of a partner cannot be transferred without the consent of other partners.

7.    Every partner is entitled to take part in the management of a firm.  In the event of differences between the partners, it can be sorted out in the manner specified in the partnership deed.  Otherwise also, they can take recourse to Arbitration & conciliation act 1996 (under Sec 9)

8.    A partner cannot enter into an agreement with the firm. Partnership activities can be unlimited if all the partners accord their consent.

9.    Maximum no. of partnership of a firm engaged in banking business is 10 and firms engaged in other business is 20.

10. In order to register a firm, the availability of the name should be ascertained.  Otherwise, later if some other firm with similar or deceptively similar name, it will get into legal issues.

11. A firm is also covered under Insolvency and Bankruptcy Act 2016.  Therefore insolvency of a firm would amount to insolvency of all partners

THAT IS ALL ABOUT PARTNERSHIP FIRM  VS COMPANY

Coming to Companies Act 2013 which replaced the Companies Act 1956, let us discuss the major changes brought about in the new Act which is relevant today.

WHAT IS PROSPECTUS

Section 2(70) of the Companies Act defines “prospectus” as any document described or issued as a prospective and includes a red herring prospectus as u/s 32 or any notice, circular, advertisement other document inviting offers from public for subscription or purchase of any securities of a body Corporate.

The first public issue is known as Initial Public Offer shortly known as (  IPO,)  the prospectus tells potential shareholders about the company’s plans and business model.

For insurance and investment fund customers, a prospectus lists out the objective of the product, inclusions, and exclusions, fees, etc.

Exchange Traded Funds shortly known as  ( ETF), a prospectus informs likely investors of the fund’s goals, history, portfolio, fees and costs, and other financial details

A prospectus exhibits to the public as to what the Company is  and on that basis, the public subscribe to the share capital and debentures of the Company.  So, the prospectus must contain frank, full and honest disclosure of all material facts about the Company.  A prospectus must be issued with due care and there should not any misstatement or suppression of material facts.  Such misstatements and non-disclosure of facts are illegal and the contract to purchase its shares and debentures will be void abinitio.  In other words in a simple language, a prospectus must not give a misleading information/impression to the public as the investors and prospective stake holders rely on it and render such prospectus invalid.  There should be no inconsistency or ambiguity in a Prospectus.

Example is a leading case law: namely CLERK Vs Urgurhart.  In this case, the Court held that non-statement of exact value of assets was ambiguous and misleading and hence invalid

Procedures for issue of prospectus

 

After successful running a Company,  promoters would like to expand the business, diversify its activities and introduce new methods for better returns. For this they would need to raise funds to meet the changing need and augment resources.

.To raise  funds, the Company may approach potential investors inviting them for participating in the Equity Shares of the Company explain the future prospects and an estimate of returns on their Investments

For this purpose, the Directors should prepare a Scheme spelling out their present authorised Capital, paid up capital and indicate the Projects, their capital outlay and realistic ROI It will also spell out the past three years financial performance, profile of Directors, key managerial personnel.  This document is known as “PRSPECTUS”  the prospectus will also indicate the names & addresses of the Registrar to the Issue legal advisors, the underwrites , the principal brokers, the Names & addresses of the According to the companies act 2013, there are four types of the prospectus,

 1)1abridged prospectus,

2) deemed prospectus,

3) red herring prospectus, and

4) shelf prospectus.

It may be noted that generally a prospectus can be issued only by Public Limited Companies and not a Private Limited Companies

Section 23 of the Companies Act, 2013, a Company may issue securities through private placement

A private Limited Company may issue securities

a)    By way of private placement

b)    By way of rights or bonus issue  (this is subject to adherence to certain norms)

A Public Company may issue securities

a)    To public thru prospectus

b)    Thru private placements

c)    Through a rights issue or a bonus issue

 

After approval by the Board of Directors, the draft prospectus will be attested by a Legal Advisor and their Auditors.  Such draft will be sent to Stock Exchange in the relevant jurisdiction for their in principle approval.

Once it is cleared by the Stock Exchange a copy will be submitted to the Registrar of Companies for record.

Then the prospectus will be sent to news paper one in English having wide publication in the State where the Registered Office is located  and in a vernacular,

 

 The Act gives a comprehensive set of regulations as to the contents of prospectus.  Its aim is to secure ‘UBBERIMAE FIDEI’ at most good faith because investors believe the statement to be true relying on which they invest their money in the Share.

Adherence to the following rules is mandatory

1)    The date of prospectus must be mentioned in the Prospectus.

2)    Prospectus must be issued within 90 days after the date on which a copy thereof has been delivered for registration. If a prospectus is issued subsequently after the expiry of this period, it shall be deemed to be a prospectus a copy of which has not been delivered to the Registrar for registration

3)    As explained in brief above, it should disclose all information regarding objects, shares, subscription contracts and claims against the Company not acknowledged by the Company (the quantum must be specified)

4)    The information provided should contain facts and truth with strict accuracy as the Investors believe on that and repose confidence on the basis of which the investors contribute to the Share.  This is known as ‘GOLDEN RULE OF PRSPECTUS or Rule in the ‘New Brunswick Company Vs Muggeriage’ (year 1860)

The rule is: Those who issue a prospectus hold out to the public great advantages which will accrue to the persons who will take shares in the proposed undertaking.  The prospectus should be issued with utmost and great care.  Misstatement and omission or suppression of material fact will result in fatal consequences  This obligation is cast on those who prepare the Prospectus

 

1)    If the prospectus is prepared with the guidance and advice of some experts, consent of such experts should be obtained in writing

 

SECTION 26 SPECIFIES THAT THE FOLLOWING MATTERS SHALL BE STATED IN THE PROSPECTUS

 

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

(c) make a declaration about the compliance of the provisions of this Act and a statement to the effect that nothing in the prospectus is contrary to the provisions of this Act, the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and the  Securities and Exchange Board of India Act, 1992 (15 of 1992) and the rules and regulations made thereunder;

(2) Nothing in sub-section (1) shall apply—

(a) to the issue to existing  members or debenture-holders of a company, of a prospectus or form of application relating to shares in or debenture  of the company,

state such information and set out such reports on financial information as may be specified by the Securities and Exchange Board in consultation with the Central Government:

Provided that until the Securities and Exchange Board specifies the information and reports on financial information under this sub-section, the regulations made by the Securities and Exchange Board under the Securities and Exchange Board of India Act, 1992, in respect of such financial information or reports on financial information shall apply.

 

 

whether an applicant has a right to renounce the shares or not under sub-clause (ii) of clause (a) of sub-section (1) of section 62 in favour of any other person; or

(b) to the issue of a prospectus or form of application relating to shares or debentures which are, or are to be, in all respects uniform with shares or debentures previously issued and for the time being dealt in or quoted on a  recognised stock exchange .

(3) Subject to sub-section (2), the provisions of sub-section (1) shall apply to a prospectus or a form of application, whether issued on or with reference to the formation of a company or subsequently.

Explanation.—The date indicated in the prospectus shall be deemed to be the date of its publication.

(4) No prospectus shall be issued by or on behalf of a company or in relation to an intended company unless on or before the date of its publication, there has been delivered to the  Registrar  for filing , a copy thereof signed by every person who is named therein as a director or proposed director of the company or by his duly authorised person  by the Board of Directors.

(5) As stated supra, a prospectus issued under sub-section (1) shall not include a statement purporting to be made by an expert unless the expert is a person who is not, and has not been, engaged or interested in the formation or promotion or management, of the company and has given his written consent to the issue of the prospectus and has not withdrawn such consent before the delivery of a copy of the prospectus to the Registrar for filing  and a statement to that effect shall be included in the prospectus.

(6) Every prospectus issued under sub-section (1) shall, on the face of it,—

(a) state that a copy has been delivered for filing  to the Registrar as required under sub-section (4); and

(b) specify any documents  required by this section to be attached to the copy so delivered or refer to statements included in the prospectus which specify these documents.

 (7) No prospectus shall be valid if it is issued more than ninety days after the date on which a copy thereof is delivered to the Registrar under sub-section (4).

(9) If a prospectus is issued in contravention of the provisions of this section, the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to three lakh rupees and every person who is knowingly a party to the issue of such prospectus shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to three lakh rupees .

10) Dates of opening and closing of the issue and declaration about the issue of allotment letter

sand refunds within the prescribed time

11) Details of separate bank account

12)The Authority for the issue and an certified copy of Boars resolution.

SECUTITIES AND EXCHANGE BOARD OF INDIA plays a major role in issuance of Securities

Establishment Of SEBI

 

The Securities and Exchange Board of India was established as a statutory body in the year 1992 and the provisions of the Securities and Exchange Board of India Act, 1992 (15 of 1992) came into force on January 30, 1992.  It is an autonomous body with quasi judicial powers. It plays an important role in the Issue  of shares

Prior to the Issue, prospectus containing the above information should be filed with SEBI who shall examine the same to ascertain whether the guidelines laid down by SEBI have been complied with and if there are inconsistencies or omission in the Prospectus SEBI will point them out to the Company to correct it and after they are complied with, SEBI will accord approval

13)   As mentioned above, one of the main points that should cover in the Prospects

a) The main objects and present business of the Company and its location, schedule of implementation  of the Projects for which funds are to be raised. For this the following particulars are to be brought in the Prospectus

b) The factors specific to the Projects – what is the Management’s perception of the RISK FACTORS involved

14) Every project cannot start making profit immediately.  There may be teething problem, gestation period etc

14) Extent of progress made in the project  and deadline for completion  Should there be delay there will be overrun and how it will be met.

15) Any litigation or legal action pending or taken by Government or a statutory body during the previous five years immediately preceding the year of issue of prospectus against the Promoters /Directors or the Company

16) Minimum subscription has been received, amount payable by way of premium, issue of shares otherwise than cash

What is minimum subscription is explained below

When shares are issued to the general public, the minimum amount that must be subscribed by the public so that the company can allot shares to the applicants is termed 'minimum subscription'. As per the Companies Act of 1956, the minimum subscription of shares cannot be less than 90 per cent of the issued amount.

 

Time limit is 120 days from the opening of the issue. 

17) Particulars of Directors, their appointment, their remuneration and other particulars’

18) Promoter’s contribution  towards equity.  State the sources of their contribution.

19) Reports of the Auditors on the financial position of the Company – in particular on profit & loss account of the Company.

20) If the above conditions are not complied with, the Company is liable t pay a fine of Rs 50,000 which may go upto Rs 3 lakhs,  In other words if a prospectus is issued in contravention of the above conditions/provisions, the Company is punishable with fine of not less than  fifty thousand rupees which will go upto rs 3 lakhs  and every person who is  knowingly party to the issue of such prospectus shall be punishable with imprisonment upto three years or with fine of not less than fifty thousand rupees upto three lakhs  or both.

