CLT SYLLABUS FOR MIDTERM EXAM

01. Salient features of a Company

02. Kinds of Companies
03. Contents of MOA (Clauses)
04. Contents of AOA.
05. MOA Vs. AOA
06. Incorporation of a Company
07. Doctrine of Ultra Vires,
08. Doctrine of Constructive Notice & Doctrine of Indoor Management.
09. Doctrine of Corporate Veil
10. Types of shares
11. Types of share Capital
12. Equity vs. Preference shares
13. Shares Vs. Debentures
14. Prospectus – Types
15. Prospectus – Contents
16. Legal requirements regarding issue of Prospectus
17. Misstatements in the Prospectus – Civil and Criminal Liability
18. Types of Directors
19. Appointment of directors,
20. Resignation of Directors
21. Powers of directors
22. Annual General meetings
23. Extraordinary General meetings
24. Board Meetings
25. Requisites of a valid meeting
26. Kinds of Resolutions
27. Oppression and Mismanagement
28. Winding up of a company
 01. COMPANY AND ITS FEATURES

A company is a voluntary association of persons formed for some common purpose with capital divisible
into parts known as shares.
Justice Lindlay, defines company “as an association of many persons who contribute money or money’s worth
to a common stock and employ it in some trade or business and who share the profits arising there from”
According to Companies Act a company means a company formed and registered under companies act. The
salient features of a company are as follows
1. Voluntary Association
A company is voluntary association of persons who have come together for a common object which
generally is to earn profit.
The activities of this association are governed by the law and are limited by its memorandum of
association
2. Incorporated Association:
A company comes into existence on incorporation or registration under the companies act. Minimum
number of persons required for the purpose of incorporation is seven in case of a public company and
two in case of a private company.
3. Separate Legal Entity:
On incorporation company gets personality which is separate and distinct from those of its members.
Company is an artificial person created by law.
4. Separate Property:
The company can own, enjoy and dispose off its property in its own name.
5. Legal Restrictions:
The formation, working and winding up of a company are strictly governed by laws, rules and
regulations
6. Perpetual Succession:
Unlike a person a company never dies. Its existence is not affected in any way by the death or
insolvency of any shareholder. Members may come and members may go , but the company continues
its operations until it is wound up.
7. Common Seal:
As a company is an artificial person it cannot sign its name on a contract. So it function with the help of
seal. All contract entered into by the members will be under the common seal of the company.
8. Share Capital:
A company mobilizes its capital by selling its shares. Those persons who buy these shares become its
share holders and thereby become members in it
9. Limited Liability:
In case of limited companies liability of members will be limited to the amount unpaid on the shares.
10. Transferability of Shares:
Members can freely transfer and sell their shares .The right to transfer share is a statutory right of
members.
11. Ownership & Management
The owners of a company are its share holders.
The affairs of the company are managed by their representatives known as Directors
 02. KINDS OF COMPANIES:

A. Classification on the basis of liability

1. Companies with limited liability

(a) Companies limited by guarantee [Sec.2(21)]- where the liability of the members of a company
is limited to a fixed amount which the members undertake to contribute to the assets of the
company in the event of its being wound up, the company is called a company limited b
guarantee.

(b) Companies limited by shares [Sec.2(22)]- where the liability of the members of a company is
limited to the amount unpaid on the shares, such a company is known as a company limited by
shares
2. Unlimited companies [Sec.2(92)] - A company without limited liability is known as an unlimited
company. In case of such a company, every member is liable for the debts of the company.

B. Classification on the basis of number of members

1. Private company [Sec.2 (68)] - A private company is normally what the Americans call a ‘close
corporation’. According to Sec.2 (68), a private company means a company which has a minimum
paid-up capital as may be prescribed by CG, and by its Articles:

a. Restricts the right to transfer its shares, if any. The restriction is meant to preserve the private
character of the company.
b. Except in case of one person company, limits the number of its members to 200 not including its
employee-members. Joint shareholders shall be counted as one member only.
c. Prohibits any invitation to the public to subscribe for any securities. In other words, a private
company shall not make a public issue of its securities.

A Private company may be:

a. One Person company [Sec. 2(62)]: It means a company which has only one person as a
member. All the provisions of a private company is also applicable to this company.
b. Small Company [Sec. 2(85)]: A company shall be a small company only if it’s paid-up capital
does not exceed Rs.50 lakhs or such higher amount as may be prescribed (not being more than
Rs. 5 crores) and its turnover does not exceeds Rs. 2 crores or such higher amount as may be
prescribed (not being more than Rs. 20 crores)

c. Other that “One Person Company” and “Small Company”.

2. Public company [Sec. 2(71)] - A public company means a company which –

a. is not a private company

b. is a private company which is a subsidiary of a company which is not a private company.
c. has a minimum paid-up capital as may be prescribed by CG.
C. Classification on the basis of control
1. Holding company-Section 2(46) - A company is known as the holding company of another
company if is has control over that other company.
2. Subsidiary company-Section 2(87) - A company is known as a subsidiary of another company
when control is exercised by the latter(called holding company) over the former called a
subsidiary company.
A company is deemed to be a subsidiary of another company when:
a. where the company controls the composition of Board of Directors of the subsidiary company
b. where the company holds more than one- half the nominal value of equity share capital of
another company
c. where a company is subsidiary of another company, which is itself is subsidiary of the
controlling company.

D. Classification on the basis of ownership

1. Foreign company [Sec 2(42)]- it means any company incorporated outside India which has an
established place of business in India.
2. Government company [Sec 2(45)] - A Government company means any company in which not
less than 51 % of the paid-up share capital is held by-
a. the Central government
b. any State government or governments
c. partly by the Central government and partly by one or more State governments.
3. Non-government company: It means a company other than Government company.

E. Classification on the basis of listing of shares on the stock exchange

1. Listed Company [Sec. 2(52)]: It means a company which has any of its securities listed on any
recognized stock exchange.
2. Unlisted Company: It means a company other than listed company
 03. MEMORANDUM OF ASSOCIATION
Meaning:
The Memorandum of association is the constitution of the company. Everything that the company does must be
in conformity with this document. Exceeding what this document provides for would amount to an ultra vires
act. Every shareholder is advised to read this important document while investing in the company.

Contents:
1. Name clause
2. Registered Office Clause
3. Liability Clause
4. Capital Clause
5. Objects Clause

1. Name Clause:
Every company needs a name. Such name must not be one that is undesirable by the government or one that
infringes trade mark of another company. The Trade Mark Act 1999 governs this procedure of granting a name
to the company. The company can use the name permanently once it acquires central government approval. The
name should be one that gives correct information about the company, incorrect usage of the world
international, intercontinental etc for companies that have only a local operation are not allowed. A private
company must affix the word private limited after its name and a public limited company must affix the word
limited after its name. A company can alter its name if its wishes too, but it would need central government
approval.

2. Registered Office Clause:

Every company must have a registered office in any Indian state. A company can have only one registered
office. A registered office is the place where the company keeps all its books of accounts and the shareholders
register along with other statutory documents. Any shareholder can access a registered office to inspect the
books of accounts of the company and other documents. Failure to maintain such statutory books in the
registered office would attract a fine or a penalty to the officer who's duty it was to do so. A registered office
can be shifted from one state to another state only if its beneficial to the share holders and if it would improve
the locale of the company. Prior permission of the company law board would be needed to this along with
special resolution passed by the share holders.

3. Liability Clause:

The liability clause would specify the kinds of liability the shareholders and the members would have. Liability
can be limited or unlimited. Under limited liability the shareholder is expected to pay up only the amount of the
share he has invested in . Under unlimited liability the share holder can be held liable much more than the value
of the share he has invested in ,moreover unlimited liability can lead to personal liability too.
4. Capital Clause:

This clause specifies the authorized capital of the business. . A private company needs a minimum capital of
one lac rupees and a public limited company needs a minimum capital of five lac rupees. The capital of the
company cannot go below the minimum level but it can exceed it depending on whats provided in the articles of
association.
The memorandum of association must be subscribed by at least 7 persons in case of public limited and 2
persons in case of private limited companies.

5. Objects Clause
This clause contains the objects of the company. That is the purpose for which such company is formed. The
object clause shows to us the kinds of business the company is entitled to carry on. The company can carry on
business that are ancillary to the ones mentioned in the objects clause but it cannot carry on one which is not
germane to the original objects. The objects clause helps the creditors to know as to what their money is being
used for and gives a better sense of security. The objects can be altered by passing a special resolution, the
conformity of the company law board is not a necessity here.
 04. ARTICLES OF ASSOCIATION

The articles of association of a company are its bye-laws or rules and regulations that govern the management
of its internal affairs and the conduct of its business. The articles play a very important role in the affairs of a
company. It deals with the rights of the members of the company inter se. They are subordinate to and are
controlled by the memorandum of association. Articles of association is subordinate to the Memorandum of
Association
CONTENTS OF ARTICLES
The articles set out the rules and regulations framed by the company for its own working. The articles should
contain generally the following matters:
1. Exclusion wholly or in part of Table F.
2. Adoption of preliminary contracts.
3. Number and value of shares.
4. Issue of preference shares.
5. Allotment of shares.
6. Calls on shares.
7. Lien on shares.
8. Transfer and transmission of shares.
9. Nomination.
10. Forfeiture of shares.
11. Alteration of capital.
12. Buy back.
13. Share certificates.
14. Dematerialization.
15. Conversion of shares into stock.
16. Voting rights and proxies.
17. Meetings and rules regarding committees.
18. Directors, their appointment and delegations of powers.
19. Nominee directors.
20. Issue of Debentures and stocks.
21. Audit committee.
22. Managing director, Whole-time director, Manager, Secretary.
23. Additional directors.
24. Seal.
25. Remuneration of directors.
26. General meetings.
27. Directors meetings.
28. Borrowing powers.
29. Dividends and reserves.
30. Accounts and audit.
31. Winding up.
32. Indemnity.
33. Capitalization of reserves.
 05. MORANDUM OF ASSOCIATION VS ARTICLES OF ASSOCIATION
BASIS FOR ARTICLES OF
MEMORANDUM OF ASSOCIATION
COMPARISON ASSOCIATION

Meaning Memorandum of Association is a document Articles of Association is a

that contains all the fundamental information document containing all the rules
which are required for the incorporation of and regulations that governs the
the company. company.