 

LIABILITIES FOR MISSTATEMENT

Amy person who is induced or enticed or allured to subscribe to shares in a Company on the faith of misstatement has some remedies available to him to safeguard his interest against the such person namely

1)    If the Directors or the Officers of a Company issue fraudulent statement in the prospectus the Officers concerned are personally liable and the agreement to subscribe to the shares is voidable at the option of the subscriber and can be rescinded.  The aggrieved part can sue the Company for compensation.  The Court may also award damages besides rescission of such agreement if the Court is considers and is primafacie convinced that there is a deception/misstatement which has affected the interest of  the subscriber

 

Case law (British case law)

Derry v Peek [1889] UKHL 1 is a case on English contract law, fraudulent misstatement, and the tort of deceit.

Derry v Peek established a 3-part test for fraudulent misrepresentation,^[1] whereby the defendant is fraudulent if he:

(i) knows the statement to be false,^[2] or

(ii) does not believe in the statement,^[3] or

(iii) is reckless as to its truth.

The House of Lords determined that, when issuing a prospectus, a company has a  general duty to use "care and skill" in to avoid making misstatements. This point is no longer good law in cases where economic loss flows from non-fraudulent misstatements.^[4]

Facts of the case

 

Peak and another person were Directors of a Tramway Company.  They applied for a lience to use steam power for trams.  They went on a premise / honesly hoping that licence will be issued from the Board of Trade. On such good faith and belief they issued prospectus stating that they had the right to use the steam power. Derry took a share in the Company on the strenth of the right to use steam power.  But the said Board declined to grant the licence  So the Company was forced to wind up the Company

The Court held that the act of Directors was not a fraud because of their honest belief that they will definitely get the licence   This is known as Rule in Derry vs peak.

 

But the Indian Companies Act 2013 did not agree with the above rule. In this connection refer Section 35.

 

As per Section 36 of Companies Act 2013, any person who makes any false, deceptive or misleading statement, promise or forecast , deliberately conceals any material facts, to induce a person to enter into an agreement regarding securities or credit facilities from any bank or financial institution is liable for action under Sec 447l

Section 36 is quoted  below:

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

(a) any agreement for, or with a view to, acquiring, disposing of, subscribing for, or underwriting  securities ; or

(b) any agreement, the purpose or the pretended purpose of which is to secure a profit to any of the parties from the yield of securities or by reference to fluctuations in the value of securities; or

(c) any agreement for, or with a view to, obtaining credit facilities from any bank or  financial institution , shall be liable for action under section 447.”

 

APPLICATION FOR ALLOTMENT OF SHARES IN FICTITUOUS NAME

 

If any person makes or abets making an application in multiple names or in different combinations of his name or surname for acquiring for its securities

Or

Induces a company to allot or register any transfer of. Securities to him or to any other persons in a fictitious name, he is liable for action u/s 447

If a person is convicted for the  above expenses, the Court may also order recovery of the gain and seizure and disposal of the securities in possession of such person

The amount received through recovery of securities is credited to an account called ‘INVESTOR EDUCATION AND PROECTION FUND’ This is different from CSR

ALLOTMENT OF SHARES:

1)    The Directors can proceed with the allotment of shares only if the minimum subscription as specified in the prospectus is received.  Refer Sec. 39.

2)    Amount payable on application should not be less than five 5 % of the security amount

3)    If the amount specified as minimum subscription as mentioned in the prospectus and the sum payable on application has not been received within a period  of 30 days from the date of issue of prospectus, the amount so received should be refunded to the applicants failing which the Company is liable to pay the person who made the payment, .and for each default, to pay a penalty of one thousand rupees for each day of default during which such default and if it continues or Rs one lakh rupees whichever is less.

4)    As mentioned supra, all the moneys received from public for subscription  to the securities should be kept in a separate account (like escrow account

5)    Company’s liability and responsibility: If any default is made in complying with the above requirement, the Company is punishable with a fine not less than five lakhs of rupees which may extend to Rupees fifty laks) The quantum will be determined by the Court having jurisdiction). Besides, every Officer who is default is punishable with imprisonment upto one year or fine not less than 50,000 Rupess or fine or both.

6)    A company may make private placement through issue of ‘Private Placement Offer letter” to prescribed number of persons of not exceeding 50 or such higher prescribed number of persons.

7)    A company making such offer or invitation should allot its securities within sixty days from the date of receipt of the application money and if not, it should repay the money to the subscriber within 15 days

8)    If a Company makes an offer or accepts moneys in contravention of the above provisions, the Company, its Promoters, Directors are liable for a penalty upto the amount involved in the offer or invitation or two crores of rupees whichever is higher The Company should also refund all the moneys  within 30 days of the order of imposing the penalty.

Section – 447 says

 Any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud: Where the fraud in question involves public interest, the term of imprisonment shall not be less than three years.. FRAUDULENT ACTIONS WILL BE CONSIDERED AS FRAUD BASED ON THE INTENTIONS TO PERFORM THE SAME FRAUD IN CONTEXT OF BOARD OF DIRECTORS: Ø Companies are prosecuted and investigated when some of its employees engineer a scheme to commit a fraud. Ø

Section - 448 If in any return, report, certificate, financial statement, prospectus, statement or other document required by, or for, the purposes of any of the provisions of this Act or the rules made thereunder, any person makes a statement,— (a) which is false in any material particulars, knowing it to be false; or (b) which omits any material fact, knowing it to be material, he shall be liable under section 447

WHAT IS DOCTRINE OF ULTRA VIRES

Doctrine of ultra virus is a commonly used word in almost all case laws and ignorance of this doctrine is no excuse.  Let us begin this chapter with this note.

As all students are aware the byelaws of a Company is known as Memorandum & Articles of Association which is the Constitution of any Company.

There is a saying ‘WHILE MEMORANDUM SPELSS OUT WHAT TO DOW AND ARTICLES DEFINES IT AS HOW TO DO’

A MEMORANDUM specifies the main objects for which a Company is incorporated, powers of the Company to achieve its objects.  Memo & Articles limits the powers of the Company and states the purpose of the Company.  It also defines the acts which are ultra vires of a Company i.e., beyond the powers spelt out in the  Memorandum.  It defines the jurisdiction and territory beyond which a Company cannot.  It is in the Public Domain as public at large can go through

Objects incidental to the main objects are also spelt out so that there is complete clarity.

A Company can carry on any business within its Ambit  and which is reasonable, and transparent

CASE LAW

 

A leading case law in Europe  (Richie vs Ashburry ) may be relevant  to be quoted here.

A Company established to engage  in the business of manufacturing and marketing of railway garages and to act as mechanical engineers besides entering as general contractors

The said company entered into a contract with RICHIE for construction of a railway line in Belgium.  However subsequently the said Company declined to perform the contract on the ground it was its beyond its powers.  Richie filed a suit against the Company for breach of contract.  The Court held that the Company was not liable.  The term used “GENERAL CONTRACTORS’ was restricted only to the main objects of the Company  and not for every activity.  .

Construction of rail way line is not within the meaning of ‘general contractors’

It was held that a Company can carry on any business which is considered reasonable and fairly incidental to the main object.

Ashbury Railway Carriage and Iron Co Ltd v Riche (1875) LR 7 HL 653 is a UK company law case, which concerned the objects clause of a company's memorandum of association.

Its importance as case law has been diminished as a result of the UK’s Companies Act 2006 s 31, which allows for unlimited objects for which a company may be carried on. Furthermore, any limits a company does have in its objects clause have no effect whatsoever for people outside a company (s 39 CA 2006), except as a general issue of authority of the company's agents.

Facts of the case

Incorporated under the Companies Act 1862, the Ashbury Railway Carriage and Iron Company Ltd’s memorandum, clause 3, stated that its objects were "to make and sell, or lend on hire, railway-carriages…" and clause 4 stated that activities beyond this needed a special resolution. But the company agreed to give Riche and his brother a loan to build a railway from Antwerp to Tournai in Belgium.^[1] Later, the company repudiated the agreement. Riche sued, and the company pleaded that the action was ultra vires.

 

Exchequer Court

The judges of the exchequer chamber being equally divided, the decision of the court below was affirmed.

Blackburn J said:

If I thought it was at common law an incident to a corporation that its capacity should be limited by the instrument creating it, I should agree that the capacity of a company incorporated under the act of 1862 was limited to the object in the memorandum of association. But if I am right in the opinion which I have already expressed, that the general power of contracting is an incident to a corporation which it requires an indication of intention in the legislature to take away, I see no such indication here. If the question was whether the legislature had conferred on a corporation, created under this act, capacity to enter into contracts beyond the provisions of the deed, there could be only one answer. The legislature did not confer such capacity. But if the question be, as I apprehend it is, whether the legislature have indicated an intention to take away the power of contracting which at common law would be incident to a body corporate, and not merely to limit the authority of the managing body and the majority of the shareholders to bind the minority, but also to prohibit and make illegal contracts made by the body corporate, in such a manner that they would be binding on the body if incorporated at common law, I think the answer should be the other way. House of Lords

The House of Lords, agreeing with the three dissentient judges in the Exchequer Chamber, pronounced the effect of the Companies Act to be the opposite of that indicated by Mr Justice Blackburn. It held that if a company pursues objects beyond the scope of the memorandum of association, the company's actions are ultra vires and void. Lord Cairns LC said,

It was the intention of the legislature, not implied, but actually expressed, that the corporations, should not enter, having regard to this memorandum of association, into a contract of this description. The contract in my judgment could not have been ratified by the unanimous assent of the whole corporation.

 

Who is Justin Blacburn?

Sir Richard Arthur Blackburn, OBE (26 July 1918 – 1 October 1987) was an Australian judge, prominent legal academic and military officer. He became a judge of three courts in Australia, and eventually became chief justice of the Australian Capital Territory.

 

COMING TO THE CONSEQUENCES AND EFFECTS OF ULTRA VIRES

1)    If a Member of a Company comes to know in advance, that an act of a Director or the Company itself would amount to “ultra Vires”, he can approach the Court having jurisdiction and obtain an injunction

2)    If the share capital is used for illegal or illegitimate purposes, by the Directors, which is obviously outside the objects of the Company, the Directors are personally liable to restore the loss besides attracting criminal misfeasance

3)    The Directors are agents and trustees are expected to act within the limits of Company’s powers as enshrined in the Memorandum of Association of the Company.

4)    An ultra vires contract which is outside the scope of the object contained in the Memorandum of Association is completely void and will have no legal sanctity

5)    Company being a corporate personality, cannot appoint a servant for it.  So, a Company cannot be made liable for the ultra vires torts of its Servants. In this connection, refer Law of Torts.