Defined in Section 2 (56) Section 2 (5)

Type of Information Powers and objects of the company. Rules of the company.
contained

Status It is subordinate to the Companies Act. It is subordinate to the

memorandum.

Retrospective Effect The memorandum of association of the The articles of association can be
company cannot be amended retrospectively. amended retrospectively.

Major contents A memorandum must contain six clauses. The articles can be drafted as per
the choice of the company.

Obligatory Yes, for all companies. A public company limited by

shares can adopt Table A in place
of articles.

Compulsory filing at Required Not required at all.

the time of
Registration

Alteration Alteration can be done, after passing Special Alteration can be done in the
Resolution (SR) in Annual General Meeting Articles by passing Special
(AGM) and previous approval of Central Resolution (SR) at Annual
Government (CG) or Company Law Board General Meeting (AGM)
(CLB) is required.

Relation Defines the relation between company and Regulates the relationship
outsider. between company and its
members and also between the
members inter se.

Acts done beyond the Absolutely void Can be ratified by shareholders.

scope
 06. INCORPORATION OF COMPANY

Moving from the Companies Act 1956 to the Companies Act 2013 therefore all the provisions become changed
with new Act, 2013. Due to new act many amendments were introduce by Central Government from time to
time by Notification, Amendments etc. There were so many amendments have been made in last approximately
4 years in relation to Incorporation of New Company.

STEP-I: Apply for Name Approval:

(A) Login on MCA Website
Applicants have to fill the information online. (This form can’t be download)
.
(B) Details required to be mentioned in online form:
 Entity type
 CIN (Corporate Identification Number and it has to be entered only when an existing
company wishes to change its name and is using RUN to reserve a new name)
 Proposed name (Auto Check Facility)
 Comment (Mention Objects of the proposed Company and any other relevant information
Like Trade Mark etc.)
 Choose File (Any attachment) (C) Choose File:
 This option is available to upload the PDF documents. If applicant want to attach any file,
can be upload at this option.
(D) Submission of Form on MCA Website:
After completion of above steps user shall submit the Form with MCA website.
(E) Payment of Fees:
There is no option of pay later challan in RUN. Applicant has to pay fees immediately after
submission of form. After payment challan shall be generated.
(F) Validity of Reserved Name:
Reserved name shall be valid for 20 days from the date of approval of Name.
Reserved name shall be valid for 60 days in case of allotment of name for existing Company
(Change of Name).

STEP-II: Preparation of Documents for Incorporation of Company:

After approval of name or for Incorporation of Company applicant have to prepare the following below
mentioned Documents;
(I) INC-9 Affidavit / declaration by first subscriber(s) and director(s) (on duly authorized Stamp
Papers).
(II) DIR-2 declaration from first Directors along with Copy of Proof of Identity and residential
address.
(III) NOC from the owner of the property.
(IV) Proof of Office address (Conveyance/ Lease deed/ Rent Agreement etc. along with rent
receipts);
(V) Copy of the utility bills (not older than two months)
 (VI) In case of subscribers/ Director does not have a DIN, it is mandatory to attach: Proof of
identity and residential address of the subscribers
(VII) All the Subscribers should have Digital Signature.

STEP – III: Fill the Information in Form:

Once all the above mentioned documents/ information are available. Applicant has to fill the information in
the e-form “Spice” INC-32.

Features of SPICe (inc-32) Form:

(a) Maximum details of subscribers are SEVEN (7). In case of more subscribers, physically signed
MOA & AOA shall be attaching in the Form.
(b) Maximum details of directors are TWENTY (20).
(c) Maximum THREE (3) directors are allowed for filing application of allotment of DIN while
incorporating a Company.
(d) Person can apply the Name also in this form.
(e) By affixation of DSC of the subscriber on the INC-33 (e-moa) date of signing will be appear
automatically by the form.
(f) Applying for PAN / TAN will be compulsory for all fresh incorporation applications filed in the
new version of the SPICe form.
(g) In case of companies incorporated, with effect from the 26th day of January, 2018, with a
nominal capital of less than or equal to rupees ten lakhs or in respect of companies not having a
share capital whose number of members as stated in the articles of association does not exceed
twenty, fee on INC-32 (SPICe) shall not be applicable

STEP-IV: Preparation of MOA & AOA:

After proper filing of SPICE form applicant has to download the e-form INC-33 (MOA) and IN-34
(AOA) form the MCA site. After downloading of form fill all the information in the forms as per
requirement of Table A to J of Schedule I.
After completely filing of the form affix DSC of all the subscribers and professional on subscriber sheet
of the MOA & AOA.
STEP-V: Fill details of PAN & TAN:
It is mandatory to mention the details of PAN & TAN in the Incorporation Form INC-32. Link to find
out of Area Code to file PAN & TAN are given in Help Kit of SPICE Form.

STEP-VI: Submission of INC-32,33,34 on MCA-:

Once all the 3 forms ready with the applicant, upload all three document as Linked form on MCA
website and make the payment of the same.
STEP -VII: Certificate of Incorporation-:
Incorporation certificate shall be generating with CIN, PAN & TAN.
 07. DOCTRINE OF ULTRAVIRES

The object clause of the Memorandum of the company contains the object for which the company is
formed. An act of the company must not be beyond the objects clause, otherwise it will be ultra vires and,
therefore, void and cannot be ratified even if all the members wish to ratify it. This is called the doctrine of ultra
vires.
The doctrine of Ultra Vires has been firmly established in the case of Ashtray Railway Carriage and Iron
Company Ltd v. Riche. Thus the expression ultra vires means an act beyond the powers. Here the expression
ultra vires is used to indicate an act of the company which is beyond the powers conferred on the company by
the objects clause of its memorandum. An ultra vires act is void and cannot be ratified even if all the directors
wish to ratify it. An ultra vires transaction cannot be ratified by all the shareholders, even if they wish it to be
ratified.

CASE LAW
Ashbury Railway Carriage and Iron Company (Limited) v Hector Riche, (1874-75) L.R. 7 H.L. 653.

The objects of this company, as stated in the Memorandum of Association, were to supply and sell the
materials required to construct railways, but not to undertake their construction or finance for the same. The
contract here was to construct a railway. That was contrary to the memorandum of association; what was done
by the directors in entering into that contract was therefore in direct contravention of the provisions of the
Company Act, 1862
It was held that this contract, being of a nature not included in the Memorandum of Association, was ultra vires
not only of the directors but of the whole company, so that even the subsequent assent of the whole body of
shareholders would have no power to ratify it.

EXCEPTIONS TO THE DOCTRINE OF ULTRA VIRES

There are, however, certain exceptions to this doctrine, which are as follows:
1. An act, which is intra vires the company but outside the authority of the directors may be ratified by the
shareholders in proper form.20
2. An act which is intra vires the company but done in an irregular manner, may be validated by the
consent of the shareholders. The law, however, does not require that the consent of all the shareholders
should be obtained at the same place and in the same meeting.
3. If the company has acquired any property through an investment, which is ultra vires, the company’s
right over such a property shall still be secured.
4. While applying doctrine of ultra vires, the effects which are incidental or consequential to the act shall
not be invalid unless they are expressly prohibited by the Company’s Act.
5. There are certain acts under the company law, which though not expressly stated in the memorandum, are
deemed impliedly within the authority of the company and therefore they are not deemed ultra vires. For
example, a business company can raise its capital by borrowing.
6. If an act of the company is ultra vires the articles of association, the company can alter its articles in
order to validate the act.
 08. DOCTRINE OF CONSTRUCTIVE NOTICE & DOCTRINE OF INDOOR MANAGEMENT