An employer can be held liable for the unlawful actions of an employee, such as harassment or discrimination in the workplace. An employer might also be held liable if an employee operates equipment or machinery in a negligent or inappropriate way that results in damages to property or personal injury under law of torts   Here employer is not a Corporate Body which is represented it its Managing Director, CEO, etc

 

EXCEPTIONS TO THIS GENERAL DOCTRINE

 

1)    A  Company may it is discretion may ratify any act which is intra vires the Company  but not any act which is ultra vires the powers of the  Directors

2)    If an act is ultra vires the Articles of Association, the Articles may be amended/altered to include the act within the powers of the Company. But not so in the case of Memorandum of Association

3)    If an act is ultra vires the Company but is done irregularly, the General Body of the Members of the Company may ratify the same

4)    If a company has taken a loan thru some misrepresentation of facts through the instrumentality of a Director, the lender has a right to make the director personally liable on the ground of breach of implied warranty of authority 

5)    If a Company has purchased a property from a third party, under a contract which is ultra  vires a contract or taken an ultra vires loan, the third party can get back his property or money under a Court order

6)    If a Company takes an ultra vires loan AND USES IT TO PAY intra vires debts, the lender who has lent the money under a vires contract is substituted in place of the creditor who has been paid off and can recover the money

 

MEETINGS OF BOARD OF DIRECTORS AND SHARE HOLDERS

 

 

Every Company whether Private Limited Company or a public Limited Company will have a Boards of Directors and Shareholders (Equity Share holders and Preferential share holders) are required to hold Board meetings every year

There will be minimum 4 Boards meetings every year – one Board meeting once in three calendar months. If a meeting is held on 2^nd January, the next meeting out to be held not later than 30^th June, Similarly if the next meeting is held on 2^nd July such meeting ought to be held on or before 30^th September and so on.

ANNUAL GENERAL MEETING

The  meeting of Share holders meeting known as General Body meeting (Annual General Meeting) (AGM) shall be held atleast once a year. Such meeting should be held within six months from the date of closure of accounts (say 31^st March) namely by 30^th September of that year,

Statutory meeting

Extraordinary  General Meetings)

A meeting is called only by a proper authority (Usually the Board od Directors) through Company Secretary and in his absence by a Director authorised by the Board.

If the AGM is not held as prescribed under the Act, the Court or Central Government may call a meeting

Section 101 requires that a proper notice to the Shareholders (Members) convening the meeting is to be served on the Members.  Omission to give such notice to any Member will invalidate the meeting.  Accidental omission will not invalidate the meeting.  Evidence of serving the notice should be available on record.  It can be delivered in person or by post or by electronic means.   Oral meeting is not admissible in law. The meeting should be in writing and dated.   And should be given 21 days clear notice.  Clear notice means the date of delivery and date of the meeting is excluded.

QUORUM FOR THE MEETING

 

Quorum means in simple terms, minimum numbers of Members to be present in the meeting

 

Generally a quorum refers to the minimum acceptable level of individuals with a vested interest in a company needed to make the proceedings of a meeting valid under the corporate body . This clause or general agreement ensures there is sufficient representation present at meetings before any changes can be made by the board.

A quorum normally consists of a group that is considered as large as possible to be depended on to attend all corporate meetings, which is a qualitative assessment. The plural of a quorum is "quora."

Under the Companies Act.

ii) thirty members personally present if the number of members as on the date of the meeting exceeds five thousand; (b) in the case of a private company, two members personally present, shall be the quorum for a meeting of the company. generally.

The amount of voters needed for a quorum will vary between governing bodies and incorporating documents. Generally speaking, groups of governing bodies will typically need at least half of all member of the group in attendance to have met quorum. Other formation documents may call for a percentage of the body, while others may call for a specific number (i.e. at least 7 board members must be in attendance

If quorum is not present on the appointed day within half an hour from the start of the meeting, the Meeting shall be held in the succeeding week at the same venue at the same appointed time with the Members present irrespective of whether quorum is present or not.

For the purpose of quorum that is the minimum numbers of persons to be present in a valid meeting is 6 in the case of a Public limited company and 2 in the case of private limited companies

Though a single Member may hold proxies of other Members, his presence in the meeting will not constitute a valid meeting as minimum 2 members personally present in the case of private limited company and 6 in the case of public company is requited to constitute a quorum

In the case of Sharp Vs Davies the Court held that one man meeting was not meeting at all and that meeting means meeting of minds of more than one person

A general meeting of a co. was called for the purpose of making a call only one share holder attended the meeting .Held: That one person could not constitute a meeting. Exceptions ) Where there is class meeting of shareholders and all the shares of that class are held by one person .ii)Directors meeting – in case of private company iii)If at the adjourned meeting also the quorum is not present within half an hour of the time of the meeting, the members present even one member constitute a meeting (iv)Creditors meeting in course of winding up)Meeting convened pursuant to a court order sec. 135(i)vi)A.G.M. convened by or at instance of the registry ) The Chairman A chairman is necessary to conduct a meeting. Unless the articles of a co. otherwise provide,  the members personally present at the meeting should elect one of themselves to be the chairman of the meeting on a show of hands. If a poll is demanded on the election of the chairman, it has to be taken immediately. The importance of the chairman lies in the fact that he is responsible for keeping order and conducting the meeting. He is the proper person to put resolutions to the meeting, court votes, declare result, authenticate the minutes by signature and declare the meeting ended. Duties)He must act at all times bonafide and in the interest of the co. as a whole .ii)He must ensure that the meeting is properly convened and constituted as to proper notice being given, quorum present and the appointment of the chairman is in order. iii)He must ensure that the proceedings at the meeting are properly and regular

 

The  pages must be consecutively  numbered and Minutes should be recorded within 30 days of the meeting.   The minutes have to be written by hand normally on the numbered pages.  Pasting of typed or handwritten papers are not allowed. Every page should be initialled  by the Chairman of the meeting and the last page should have his full signature

 

Section 118 (1): “Every company shall cause minutes of the proceedings of every general meeting of any class of shareholders or creditors, and every resolution passed by postal ballot and every meeting of its Board of Directors or of every committee of the Board, to be prepared and signed in such manner as may be prescribed and kept within 30 days of the conclusion of every such meeting concerned, or passing of resolution by postal ballot in books kept for that purpose with their pages consecutively numbered.

 A minute book shall be maintained for each type of meeting namely

1. General Meetings of the Members including extra-ordinary General Meeting.

2. Board Meeting of the Directors

 3. Meetings of each Committee of the Board

. Meetings of the Creditors Resolutions passed by postal ballot shall be recorded in the minute book of general meetings as if it has been deemed to be passed in the general meeting. Rule 25 of the Companies (Management and Administration) Rules, 2018

1 The minutes of proceedings of each meeting shall be entered in the books maintained for that purpose along with the date of such entry within 30 days of the conclusion of the meeting.

2 In case of every resolution passed by postal ballot, a brief report on the postal ballot conducted including the resolution proposed, the result of the voting thereon and the summary of the scrutinizer’s report shall be entered in the minutes book of general meetings along with the date of such entry within thirty days from the date of passing of resolution.

 3 Each page of every such book shall be INITIALLED            or signed and the last page of the record of proceedings of each meeting or each report in such books shall be dated and signed, by the chairman of the said meeting or the chairman of the next succeeding meeting;

 b. in the case of minutes of proceedings of a general meeting, by the chairman of the same meeting within the aforesaid period of thirty days or in the event of the death or inability of that chairman within that period, by a director duly authorized by the Board for the purpose;

c. In case of every resolution passed by postal ballot, by the chairman of the Board within the aforesaid period of thirty days or in the event of there being no chairman of the Board or the death or inability of that chairman within that period, by a director duly authorized by the Board for the purpose

 4 The minute’s books of the Board and committee meetings shall be preserved permanently and kept in the custody of the company secretary of the company or any director duly authorized by the Board for the purpose and shall be kept in the registered office or such place as Board may decide. “

OTHER IMPORTANT PROCEDURES REGARDING  MINUTES

: 1. The minutes of each meeting shall contain a fair and correct summary of the proceedings thereat.

 2. All appointments made at any of the meetings aforesaid shall be included in the minutes of the meeting.

3. . If Meeting is adjourned, the Minutes shall be entered in respect of the original Meeting as well as the adjourned Meeting

4. . In the case of a meeting of the Board of Directors or of a committee of the Board, the minutes shall also contain—

 (a) the names of the Directors present at the meeting; and

(b) in the case of each resolution passed at the meeting, the names of the Directors, if any, dissenting from, or not concurring with the resolution.

5. The minutes kept in accordance with the provisions of this section shall be evidence of the proceedings recorded therein.

6 . Where the minutes have been kept in accordance with provisions then, until the contrary is proved, the meeting shall be deemed to have been duly called and held, and all proceedings thereat to have duly taken place, and the resolutions passed by postal ballot to have been duly passed and in particular, all appointments of Directors, key managerial personnel, auditors or company secretary in practice, shall be deemed to be valid.

In the case of an One Man Company  No quorum is required as there is only one man who is the only share holder like a sole proprietary firm

 

For any business required to be done/transacted at an AGM or other General meetings like EGM,  by an ordinary or special resolution
it is enough the resolution is communicated by the Member to the Company and entered in the Minutes Book.(in loose leaf binder but page numbering is mandatory.

CHIARAMAN of the Board of Directors usually preside over the meetings Such Chairman is  usually named in  The Articles of Association.  If the Articles does not name a Chairman, the Members may elect any of the Members to be the Chairman of the meeting.  Hence only a Member can the Chairman of the meeting

PROXY

Some members may not be able to attend the Meeting personally.  So, he can appoint a proxy to vote on his behalf in the meetings,  A proxy is not entitled to speak in the meeting on behalf the Member appointing him as proxy.

The proxy is to be appointed by means of an Instrument in writing signed by a Member or his Attorney.  Such proxy is to be deposited atleast 48 hours before the start of the meeting and must be Lodged in the Registered Office of the Company. Section 105

Form of Proxy is available in MGT 11 of Companies Act

What is poll?

All  motions are carried by a vote by the Members -  It can be personally voted or thru the instrumentality of a Proxy appointed by the Share Holder in the prescribed duly signed and dated.

There are three  methods of voting namely

a)    By show of hands

b)    Voting by Poll

c)    Voting by electronic means  (ref sec 108)

If a Member is dissenting or not satisfied with the result of voting, members may demand a poll.  The voting right of every Member is in proportion to his share of the equity share capital.  Preference share holders are not entitled to vote.

The Central Government may prescribe the class or classes of Companies and the manner in which a member may exercise his/her right to vote by electronic means

Annual general meeting

As mentioned supra, every Company is required a hold an Annual General Meeting once a year within 6 months from the date of closure of Accounts of that year.  Usually it is March in India.

One of the essentials for calling for a  meeting is that there should be proper notice in writing and it must give “clear 21 days period from the date of delivery of the notic.  If the notice is sent by post, then 48 hours must be deducted for transit by post.  That is the date of issue of notice and date of the meeting are excluded from these 21 days.

In the case of Nagappa Chettiar vs Madras Race club it was held that deducting 2 days for transit by post reduced the interval to 20 days  and since it was short by one day, the notice was held to be an invalid notice.

The notice convening such meeting contains the following

·         Consideration and adoption of the audited financial statements.

·         Consideration of the Director’s report and auditor’s report.

·         Dividend declaration to shareholders.

·         Appointment of directors to replace the retiring directors.

·         Appointment of auditors and deciding the auditor’s remuneration.

These are known as Ordinary business

 

Apart from the above ordinary business, if any other business to be conducted will be considered  as  special business of the company.

The ordinary business of the company will be passed by an ordinary resolution where the votes cast in favour are more than the votes cast against the resolution.

However, in case of special business transactions, the resolution may be passed as an ordinary resolution or a special resolution, depending on the applicable legal provisions. A special resolution requires at least 75% votes in favour of the resolution.  In the case of special business an explanatory statement highlighting  the business is to be attached to the Notice which shall  contain material facts which would help a member to understand the meaning, scope and impact of the business item and to take prudent decision before voting for such resolution.

The purpose of explanatory statement is, it shall contain material facts which would help a member to understand the meaning, scope and impact of the business item and to take prudent decision before voting for such resolution

An AGM should be conducted during the business hours between 9 a.m. and 6 p.m. only. The meeting can be conducted on any day, which is not a national holiday, including holidays declared by the Central Government. The meeting can be held at any place which is within the limits of the city or town or village in which the registered office is situated.

A government company can also hold its AGM at any other place as the Central Government may approve. An unlisted company can hold an AGM at any place in India after obtaining consent from its members in writing or in electronic mode. In the case of a Section 8 company, the Board decides the date, time and place of the AGM as per the directions given in a general meeting of the company.

DIRECTORS

Every Private Limited Company  shall have minimum 2 Directors and ma

ximum 15 Directors
The first Directors are normally given the Article of Association.

Thereafter Directors are appointed as Additional Directors. The tenure of these Additional Directors will hold Office until the next AGM who may appoint them as regular Directors at their option.

IN CASE OF PUBLIC LIMITED COMPANY.

Section 149(1) of the Companies Act, 2013 requires that every company shall have a minimum number of 3 directors in the case of a public company, two directors in the case of a private company, and one director in the case of a One Person Company. A company can appoint maximum 15 fifteen directors ,

ROTATION OF DIRECTORS

Directors who have been in office the longest shall retire by rotation at the general meeting. However, persons who became directors on the same day shall retire as per mutual agreement otherwise the same shall be determined by lot

In the case of a Public Company, or a private company which is subsidiary of a public limited company atleast  2/3^rd of the total number of directors retire  by rotation and shall be appointed in general meetings.  The remaining 1/3^rd may be appointed as provided in the Articles.

The Directors of a Private Limited Company are not subject to retirement unless otherwise provided in the Articles

Nominee directors

One third of total no of Directors may be appointed by debenture holders or other creditors who have advance loans to the Company.

If the Articles so provide the Directors of a Company may appoint Directors not exceeding 2/3^rd of the total number of Directors as per the concept of proportional representation be it a single transferable vote or by a system of cumulative voting  Such appointment is made once 3 years.

APPOINTMENT OF DIRECTORS BY CENTRAL GOVERNMENT

OPPRESSION OF MAJORITY AND MISMANAGEMENT (Section 397 & 398 of 1956 Act  and section 241-246 of 2013 Act

Section 241-246 of the Companies Act, 2013 lays down the provisions to effectively deal with oppression and mismanagement in a company. Corporate democracy finds its roots in the concept of majority rule

Chapter XVI of the Companies Act, 2013 deals with the prevention of oppression and mismanagement. The majority rule is normally followed in the company and thereby,  normally  do not interfere to protect minority rights. However, prevention of oppression and mismanagement is an exception to the rule.  Once an oppression and mismanagement is proved, notwithstanding any Court Order, the Central Government may appoint a Director/s to participate in the Board meeting to prevail upon the Board to prevent such oppression or mismanagement. Which they consider are prejudicial to the interest of Members complaining or to the Company’s / public interest.

Earlier under the previous act of 1956, this is Covered under Section 396 & 397 provisions of which I have quoted above. Along with Case laws like Shanthi Prasad Jain vs Kalinga Tubes Ltd and NR Murthi vs Industrial Development Corporation of Orissa Ltd relating to East Brewerage and Distilliaries Ltd

A PERSON cannot be appointed as Director for more than 20 Companies (10 in Public Limited &ten in private limited Companies)

 

According to Section 165 of the Companies Act, 2013 no  person can be appointed as Director of more than 20 Companies (private companies, unlimited companies non profit associations are not taken into  account here.  Nevertheless, the maximum no. of public companies in which a person can be appointed as a Director shall not exceed ten.  If a person already holding Directorship of 20 Companies is appointed as Director of in another Company, he should resign from the Directorship of a Company so that his Directorship is limited to 20 Companies within 15 days  Otherwise his new appointment will be null and void besides attracting a fine of Rs 5,000  in each Company in addition to 20 Companies.

Unless Articles otherwise provide, Ever Director is required to hold certain minimum amount of shares to be eligible to be appointed as a Director.   A Director need not be a Shareholder in the normal course.

OPPRESION OF MINORITY AND MISMANAGEMENT

Case law u/s 397 of 1956 Act

 

IN THE HIGH COURT OF ORISSA, CUTTACK

N.R. Murty vs Industrial Development Corporation of Orissa Ltd ... (7 January, 1977)

JUDGMENT JUSTICE RAMGANATH MISHRA (later he was elevated to Supreme Court)

1. This is an application under Sections 397 and 398 of the Companies Act of 1956 (hereinafter referred to as "the Act") by a shareholder of a public limited company--M/s. East Coast Breweries & Distilleries Ltd.--having its registered office at Cuttack.

" 397. (1) 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 oppressive to any member or members (including any one or more of themselves) may apply to the court for an order under this section.......

(2) If, on ,any application under Sub-section (1), the court is of opinion--

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

The court may, with a view to bringing to an end the matters complained of, make such order as it thinks fit.

398. (1) Any members of a company who complain--

(a) 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

(b) that a material change (not being a change brought about by, or in the interests of, any creditors including debenture-holders, or any class of shareholders, of the company) has taken place in the management or control of the company, whether by an alteration in 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 court for an order under this section, provided such members have a right so to apply in virtue of Section 399.

(2) If, on any application under Sub-section (1), the court 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"

25. The power of the court under these two sections can be invoked in different circumstances. So far as Section 397 is concerned, unless facts justify the making of a winding-up order, jurisdiction cannot be exercised. No such facts, however, are necessary to be proved for an application under Section 398. It is enough if the affairs of the company are conducted in a manner prejudicial to the interests of the company or in a manner prejudicial to public interest to vest power in the court to make an order in terms of the statutory provision.

26. In Section 402, the powers of the court on an application made under Section 397 or, under Section 398 of the Act have been enumerated. It has been indicated by the Supreme Court in the case of Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351 (SC) that the powers conferred on the court to grant remedy in an appropriate case appeared to envisage a reasonably wide discretion vested in the court in relation to the order sought by a complainer as the appropriate equitable alternative to a winding-up order. Subject to what is yet to be said on the connected issues, this issue must be disposed of in favour of the petitioner. Issue No. 2.

The issue in question is a Company under the name & style of East Coast Breweries and Distillieries Ltd was incorporated in early 70s in which IDC of Orissa Ltd,. A wholly owned Orissa Government Company  with the object of setting up a brewery plant near Paradeep Port. Was owning 75% of the paid up capital.  The Managing Director was one Mr N K Mahapatra and Chairman was Mr S N Das Mahapatra nominated by IDC by virtue of being the MD of the said IDC.  Like an ex-oficio Chairman  IDC was not happy with the functioning  of the said N K Mahapatra   Among other allegations placed before the Court, one allegation is that he purchased a large number   of beer bottles from Goa but could not dispose them as no marketing efforts was made resulting in huge loss and the Company was not being managed properly. A resolution was passed by the Board of IDC to remove him from the Directorship of the Company u/s 307 & 398 on the ground of his mismanagement under Sec 284.

The said NKM moved the Hoble High Court of Orissa to set aside the Resolution on the ground of oppression of minority and the procedure laid down in Section 284 was not followed..

The Court under the then Justice Ranganath Misra (later promoted as Judge of Supreme Court) accepted his application and ordered his reinstatement with retrospective effect. In January 1976.  IDC did not go appeal.

 

Section 397 in The Companies Act, 1956(old act) reads as under:

397. Application to Company Law Board for relief in cases of oppression.

(1) Any members of a company who complain that the affairs of the company ² are being conducted in a manner prejudicial to public interest or] in a manner oppressive to any member or members (including any one or more of themselves) may apply to the ¹ Company Law board] for an order under this section, provided such members have a right so to apply in virtue of section 399.

(2) If, on any application under sub- section (1), the  Company Law Board] is of opinion-

(a) that 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) that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding- up order on the ground that it was just and equitable that the company should be wound up; the  Company Law Board] may with a view to bringing to an end the matters complained of, make such order as it thinks fit.

In such a situation, the Central Government may appoint Directors on the application of not less than 100 members of the Company or on the application of members holding not less than 1/10^th of the total voting power in the company.

The Directors so  appointed by CG need not hold any qualification shares and is not subject to rotation or retirement Nevertheless , the Central Government may remove such Director and appoint any other person as a Director in his place

PREVENTION AND Oppression of minority and mismanagement

In a Democracy, minority is bound by the decisions of majority   Thu\is General rule applies to a Company too (though not mutadis nutandis)  Generally, the decisions taken by majority share holders will prevail and minority shares holders are bound to accept it.

However majority may act prejudicially to the bonafide interest of minority  share holders some times.. For smooth functioning of the Company u should strike a balance between minority and majority share holders.  The interest of minority should also be protected without foregoing the rights of Majority share holders.

When minorities feel aggrieved by oppression of minority they have the following remedies are available to them:

1)    They can apply to the Court (now NCLT) seeking winding up the Company. This is the last resort

2)    They may apply to the Court for other alterative appropriate relief to do justice to them

3)    They can also approach the Central Government for appropriate relief

 

Quoted below are some leading case laws relating to oppression of minority and mismanagement

·          

·         Kalinga Tubes Ltd. And Ors. vs Shanti Prasad Jain And Ors. on 18 April, 1963

·         Equivalent citations: AIR 1963 Ori 189 in Orissa High Court, Cuttack

 

·         Bench: R Das, G Misra

·         JUDGMENT Misra, J.

Mr Shanthi Prasad Jain and his Associates were holding 3000 equity shares of Rs 100 each. 

The detailed case law and Judgement may be seen in Law Journal

N R MURTHY  VS INDUSTRIAL DEVELOPMENT CORPORATION OF ORISSA

N.R. Murty vs Industrial Development ... on 7 January, 1977

Bench: Justice Ranganath Misra (who later became Supreme Court Judge.)

I have briefly mentioned the above case law and facts of the case.

 

POWERS OF THE DIRECTORS

The powers  of  Directors are  vast since they are the highest authoritative person in the organisation and they are vested with unfettered powers under the Companies Act of 1956 and 2013

Sections 179 and 166 of the Companies Act 2013 prescribes the powers and duties of Directors of a company as

• Exercising power over which the company has the legal authority.
• Taking action on events, the company has legal authority.