Doctrine of Constructive Notice

Section 399 allows any person to electronically inspect make a record, or get a copy/extracts of any document
of any company which the Registrar maintains. There is a fee applicable for the same. The documents include
the certificate of incorporation of the company.
The Memorandum and Articles of Association are public documents. Before any person deals with a company
he must inspect its documents and establish conformity with the provisions. However, even if a person fails to
read them, the law assumes that he is aware of the contents of the documents. Such an implied or presumed
notice is called Constructive Notice.
In simpler words, if a person enters into a contract which is beyond the powers of a company, then he has no
right under the said contract against the company. The Memorandum of Association defines the powers of the
company. Also, if the contract is beyond the authority of the directors as defined in the Articles, the person has
no rights.
Doctrine of Indoor Management
Section 399 of the Companies Act, 2013, specifies the rules and regulations governing the inspection,
production, and evidence of documents with the Registrar. In this article, we will look at the doctrine of
constructive notice, the doctrine of indoor management, and exceptions to the indoor management rule.
The doctrine of indoor management is an exception to the earlier doctrine of constructive notice. It is important
to note that the doctrine of constructive notice does not allow outsiders to have notice of the internal affairs of
the company.
Hence, if an act is authorized by the Memorandum or Articles of Association, then the outsider can assume that
all detailed formalities are observed in doing the act. This is the Doctrine of Indoor Management or the
Turquand Rule. This is based on the landmark case between The Royal British Bank and Turquand. In simple
words, the doctrine of indoor management means that a company’s indoor affairs are the company’s problem.
Therefore, this rule of indoor management is important to people dealing with a company through its directors
or other persons. They can assume that the members of the company are performing their acts within the scope
of their apparent authority. Hence, if an act which is valid under the Articles, is done in a particular manner,
then the outsider dealing with the company can assume that the director/other officers have worked within their
authority.
Exceptions to the Doctrine of Indoor Management
The Turquand rule or the law of indoor management is not applicable to the following cases:
The outsider has actual or constructive knowledge of an irregularity
In such cases, the rule of indoor management does not offer protection to the outsider dealing with the said
company.
The outsider behaves negligently
The rule of Indoor management does not protect a person dealing with a company if he does not initiate an
inquiry despite suspecting an irregularity. Further, this rule does not offer protection if the circumstances
surrounding the contract are suspicious. For example, the outsider should get suspicious if an officer purports
to act in a manner outside the scope of his authority.
Forgery
The doctrine of indoor management is applicable to irregularities that affect a transaction except for forgery. In
case of a forgery, the transaction is deemed null and void.
 09. DOCTRINE OF CORPORATE VEIL

Doctrine of Corporate Veil

The separate legal entity of a company is one of its most unique features. In this article, we will look at the famous
Corporate Veil Theory and try to understand the scenarios under which lifting or piercing the corporate veil is
possible.

What is the Doctrine of Corporate Veil?

The Corporate Veil Theory is a legal concept which separates the identity of the company from its members.
Hence, the members are shielded from the liabilities arising out of the company’s actions.
Therefore, if the company incurs debts or contravenes any laws, then the members are not liable for those errors
and enjoy corporate insulation. In simpler words, the shareholders are protected from the acts of the company.
This brings us to some important questions:
1. If lifting or piercing the corporate veil possible?
2. If yes, then what are the scenarios and the rules that govern piercing the corporate veil?

Piercing the Corporate Veil means looking beyond the company as a legal person. Or, disregarding the corporate
identity and paying regard to the humans instead. In certain cases, the Courts ignore the company and concern
themselves directly with the members or managers of the company. This is called piercing the corporate veil.
Usually, Courts choose this option when the case involves a question of control rather than ownership.

Piercing the Corporate Veil

Scenarios under which the Courts consider piercing or lifting the corporate veil are as below,
1) To Determine the Character of the Company
2) To Protect Revenue or Tax
3) If trying to avoid a Legal Obligation
4) Forming Subsidiaries to act as Agents
5) A company formed for fraud or improper conduct or to defeat the law
 10.TYPES OF SHARES

EQUITY SHARE AND ITS TYPES

EQUITY SHARES
Equity shares are also known as ordinary shares. They are the form of fractional or part ownership in which the
shareholder, as a fractional owner, takes the maximum business risk. The holders of Equity shares are
members of the company and have voting rights. Equity shares are the vital source for raising long-term
capital.
Equity shares represent the ownership of a company and capital raised by the issue of such shares is known as
ownership capital or owner’s funds. They are the foundation for the creation of a company.
Equity shareholders are paid on the basis of earnings of the company and do not get a fixed dividend. They are
referred to as ‘residual owners’. They receive what is left after all other claims on the company’s income and
assets have been settled. Through their right to vote, these shareholders have a right to participate in the
management of the company.
Now let’s understand what motivates the company to raise them:

Merits of Equity Shares

 Equity capital is the foundation of the capital of a company. It stands last in the list of claims and it provides
a cushion for creditors.
 Equity capital provides creditworthiness to the company and confidence to prospective loan providers.
 Investors who are willing to take a bigger risk for higher returns prefer equity shares.
 There is no burden on the company, as payment of dividend to the equity shareholders is not compulsory.
 Equity issue raises funds without creating any charge on the assets of the company.
 Voting rights of equity shareholders make them have democratic control over the management of the
company
Now let’s understand what limits the company from raising them:
Limitations of Equity Shares
 Investors who prefer steady income may not prefer equity shares.
 The cost of equity shares is higher than the cost of raising funds through other sources.
 The issue of additional equity shares dilutes the voting power and earnings of existing equity shareholders.
 Many formalities and procedural delays are involved and they are time-consuming processes

PREFERENCE SHARES
Preference shares are the shares which promise the holder a fixed dividend, whose payment takes priority over
that of ordinary share dividends. Capital raised by the issue of preference shares is called preference share
capital.
The preference shareholders are in superior position over equity shareholders in two ways: first, receiving a
fixed rate of dividend, out of the profits of the company, before any dividend is declared for equity
shareholder and second, receiving their capital after the claims of the company’s creditors have been settled, at
the time of liquidation. In short, the preference shareholders have a preferential claim over dividend and
repayment of capital as compared to equity shareholders.
 Dividends are payable only at the discretion of the directors and only out of profit after tax, to that extent, these
resemble equity shares. Preference resemble debentures as both bear fixed rate of return to the holder. Thus,
preference shares have some characteristics of both equity shares and debentures.
Preference shareholders generally do not enjoy any voting rights. In certain cases, holders of preference shares
may claim voting rights if the dividends are not paid for two years or more on cumulative preference shares and
three years or more on non-cumulative preference shares. But what are cumulative and non-cumulative
preference shares? They are classified below:
Types of Preference Shares
1. Cumulative and Non-Cumulative:
The preference shares that have the right to collect unpaid dividends in the future years, in case the same is
not paid during a year are known as cumulative preference shares. Non-cumulative shares, the dividend is
not accumulated if it is not paid in a particular year.
2. Participating and Non-Participating:
Preference shares which have a right to participate in the extra surplus of a company shares which after
dividend at a certain rate has been paid on equity shares are called participating preference shares. These
non-participating preference shares do not enjoy such rights of participation in the profits of the company.
3. Convertible and Non-Convertible:
Preference shares that can be converted into equity shares within a specified period of time are known as
convertible preference shares. Non-convertible shares are such that cannot be converted into equity shares.
intervals say six months or one year.
Now let’s understand what motivates the company to raise them:
Merits of Preference Shares
 It does not affect the control of equity shareholders over the management as preference shareholders don’t
have voting rights.
 Payment of fixed rate of dividend to preference shares may make a company to announce higher rates of
dividend for the equity shareholders in good times.
 Preference shares have reasonably steady income in the form of fixed rate of return and safety of the
investment.
 Also, they are suitable for those investors who want a fixed rate of return with low risk.
 Preference shareholders have a preferential right of repayment over equity shareholders in the event of
liquidation or bankruptcy of a company.
 Preference capital does not create any sort of charge against the assets of a company.
Limitations of Preference Shares
 The rate of dividend on preference shares is generally higher than the rate of interest on debentures.
 The Dividend on these shares is to be paid only when the company earns a profit, there is no assured return
for the investors.
 Preference shares are not preferred by those investors who are willing to take a risk and are interested in
higher returns;
 Preference capital dilutes the claims of equity shareholders over assets of the company.
 The dividend paid is not deductible from profits as an expense. Thus, there is no tax saving as in the case of
interest on loans.
 11. SHARE CAPITAL
There are various class of shares (equity) dependent on various things. Let’s discuss them.

AUTHORIZED SHARE CAPITAL

 It is the maximum amount of capital which a company can issue. The companies can increase it from
time to time. For that we need to comply with some formalities also have to pay some fees to the legal
bodies.
ISSUED SHARE CAPITAL
 It is that part of authorized capital which the company offers to the investors.
SUBSCRIBED SHARE CAPITAL
 It is that part of issued capital which an investor accepts and agrees upon.
PAID UP CAPITAL
 It is the part of the subscribed capital, which the investors pay. Normally, all companies accept complete
money in one shot and therefore issued, subscribed and paid capital becomes one and the same.
Conceptually, paid-up capital is the amount of money which a company actually invests in the business.
 Apart from the above, there are other types of shares (equity) also.
RIGHTS SHARES
 These shares are those which a company issues to it’s existing shareholders. The company issues such
kind of shares in order to protect the ownership rights of the existing investors.
BONUS SHARES
 When the company issues shares to its shareholdersin the form of a dividend, we shall call them bonus
shares. There are various advantages and disadvantages of bonus shareslike dividend, capital gain,
limited liability, high risk, fluctuation in the market, etc.