The Directors are  ultimately accountable to the Equity Share holders

While using the power, all directors are required  to adhere to some rules and regulations of:

• The Companies Act
• The Articles of Association
• The Memorandum of Association
• Regulations made by the company

Some specific powers of the Board of directors can be exercised only by the Board using a resolution passed at  Board meeting. They are

• To make calls
• To issue debentures.
• To borrow money by means or to make loans.
• To invest the funds of the company.

In some cases, consent of the Government is required by the Board for certain activities:

• As per section 268, provisions for the Board’s appointment or reappointment of managing directors must first be approved by the Government.
• As per section 295, the Board has to take the Government’s consent to choose a managing director for the first time.
• Subject to the Government’s consent, the Board has the option to invest in shares of other companies curtaining to the limits specified in section 372 of the Companies Act, 2013.

 

The powers interalia include

a)    Power of superintendence, control and direction over the Managing Director ad Manager who are the persons who manages the whole or substantially the whole of the affairs of a Company.

b)    It is the duty of the Board to see all the moneys received from the persons towards allotment of shares are deposited in specified bank until shares are allotted failing which the money should be refunded to the  applicants or until the certificate of commencement of business is received

c)    The Board may dispose of the shares which are available or issue fresh shares in order to increase the subscribed capital of a Company after complying with the provisions of Section 81.  This does not apply to private limited Companies.

These powers are not exhaustive in nature and are only illustrative in nature.

THERE ARE SOME POWERS WHICH  CAN BE EXERCISED only  BY THE BOARD

SOME of which have already been mentioned above

These powers inter-alia include

a)    To make calls on share holders in respect of money remaining unpaid on the shares subscribed by them

b)    Buy back of securities

c)    Issue securities including debentures whether in India or outside India

d)    Exercise borrowing powers

e)    Grant loans or give guarantees for loans

f)     To borrow funds to meet the Company’s financial needs

g)    To approve Directors’ report and financial statements to share holders

h)    ‘to develop the business for the growth of company including diversification of business activities

i)     To take over a Company / acquire substantial stake in another Company including controlling interest in such company

j)     ‘Amalgamation, merger / reconstruction

DIRECTORS CANNOT SUBDELEGATE THEIR POWERS

As mentioned in the foregoing paras, Directors are the Agents of the Company.  So they cannot sub-delegate their powers.  By common law, it is known by the maxim called “Delegatus non prtest delegare’ i.e,., delegate cannot  further delegate. But the delegation of functions can be made provided it is authorised by the Act,

However, under certain exigencies, the power of a Director can be delegated to other officers but it is incumbent on such Director to get this ratified by the Board.

The shareholders can successfully bring action against any Director for any manipulations in accounts or falsify the accounts,.  Nevertheless a co-director can delegate some of his powers to another director if so authorised by the articles of association or under exigency circumstances warranting such sub-delegation.

In a leading case “DOVE Vs Cosy, the court held the delegation was valid.  This is however under exceptional cases and not as a matter of routine.

Section 81 of Companies Act states as under:

“ . Further issue of capital.

(1) Where at any time after the expiry of two years from the formation of a company or at any time after the expiry of one year from the allotment of shares in that company made for the first time after its formation, whichever is earlier, it is proposed to increase the subscribed capital of the company by allotment of further shares, then,]

d)    (a) such  further] shares shall be offered to the persons who, at the date of the offer, are holders of the equity shares of the company, in proportion, as nearly as circumstances admit, to the capital paid up on those shares at that date;

e)    (b) the offer aforesaid shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days from the date of the offer within which the offer, if not accepted, will be deemed to have been declined; (c) unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercis- able by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and the notice referred to in clause (b) shall contain a statement of this right;

f)     (d) after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of directors may dispose of them in such manner as they think most beneficial to the company.

The Board must forward the Statutory report to every Member of the Company at least 21 days before the date on which the statutory meeting is held

It must file a certified copy of Report to the ROC

Must make a list of Members together with number of shares held by each Member to be produced at the meeting

THESE PROVISIONS DO NOT APPLY TO A  PRIVATE LIMITED COMPANY

On the requisition of specified number of Members the Board must convene an extraordinary meeting of the Company

The Board has to approve the balance sheet, & profit and loss account before they are signed on behalf  of the Board and submitted to the auditors for their report thereon

If there are qualifications in the Audit report the Directors shall provide clarification to each qualification

The Board has the power to appoint the first Auditor

The Board can also appoint additional Directors if so authorised by the Articles  They can also fill the casual agencies

Under Section 179, duties of the Directors have been spelt out

At the same time, such vast powers are coupled with certain duties and responsibilities and are subject to certain liabilities and responsibilities.

The position of Director of a Private Limited Company or Limited Company or One Person Company comes with certain duties and responsibilities. Many Directors of a Company are unaware of these duties and responsibilities expected of them and hold the position just as a namesake. The  object of  this article is to change that mindset and create awareness about the duties and responsibilities of a Director of a Company. This will in turn help create companies that have a strong and ethical Board of Directors, thereby benefitting all the stakeholders of a company

Duty to act in the best interests of the Company

Directors are in a fiduciary position in relation to the company. So the Director must exercise his/her power for the benefit of the company or in the best interest of the company. A Director must also consider the interests of the company supreme and, in any case, above their personal interest. Therefore, a Director acting honestly but not in the best interests of the company is in breach of duty.

Fiduciary: A fiduciary is a person who holds a legal or ethical relationship of trust. Typically, a fiduciary prudently takes care of money for another person.

Duty NOT to misapply company assets

Directors do not have legal ownership of the company’s assets. They only have effective control of them, and they must use them and employ them for the proper purposes of the company, and in the best interests of the company.

Duty NOT to make secret profits

A Director holds a key position in relation to the company. Therefore, in the course of management of the business, the Director may get confidential and sensitive information concerning the company’s business and affairs, or trade secrets. This privileged information cannot be used by the Director for his/her personal benefit and gain to the detriment of the company.

Duty of confidentiality

Directors would have access to all the relevant information about the operations and financials of a company. However, a Director has a duty to ensure that such information is not, directly or indirectly, divulged. A Director must not disclose or make use of that confidential information for any purpose other than for the benefit of the company.

Duty to NOT permit conflict of interest

A Director of a company has a duty to not enter into any arrangement which will possibly impair the Director’s interest and cause conflict of interest with the Company. A conflict of interest arises when a person is in a position to derive personal benefit from actions or decisions made in their official capacity.

Duty to attend meetings

A Director of a company must make best efforts to attend as many board meetings as circumstances permit. In India, if a Director is absent from three consecutive meetings of the Board, or from all meetings held in three months, whichever is longer, without obtaining leave of absence from the Board, then the Director could lose his/her Directorship in the Company.

Duty  NOT to exceed powers

The Memorandum of Association (MOA) of a Company states what the company is authorized to do. Whereas, the Articles of Association (AOA) of the Company state what powers are given to the Directors of the Company. It is the duty of the Directors to ensure that not only do they keep within the company’s powers but also that hey keep within the powers actually given to them in the Articles of Association.

At the meeting of creditors in a creditors’ voluntary winding up, the Board must cause a full statement of position of the Company’s affairs together with a list of creditors and the amounts of their claims to be laid before the meeting and to appoint one of their members to preside over at the said meeting.

At the voluntary winding up the Board is required to make a declaration of solvency of the Company of the Company verified by an affidavit

The Board of Directors may contribute to the National Defence Fund for the purposes of national defence subject to availability of surplus funds

ALTERATION O ARTICLES

Articles of Association (AOA) of a company CONTAINS the procedures and rules and regulations governing the internal management of a company which has been briefly mentioned above.. It provides the  procedures for executing various matters such as management and issue of share capital, shareholder meetings, appointing directors, managing the accounts of the company, and so on.

Unlike the procedure for alteration of Memorandum, the procedure for alteration of Articles is simple.   The Act provides that every Private Company has the right to amend its articles of association- a power vested on the Board of Directors and through them the Members of the Company.

No provision can prohibit this power for alteration of the Articles

Section 14 of the Companies Act, 2013 contains the provisions for the alteration of the Articles of Association of a company. A company may modify, delete or add any article in the following manner:

·         Meeting of the Board of Directors: The company has to convene a meeting of the Board of Directors. All the directors must be served seven days’ notice of the board meeting. The board has to recommend the proposed alteration to the members. A special resolution, with a 75% majority, has to be passed by the Board to give effect to any alteration of the articles. The votes which are cast in favour of the resolution should be at least three times more than the number of votes if any cast against the resolution.

·         General meeting of the company: The company should call for a general meeting or an extraordinary general meeting (EGM). The company has to give at least 21 days CLEAR  notice for holding the meeting specifying the date, time and place and business to be transacted. An EGM can be called with a shorter notice with the consent of at least 95% of the members entitled to vote. The notice should be sent to all the directors, members and auditor of the company. The meeting should have the prescribed quorum, presence of auditor (leave of absence otherwise), conducted with the passing of a special resolution for the alteration of the AOA.

·         Compliance with Companies Act, 2013 The amendment or the alteration to AOA should conform to the provisions of the Companies Act, 2013. For example, the alteration should not modify the membership or shareholding of the company. The alteration should not increase or alter the liability of any member or shareholder of the company. The articles are procedural, and hence the alteration can be of only the procedural matters contained therein.

·         Compliance with Memorandum of Association: The alteration of the articles should not violate the memorandum of association of the company. The alteration cannot alter the objects of the company (MENTIONED IN THE MEMORANDUM) or the address of the registered office of the company. These matters are dealt with by the Memorandum of Association of the company. The AOA is subordinate to the memorandum of association of the company. The alteration should be in accordance with the powers conferred on the Directors/Members of the Company by the memorandum.

·         Changing the status of the company: The alteration should not have the effect of changing the status of the company. In a case where the alteration has the effect of converting a private company into a public company or a public company into a private company, the same cannot be carried out without the approval of the Central Government or its instrumentality like Regional Director/MCA.

·         Filing compliance with ROC: After the passing of the board resolution, the company has to file Form MGT-14 with the Registrar of Companies for the filing of resolutions and agreements with the Registrar or ROC. The form has to be filed within 30 days of the passing of the board resolution. The form shall be accompanied with such fees as may be prescribed. In a case of delayed filing, the company will be liable to pay additional fees at the time of filing of the form, calculated based on the number of days of delay. The fee is calculated as per The Companies (Registration offices and fees) Rules, 2014.

·         No stamp duty is needed on alteration.

·         Effect of alteration of Articles of Association :The amended Articles of Association comes into effect on the date of passing of the board resolution. The altered articles will have the same effect as the original articles. The alteration is effective only when the procedure laid down in the Companies Act and Memorandum is followed. The changes shall be made in all the copies of the Articles of Association.

 

The AOA of the company should be in the prescribed format as per Table F to J, as may apply to the company. A company has to register its articles at the time of company incorporation..