SWEAT EQUITY SHARE

 Sweat equity shares are issued to exceptional employees or directors of the company for their
exceptional job in terms of providing know-how or intellectual property rights to the company.
 12. EQUITY VS. PREFERENCE SHARES

BASIS FOR
EQUITY SHARES PREFERENCE SHARES
COMPARISON

Meaning Equity shares are the Preference shares are the shares that
ordinary shares of the carry preferential rights on the
company representing the matters of payment of dividend and
part ownership of the repayment of capital.
shareholder in the
company.

Payment of The dividend is paid after Priority in payment of dividend over

dividend the payment of all equity shareholders.
liabilities.

Repayment of In the event of winding up In the event of winding up of the

capital of the company, equity company, preference shares are repaid
shares are repaid at the before equity shares.
end.

Rate of dividend Fluctuating Fixed

Redemption No Yes

Voting rights Equity shares carry voting Normally, preference shares do not
rights. carry voting rights. However, in
special circumstances, they get voting
rights.

Convertibility Equity shares can never be Preference shares can be converted

converted. into equity shares.

Arrears of Equity shareholders have Preference shareholders generally get

Dividend no rights to get arrears of the arrears of dividend along with the
the dividend for the present year's dividend, if not paid in
previous years. the last previous year, except in the
case of non-cumulative preference
shares.
 13. SHARES VS. DEBENTURES
BASIS FOR
SHARES DEBENTURES
COMPARISON

Meaning The shares are the owned funds The debentures are the
of the company. borrowed funds of the
company.

What is it? Shares represent the capital of Debentures represent the debt
the company. of the company.

Holder The holder of shares is known as The holder of debentures is

shareholder. known as debenture holder.

Status of Holders Owners Creditors

Form of Return Shareholders get the dividend. Debenture holders get the
interest.

Payment of return Dividend can be paid to Interest can be paid to

shareholders only out of profits. debenture holders even if
there is no profit.

Allowable Dividend is an appropriation of Interest is a business expense

deduction profit and so it is not allowed as and so it is allowed as
deduction. deduction from profit.

Security for No Yes

payment

Voting Rights The holders of shares have The holders of debentures do

voting rights. not have any voting rights.

Conversion Shares can never be converted Debentures can be converted

into debentures. into shares.

Repayment in the Shares are repaid after the Debentures get priority over
event of winding up payment of all the liabilities. shares, and so they are repaid
before shares.

Quantum Dividend on shares is an Interest on debentures is a

appropriation of profit. charge against profit.

Trust Deed No trust deed is executed in case When the debentures are
of shares. issued to the public, trust deed
must be executed.
 14. PROSPECTUS - TYPES
“A prospectus means any documents described or issued as a prospectus and includes any notices, circular,
advertisement, or other documents inviting deposit from the public or documents inviting offer from the public
for the subscription of shares or debentures in a company.” A prospectus also includes shelf prospectus and red
herring prospectus. A prospectus is not merely an advertisement. [Section 2(70)]
Thus, a prospectus is a just an invitation to offer securities to the public and not an offer in the
contractual sense.
A public listed company who intends to offer shares or debentures can issue prospectus.

There are four types of a prospectus, which are as under:

RED HERRING PROSPECTUS [Section 32]
The word Red Herring means to distract or mislead someone from an important issue. When a company decides
to attract investors to invest in their company, they use a prospectus named Red Herring Prospectus.
It is basically a prospectus which is used in the public issue to attract different investors. In this prospectus,
the price and quantum are not mentioned or disclosed.
Here price means the actual price to be issued per share in the IPO and quantummeans the quantity or the total
number of shares to be offered in the IPO.
ABRIDGED PROSPECTUS [Section 2(1)]
Abridged Prospectus is the actual summary of a prospectus. It contains all the salient features of a prospectus.
The original prospectus that a company files to the exchange regulator is too large. The abridged prospectus
contains the summary of the same prospectus.
Reading the entire prospectus may be too much time consuming for an investor. Instead, they go through the
abridged prospectus, which gives them the basic idea about the company.
The abridged prospectus contains all the important and materialistic information. No company will issue the
share buying from without the abridged prospectus attached to it so that investors can take a well-informed
decision.
SHELF PROSPECTUS [Section 31]
Shelf means ‘life’ or ‘validity’ of a prospectus. Only selected companies bring their shelf prospectus. All
companies are not eligible for designing a shelf prospectus. Normally finance-based companies are eligible for
bringing out their shelf prospectus.
Shelf prospectus has a validity of maximum of one year. There are various companies which frequently raise
funds (ex. banks) for issuing loans. Every time they raise funds from the public, they require approval from the
Stock Exchange and ROC.
Every time a company wishes to raise funds, they must file their prospectus to the regulators for approval. If a
company submits their Shelf prospectus, they don’t have to file the prospectus again and again while raising
funds for that particular year.
A company filing a Shelf prospectus has to file an Information memorandum which must contain:
 If any changes made by the company after the previous offer security.
 Any new charges created if any
 Any new material or facts created
After the validity period is over, the company has to submit another prospectus which will be valid for another
one year.
DEEMED PROSPECTUS [Section 25(1)]
Deemed means to presume something. When a company agrees to allot shares to an issuing house (which is a
different company) which they will later sell to the public, then the document by which offer is made is deemed
to be a prospectus.
The document by which the issuing house offers share to the public is said to be deemed prospectus.
Any one condition from the following two conditions should be fulfilled:
 The issuing house should issue the shares to the public 6 months after the agreement with the company
whose shares are to be issued.
 The issuing house shouldn’t give the share price to the company until they bring it to the public.
 15- CONTENTS OF A PROSPECTUS:
1. Address of the registered office of the company.
2. Name and address of company secretary, auditors, bankers, underwriters etc.
3. Dates of the opening and closing of the issue.
4. Declaration about the issue of allotment letters and refunds within the prescribed time.
5. A statement by the board of directors about the separate bank account where all monies received out of
shares issued are to be transferred.
6. Details about underwriting of the issue.
7. Consent of directors, auditors, bankers to the issue, expert’s opinion if any.
8. The authority for the issue and the details of the resolution passed therefore.
9. Procedure and time schedule for allotment and issue of securities.
10. Capital structure of the company.
11. Main objects and present business of the company and its location.
12. Main object of public offer and terms of the present issue.
13. Minimum subscription, amount payable by way of premium, issue of shares otherwise than on cash.
14. Details of directors including their appointment and remuneration.
15. Disclosure about sources of promoter’s contribution.
16. Particulars relation to management perception of risk factors specific to the project, gestation period of
the project, extent of progress made in the project and deadlines for completion of the project.
 16- LEGAL REQUIREMENT REGARDING ISSUE OF PROSPECTUS:
(Sec. 26 of the Companies Act, 2013)
The Companies Act has defined some legal requirements about the issue and registration of a prospectus. The
issue of the prospectus would be deemed to be legal only if the requirements are met.
1. Issue after the incorporation: As a rule, the prospectus of a company can only be issued after its
incorporation. A prospectus issued by, or on behalf of a company, or in relation to an intended company,
shall be dated, and that date shall be taken as the date of publication of the prospectus.

2. Registration of prospectus: it is mandatory to get the prospectus registered with the Registrar of Companies
before it is issued to the public. The procedure of getting the prospectus registered is as under:
A. A copy of the prospectus, duly signed by every person who is named therein as a director or a
proposed director of the company must be filed with Registrar of Companies before the prospectus is
issued to the public.
B. The following document must be attached thereto:
i) Consent to the issue of the prospectus required under any person as an expert confirming his
written consent to the issue thereof, and that he has not withdrawn his consent as aforesaid
appears in the prospectus.
ii) Copies of all contracts entered into with respect to the appointment of the managing director,
directors and other officers of the company must also be filed with Registrar.
iii) If the auditor or accountant of the company has made any adjustments in the company’s account,
the said adjustments and the reasons thereof must be filed with the documents.
iv) There must be a copy of the application which is to be filled for the issue of the company’s
shares and debentures attached with the prospectus.
v) The prospectus must have the written consent of all the persons who have been named as
auditors, solicitors, bankers, brokers, etc.
C. Every prospectus must have, on the face of it, a statement that:
i) A copy of the prospectus has been delivered to the Registrar for registration.
ii) Specifies that any documents required to be endorsed by this section have been delivered to the
Registrar.
D. A copy of the prospectus must be filed with the Registrar of Companies.
E. According to the Section 26, no prospectus shall be issued more than ninety days after the date on
which a copy thereof is delivered for registration.
If a prospectus issued in contravention of the above –stated provisions, then the company and every
person who knows a party to the issue of the prospectus shall be punishable with a fine.

17- MISSTATEMENTS IN THE PROSPECTUS

Misleading Prospectus or Mis-statement in prospectus:

A prospectus is said to be misleading or untrue in two following cases:
1) A statement included in a prospectus shall be deemed to be untrue, if the statement is misleading in the
form and context in which it is included.
2) Omission from prospectus of any matter to mislead the investors

Contravention of Section 26 of the Companies Act, 2013

 If a prospectus is issued in contravention of the provisions of this section, then the company shall be
punishable with a fine, not less than fifty thousand rupees which may extend to Three Lakhs Rupees,
and
 Every person who is party to the issue of the prospectus shall be punishable with imprisonment for a
term which may to three years or with a fine, not less than Fifty Thousand Rupees which may
extend to Three Lakhs Rupees, or with Both.
 CRIMINAL LIABILITY FOR MIS-STATEMENT IN PROSPECTUS (SECTION 34):

Where a prospectus, issued, circulated or distributed:

1. Includes any statement which is untrue or misleading in form or context in which it is included; or
2. Where any inclusion or omission of any matter is likely to mislead;
Every person who authorizes the issue of such prospectus shall be liable under section 447 i.e. FRAUD.

PUNISHMENT:
Imprisonment for a term which may not be less than six months, but which may extend to TEN years;
OR
A fine not less than the amount involved in fraud but it may extend to three times the amount of
fraud; OR with BOTH.

Defenses available in this section are:

1. Person shall prove that statement or omission was immaterial;
2. Person has reasonable ground to believe and did believe that statement was true; or
3. Person has reasonable ground to believe and did believe that the inclusion or omission was necessary.

Where a prospectus is issued which includes any statement which is untrue or misleading in form or context or
any matter is likely to mislead the investor, then every person who authorizes the issue of prospectus shall be

CIVIL LIABILITY FOR MIS-STATEMENTS IN PROSPECTUS (SECTION 35):

Where a person has subscribed for securities of a company acting upon any misleading statement, inclusion or
omission and has sustained any loss or damage as its consequence, the company and every person, related with
the issue of the prospectus, which includes the following persons shall be liable to pay compensation to effected
person.
1. Director at the time of the issue of prospectus;
2. Named as director or as proposed director with his consent;
3. Promoter of the company;
4. Person who has authorized the issue of the prospectus; and
5. Expert;

This civil liability shall be in addition to the criminal liability under section 36. Where it is proved that a
prospectus has been issued with intent to defraud the applicants for the securities of a company or any other
person or for any fraudulent purpose, every person shall be personally responsible, without any limitation of
liability, for all or any of the losses or damages that may have been incurred by any person who subscribed to
the securities on the basis of such prospectus.

Defenses under this section are:

1. he has withdrawn his consent or never give his consent;
2. the prospectus was issued without his knowledge or consent and when he become aware, gave a reasonable
public notice that prospectus was issued without his knowledge or consent

Conclusion
As seen above, a prospectus is a mandatory document for limited companies to commence their business, but its
complicated procedure delays the operation of any business, therefore a number of organizations hesitate to
issue prospectus to the general public for subscription of share capital & debentures.
 18. TYPES OF DIRECTORS

3.3. Types of Directors

Director means a person appointed to the Board of a Company. The different types of directors in a company
are discussed here below.

3.3.1. Resident director

A Director, who resides in India during the preceeding financial year, for a period not less than 182 days is
called a Resident director. Every company shall have at least one resident director.

3.3.2 Women director

Every listed company and every other public company having paid up share capital of Rs 100 crores and above
or turnover of Rs 300 crores and above shall have at least one women director. This stipulation as per section
149 of the Act shall be complied with in 6 months from the date of incorporation of the company. Any
intermittent vacancy shall be filled with in 3 months or before the ensuing Board meeting whichever is later.

3.3.3 Small share Holder’s director :

A small share holder is one who holds shares with a nominal value of not more than Rs 20000/- or such other
sum as may be prescribed from time to time. A listed company shall appoint one director representing the small
share holders, on requisition of not less than 1000 small share holders or 1/10th of the total number of such
shareholders whichever is less. The tenure of such director shall not be more than 3 consecutive years and there
after they are not eligible for reappointment.

3.3.4 Additional Director

Additional Directors are appointed by the Board of Directors. They hold the office until the next general
meeting or the last date on which the annual general meeting is to be held whichever is earlier. A person, who
failed to get appointed in the general meeting, shall not be appointed as an alternate Director.

3.3.5 Alternate Director

Alternate Director is appointed by the Board if permitted by the articles of the company or by a resolution
passed in the general meeting. An alternate director is appointed in the vacancy created due to the absence of a
director in the company for a period of more than 3 months from India. The alternate director would hold the
office until the director in whose place is appointed returns back to India or until the term of his office
whichever is earlier.
A person appointed as an alternate director shall not be a director or alternate director in the same company as
on the date of appointment. No person can be appointed as an alternate director in the place of an Independent
director, unless the person proposed to be appointed as alternate director is qualified to be appointed as an
Independent director.
3.3.6. Casual Director
The Board of Director may appoint a person as Casual Director in the vacancy created on account of vacation of
office by an existing director before his term. Such appointment shall be approved by members in the
immediate next general meeting. The Casual Director would hold the office until the remaining term of the
director who vacated the office.

3.3.7 Nominee director:

Nominee director is a person who is permitted to be nominated by the parties interested in the company as per
the provisions of law in force. He is appointed to the board of a company to represent the interests of Financial
Institutions, Government and others

3.3.8. Shadow Director: Section 2(59) defines the term officer. Officer includes any Director. Manager or
Key Managerial personnel or any person in accordance with whose directions or instructions the Board of
directors or any one or more of the directors is / are accustomed to act.
Thus a person, though not being on the board is able to influence the decisions of the board is called shadow
director

3.3.9 Executive Director: The Key Managerial Personnel of a company include Managing Director and the
Whole Time Directors. [Section 2 (51)]. As per section 2 (34) of the act, Director, means a director appointed to
the Board of a Company. Whole time Director includes a director in the whole time employment of the
company [Section 2(94)].
Managing Director is a director who by virtue of, the articles of a company or an agreement with the company,
or a resolution passed in its general meeting or by its board of directors, is entrusted with substantial powers of
management of the affairs of the company by whatever name he is called [2 (54)]
Thus a director who is a part of the board and as well the management of the company is called Executive
Director.

3.3.10 Non-Executive Director: A director who is neither a Whole time Director nor Managing director is
called a non-executive director.

3.3.11 Independent Director:

The Independent director is a person of integrity having experience and expertise in the relevant field. He is
neither Promoter nor Managing / Whole Time / Nominee Director of the company or its Holding /Subsidiary
/Associate Company. He either in his personal capacity or official capacity is not related to the company.
Neither he nor his relatives in his / their personal or official capacity have any pecuniary relationship with the
company or its Holding / Subsidiary / Associate companies, exceeding prescribed limits specified in the Act.
A Public Company having paid up share capital of Rs 10 crores and more; or turnover of Rs 100 crores and
above; or aggregate outstanding loans, debentures and deposits exceeding Rs 50 crores shall have at least two
independent directors. The number of independent directors in the board shall not be less than 1/3 rd of the total
number of directors. While calculating the 1/3rd number every fraction shall be rounded off to one.
 19. APPOINTMENT OF DIRECTORS.

3.4. Appointment of Directors.

The procedure for appointment of directors is mentioned in section 152 of the act and appointment and
Qualifications of Directors Rules 2014
3.4.1 The procedure for appointment of Directors in a company
1. The first directors of a company would the subscribers to its memorandum of association, unless
provided otherwise by the articles of association. They are deemed as the first directors until the
directors are duly appointed.
2. In case of One Person Company, the individual member would continue to be the first director of the
company, until the directors are duly appointed.
3. Every director shall be appointed by the company in general meeting
4. No person shall be appointed as a director, unless he has been allotted Director Identification Number
(DIN) or such other prescribed number.
5. Every person proposed to be appointed as a director shall furnish the following in the general
meeting.
i. DIN / such other prescribed number
ii. A declaration that he is not disqualified to become a director under this act.
6. The Articles of Association provides for the procedure of appointment of directors in a company. The
company may adopt the principle of proportional representation, where by not less than 2/3rd of the
total number of directors of a company are appointed once in three years.
7. The person appointed as director shall give consent to hold the office of director in the company.
Such consent letter shall be filed with the Registrar of Companies within 30 days of such
appointment.

8. At the first annual general meeting of a public limited company, (held next after the date of general
meeting at which the first directors are appointed) and at every subsequent annual general meeting
1/3rd of such rotational directors are liable to retire by rotation
9. The appointment of independent director shall be approved by the company in the general meeting.
The notice for general meeting shall contain the justification in choosing the person for appointment
as independent director.

3.4.2 Right of persons other than retiring directors to stand for directorship
A person, who is not a retiring director, but otherwise eligible for appointment as a director in the
general meeting shall adhere to the following procedure
1) The candidate shall lodge an application at the registered office of the company, at least 14 days
prior to the commencement of the general meeting. person any
2) Alternately, the candidature of a person can also be proposed by some other member.
3) An amount of Rs 100000/- or such other higher amount fixed shall be deposited.
4) The requirement of deposit of amount is not applicable in the following cases.
i. In case of appointment of an Independent director.
ii. Where a director is recommended by “The Nomination and Remuneration Committee”,
where such committee is constituted. In its absence, such recommendation can be made by
“The Board of Directors”
 5) The company shall inform the candidature of a person for the office of director as per the
prescribed procedure.
6) The deposit amount is refundable , if the person proposed,
i. Is elected as a director.
ii. Gets 25% of total valid votes cast on such resolution

3.4.3 Director Identification Number (DIN)

 DIN is a 8 digit unique identity number, which has lifelong validity.
 It is person specific .If a person resigns one company and joins another company as a director, the
same DIN can be used
 Every person intending to be appointed as a director in a company shall apply for allotment of DIN
to Central Government (Ministry of Corporate Affairs).
 If the application is found to be in order, the competent authority would allot DIN within 30 days of
application.
 Whenever a return / application / information, related to a company is to be submitted by a director,
the DIN is required to be mentioned by him under his signature.
 A person, having a DIN shall not apply for a second one.
 A person, within 30 days from the date of receipt of the DIN, shall inform the same to the company
/companies in which he is a director.
 If a person contravenes the provisions of the act, and applies for additional DIN or fails to
communicate his DIN to the companies in which he is a director, within 30 days of its receipt, is
punishable with imprisonment up to 6 months or a fine up to Rs 50000/-. Thereafter if the
contravention continues beyond the first day, a further fine of Rs 500/- per day is levied.
 Every company, within 15 days, from the date of receipt of information, shall furnish the details of
DINs of all its directors to Registrar / competent authority. Failing which, the company and the
every officer of the company in default is punishable with a fine ranging from Rs 25000/.- to Rs
100000/-

3.4.4 Number of Directorships

 A person shall not hold office as a director, including any alternate directorship, in more than
Twenty (20) companies (other than dormant companies), of which directorship in public companies
shall not exceed Ten (10). The term public companies for this purpose include private companies
which are holding or subsidiary companies of the public company.
 The members of a company may reduce the captioned limits by passing a special resolution.
 A person holding directorship in more than 20 companies , within one year from the date of
commencement of the Act ,
a) Shall choose the companies up to the permitted limit, in which he would like hold the office
as director and inform them, under intimation to the Registrar having jurisdiction in respect of
each of such company.
b) Shall resign his office in the remaining companies.
 If any person holds office of directorship in contravention of the provisions of the act, is punishable
with a fine which may range from Rs 5000/- to Rs 25000/- per day after the first, during which the
contravention continues.
3.5. Disqualifications for appointment of a Director.( section. 164)
The following persons are not eligible to be appointed as directors of a company
1) A person declared to be of unsound mind by the competent court of law.
2) An undischarged insolvent.
3) A person, whose application is pending before a court, for adjudicating him as an insolvent
4) A person, who has been convicted by a court of any offence, and sentenced imprisonment for a
period of
a) Not less than 6 months, and a period of 5 years has not lapsed from the date of expiry of
such sentence.
b) Seven years or more
5) The person has been convicted for an offence u/s188 dealing with the related party transactions at
any time during the last preceeding 5 years.
6) The competent Court of law / Tribunal has passed an order disqualifying a person for appointment
as a director, and the order is in force.
7) Shares of the company held by him either singly or jointly with others, has calls in arrears for more
than 6 months.
8) The person has not been allotted DIN
9) The directors of the following companies are not eligible to be reappointed as a director in the
same company or any other company for a period of five (5), years from the date on which the said
company fails to comply with the following requirements.
a) Non filing of “Financial Statements / Annual Returns” continuously for a period of three
(3) financial years.
b) Failure to make the following payment obligations continuously for a period of one year
and more.
i. Repayment of the deposits accepted
ii. Payment of interest on deposits
iii. Redemption of any Debentures on due date.
iv. Payment of interest on the Debentures
v. Payment of any dividend declared
The above disqualification does not apply to a person, who is appointed as a director of a company
which is in default of clause (a) or clause (b) above; for a period of six months from the date of his
appointment.
10) In addition to the above , a private company may by its articles provide for any disqualifications
for appointment of a director.
 20. RETIREMENT OF DIRECTORS BY ROTATION

3.8. Retirement of Directors by Rotation

Unless the articles of association provide otherwise, the retirement of all the directors shall be as follows.
1) The period of office of not less than 2/3rd of the total number of directors is liable to determination by
retirement of directors by rotation.
2) In determining the total number of directors, independent directors shall be excluded.
3) At the first annual general meeting of a public limited company, (held next after the date of general
meeting at which the first directors are appointed) and at every subsequent annual general meeting 1/3 rd
of such rotational directors are liable to retire by rotation.( In case of fraction, number nearest to1/3rd is
counted)
4) The directors to retire by rotation are those who have been longest in the office, since their last
appointment. Where there are two or directors with the same tenure of office, those who are to retire
shall, in default of and subject to any agreement among themselves, be determined by lot.
5) The vacancy of a retired director is filled in either by appointing the retiring director or some other
person, in the annual general meeting.
6) If the vacancy could not be filled in during the general meeting, and in the absence of any resolution
passed in the meeting not to fill in the vacancy, the meeting stands adjourned till the same day in the
next week( If such day is a holiday the succeeding working day) at the same place and time.
7) On the day of adjournment, if the vacancy could not be filled in, and in the absence of any resolution by
the meeting, not to fill in the vacancy; the retired director is deemed to have been reappointed, subject to
the following conditions.
a) The resolution for the re-appointment of such director has been put before the present or
previous meeting and has been lost.
b) The retiring director has communicated to the company in writing his dissent for re-appointment.
c) The person is neither qualified nor disqualified for appointment
d) An ordinary or special resolution is required for his appointment or re-appointment.
e) Where appointment of directors need to be voted individually.
8) If a person contravenes the provisions of the act about the appointment of directors, is punishable with
imprisonment up to 6 months or a fine up to Rs 50000/-. Thereafter if the contravention continues
beyond the first day, a further fine of Rs 500/- per day is levied.
Resignation of a Director
3.11 Resignation of a Director
The following procedure is to be followed for the resignation of a director
a) A director, intending to retire shall give a notice in writing to the company.
b) The Board, on receipt of the notice shall make note of the same
c) The company shall inform the Registrar within such time as may be prescribed.
d) The matter shall be placed in the immediately following general meeting by the board in its report.
e) The Director may also forward a copy of his resignation letter , with the reasons for resignation to
the Registrar, within 30 days of his resignation.
f) The resignation of the Director would be effective from the date of receipt of his resignation by the
company or the date specified by the director in the notice, whichever is later.
The Director who has resigned shall be liable even after his resignation for the offences which occurred during
his tenure
 21. POWERS OF DIRECTORS

Company is a legal person. The decisions on behalf of a company are exercised by the board of directors as per
the provisions of Memorandum and Articles of Association of the company. The powers of board of directors
are mentioned in a summary form
01. Powers of the Board to be exercised by the Board by means of the resolution passed at a duly convened
Board meeting
(a) to make calls on shareholders in respect of money unpaid on their shares;
(b) to authorize buy-back of securities under section 68;
(c) to issue securities, including debentures, whether in or outside India;
(d) to borrow monies;
(e) to invest the funds of the company;
(f) to grant loans or give guarantee or provide security in respect of loans;
(g) to approve financial statement and the Board’s report;
(h) to diversify the business of the company;
(i) to approve amalgamation, merger or reconstruction;
(j) to take over a company or acquire a controlling or substantial stake in another company;
(k) any other matter which may be prescribed in Rule 8 of the Companies (Meetings of
02. Certain more powers that shall also be exercised by the Board of Directors only by means of resolutions
passed at meetings of the Board:
(1) to make political contributions;
(2) to appoint or remove KMP
(3) to appoint internal auditors and secretarial auditor;
03. The Board may, by a resolution passed at a meeting, delegate the powers specified in points (d) to (f)
above, on such conditions as it may specify to:
1. any committee of directors,
2. the managing director,
3. the manager or any other principal officer of the company, or
4. the principal officer of the branch office (in the case of a branch office of the company).
 22. ANNUAL GENERAL MEETING

An annual general meeting (AGM) must be held each year by every company other than “OPC”. AGM is an
important platform by which the general body of shareholders finds an opening to exercise their power of
control.

RULES RELATING TO ANNUAL GENERAL MEETING.

Following are the rules regarding annual general meetings:

1) In case of the first annual general meeting, it shall be held within a period of nine months from the
date of closing of the first financial year of the company and in any other case, within a period of six
months, from the date of closing of the financial year.
2) If a company holds its first annual general meeting as aforesaid, it shall not be necessary for the
company to hold any annual general meeting in the year of its incorporation.
3) Not more than 15 months shall elapse between two AGMs.
4) In case there is any difficulty in holding any AGM (except the first one), the ROC may, for any special
reasons shown, grant an extension of time for holding the meeting by a period not exceeding 3 months
provided the application for the purpose is made before the due date of the annual general meeting
5) A notice (either in writing or electronic mode) of at least 21 days before the meeting must be given to
the members.
6) However, a general meeting may be called after giving a shorter notice if consent is given in writing or
by electronic mode by not less than ninety-five per cent of the members entitled to vote at such
meeting.
7) A statement setting out the material facts concerning each item of special business to be transacted at a
general meeting shall be annexed to the notice calling such meeting.
8) The AGM must be held on a working day during business hours ( between 9 am and 6 pm) on any day
that is not a ‘National Holiday’ at the registered office of the company or at some other place within the
city, town or village in which the registered office of the company is situated.
9) Quorum: in case of public company,
a) Five members personally present if the number of members as on the date of meeting is Up to one
thousand
b) Fifteen members personally present if the number of members as on the date of meeting is more than
one thousand but up to five thousand;
c) Thirty members personally present if the number of members as on the date of meeting exceeds five
thousand.
10) In the case of private company, two members personally present, shall be the quorum for a meeting of
the company.

BUSINESS TO BE TRANSACTED AT AGM

At every AGM, the following matters must be discussed and decided. Since such matters are discussed at every
AGM, they are known as ordinary business. All other matters and business to be discussed at the AGM are
special business.
 The following matters constitute ordinary business at an AGM :-
1. Consideration of final accounts, director’s report and the auditor’s report
2. Declaration of dividend
3. Appointment of directors in the place of those retiring
4. Appointment of and the fixing the remuneration of the statutory auditors.
In case any special business has to be discussed and decided upon, an explanatory statement of the special
business must also accompany the notice calling the meeting. The notice should also give the nature and extent
of the interest of the directors or manager in the special business, as also the extent of the shareholding interest
in the company of every such person.

CONSEQUENCES OF NOT HOLDING AN AGM

Default in holding an AGM may result in the following consequences:
1. Any member of the company may apply to the NCLT which may in turn call, or direct the calling of the
meeting.
2. NCLT may give such ancillary or consequential directions as it may consider expedient in relation to the
calling, holding and conducting of the meeting.
3. The NCLT may also direct that one member present in person or by proxy shall be deemed to constitute
the meeting.
4. A fine, which may extend to Rs one lakh on every officer of the company who is in default, may be
levied and for continuing default, a further fine which may extend to five thousand rupees per day for
the duration of the default may be levied.
 23. EXTRAORDINARY GENERAL MEETING

 An extraordinary meeting is usually called by the Board for taking some urgent business that cannot be
kept pending till next AGM.
 Every business transacted at such a meeting is a special business.
 An explanatory statement of the special business must also accompany the notice calling the meeting.
 The notice should also give the nature and extent of the interest of the directors or manager in the special
business, as also the extent of the shareholding interest in the company of every such person.

Who can call an extraordinary general meeting?

An Extraordinary general meeting may be called by the following.
1. The Board on requisitions:
The Board must call an EGM of the company if required to do so by the following number of members:
(a) In the case of a company having a share capital, such number of members, who hold, on the date
of receipt of the requisition, not less than one-tenth of the paid-up share capital of the
company as on that date carrying the right of voting.
(b) In the case of a company not having a share capital, such number of members who have, on the
date of receipt of requisition, not less than one-tenth of the total voting power of all the
members having on the said date a right to vote.
2. By the Requisitionists:
If the Board does not, within 21 days from the date of receipt of a valid requisition in regard to any
matter, proceeds to call a meeting for the consideration of that matter on a day not later than 45 days
from the date of receipt of such requisition, the meeting may be called and held by the requisitionists
themselves within a period of 3 months from the date of requisition

24. BOARD MEETINGS

Board meetings refer to meetings of directors. The directors are supposed to act collectively as a single entity,
called the board, hence the term ‘Board Meetings’.

Periodicity of the Board meetings.

Every company shall hold the first meeting of the Board of Directors within thirty days of its incorporation
and thereafter hold a minimum four meetings every year in such a manner that not more than one hundred
and twenty days shall intervene between two consecutive meetings. [Section 173(1)]
• The participation of directors in a meeting of the Board may be either in person of through video
conferencing or other audio visual means.
• A meeting of the Board shall be called by a minimum seven days notice in writing to every director at
his address registered with the company.
• In case of absence of independent directors from such a meeting of the Board, decision taken at such a
meeting shall be circulated to all the directors and shall be final only on ratification thereof by at least
one independent director, if any
• The quorum for a meeting of the BoD of a company shall be one-third of its total strength or two
directors whichever is higher and the participation through video conferencing shall be taken into
account.
 25. REQUISITES OF A VALID MEETING
The following conditions must be satisfied for a meeting to be called a valid meeting:
1. It must be duly convened. The persons calling the meeting must be authorized to do so.
2. The proper authority in this regard is the Board of Directors, members, or National Company Law
Tribunal, as the case may be.
3. Proper and adequate notice must have been given to all those entitled to attend.
4. The rules of quorum must be maintained and the relevant provisions of the Act and the articles must be
duly complied with.
5. The business at the meeting must be validly transacted.
6. The meeting must be conducted in accordance with the regulations governing the meetings.

PROXY
 A member may appoint another person to attend and vote at a meeting on his behalf. Such otperson
is known as ‘Proxy’.
 If the articles so authorize, any member, entitled to attend and vote at a meeting of the company,
shall be entitled to appoint another person (whether a member or not) as his proxy to attend and vote
in his/her behalf.
 The member appointing a proxy must duly deposit with the company a proxy form at the time of the
meeting or prior to it giving details of the proxy appointed.
 A proxy is not entitled to vote except on a poll.

RESOLUTIONS
 A motion, with or without amendments is put to vote at a meeting.
 A 'motion' when passed by requisite majority of votes by the shareholders becomes a company
resolution.
 Thus, a resolution may be defined as the formal decision of a meeting on any

MINUTES
 Every company must keep records of all the proceedings of a meeting, known as minutes.
 The minutes are a gist of the discussions at the meeting and the final decisions taken there at.
 It normally includes only the resolutions actually passed.
 The pages of the minute books must be consecutively numbered and the minutes must be recorded
therein within 30 days of the conclusion of the meeting.
 The minutes book of the proceedings of general meetings must be kept at the registered office of the
company.
If any person is found guilty of tampering with the minutes of the proceedings of meeting, he shall be
punishable with imprisonment for a term which may extend to two years and with a fine which shall not be less
than Rs.25,000/- but which may extend to 1 lakh.
 26. KINDS OF RESOLUTIONS.
There are three types of resolutions:
a) Ordinary Resolution
b) Special Resolution
c) Resolution requiring a special notice

a) Ordinary resolution
 An ordinary resolution is one which can be passed by a simple majority. That is if the votes (including
the casting vote, if any, of the chairperson), at a general meeting cast by members entitled to vote in its
favour are more than the votes cast against it.
 An ordinary resolution is required to transact such businesses as: declaring dividend, appointment of
auditors, electing directors, or to pass the annual accounts.

b) Special Resolution
 A special resolution is one which is passed by at least three-fourths clear majority.
 This means that the votes cast in favour of the resolution is at least three times the
number of votes cast against it.
 Special resolutions are needed to decide on important matters of the company.

Examples where special resolutions are required are:

1. To alter the domicile clause of the memorandum from one state to another, or to alter the objects
clause of the memorandum.
2. To alter the name of the company with the approval of the Central Government.
3. To alter the articles of association.
4. To change the name of the company by omitting ‘Limited’ or ‘Private Limited’.
\
c) Resolutions requiring a special notice
There are certain matters specified in the Act which may be discussed at a general meeting for which a prior
intention to move the resolution has to be given to the members. Such a prior intention in the form of special
notice enables the members to be prepared on the matter to be discussed and gives them time to indicate their
views on the resolution.
The following matters require special notice to be passed at a meeting:
1. To appoint an auditor other than a retiring auditor at an annual general meeting.
2. To resolve at an annual general meeting that a retiring auditor shall not be reappointed.
3. To remove a director before the expiry of his period of office.
4. To appoint another director in place of removed director.
5. Where the articles of a company provide for serving a special notice for a resolution, in respect of any
specified matter or matters.
6. A resolution requiring special notice may be passed either as an ordinary resolution or as a special
resolution.
 27. Oppression and Mismanagement

The management of a Company is based on the majority rule, but at the same time the interests of the minority
can’t be completely overlooked. While talking of majority and minority, we are not talking of numerical
majority or minority but of majority or minority voting strength. The reason for this distinction is that a small
group of shareholders may hold the majority shareholding whereas the majority of shareholders may, among
them, hold a very small percentage of share capital. Once they acquire control, the majority can, for all practical
purposes, do whatever they want with the Company with practically no control or supervision, because even if
they are questioned on their acts in the general meeting, they always come out winners because of their greater
voting strength. So, the modern Companies Acts contain a large number of provisions for the protection of the
interests of minorities in companies.

OPPRESSION
The term ‘oppression’ has been explained by Lord Cooper in Elder v. Elder & Watson Ltd. as, “The essence of
the matter seems to be that the conduct complained of should at the lowest involve a visible departure from the
standards of fair dealing, and a violation of the conditions of fair play on which every shareholder who entrusts
his money to the company is entitled to rely.”

ACTS HELD AS OPPRESSIVE

 Not calling a general meeting and keeping shareholders in dark.
 Non-maintenance of statutory records and not conducting affairs of the company in accordance with
the Companies Act.
 Depriving a member of the right to dividend.
 Refusal to register transmission under will.
 Issue of further shares benefiting a section of shareholders.
 Failure to distribute the amount of compensation received on nationalisation of business of company
among members, where required to be so distributed.

ACTS HELD AS NOT OPPRESSIVE

The following acts have been held as not oppressive:-
 An unwise, inefficient or careless conduct of director.
 Non-holding of the meeting of the directors.
 Not declaring dividends when company is making losses
 Denial of inspection of books to a shareholder.
 Lack of details in notice of a meeting.
 Non-maintenance / Non-filing of records.
 Increasing the voting rights of the shares held by the management.
MISMANAGEMENT
Mismanagement is said to be done if
 the affairs of the company are being conducted in a manner prejudicial to the interests of the company;
or
 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 of
control of the company, whereby it is likely that the affairs of the company will be conducted in a
manner prejudicial to the interests of the company.

Acts held as Mismanagement

The following acts have been held as amounting to mismanagement:-
 Where there is serious infighting between directors.
 Where Board of Directors is not legal and the illegality is being continued.
 Where bank account(s) was/were operated by unauthorised person(s).
 Where directors take no serious action to recover amounts embezzled.
 Continuation in office after expiry of term of directors.
 Sale of assets at low price and without compliance with the Act.
 Violation of Memorandum.
 Violation of statutory provisions and those of Articles.
 Company doomed to trade unprofitably.

Acts held as not Mismanagement

The following acts have been held to not to amount to Mismanagement:-
 Building up of reserves or non-declaration of dividend especially when it does not result in devaluation
of shares.
 Merely because company incurs loss, mismanagement can’t be alleged.
 Arrangement with creditors in company’s bonafide interest.
 Removal of director and termination of works manager’s services.

APPLICATION AGAINST OPPRESSION & MISMANAGEMENT

a) Application to National Company Law Tribunal (NCLT)
The first remedy available to oppressed minority is to move NCLT. Whenever the affairs of a company
are being conducted in a manner pre-judicial to public interest or in a manner oppressive to any member
or members, an application can be made to the Company Law Board (now Tribunal) u/s 397.
b) Who can apply
i. Any member of a company who complain that the affairs of the company are being conducted
in a manner oppressive to any member or members
ii. As per Section 399 the aggrieved member who is able to show that he suffered an injustice in
his capacity as a shareholder and not in any other capacity.
iii. Central Government or any person authorized by the Central Government.
iv. A legal representative of a deceased member, on whom title to the shares devolves by operation
of law.
 The requisite number of members who must sign the application is given in Section 399. The
requirement varies with the fact as to whether the company has a share capital or not and is discussed
below:-
 In the case of a company having a share capital, not less than one hundred members of the
company or not less than one tenth of the total number of its members, whichever is less, or any
member or members holding not less than one-tenth of the issued share capital of the company,
provided that the applicant or applicants have paid all calls and other sums due on their shares.
 In the case of a company not having a share capital, not less than one-fifth of the total number of
its members.
·
c) Who cannot apply
The following can’t apply for relief u/s 397:-
 A member whose calls or other sums due on their shares have not been paid.
 A holder of a letter of allotment of a partly paid share.
 A holder of a share warrant.
 A transferee of shares who has not lodged the shares for transfer to the company.

d) Notice to the Central Government

NCLT is required to give notice of every application made to it u/s 397 to the Central Government.

RELIEF AGAINST OPPRESSION & MISMANAGEMENT

Sections 397 and 398 confer general powers on the NCLT to pass necessary orders including an interim order,
where appropriate, to end oppression and mismanagement. Section. 402 empower it to grant certain specific
reliefs mentioned here below.

(a) The regulation of the conduct of the company's affairs in future;

(b) The purchase of the shares or interests of any members of the company by other members thereof
or by the company;
(c) In the case of a purchase of its shares by the company as aforesaid, the consequent reduction of
its share capital;
(d) The termination, setting aside or modification of any agreement howsoever arrived at, between
the company on the one hand, and any of the following persons, on the other namely:—
(i) The managing director,
(ii) Any other director,
(iii) The managing agent,
(iv) The secretaries and treasurers, and
(v) The manager,

e) Any other matter for which in the opinion of the Court it is just and equitable that provision
should be made.
 28. WINDING UP OF A COMPANY

Winding up of a company – a means by which a company is dissolved. It is an unwarranted event whereby:

 Its life for some unavoidable circumstances is put to an end; and
 Its property is administered for the benefit of its creditors and members.

Modes of Winding up: A company may be wound up either:

(i) Compulsorily i.e. by the Tribunal (NCLT) Or (ii) Voluntarily Compulsory

COMPULSORY WINDING UP
Winding up takes place by an order of the National Company Law Tribunal (NCLT).

Grounds for Compulsory Winding Up:

Tribunal may order winding up of a company (on a petition submitted before it) on the following two basic
grounds:
1. Inability to pay its debts i.e. the realizable value of its existing assets is not sufficient to discharge its existing
liabilities.
2. Special resolutions by the members’ .i.e. where at least 75% of members attending and voting resolve to put
an end to the life of their company.

When is a company deemed to be unable to pay its debts?

1. If a creditor to whom Rs.1 lakh or more is due to be paid by the company and after 21 days of servicing
demand notice, if the company is unable to pay debt.
2. If any decree or execution is issued in favour of a creditor by the Tribunal or any court to the company
and is returned unsatisfied in whole or in part.
3. If it is proved to the satisfaction of the Tribunal that the company is unable to pay its debts (Contingent
and prospective).

Special resolution by members for winding up by Tribunal

1. Shareholders can pass a special resolution with at least 75 percent of members attending and voting, for
winding up.

Implication of winding up:

During this process the company ceases to carry on its usual business, the assets are realized, the proceeds are
utilized in paying off the debts and the surplus, if any, is distributed amongst the contributories on pro rata
basis.

Some instances, where the Tribunal had ordered wing up of a company under “Just & Equitable” clause:
1. When substratum of the company has disappeared, i.e., company is unable to achieve any of its main
objects i.e. unable to establish the business for which it was formed.
2. It is impossible to carry on business except at a loss and there is no reasonable hope of making profits.
3. Existing or probable assets are insufficient to meet known existing liabilities.
4. Complete deadlock in the management due to hostility among directors which cannot be resolved in
General or Board meetings.
5. If the company is only a ‘bubble’, i.e., it does not have any real business or property to carry on.
6. It is in public opinion that the company be wound up. As a corollary, wind up can be declined if it is
against public interest

Other Grounds for Compulsory Winding Up: Tribunal may order winding up of a company on the basis
of the following grounds also:
1) If the company has acted against the interests of the sovereignty and integrity of India, the security of
the State, friendly relations with foreign states, public order, decency or morality.
2) If a scheme of revival and rehabilitation of a sick company is not approved by the creditors in the
manner specified
3) If the affairs of the company have been conducted in a fraudulent manner/company was formed for
fraudulent and unlawful purposes or the persons concerned in the formation of the company or
management of its affairs have been guilty of fraud, misfeasance or misconduct in connection therewith
and that it is proper that the company be wound up.
4) If the company has defaulted in filing with the ROC its financial statements or annual returns for
immediately preceding the five consecutive financial years
5) The Tribunal is of the opinion that it is just and equitable to wind up the company.

Who can file petition for winding up by the Tribunal?

1. Company itself
2. Any creditor or creditors, including any contingent or prospective creditor or creditors;
3. Any contributory or contributories
4. Any combination of creditors, company, or contributories acting jointly or separately;
5. The Registrar
6. Any person authorized by the Central Govt. in consequence of investigation
7. By the Central Govt. or State Govt. where the company has acted against the interest of the
sovereignty and integrity of India, the security of the State, friendly relations with foreign states, public
order, decency or morality.

Commencement of winding up and appointment of an official liquidator

Proceedings of winding up are conducted by an official administrator, called ‘liquidator’ under the supervision
of the Tribunal. The liquidator is attached to each High Court. He/she is appointed by the Central Govt. and
works under the supervision of the Regional Director of Department of Company Affairs.

Rules governing the appointment of a liquidator.

1. The Tribunal will appoint an Official Liquidator for a panel maintained by the Central Government
consisting of names of CAs, Cost accountants, Advocates, Company Secretaries and such other
professional as notified by the Central Govt
2. The Tribunal has the power to limit or restrict the powers of the liquidator.
3. Central Govt. has the right to remove from the panel the names of any professional on the grounds of
misconduct, fraud, misfeasance and breach of duties.
4. The terms and conditions of appointment of a provisional liquidator and the fee payable to him shall by
fixed by the Tribunal.
 5. Provisional liquidator shall file a declaration within seven days from the date of appointment in the
prescribed form disclosing conflict of interest or lack of independence in respect of his appointment.

Removal and replacement of a liquidator

The Tribunal can remove a provisional liquidator on the following grounds:
1. Misconduct
2. Fraud or misfeasance
3. Professional incompetence or failure to exercise due care and diligence in performance of the powers
and functions
4. Conflict of interest or lack of independence during the term of his appointment that would justify
removal.
5. Where the Tribunal is of the opinion that any liquidator is responsible for causing any loss or damage to
the company due to fraud or misfeasance or failure to exercise due care and diligence in the performance
of his or its powers and functions, the Tribunal may recover or cause to be recovered such loss or
damage from the liquidator and pass such other orders as it may think fit

VOLUNTARY WINDING UP OF A COMPANY

Voluntary Winding Up implies winding up of a company by the members in a predefined manner and subject to
fulfillment of certain conditions by the company.
A company can be wound up voluntarily:
 If the company in general meeting passes a resolution requiring the company to be wound up
voluntarily as a result of the expiration of its duration, if any, fixed by its ‘Articles’ or on the
occurrence of any event in respect of which the articles provide that the company should be
dissolved
 If the company passes a special resolution that the company be wound up voluntarily. [Section 304]

VOLUNTARY WINDING UP - PROCESS

1. Declaration of solvency: Where it is proposed to wind up a company voluntarily, its director/(s) shall at
a Board meeting make a declaration (on the basis of their full enquiry into the affairs of the company)
that the company is solvent to discharge its external liabilities, if any.
2. Meeting of creditors
3. Appointment of company liquidator
4. Liquidator to submit his report on the progress of winding up
5. Report of the liquidator to the Tribunal
6. Final meeting of members and dissolution of the company