Printed Copies of the Amended Articles (3 copies) with R O C. Besides a Company shall also keep sufficient printed copies so that they can be given to Banks & FIs whenever required.  The Memo & Articles together with Certificate of registration are like Aadhar card.

These procedures carry with a caveat that

‘1) The alteration should be within the ambit of the Companies Act and not inconsistent with the provisions of Memorandum as it amount  to ultra-vires and naturally void.

2)    if there is a conflict between the proposed amendment to Articles with Memorandum, the Memorandum will over-ride the Articles as Articles is always subordinate to Memorandum which is superior to the Articles

3)    Such alteration should be for the benefit of Company as a whole

4)    It is not supposed to sanction anything which is illegal, immoral or opposed to public policy

5)    The alteration should not seek increase the liability of the existing members to contribute to the share capital unless the share holders agree to such proposal either before or after the alteration is nade

6)    If the proposal seeks to convert a public company into a private co., approval of Central Government is required

7)    There is provision to alter the articles with retrospective effect

 

CORPORATE SOCIAL RESPONSIBILITY (CSR)

The Companies Act, 2013 provides for CSR under section 135. Thus, it is mandatory for the companies covered under section 135 to comply with the CSR provisions in India. Companies are required to spend a minimum of 2% of their net profit over the preceding three years as CSR  Directors’ duty includes compliance with this requirement

The basic objective of the current phase is to maximise the Company’s overall impact on the society and stake holders. Corporate social responsibility policies, practices and programs are being comprehensively integrated by an increasing number of companies throughout their business operations and processes.

This apart, a no of corporates feel that their goodwill and reputation should be improved and protected.

Every Corporate body is therefore required by law to allocate certain amount of their profits should be earmarked to fund this CSR programs. This includes community development , health care, education, protection of environment.   Mostly this is done with the aid, assistance and through the instrumentality of NGOs by using their expertise in devising programs which address wider problems,

The Central Government   Incometax Dept give tax exemptions to a limited extent for encouraging CSR.

The CG also allocate certain amount towards these welfare measures out of taxes collected by them towards Incometax, GST etc.

Section 197(1) specifies the remuneration of Directors according to which the total remuneration payable by a public limited company including Managing  Director whole time directors and manager shall not exceed eleven percenet of the net profit of that Company read with Section 198

Maximum Remuneration to Managerial Personnel

 

A public company can pay managerial remuneration to its directors, including managing director, whole-time director, and its manager in respect of any financial year, up to the maximum limit as prescribed under section 197. The remuneration computed as per section 198 shall not exceed 11% of the net profits for the financial year, except that the remuneration of the directors shall not be deducted from the gross profits.

Provided that the company in general meeting may, authorize the payment of remuneration exceeding 11% of the net profits of the company, subject to the provisions of Schedule V:

 

Anyone MD or WTD or manager	shall not exceed 5% of the net profits of the company
more than one MD or WTD or manager remuneration	shall not exceed 10% of the net profits to all such directors and managers taken together;
directors who are neither MD nor WTD	shall not exceed 1% of the net profits of the company, if there is a managing or whole-time director or manager
directors who are neither MD nor WTD	shall not exceed 3% of the net profits of the company, if there is no managing or whole-time director or manager

 

PART II of Schedule V

 

1.    Remuneration payable by companies having profits: Subject to the provisions of section 197, a company having profits in a financial year may pay remuneration to a managerial person or persons not exceeding the limits specified in such section.

2.    Remuneration payable by companies having no profit or inadequate profit without Central Government approval: Where in any financial year during the currency of tenure of a managerial person, a company has no profits or its profits are inadequate, it may pay remuneration to the managerial person not exceeding, the limits under (A) and (B) given below:-

 

Where the effective capital is	Limit of yearly remuneration payable shall not exceed (Rupees)
1. Negative or less than 5 crores	60 lakhs
2. 5 crores and above but less than 100 crores	84 lakhs
3. 100 crores and above but less than 250 crores	120 lakhs
4. 250 crores and above	120 lakhs plus 0.01% of the effective capital over Rs. 250 crores

Provided that the remuneration over the above limits, may be paid, if the resolution passed by the shareholders, is special.

(B) In the case of a managerial person who is functioning in a professional capacity, if such managerial person is not having any interest in the capital of the company or its holding company or any of its subsidiaries directly or indirectly or through any other statutory structures and not having any, direct or indirect interest or related to the directors or promoters of the company or its holding company or any of its subsidiaries at any time during the last two years before or on or after the date of appointment and possesses graduate-level qualification with expertise and specialized knowledge in the field in which the company operates:

Provided that any employee of a company holding shares of the company not exceeding 0.5% of its paid-up share capital under any scheme formulated for allotment of shares to such employees including Employees Stock Option Plan(ESOP)  or by way of qualification shall be deemed to be a person not having any interest in the capital of the company.

 

 

ISSUE OF SHARES

A prospectus is issued when a Company wants money for its Project or working capital.

For this purpose a Company invites the Public to subscribe for its shares through the means of prospectus.  A person applying for such shares makes an offer to the Company to buy shares.  If the application is found in order, it accepts the offer and if the conditions mentioned in the prospectus are fulfilled, the Company allots the shares within the limits prescribed.  The Company may reject the offer also.

Allotment of shares creates a binding contract between the Company and its share holders. When such allotment is entered in the Allotment Register and the Register of Members, the Share holder becomes a Member of the Company.

WHAT ARE THE CONDITIONS OF ALLOTMENT OF SHARES

1)    A person may apply for any number of shares  in a Company but he will get allotment of shares upto the prescribed limit only   The Board of Directors will allot shares as per the provisions contained in the Act and in the prospectus.  No allotment can be made beyond the Authorised Capital of the Company.

2)    Acceptance of the offer by the Company should be communicated to the offerer by a notice of allotment followed by issue of Share Certificate as per provisions of the Contract Act.3

3)    )Allotment of shares is the prerogative of the Board of Directors..  So a Resolution to this effect needs to be passed by the Board .within a specified period/reasonable period   lest the applicant is not bound to accept it and has a right to ask for refund.

4)    3)The allotment must be absolute and unconditional Otherwise the contract is voidable at the option of the Applicant.

WHAT IS SHARE CERTIFICATE AND ITS SIGNIFICANCE:

1)    A share certificate is a document / certificate issued by a Company under the common seal of a Company specifying the number of shares allotted in favour of a person who has applied for allotment of share

2)    Such share certificate is a primefacie evidence rather conclusive evidence of the title of the shares allotted to him

3)    A share holder can apply for duplicate share certificate if he complies with the following conditions:

a)    He has to prove that he has lost the same or it is destroyed

b)     or it is mutilated or defaced or torn and such mutilated or soiled certificate and is surrendered to the Company

                      

Shareholders should take the following steps after the loss or misplacement of Share Certificate:

• The Shareholder should immediately inform about the lost or misplaced Share Certificate to the Company.
• The communication of the information can be done through a letter to the address of the Company, or an email can be sent to the Company.
• The details of the lost or misplaced Share Certificate like Name, Address, Folio Number, and Share Certificate Number.   

Steps To Be Taken By Company

The Company should take the following steps after loss or misplacement of Share Certificate:

• Once the information is received of the lost or misplaced Share Certificate, the Company should freeze the transfer for at least 30 days to prevent any fraudulent transfer or illegal proceeding of the transfer.

 

What  documents are required for  issue of duplicate share certificate  

The Documents required for the Issue of Duplicate Share Certificate are as follows:

• Prepare an Indemnity Bond Agreement on Non-Judicial Stamp Paper.
• An affidavit is prepared on a Non-Judicial Stamp Paper of Rs.100.
• F.I.R should be filed with the police with full information on the lost Share Certificate. The details required of the Share Certificate are as follows:

1. Name on the Share Certificate
2. Folio Number on Share Certificate
3. Share Certificate Number
4. The Distinctive Number of Shares 

• An advertisement should be published in the Newspaper about the fact of the lost Share Certificate.

 Procedure to be  followed for issue of duplicate share  certificate

The procedure followed for Issue of Duplicate Share Certificate is as follows: An application for the Issue of Duplicate Share Certificate will be made by the Shareholder with the required documents to the Company

 

• The application, when received by the Company, the process for the Issue of Duplicate Share Certificate, can be started.
• The Issue of Duplicate Certificate will be done with the consent of the Board of members of the Company.
• While giving the consent for the Issue of Duplicate Share Certificate, the Board should look into the following things:

1. The fees should be taken as think to be fit by the Board, but the fees should not exceed Rupees 50 per Share certificate.
2. The out of pocket expenses which occurred while investigating the evidence produced by the Shareholder should also be taken into consideration by the Board while Issue of Duplicate Share Certificate by the Company.

• The Board consent once received, the process for the Issue of Duplicate Share Certificate can be started.
• The Company will scrutinize all the documents and will Issue the Share Certificate.
• The Issue of Duplicate Share Certificate should be completed within 4 to 6 weeks.
• The Duplicate Share Certificate will be issued to Listed Company within 45 days from the date of submission of the documents to the Company.
• The Unlisted Company will be issued with the Duplicate Share certificate within 3 months from the date of submission of the documents to the Company.
• Once Issue of the Duplicate Share Certificate is done, entries should be made in the Register of Renewed and Duplicate Share Certificate in Form SH-2.
• The format of SH-2 is prescribed under Companies (Share Capital and Debentures) Rules, 2014.
• The Duplicate Share Certificate should include the following lines “Duplicate issued in lieu of Share Certificate No………” and word “Duplicate” should be printed or stamped in block letters in the Share Certificate.
• The Register should be kept in the registered office of Company, or where Register of members is kept by Company or can be preserved by Company Secretary or any other as authorized by Board of members for the purpose.

It is Important to note

If a Company with intent to defraud issues fraudulently issue a duplicate certificate of shares, the Company is punishable with fine of not less than five times of the face value of the shares involved in the issue of duplicate certificate and upto ten times the face value of such shares or rupees ten crores whichever is higher and every officer who is in default is liable for action u/s 447 of the Act.

The procedure for issue of duplicate share certificate is  big lengthy It is therefore imperative that all the Original Share Certificates should be kept in a safe and secure place

THERE ARE CERTAIN RESTRICTIONS ON ALLOTMENT OF SHARES

 

THERE are two instances on allotment  they are:

a)       When no public order is made and

b)      When public offer is made by way of issue of prospectus or statement in lieu of prospectus

 

a)       When a public company having a share capital does not offer shares or debentures to the public, it need not issue a prospectus.  It should start allotting shares only after filing a statement in lie of prospectus with the Registrar of Companies atleast three days before the first allotment.  Such statement should be signed by all Directors or proposed director.  Failure to meet this requirement, the allotment is deemed to be irregular and every Director who deliberately  or wilfully authorises the contravention, is punishable with fine upto Rs 1,000/-

b)      When public offer of shares or debentures is made first , the following provisions relating to allotment are to be complied with.

 

a)       A copy of the prospectus should be filed with the Registrar of Companies

b)      The prospectus shall indicate the minimum subscription to be raised.  Such minimum subscription of shares should have been received before proceeding with the allotment of shares.  The minimum subscription so received is intended to be used for meeting the initial expenses, repayment of money borrowed by the Company,, initial project expenses, working capital, or any other expenses that may be incurred for the formation of the Company

Conditions precedent to allotment of shares

1)      Amount stated as minimum subscription should have been received

2)      The amount payable on application for such amount should have been received by the Company either in cash or by cheque.

3)      The amount so payable on application on each share should not be less than 5% of nominal/par value  of the shares

4)      Application of premium money should also be received on issue of shares

SECTION 52 (1) of Companies Act 2013 states

 

Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount of the premium received on those shares shall be transferred to a “securities premium account” and the provisions of this Act relating to reduction of share capital of a company shall, except as provided in this section, apply as if the securities premium account were the  paid-up share capital  of the company

5)    The security premium account of the Company utulised by the Company to meet the following expenses

a)    Towards the unissued shares of the Company to the Members of the Company as fully paid bonus shares

b)    Write off preliminary expenses

c)    Write of the expenses of, or the commission paid to brokers or fees to the Ms

Managers of the issue or discount allowed on, any issue of shares or debentures of the Company

d)    Providing for premium payable on redemption of shares or debentures of the Company

e)    Now a Company can purchase its own shares,  Such money can be used for purchase of its own shares or other securities

ISSUE OF SWEAT EQUITY SHARES  (COVERED IN SEC 54)

What is sweat equity ?

 

It means some incentive/bonus issued to the Directors/promoters for the efforts put in by them for formation of the Company and entering into contracts for purchase of the property, incidental expenses like preliminary and preoperative expenses

As per Section 2(88) of the Companies Act, 2013, Sweat Equity Shares are the shares issued by the company to its Director or employee at a discount or for consideration other than cash, for providing know-how or making available like intellectual property rights or value addition

 

1) Notwithstanding anything contained in section 53, a company may issue sweat equity shares of a class of shares already issued, if the following conditions are fulfilled, namely:—

(a) the issue is authorised by a special resolution passed by the company;

(b) the resolution specifies the number of shares, the current market price, consideration, if any, and the class or classes of  directors or employees to whom such equity shares are to be issued;

(c) where the equity shares of the company are listed on a  recognised stock exchange , the sweat equity shares are issued in accordance with the regulations made by the  Securities and Exchange Board in this behalf and if they are not so listed, the sweat equity shares are issued in accordance with such rules as may be prescribed.

(2) The rights, limitations, restrictions and provisions as are for the time being applicable to equity shares shall be applicable to the sweat equity shares issued under this section and the holders of such shares shall rank pari passu with other equity shareholders.

Not Less than one year has, at the date of such issue elapsed since the date on which the Company has commenced its business

 (3) The rights, limitations, restrictions and provisions as are for the time being applicable to equity shares shall be applicable to the sweat equity shares issued under this section and the holders of such shares shall rank pari passu with other equity shareholders.

PREFERENCE SHARES – ISSUE & REDEMPTION

What is preference shares?

Preference shares, also called preferred stocks, enable preference shareholders to receive dividends announced by companies before ordinary shareholders. For instance, if companies decide to pay dividends to their shareholders, preference shareholders are the first to receive dividend payout from the company.

 

Prohibition on issue of shares at a discount

1)    In the normal course a Company should not issue shares at  discount u/s 53

2)    Any shares issued by a Company at a discounted price is void

3)    If a Company issues shares at a discount it is a contravention of the Act and the Company is punishable with fine not less than rs one lakh which may go upto rupees five lakhs and every Officer in default is punishable with imprisonment upto six months or fine of not less than rupees one lakhs which may go upto rupees five laks or both u/s 53 of the Act which reads as under:

Section 53 states  as Under:

Prohibition on issue of shares at discount.

 

 “53. (1) Except as provided in section 54, a company shall not issue shares at a discount.

(2) Any share issued by a company at a [discount] shall be void.

 

[(2A) Notwithstanding anything contained in sub-sections (1) and (2), a company may issue shares at a discount to its creditors when its debt is converted into shares in pursuance of any statutory resolution plan or debt restructuring scheme in accordance with any guidelines or directions or regulations specified by the Reserve Bank of India under the Reserve Bank of India Act, 1934 (2 of 1934) or the Banking (Regulation) Act, 1949 (10 of 1949).]

[(3) Where any company fails to comply with the provisions of this section, such company and every officer who is in default shall be liable to a penalty which may extend to an amount equal to the amount raised through the issue of shares at a discount or five lakh rupees, whichever is less, and the company shall also be liable to refund all monies received with interest at the rate of twelve per cent per annum from the date of issue of such shares to the persons to whom such shares have been issued.

 

 

 

ISSUE AND REDEMPTION OF PREFERENCE SHARES (u/s55)

1)    No Company limited by shares shall issue preference shares which are irredeemable

2)    A Company limited by shares may issue preference shares which are liable to be redeemed not exceeding 20 years from the date of their issue.  However a   company may issue preference shares exceeding 20 years for infrastructure projects.

3)    Clog on redemption.  However when  we speaks  about clog on redemption in very general sense it means, anything which obstructs the right of the mortgagor to redeem his property is a clog and such clog makes the agreement void. This is commonly known by the name of clog on redemption under the provisions of Transfer of Property Act

ISSUE OF BONUS SHARES

U/S 63 OF the Act

1)A Company may issue fully paid up bonus shares to its members out of

(1)  Its free reserves

(2)  Securities premium account

(3)  Capital redemption reserve

 

 

 

2)    A Company can capitalise its profits or reserves for issuing fully paid up bonus shares if it is

a)    Authorised by its articles

b)   It has been authorised in the general meeting of the Company

c)    It has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it

d)   It has not defaulted in respect of payment of statutory dues of its employees like PF, ESI. Gratuity, bonus, etc

e)    Partly paid up shares, if any outstanding on the date of allotment are made fully paid up

 

3)    Bonus shares should not be issued in lieu of dividend

 

IRREGULAR ALLOTMEBT OF SHARES

Allotment of shares are voidable and irregular in nature

1)    If shares are allotted without receiving the minimum subscription in full

 

2)    In the absence / in the case of non-filing a prospectus a statement in lieu

Of prospectus should have been filed atleast  3 days prior to the first allotment .  failure to do so will entail in allotment becoming irregular and voidable at the option of the applicant.

 

We have discussed about issue of Equity and Preference Share.

DEBENTURES

 

Debentures under Companies Act, 2013

Every Company needs funds for their Business and future plans including new Projects and projects in progress.  It is not that easy to raise funds particularly new Companies and Start-ups.  Generally a Company requires huge loans for doing its business.  Such loan is split into several units and for each unit carrying a nominal value, an instrument/document is made acknowledging the loan.  Such document is otherwise called debenture.

If you approach a commercial Bank for a loan or Private Equity providers, it is difficult to comply with their requirements. The Director/Promoters will have to look for alternative sources for funds to meet its expenses.

The term ‘debenture’ is an abstract term and difficult to define precisely.   However, a broad definition is given in Section 2(30) of the Companies Act 2013. As per this Section  “debenture” includes debenture stock, bonds, or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not;

(a) the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934; and

(b) such other instrument, as may be prescribed by the Central Government in consultation with the Reserve Bank of India, issued by a company, shall not be treated as debenture;
From the above definition, we conclude that debentures are a type of bond or loan which a company takes against security or in any other form

Debentures under Companies Act is an acknowledgment of the loan received by the company equal to the nominal value of the debenture.  N. R . Pollock observes “the right meaning of debentures is the indebtedness and nothing but indebtedness .

 

From the above definition, you can conclude that Debentures under the Companies Act, 2013 are a type of bond or loan which a company takes against security or in any other form

A person holding debenture or debentures is called a “debenture holder”. A debenture holder is the creditor of the Company.  Under Insolvency and Bankruptcy Code 2016, a debenture holder an financial creditor.

Is a debenture holder a financial creditor under IBC?

In fact, the subscriber to the OCDs was an investor in the company and not a financial creditor. However, the NCLAT held that section 5(8)(c) makes it clear that a debenture comes within the meaning of financial debt. Thus, in the present case, the amounts owed on maturity of debentures would be a financial debt.

A debenture is a document issued under the seal of the company. It is an acknowledgment of the loan received by the company equal to the nominal value of the debenture. It bears the date of redemption and rate and mode of payment of interest.

A Debenture is a unit of the loan amount as explained supra.. When a company intends to raise the loan amount from the public it issues debentures. Issuing debentures means the issue of a certificate by the company under its seal which is an acknowledgment of debt taken by the company. The procedure of issue of debentures by a company is similar to that of the issue of shares. A Prospectus is issued, applications are invited, and letters of allotment are issued. On rejection of applications, application money is refunded. In the case of partial allotment, excess application money may be adjusted towards subsequent calls.

 

What are the salient features of debentures

A debenture is a debt tool used by a company that supports long-term loans. Here, the fund is a borrowed capital, which makes the holder of debenture a creditor of the business. The debentures are redeemable and unredeemable, freely transferable with a fixed interest rate. It is unsecured and sustained only by the issuer’s credibility.

• A debenture is a loan document that acknowledges a debt
• The debentures are the part of the borrowed fund capital
• It is in the form of a certificate issued under the seal of the company called a debenture deed
• The interest is payable irrespective of the profit level, which means that even when the company is at loss, it has to pay the interest
• Debentures can be secured against the assets of the company or maybe unsecured.
• Debentures are generally freely transferable by the debenture holder.
• Debenture holder does not have the right to vote in the General meetings  of shareholders, but they may have separate meetings to vote.
• The debenture holders are eligible to get a fixed rate of interest.
• In the event of liquefying the company, the debenture holder get preference in terms of repaying the borrowed amount

What are the types of Debentures

The debenture holders do not any do not hold any voting rights.

The debentures are of the following types:

Types of Debentures based on Security

Secured Debentures

Secured debentures are the kind of debentures where a charge is created over   the properties or assets of the enterprise for any payment. The charge might be either floating or fixed.

The fixed charge is established against those assets which come under the enterprise’s possession for the purpose to use in activities not meant for sale whereas floating charge comprises all assets excluding those accredited to the secured creditors. A fixed charge is established on a particular asset whereas a floating charge is on the general assets of the enterprise.

Unsecured Debentures

This type of debentures does not have a particular charge on the assets of the enterprise. However, a floating charge may be established on these debentures by default. Usually, these types of debentures are not circulated.

Tenure based debentures

Redeemable Debentures

These debentures are those debentures that are due on the cessation of the time frame either in a lump-sum or in installments during the lifetime of the enterprise. Debentures can be reclaimed either at a premium or at part.

Irredeemable Debentures

These debentures are also called Perpetual Debentures as the company doesn’t give any attempt for the repayment of money acquired or borrowed by circulating such debentures. These debentures are repayable on the closing up of an enterprise or the expiry (cessation) of a long period.

 

Convertible Debentures

Debentures that are changeable to equity shares or in any other security either at the choice of the enterprise or the debenture holders are called convertible debentures. These debentures are either entirely convertible or partly changeable.

Non-Convertible Debentures

The debentures which can’t be changed into shares or in other securities are called Non-Convertible Debentures. Most debentures circulated by enterprises fall in this class.

Types of Debentures based Coupon Rate

Specific Coupon Rate Debentures

Specific Coupon Rate Debentures Debenture are circulated with a specified  rate of interest, and it is known as the “coupon rate.”

Zero-Coupon Rate Debentures

These debentures don’t normally carry a particular rate of interest. To restore the investors, such types of debentures are circulated at a considerable discount and the difference between the nominal value and the circulated price is treated as the amount of interest associated with the duration of the debentures.

 

Registered Debentures

These debentures are such debentures within which all details comprising addresses, names, and particulars of holding of the debenture holders are filed in a register kept by the enterprise. Such debentures can be moved only by performing a normal transfer deed.

Bearer Debentures

These debentures are debentures that can be transferred by way of delivery and the company does not keep any record of the debenture holders Interest on debentures is paid to a person who produces the interest coupon attached to such debentures

Debentures for cash

Debentures are usually normally  issued for raising funds for the company as mentioned in the foregoing paragraphs . They are mainly issued for cash. The Debentures can be issued either at par, at discount, or at a premium

Debentures can also be used as collateral security as an additional security for any loan or Letter of Credit by Bankers.

 

Redeemable debenture

Redeemable debentures are debentures for specific amount and for a specific period

Bearer Debentures

Such debentures do not need registration which can be transferred mere delivery.   This is intended to avoid unnecessary delay and inconvenience to the holder of the instrument.  The holder of such debentures is entitled to get the charge

 

What is irredeemable debenture / perpetual debentures?

Irredeemable Debentures are those debentures which may not be redeemed during the life of a Company. They can only be paid off in the event of winding up of the Company. The holder of such debenture will enjoy interest on these debentures throughout the life of the company.

In other words, if time is not fixed within which the Company is bound to repay the loan amount, then such a debenture  is called perpetual debenture or irredeemable debenture.  In such a case, debenture holder cannot demand payment provided the Company pays the interest regularly and when it is a going concern.

The Company can pay back the money at any time as may be decided by the Company

Debentures are normally payable only on liquidation of the Company

REGISTERED DEBENTURES

SECURED debentures are those where a charge is created over a Company’s property – either a floating charge or fixed charge.

UNSECURED DEBANTURES

In such cases no charge  is created over the assets of the Company.

The only option available for the debenture holder to stake his claim is TO SUE THE Company .for recovery of the debt.

CONVERTIBLE DEBENTURES

A Company gives an option to the holders to convert them into preference or equity shares at agreed rate of exchange after certain period.  When debentures are converted to preference or equity shares, the holders become members of the company

In other words, .a convertible debenture is a type of long-term debt issued by a company that can be converted into shares of equity stock after a specified period. Convertible debentures are usually unsecured bonds or loans, often with no underlying collateral backing up the debt.

LET US HOW UNDERSTAND THE RIGHTS & REMEDIES OF DEBENTURE HOLDERS

1) Any holder of debentures of a company is entitled, on request and on payment of such fee as may be prescribed, to be provided with a copy of any trust deed for securing the debentures.

(2) If default is made in complying with this section, a contravention of these Regulations is committed by every officer of the company who is in default is liable to pay penalty apart from payment of principal and interest

(3) A person who commits a contravention of this section is liable to a level 2 fine.  A LEVEL 2 FINE IS Rs. 500

(4) In the case of any such default the Court may direct that the copy required be sent to the person requiring it.

(5) He may sue on behalf of himself and all other debenture holders to get their payment  If several debenture holders sue separately to get their dues, the Court may consolidate their claims into one

(6) He may even appoint a Receiver if he has the power to apply to the Court for the same.  Once a Receiver is appointed, the assets of the Company become charged in favour of the debenture holders.

(7) He has the right to sell the property through a trustee if such power is conferred in the debentures

(8) He may even apply to the Court for forfeiture of the Company’s right to the debentures.

(9) if a Company is declared as Insolvent and the security is insufficient to cover the debenture amount with interest he can get the security valued and prove his balance. Otherwise he can surrender his security and prove for the whole amount of debt

DOCTRINE OF INDOOR MANAGEMENT

The Memorandum and Articles of Association on registration/incorporation of the Company are public documents and are in public domain.  An investor/creditor/supplier  on the basis of this public document repose confidence on the Company and invest in the Company.  Therefore any alteration in such document will act as constructive notice to third parties with the Company. But if alteration is made in any other document, then third parties will not be affected by the irregularity in the internal management.

This is known as doctrine of indoor management,  Thus the doctrine of indoor management is a restriction to the rule of Constructive Notice.

Case Law relating to Doctrine of Indoor Management

 

The doctrine started  from the popular and well known  case of “ Royal British Bank V Turquand”:(1856) 6 E&B 327.

 

The Directors of a Company by virtue of deed of settlement were authorised to borrow money with prior resolution of the Company in a General Body meeting subject to fulfilment of certain norms and conditions.  The resolution was passed without observing these formalities/preliminaries .  Therefore, the powers of the Directors to borrow loans  were declared as “ultra vires’ .    The Company explained that it was not liable for repayment of loan. The Court held that third parties were not bound to see whether all the preliminaries have been gone through properly as it is the indoor management of the Company.

 

In above  case the Articles of  a Company accommodate the getting of cash on bonds, which requires a special resolution to be passed in the General Meeting. The management obtained the credit yet neglected to pass the resolution. The reimbursement on the credit defaulted, and the organisation was expected to take responsibility. The investors wouldn’t acknowledge the case without even a trace of the resolution. They held, the organisation will be obligated since the individual managing the organisation is qualified to accept that there has been essential compliance with respect to the internal administration.

The standard was additionally embraced by the House of Lords in Mahony V, East Holyford Mining Co. [1875] LR 7 HL 869. 6. For this situation, the Articles of the organisation state that the cheque will be endorsed by two Directors and countersigned by the Secretary. It later became exposed that neither the Chiefs nor the Secretary who marked the cheque was selected appropriately. Held, the individual getting such a cheque will be qualified for the sum since the appointment of directors is a piece of the internal administration of the organisation, and an individual managing the organisation isn’t needed to enquire about it.

The above view held on account of the House of Lords in Mahony V East Holyford Mining Co. is upheld by Section 176 of the Companies Act, 2013, which expresses that the imperfections in the arrangement of the chief or directors will not discredit the demonstrations or acts done.

The doctrine gives the outsiders who go into an agreement with the organisation ensured against any abnormalities in the inside method of the organisation. The outsiders can’t discover interior abnormalities that happen in an organisation, consequently, the organisation will be responsible for any misfortune endured by them because of these anomalies”

The doctrine of constructive notice ensures the organisation is against the claim of outsiders while the convention of indoor administration secures the outsiders against the organisation’s methods.

HERE IS AN IMPORTANT ISSUE TO BE STUDIED IN THE DOCTRINE OF INDOOR MANAMENT

 Secretary of a Company or a Director of a Company forged the signature of Directors and issued Share Certificate to a Member of the Company.  Whether such share certificate is valid in law and is binding on the Company.

Here, since the internal procedure of the Company is not in open to public inspection or perusal, the public cannot be expected to know such internal proceedings and hence they are protected against the internal proceedings of the Company.

In this connection the rule laid down in ROYAL BRITISH BANK Vs TURQUAND. Nevertheless such rule is not applicable to cases of fraud or forgery namely if an Officer of the Company forges the signature or marks of any other authorised officer, then the Company is not liable for such forgedacts of the Officer.

This view was held in Ruben Vs Great Fingall ltd where the Court held that the doctrine of Indoor Management would not apply to forgery and so the Company was not liable.  The learned judge observed “the doctrine applies to all irregularities which otherwise affect the genuine transactions but not forgery

HOWEVER THERE ARE CERTAIN EXCEPTIONS TO THIS DOCTRINE

1)According to the exceptions to the doctrine of indoor management, a transaction involving forgery is null and void. Since the document issued to Xyz is null and void, the claim made by him is not valid. Thus, he is not entitled to any relief 2) when third parties have the actual knowledge  of the irregularity, this doctrine will not help.   When one Director transfers or advances loans to the other director who has the knowledge of irregularity the Company is not liable,

2) Suspicion of Irregularity

In case any person dealing with the company is suspicious about the circumstances revolving around a contract, then he shall enquire into it. If he fails to enquire, he cannot rely on this rule.

In the case of Anand Bihari Lal V Dinshaw & Co, (1946) 48 BOMLR 293, the plaintiff accepted a transfer of property from the accountant. The Court held that the plaintiff should have acquired a copy of the Power of Attorney to confirm the authority of the accountant. Thus, the transfer was considered void.

 

3 ) If any Officer of the Company forges the signature or marks of any other authorised officer, the Company cannot be held liable for such forgered acts of the Officer.

3)    If the Officers act beyond the powers conferred on them, it is an ultravires act and hence the Company is not responsible

4)    Ignorance of Articles.  As mentioned supra, the Article of Association is a public document and is always available to the public as it is in public domain.

So ignorance of the contents of the Articles is not an excuse or is of no defence to the Doctrine of Indoor Management and the Company cannot be held liable,

We will now come to filing of forms

 

WHAT  ARE THE FORMS/RETURNS TO BE FILED UMDER COMPANIES ACT 2023

Name of the E-form	Purpose of the E-form
Form ADT-1	Auditor appointment
Form AOC-4 and Form AOC-4 CFS ( for Consolidated Financial Statements).	For filing the Annual Accounts.
Form MGT-7	For filing the Annual Return
Form CRA-4 Form CRA 4 Form E 1   Form DIR-12 Form MGT-14        Form INC-23   E form INC-28	For filing the Cost Audit Reports ·         Rule 15: The company shall within thirty days from the date of receipt of notice of resignation from a director, intimate the Registrar in and post the information on its website, if any. Cost Audit Report by Companies   Application and declaration for incorporation of a company      return containing the particulars of appointment of director or key managerial personnel and changes therein, shall be filed with the Registrar   Resolution to change the registered Office to be filed with Regional Director for approval to shift the registered office from the jurisdiction of one ROC to another ROC within the State     Resolution to change the registered office. The company should file to the Regional Director for approval to shift its registered office from the jurisdiction of one ROC to another ROC within the STATE The applicant must complete along with the registrar for the order registration passed by the Regional Director within 30 days after receiving a certified copy of the order confirming the change of registered office. Document confirming the location of the registered office

       

     

AS 14. F	As per Companies Act 1956
Form E 1	Application and declaration for incorporation of a company :

                                                             

: