3RD SEMESTER - 2022 PAPER – IV

COMPANY LAW

Q.1. What is company. What are the different kinds Governments and includes a company which is a
of company? subsidiary of a government company.
Ans: A company in common parlance, means a group of 6. Foreign Companies
persons associated together for the attainment of a Means a company incorporated in a country outside
common end. In broad sense company may means an India under the law of that other country and has
association of individuals formed for some common established the place of business in India.
purpose. Justice Lindley defines a company as “ an 7. One Person Company (OPC) is a newly introduced
association of many persons who contribute money or type of company. OPC was introduced in the Companies
money’s worth to a common stock, and employ it in Act, 2013 to support entrepreneurs who on their own are
some common trade or business, and who share the capable of starting a venture by allowing them to create
profit or loss arising therefore. a single person economic entity. One of the biggest
Types of Companies:The various kinds of companies advantages of a OPC is that there can be only one
are as follows: member in a OPC, while a minimum of two members are
1)Public Company 2)Private Company 3)Limited and required for incorporating and maintaining a Private
Unlimited companies 4)Holding and Subsidiary Limited Company or a Limited Liability Partnership.
companies 5)Government Companies 6)Foreign Similar to a Company, a OPC is a separate legal entity
Companies from its members, offers limited liability protection to its
1.Public Company means a company which not a shareholders, has continuity of business and is easy to
private company. incorporate.
2.Private Company means a company which by its
articles of association :- Q.2. Explain the Characteristics of a company
a. Restricts the right of members to transfer its shares Ans: Characteristics of a company:
b. Limits the number of its members to fifty. Separate legal entity: A company is in law regarded as
c. Prohibits an invitation to the public to subscribe to any an entity separate from its members. On incorporation
shares in or the debentures of the company. under law, a company becomes a separate legal entity
3.Limited and Unlimited companies: as compared to its members. The company is different
Companies may be limited or unlimited companies. and distinct from its members in law. In other words, it
Limited company: Company may be limited by shares has an independent corporate existence. Any of its
or limited by guarantee. members can enter into contracts with it in the same
a. Company limited by shares: In this case, the liability manner as any other individual can.(Salmon vrs. Salmon
of members is limited to the amount of uncalled share & co.)
capital. Limited liability: A company may be a company limited
b. Company limited by the guarantee: A company by share or a limited by guarantee. In a company limited
limited by guarantee is a registered company having by share, the liability of members is limited to the unpaid
the liability of its members limited by its memorandum value of the shares. It means the liability of the members
of association to such amount as the members may of the company is limited to contribution to the assets of
respectively thereby undertake to pay if necessary on the company upto the face value of shares held by him.
liquidation of the company. A member is liable to pay only the uncalled money due
Unlimited Company: The liability of members of an on shares held by him when called upon to pay and
unlimited company is unlimited. Therefore their liability is nothing more, even if liabilities of the company far
similar to that of the liability of the partners of a exceeds its assets. In a company limited by guarantee,
partnership firm. the liability of members is limited to such amount as the
4.Holding and Subsidiary companies members may under take to contribute in the event of its
Holding company: For the purposes of this Act, a being wound up.
company shall be deemed to be the holding company of Perpetual Succession: A company is a juristic person
another if, but only if, that other is its subsidiary. with a perpetual succession. Perpetual succession
Subsidiary company: A company shall be deemed to means that a company’s existence persists irrespective
be subsidiary of another company if :- of the change in the composition of its membership. A
1. That other company controls the composition of its company does not die or cease to exist unless it is
board of directors ; or specifically wound up or the task for which it was formed
2. That other company holds more than half in face has been completed. It is created by a process of law
value of its equity share capital and can be put an end to only by a process of law.
3. Where the first mentioned company is subsidiary Membership of a company may keep on changing from
company of any company which that other's time to time but that does not affect life of the company.
subsidiary. Death or insolvency of member does not affect the
5.Government Companies existence of the company. It continue to exist even if all
Means any company in which not less than 51% of the its human members are dead.
paid up share capital is held by the Central Government Common Seal: A company is a artificial person and
or any State Government or partly by the Central does not have a physical presence. Therefore, it acts
Government and partly by the one or more State through its Board of Directors for carrying out its
activities and entering into various agreements. Such
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contracts must be under the seal of the company. The enters in respect of the company. Thus where he
common seal is the official signature of the company. purchases some property for the company, he cannot
The name of the company must be engraved on the rightfully sell that property to the company at a price
common seal. Any document not bearing the seal of the higher than he have for it. If he does so, the company
company may not be accepted as authentic and may not may, on discovering it, rescind the contract and
have any legal force. recover the purchase money.
Transferability of Shares: The capital of a company is 3. To make a full disclosure of interest or profit-if the
divided into parts called shares. Shares in a company promoter fails to make a full disclosure of all the
are freely transferable, subject to certain conditions, relevant facts, including any profit and his personal
such that no share-holder is permanently or necessarily interest I a transaction with the company, the company
wedded to a company. When a member transfers his may sue him for damages for breach of his fiduciary
shares to another person, the transferee steps into the duty and recover from him any secret profit made even
shoes of the transferor and acquires all the rights of the though rescission is not asked or is impossible.
transferor in respect of those shares. 4. Not to make unfair use of position-the promoter
Separate property: As a company is a legal person must not make an unfair or t take care to avoid any
distinct from its members, it is capable of owning, unreasonable use of his position and must take care to
enjoying and disposing of property in its own name.
avoid anything which has the appearance of undue
Although its capital and assets are contributed by its
influence or fraudFurther, a promoter cannot relive
shareholders, they are not the private and joint owner of
its property. himself of his liability by making provisions to that
Capacity to sue: A company can sue and be sued in its effect in the Articles of the company.
corporate name as distinct from its members. 5. Duty of promoter as regards prospectus-the
promoter must see, in connection with the prospectus,
if any is issued, that the prospectus –
Q.3. Who is promoter? Explain his function and (a) contains the necessary particulars
position. (b) does not contain any untrue or misleading
Ans: A promoter is a person who does the necessary statements or does not omit any material fact.
preliminary work incidental to the formation of a Remuneration
company. It is a compendious term used for a person A promoter has no right to get compensation from
who undertakes, does and goes through all the the company for his services in promoting the company
necessary and incidental preliminaries, keeping in view unless there is a contact to that effect. However, the
the object, to bring into existence an incorporated following are the rights of a promoter:
company. Chronologically, the first persons who control 1. He is entitled for reasonable remuneration for the
a company’s affairs are its promoters. services rendered.
Functions: 2. He can recover from the company preliminary
1. The promoter of a company decides its name and expenses he has incurred prior to the incorporation,
ascertains that it will be accepted by the Registrar of provided there is an expressed or implied contract
Companies. between himself and the company after incorporation.
2. He settles the details of the company’s 3. He can recover the price of any property he has
Memorandum and Articles, the nominations of purchased for the company. But the transaction must
directors, solicitors, bankers, auditors and secretary be ratified by an independent Board of Directors
and the registered office of the company. constituted after the incorporation of the company.
3. He arranges for the printing of the Memorandum and
Articles, the registration of the company, the issue of Q.4.Define a company. Distinguished it from a
prospectus, where a public issue is necessary partnership.
He is responsible for bringing the company into Ans: A company in common parlance, means a group of
existence for the object which he has in view. persons associated together for the attainment of a
Quasi-trustee-a promoter is neither an agent nor a common end. In broad sense company may means an
trustee of the company under incorporation but certain association of individuals formed for some common
fiduciary duties have been imposed on him.He is not an purpose. Justice Lindley defines a company as “ an
agent because there is no principal born at the time and association of many persons who contribute money or
he is not a trustee because there is no cesti que trust in money’s worth to a common stock, and employ it in
existence. Hence he occupies the peculiar position of a some common trade or business, and who share the
quasi-trustee. profit or loss arising therefore.
Fiduciary position Companies and partnerships compared: The major
1. Not to make any profit at the expense of the difference between companies and partnerships may be
company-the promoter must not make, either directly considered under the following headings :
or indirectly, any profit at the expense of the company Formation: A company is created by registration under
which is being promoted. If any secret profit is made in the Companies Act. A partnership is created by
violation of this rule, the company may, on discovering agreement which may be express or implied from the
it, compel him to account for and surrender such profit. conduct of the partners and is subject to the Indian
2. To give benefit of negotiations to the company-the Contract Act and the Indian Partnership Act. No special
promoter must, when once he has begun to act in the form is required , though partnerships articles are usually
promotion of a company, give to the company the written.
benefit of any negotiations or contracts into which he Status at Law: A company is an artificial legal person
with perpetual succession. Thus a company may
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property , make contracts and sue and be sued. It is an (a) the memorandum and articles of the company duly
entity distinct from its members. A partnership is not a signed by all the subscribers to the memorandum in
legal though it may sue and be sued in the firm’s name. such manner as may be prescribed;
Thus the partners own the property of the firm and are (b) a declaration in the prescribed form by an advocate,
liable for the contracts of the firm jointly as well as a chartered accountant, cost accountant or company
severally. secretary in practice, who is engaged in the formation of
Transfer Of Shares: Shares in a company are freely the company, and by a person named in the articles as
transferable unless the company’s constitution otherwise a director, manager or secretary of the company, that all
provides; restrictions may , of course , appear in the the requirements of this Act and the rules made there
articles of a private company. A partner can transfer his under in respect of registration and matters precedent or
shares in the firm , but the assignee does not thereby incidental thereto have been complied with;
become a partner and is merely entitled to the assigning (c) an affidavit from each of the subscribers to the
partner’s share of the profits. memorandum and from persons named as the first
Number Of Members(a)Minimum:The minimum directors, if any, in the articles that he is not convicted of
number of partners in a firm is 2 whereas the minimum any offence in connection with the promotion, formation
number of members in a private company is 2 and in or management of any company, or that he has not been
case of a public company 7. found guilty of any fraud or misfeasance or of any
(b)Maximum: The maximum number of partners in a breach of duty to any company under this Act or any
firm carrying on banking business can be 10 and in any previous company law during the preceding five years
other business 20. The maximum number of members in and that all the documents filed with the Registrar for
a private company is 200 and in case of a public registration of the company contain information that is
company there is no limit to the maximum number. correct and complete and true to the best of his
Management: Members of a company are not entitled to knowledge and belief;
take part in the management of the company unless they (d) the address for correspondence till its registered
become directors. Partners are entitled to share in the office is established;
management of the firm unless the articles provide (e) the particulars of name, including surname or family
otherwise. name, residential address, nationality and such other
Agency: A member of a company is not an agent of the particulars of every subscriber to the memorandum
company or that of other members, and he cannot bind a along with proof of identity, as may be prescribed, and in
company by his acts. Each partner is an agent of the the case of a subscriber being a body corporate, such
firm and his partners, and nay bind the firm by particulars as may be prescribed;
his acts. (f) the particulars of the persons mentioned in the
Liability Of Members: The liability of a member of a articles as the first directors of the company, their
company may be limited by shares or by guarantee. The names, including surnames or family names, the
liability of a partner is unlimited. Director Identification Number, residential address,
Powers: The affairs of accompany are closely controlled nationality and such other particulars including proof of
by the Companies Act, and the company can only identity as may be prescribed; and
operate within the objects laid down in the memorandum (g) the particulars of the interests of the persons
of association, though these can be altered to some mentioned in the articles as the first directors of the
extent by special resolution. Partners may carry on any company in other firms or bodies corporate along with
business as they please so long as it is not illegal and their consent to act as directors of the company in such
make whatever arrangements they wish with regard to form and manner as may be prescribed.
the running of the firm from time to time. Sec-7(2) The Registrar on the basis of documents and
Termination: No one member of a company can wind information filed under sub-section (1) shall register all
up the company, and the death, bankruptcy or insanity of the documents and information referred to in that
a member does not mean that the company must be subsection in the register and issue a certificate of
wound up. A partnership may be dissolved by any incorporation in the prescribed form to the effect that the
partner at any time unless the partnership is entered into proposed company is incorporated under this Act.
for a fixed period of time. A partnership is also dissolved (3) On and from the date mentioned in the certificate of
by the death or bankruptcy of a partner. incorporation issued under sub-section (2), the Registrar
shall allot to the company a corporate identity number,
Q.5.How is a company formed under the Companies which shall be a distinct identity for the company and
Act ? Enumerate the various documents to be filed which shall also be included in the certificate.
with the registrar. (4) The company shall maintain and preserve at its
Ans: Before a company is formed, certain preliminary registered office copies of all documents and information
steps are necessary, e.g., whether it should be a private as originally filed under sub-section (1) till its dissolution
company or a public company, what its capital should under this Act.
be, and whether it is worthwhile forming a new company (5) If any person furnishes any false or incorrect
or taking over the business of an already established particulars of any information or suppresses any material
concern. information, of which he is aware in any of the
Mode of forming incorporated company. Sec-7(1) documents filed with the Registrar in relation to the
There shall be filed with the Registrar within whose registration of a company, he shall be liable for action
jurisdiction the registered office of a company is under section 447.
proposed to be situated, the following documents and
information for registration, namely:—
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Q.6. What are the consequences of incorporation of principle is that there is a fictional veil between the
a company? company and its members. The human ingenuity
Advantages of incorporation: Incorporation offers however, started using this veil of corporate personality
certain advantages to a company as compared with all blatantly as a cloak for fraud or improper conduct. Thus
other kinds of business organizations. They are it became necessary for the courts(NCLT) to break
1) Independent corporate existence- the outstanding through or lift the corporate veil and look at the persons
feature of a company is its independent corporate behind the company who are the real beneficiaries of the
existence. By registration under the Companies Act, a corporate fiction.
company becomes vested with corporate personality, The various cases in which corporate veil has been lifted
which is independent of, and distinct from its members. are as follows:
A company is a legal person.  Protection of revenue: The NCLT may ignore the
2) Limited liability- limitation of liability is another major corporate entity of a company where it is used for tax
advantage of incorporation. The company, being a evasion.
separate entity, leading its own business life, the  Prevention of fraud or improper conduct: The legal
members are not liable for its debts. personality of a company may also be disregard in the
3) Perpetual succession- An incorporated company interest of justice where it has been used for some
never dies. Members may come and go, but the fraudulent purpose.
company will go on forever.  Determination of character of a company whether it is
4) Common seal- Since a company has no physical enemy
existence, it must act through its agents and all such  Where the company is a sham: The court(NCLT) also
contracts entered into by such agents must be under the lift the veil where a company is a mere cloak or sham.
seal of the company. The common seal acts as the  Company avoiding legal obligation: Where the use of
official seal of the company. an incorporated company is being made to avoid legal
5) Transferable shares- when joint stock companies obligations, the court(NCLT) may disregard the legal
were established the great object was that the shares personality of the company.
should be capable of being easily transferred.  Avoidance of welfare legislation: It is the duty of the
6) Separate property- The property of an incorporated courts in every case where ingenuity is expended to
company is vested in the corporate body. The company avoid welfare legislation to get behind the smoke
is capable of holding and enjoying property in its own screen and discover the true state of affairs
name. No members, not even all the members, can  Protecting public policy: The courts invariably lift the
claim ownership of any asset of company’s assets. corporate veil to protect the public policy and prevent
7) Capacity for suits- A company can sue and be sued transaction contrary to public policy.
in its own name. The names of managerial members Statutory exception
need not be impleaded. Number of members below statutory minimum.
8) Professional management- A company is capable of Failure to refund application money u/s 39
attracting professional managers. It is due to the fact that Misdescription of company’s name. u/s 12
being attached to the management of the company gives Fraudulent trading. u/s 339
them the status of business or executive class. Holding and subsidiary companies.
Disadvantages of incorporation For investigating company’s ownership. u/s 216
1) Lifting of corporate veil- though for all purposes of
law a company is regarded as a separate entity it is Q.8. What are the procedure for effecting the
sometimes necessary to look at the persons behind the conversion of a private company into a public
corporate veil. company. How does a private company differ from
a) Determination of character public company?
b) For benefit of revenue Ans: Conversion of Private company into Public
c) Fraud or improper conduct- company:
d) Agency or Trust or Government company- A private company may become a public company in the
e) Under statutory provisions following manner:
2) Formality and expense- Incorporation is a very a)Conversion by default and b)conversion by operation
expensive affair. It requires a number of formalities to of law.
be complied with both as to the formation and a)Conversion by default: Where a default is made by
administration of affairs. a private company in complying with the essential
3) Company not a citizen- In State Trading requirements of a private company the company shall
Corporation of India v. CTO, the SC held that a cease to be entitled to the privileges and exemptions
company though a legal person is not a citizen neither conferred on private companies
under the provisions of the Constitution nor under the b) conversion by operation of law:
Citizenship Act. i) Where at least 25% of the paid up share capital of a
private company is held by one or more bodies
Q.7. “ A company is a legal entity distinct from its corporate the private company shall automatically
members.” In what cases do the Court ignore this become the public company.
principle? Or When can Corporate Veil of a ii)Where the annual average turnover of the private
Company be Lifted? company during the period of three consecutive
From the juristic point of view, a company is a legal financial years is not less than Rs 25 crores, the
person distinct from its members. This principle may be private company shall be, irrespective of its paid up
referred to as “the veil of incorporation”. The effect of this share capital, become a deemed public company.
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iii)Where not less than 25% of the paid up capital of a Q.10. Explain the Procedure for Alteration of
public company limited is held by the private Memorandum of Association.
company, then the private company shall become a Alteration of Memorandum. (Sec.13)
public company. Alteration of name
iv)Where a private company accepts deposits after the A company may change its name at any time by
invitation is made by advertisement or renews deposits passing a special resolution and with the prior approval
from the public such companies shall become public of the Central Government. Where a company has been
company. on and from date such acceptance or registered with a name which is undesirable, the same
renewal is first made. may be changed by an ordinary resolution and with the
prior approval of the Central Government. In such a case
Difference between private and public company: the central government may also within 12 months of
 The minimum number of persons required to form a registration direct the company to rectify its name and
public company is seven. It is two in case of a private the company must change the name within 3 months
company. There is no restriction on maximum number from the date of direction unless the time is extended.
of members in a public company; where as the The new name would also require the prior approval of
maximum number cannot exceed fifty in a private the Central Govt. When a company changes its name,
company. the Registrar of Companies has to enter the new name
 A public company must have at least 3 directors, in the register and a new certificate of incorporation must
whereas a private company must have at least 2 be issued with necessary alterations.
directors. Effect of such change: The old name of the company
 A public company invites the general public to will stand abolished and the new name will come into
subscribe for the shares or debentures of the existence from the date of passing such resolution.
company. A private company cannot do so. However, it does not affect the rights and obligations of
 In a public company the shares or debentures are the company.
freely transferable but in a private company it is Alteration of registered office clause
restricted by he articles. Shifting of registered office from one State to another
 A private company enjoys some special privileges. A is a complicated affair. For this purpose,
public company enjoys no such privileges. a) A special resolution of the company.
b) The sanction of the Company Law Board.
Q.9. What is Memorandum of association? What are The Board can confirm the alteration only if the
its contents? shifting of the registered office from one state to another
Ans: The first step in the formation of a company is to is necessary.
prepare memorandum of association. It is the Alteration of objects.
fundamental document. It is a document of great A company may alter its objects with the passing of a
importance in relation to the proposed company. It special resolution. The confirmation of the Company Law
contains the fundamental conditions upon which alone Board is not required for this purpose.
the company is allowed to be incorporated. It lays down Registration of alteration.
the area of operation of the company. According to In case of alteration of objects, a copy of the
Sec2(56) of Companies Act 2013 memorandum means resolution should be filed with the Registrar of
the memorandum of association of a company as Companies within one month from the date of resolution.
originally framed or as altered from time to time. In the case of inter-state shifting of the registered office a
Purpose of Memorandum:1)The prospective certified copy of the Board’s order and a printed copy of
shareholders shall know the purpose for which their the altered memorandum must be filed with the Registrar
money is going to be used by the company and what risk within three months of the Board’s order. Within one
they are undertaking in making investment. 2) The month the Registrar will certify the registration. Alteration
outsiders dealing with the company shall know the takes effect when it is so registered.
objectives and the scope of activity of the company
Q. 11. Explain the Doctrine of Ultra-vires.
Contents of Memorandum:Sec-4.Companies Act 2013 Introduction
The memorandum of every company shall state – The object clause of the Memorandum of the
(a) Name clause:-the name of the company with company contains the object for which the company is
"Limited" as the last word of the name formed. An act of the company must not be beyond the
(b) Registered office clause:-the State in which the objects clause, otherwise it will beultra vires and,
registered office of the company is to be situate therefore, void and cannot be ratified even if all the
(c) Object clause:- the objects of the company ; members wish to ratify it. This is called the doctrine
(i) the main objects of the company of ultra vires.
(ii) other objects of the company The word ‘ultra’ means beyond and ‘vires’ means
(d) Liability Clause:-The memorandum of a powers. Thus the expression ultra vires means an act
company limited by shares or by guarantee shall beyond the powers. Here the expression ultra vires is
also state that the liability of its members is limited. used to indicate an act of the company which is beyond
(e) Capital clause:-In the case of a company having a the powers conferred on the company by the objects
share capital the memorandum shall also state the clause of its memorandum.
amount of share capital with which the company is to The application of the doctrine of ultra-vires was first
be registered and the division thereof into shares of a demonstrated by the House of Lords in Ashbury
fixed amount; Railway Carriage & Railway Co. v. Riche. In the
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next leading case of Attorney General v. Great Q.12. What is Articles of association? Explain its
Eastern Railway Co, this doctrine was made clearer. importance.
The House of Lords held that the doctrine of UV as Ans: The Articles of Association are the rules,
explained in Ashbury case should be maintained but regulations and bye-laws for the internal management of
reasonably understood and applied. Thus, an act which the affairs of a company. Articles of Association is the
is incidental to the objects authorized ought not to be second important document, which in case of some
held as UV, unless it is expressly prohibited. In India the companies, has to be registered along with the
Supreme Court has affirmed the doctrine memorandum. As per sec 26, companies which must
in A Lakshmanaswami Mudaliar v. LIC, where the have articles are:
donation made as charity was held ultra vires and the 1) Unlimited companies; 2) Companies limited by
directors were held personally liable to compensate the guarantee; 3) Private companies limited by shares.
money. Thus an act of the company is ultra vires if it is This document contains rules, regulations and bye-
not laws for the general administration of the company.
a) Essential for the fulfillment of the objects stated in the Schedule I of the Act sets out tables of model forms of
memorandum; articles for different companies.
b) Incidental or consequential to that attainment of its Contents
objects Articles of Association may prescribe such
c) Which the company is authorized to do by the regulations for the company as the subscribers to the
Company’s Act, in course of its business. memorandum deem expedient. The Act gives the
subscribers a free hand. Any stipulations as to the
Consequences relation between the company and its members or
1) Injunction- whenever an ultra vires act has been or is members inter se may be inserted in the articles. But
about to be done, any member of the company can get everything stated therein is subject to the Companies
an injunction to restrain the co from proceeding further. Act. Usually, articles contain provisions relating to the
2) Personal liability of the directors- it is the duty of following matters:
the directors to see that the funds of the company are 1) Share capital, rights of shareholders, share
used only for legitimate business of the company. If the certificates, payment of commission. 2) Lien on
funds of the company are used for a purpose foreign to shares.,3) Call on shares., 4) Transfer of shares.
its memorandum, the directors will be personally liable to 5) Transmission of shares. 6) Forfeiture of shares.
restore it. 7) Conversion of shares into stock. 8) Share warrants.
3) Breach of warranty of authority- an agent who acts 9) Alteration of capital. 10) General meetings and
beyond the scope of his authority will be held personally proceedings there at. 11) Voting rights of members,
liable. The directors of a company are its agents. If they voting and poll, proxies. 12) Directors, their
induce an outsider to contract in a matter the company appointment, remuneration, qualifications, powers and
does not have power to act, they will be personally liable proceedings of Board of Directors. 13) Manager.
to him. 14) Secretary. 15) Dividends and reserves.
4) Ultra vires acquired property- if a company’s money 16) Accounts, audit and borrowing power.
has been spent ultra vires in purchasing some property, 17) Capitalization of profits. 18) Winding up.
the company’s right over that property must be held
secure. For that asset, though wrongfully acquired, Importance of Articles of Association
represents corporate capital. The memorandum and the articles when registered,
5) Ultra vires contracts- an ultra vires contract being shall bind the company and its members to the same
void ab initio, cannot become intra vires by reason extent as if it had been signed by them and had
of estoppel, lapse of time, ratification, acquiescence or contained a covenant on their part that the memorandum
delay. No performance of either side can give an and the articles shall be observed.
unlawful contract any validity or right of action upon it. With respect to the above section, the importance of
6) Ultra vires torts- a company can be made liable for articles of association can be summed up as follows:
an ultra vires tort committed, provided, it is shown that 1)Binding on members in their relation to the
a) The activity in the course of which it has been company- the members are bound to the company by
committed falls within the scope of the memo. the provisions of the articles just as much as if they had
b) That the servant committed the tort. all put their seals to them.
2)Binding on company in relation to its members-
Conclusion: It can be concluded that an UV act is void just as members are bound to the company, the
and cannot be ratified. It prevents the wrongful company is bound to the members to observe and follow
application of the company’s assets likely to result in the the articles.
insolvency of the company and there by protects 3)Neither company, nor members bound to
creditors. It also prevents directors from departing the outsiders- articles bind the members to the company
object for which the company has been formed and, and company too the members but neither of them is
thus, puts a check over the activities of the directions. bound to an outsider to give effect to the articles.
However, it has sometimes led to injustice of third 4)Binding between members inter se- the articles
parties acting in good faith. define rights and liabilities of the members. As between
members inter se the articles constitute a contract
between them and are also binding on each member as
against the other or others. Such contract can be
enforced only through the medium of the company.
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Q.13. What are the Relation and Difference between Memorandum. If it does it will be ultra vires and wholly
articles and memorandum? void and inoperative.
Ans. Their Relation: (iii) Must not sanction anything illegal:The alteration
1.The Articles are subordinate to t Memorandum. The must not purport sanction any thing which is illegal.
Articles cannot give power to a company which are not (iv)Must be for the benefit of the company: The
conferred by the Memorandum nor can they purport to alteration must be made bona fide for the benefit of the
create rights which are inconsistent with the company as a whole. The company as a whole means
memorandum. the company as a general body. An alteration must not
2. The memorandum must be read in conjunction with constitute a fraud on the minority. It should not be an
Articles. attempt to deprive the company or its minority
3. The terms of the memorandum cannot be modifiiedor shareholders of something that in equity belongs to
controlled by the Articles. them.
Differences: (v)No increase in the liability of members: no
1) The memorandum contains the fundamental condition alteration can require a person to purchase more shares
upon which alone the company is allowed to be in the company or to increase his liability in any manner
incorporated. The articles are for the internal regulation except with his consent in writing.
and management of the company. (vi) Alteration by special resolution only: The
2) Memorandum defines the scope of the activities of alteration can be made only by a special resolution.
the company, or the area beyond which the actions of Thus, the power of alteration should be exercised in
the company cannot go. Articles are the rules for absolute good faith in the interest of the company.
carrying out the objects of the company as set out in the
memorandum. Q.15. Explain the rule of constructive notice and the
3) Memorandum being the character of the company, is doctrine of indoor management.
the supreme document. Art are subordinate to the Ans: Rule of constructive notice: The
memorandum. If any conflict between them, the memorandum and the articles of association of every
memorandum prevails. company are registered with the Registrar of
4) Every company must have its own memorandum. A Companies. The office of the Registrar is a public office.
company limited by shares need not have articles of its Hence, the memo and the articles become public
own. In such a case, Table A applies. documents. It is therefore the duty of person dealing with
5) An action of the company outside the scope of its a company to inspect its public documents and make
memorandum is void and incapable of ratification. An act sure that his contract is in conformity with their
of the company outside the scope of its articles can be provisions.
confirmed by the shareholders. Every outsider dealing with a company is deemed to
6) There are strict restrictions on its alteration. The have notice of the contents of the Memorandum and the
change of name requires the prior permission of central Articles of Association. This is known as constructive
government and change of registered office to another notice of Memorandum and Articles. The doctrine of
state requires the prior approval of the Company Law constructive notice of the Memorandum and Articles,
Board. Articles can be altered by a special resolution, to however, is not a positive doctrine but a negative one. It
any extent, provided they do not conflict with the is like doctrine of estoppel. It does not operate against
memorandum and the Companies Act. the company. It operates only against an outsider
dealing with the company. Thus, the doctrine of
Q.14. Explain the Alteration of articles (sec 14) constructive notice seeks to protect the company against
Ans. (1) Subject to the provisions of this Act and the the outsider by deeming that such an outsider had the
conditions contained in its memorandum, if any, a notice of the public documents of the company.
company may, by a special resolution, alter its articles Doctrine of Indoor management : The doctrine of
including alterations having the effect of conversion of— indoor management is an exception to the rule of
(a) a private company into a public company; or constructive notice. It imposes an important limitation on
(b) a public company into a private company: the doctrine of constructive notice. There is one
(2) Every alteration of the articles under this section and limitation to the doctrine of constructive notice of the
a copy of the order of the Tribunal approving the Memorandum and the Articles of the company. The
alteration as per sub-section (1) shall be filed with the outsider dealing with the company are entitled to
Registrar, together with a printed copy of the altered assume that as far as the internal proceedings of the
articles, within a period of fifteen days in such manner as company are concerned every thing has been regularly
may be prescribed, who shall register the same. done They are presumed to have read these documents
(3) Any alteration of the articles registered under sub- and to see that the proposed dealing is not inconsistent
section (2) shall, subject to the provisions of this Act, be therewith. They need not inquire into the regularity of the
valid as if it were originally in the articles. internal proceedings. They can presumed that all is
It is subject to following restrictions- being done regularly. This limitation of the doctrine of
(i)It must not be in contravention with the provisions constructive notice is known as the “doctrine of indoor
of the Act.: The alteration of the Articles must not be management”.
inconsistent with, or go beyond the provision of the Thus where as the doctrine of constructive notice
Companies Act. protects the company against outsiders, the doctrine of
(ii)It is subject to the conditions contained in the indoor management seeks to protect outsiders against
memorandum of association.: The alteration of the the company.
Articles must not exceed the power given by the
7
Exception to the dontrine of indoor management: (c) is a promoter of the company;
1)Knowledge of irregularity A person who has actual (d) has authorised the issue of the prospectus; and
knowledge of the internal irregularity cannot claim the (e) is an expert referred to in sub-section (5) of section
protection of this rule, because he could have taken 26, shall, without prejudice to any punishment to which
steps for self-protection. A person who himself is a party any person may be liable under section 36, be liable to
to the inside procedure, such as a director is deemed to pay compensation to every person who has sustained
know the irregularities, if any. such loss or damage.
2)Negligence and suspicion of irregularity: where a
person dealing with a company could discover the Q.17.What is share? Enumerate the different types of
irregularity if he had made proper inquiries, he cannot shares that may be issued by a company?
claim the benefit of the rule of indoor management. The Ans: Share is the interest of a share holder in a
protection of the rule is also not available where the company. The capital of a company is divided into
circumstances surrounding the contract are so certain indivisible units of a fixed amount. These units
suspicious as to invite inquiry, and the outsider dealing are called shares. Section. 2(84) of the Companies Act
with the company does not make proper inquiry. defines share means share in the share capital of a
3) Forgery: The rule in Turquand’s case does not apply company. It includes stock except where a distinction
where a person relies upon a document that turns out to between stock and shares is expressed or implied. A
be forged since nothing can validate forgery. share is a movable property It is incorporeal in nature,
4) Acts outside the scope of apparent authority. and it consists merely of a bundle of rights and
obligations.
Q.16.. What is prospectus? What are its contents? Share Certificate: Every person whose name is entered
Explain how it is different from statement in-lieu of as a member in the register of members of a company
prospectus. Explain the remedies for has a right to receive a certificate of his shares. A share
misrepresentation in a prospectus. certificate under the seal of company is prima facie
Ans: “prospectus” means any document described or evidence of the title of the member to the shares
issued as a prospectus and includes a red herring specified in the certificate. A share certificate of a
prospectus referred to in section 32 or shelf prospectus company creates two kinds of estoppel against the
referred to in section 31 or any notice, circular, company namely Estoppel as to title and Estoppel as
advertisement or other document inviting offers from the to payment.
public for the subscription or purchase of any securities Types of share: A company can issue two types of
of a body corporate.[Sec-2(70)] shares: (1) Preference shares, (2) Equity shares.
In other words, any document inviting deposit 1) Preference shares: Preference share holders have a
from the public or inviting offers from the public for the preferential right to be paid dividend during the life time
subscription of shares or debentures of a company is a of the company and a preferential right to the return of
prospectus. capital when the company goes into liquidation.
Misstatement in prospectus and there Kinds of preference shares: Preference shares are of
consequences: If there is any misstatement of a the following kinds: a) Cumulative preference shares, b)
material fact in a prospectus there may arise:- Non-cumulative preference shares, c) Participating
I) Civil liability Preference shares, d) Non-participating Preference
II)Criminal liability shares, e) Redeemable Preference shares, f)
Criminal liability:Sec. 34. Where a prospectus, issued, Irredeemable Preference shares.
circulated or distributed under this Chapter, includes any 2) Equity shares: Equity shares, with reference to any
statement which is untrue or misleading in form or company limited by shares are those which are not
context in which it is included or where any inclusion or preference shares. They are also called ordinary shares.
omission of any matter is likely to mislead, every person They carry no preferential right as to dividend or capital
who authorizes the issue of such prospectus shall be payment. These shares get dividend after dividends are
liable under section 447: paid on preference shares. The rate of dividend on these
Provided that nothing in this section shall apply shares is not fixed. It is determined every year in the
to a person if he proves that such statement or omission annual general meeting. Dividend may vary from year to
was immaterial or that he had reasonable grounds to year. It depends on the profits of the company.
believe, and did up to the time of issue of the prospectus
believe, that the statement was true or the inclusion or Q.18. Explain the principles of allotment of share.
omission was necessary. Ans: General Provisions regarding allotment of
Civil Liability. Sec. 35. (1) Where a person has shares : The general principles as to offer and
subscribed for securities of a company acting on any acceptance in the law of contract apply to contract
statement included, or the inclusion or omission of any involving an application for and allotment of shares in a
matter, in the prospectus which is misleading and has company. These principles are as follows:
sustained any loss or damage as a consequence 1. Proper authority: An allotment must be made by a
thereof, the company and every person who— resolution of the Board of directors of the company.
(a) is a director of the company at the time of the issue This duty cannot be delegated by the directors except
of the prospectus; in accordance with the provisions of the Articles.
(b) has authorised himself to be named and is named in 2. Reasonable time: The allotment must be made
the prospectus as a director of the company, or has within a reasonable time otherwise the applicant is not
agreed to become such director, either immediately or bound to accept it. But if inspite of an unreasonable
after an interval of time;
8
 delay, shares are accepted by the applicant he cannot Issued or subscribed capital-issued capital is the
plead that his offer had lapsed because of the delay. nominal value of the shares which are offered to the
3. Communication: The allotment must be public for subscription. The issued capital can never
communicated to the person making the application exceed the authirised capital.
so that it is legally complete. Called-up capital-this is that part of the issued capital
4. Absolute and unconditional: The allotment must be which has been called up on the shares.
absolute and unconditional. If an application for Paid-up capital-this is that part of the issued capital
shares is conditional and the condition is not fulfilled, which has been paid up by the shareholders or which is
the applicant is not bound to take shares. credited as paid-up on the shares
5. Revocation: An offer to take shares may be Uncalled capital-this is the remainder of the issued
withdrawn an y time before communication of its capital which has not yet been called.
acceptance is complete as against the applicant. That Reserve capital-this is that part of the uncalled capital
is, an applicant for shares can withdraw his offer any of a company which can be called only in the event of its
time before his offer has been accepted. winding up.
Kinds of share Capital:
Q.19. Explain the procedure of transfer of shares. Share capital means the capital raised by a company by
Ans: Transfer of shares: The shares of a member in a the issue of shares. The capital of a company may be of
company are movable property, transferable in the two kinds-
manner prescribed in the Act and the Articles of the 1.Equity share capital- Equity share capital means,
company. The right of a shareholder to transfer his with reference to a company limited by shares, all share
shares in a company is absolute as it is inherent in the capital which is not preference share capital. In other
ownership of the shares, but it can be restricted by words it is capital which does not carry preferential right
contract which has to be found in the Articles of as to: payment of dividend , repayment of capital on
Association of the company. winding up.Euity share capital may be (i) with voting
Secs. 108 to 112 of the Act deal with the transfer of rights or (ii) with differential rights as to dividend, voting
shares. or otherwise in accordance with such rules and subject
1. Transfer not to registered except on production of to such conditions as may be prescribed.
instrument of transfer(Sec-108): A company shall Shares with differential rights- it means a share that is
not register a transfer of shares unless a proper issued with differential rights in accordance with the
transfer deed duly stamped and executed and signed provisions of Section 86.
by both the transferor and the transferee is delivered 2 Preference share capital-it means, in the case of a
to the company. company limited by shares, that part of the capital of the
2. Transfer by legal representatives (Sec-109): A company which carries a preferential right as to-
transfer executed by the legal representative of a (a) payment of dividend during the lifetime of the
deceased member, although he is not himself a company
member, is valid as the one executed by the (b) repayment of capital on winding up
members himself
3. Application for transfer (Sec.110): An application Q.21. Define Director. Discuss the position of
for the registration of a transfer of share of a company Director in a company and explain its powers and
may be made either by the transferor or by the duties.
transferee Ans: A company is a legal entity and does not have any
4. Power to refuse registration and appeal against physical existence. It can act only through natural
refusal (Sec.111): With a view to providing adequate persons to run its affairs. The person, acting on its
protection to investors against refusal of a company to behalf, is called Director. The persons who are in
register transfer of shares, Sec-111 requires charge of the management of the affairs of the company
companies to give reasons before they refuse any as termed as directors. They are collectively known as
transfer of shares. It also confers a right on the board of directors or the Board. The directors are the
aggrieved investor to apply for relief to the Company brain of the company. They occupy a pivotal position in
Law Board on specified ground . the structure of the company. The true position is that
5. Certification of transfer(Sec.112): Certifications an directors are in a fiduciary relation ship. Directors have
act of endorsement on the instrument of transfer by sometimes been called as trustees, sometimes as
an officer of the company that the share certificate agents, and sometimes as managing partners. It does
relating to the share to be transferred has been lodge not matter much what you call them so long as you
with the company. understand what their real position is, which is that they
are really commercial men managing a trading concern
Q 20. What are the Kinds of Share Capital? for the benefit of themselves and of all the share holders
Ans: Share capital means the capital raised by a in it.
company by the issue of shares. The word capital in Powers of directors:
connection with a company is used in several senses: it General powers of Board: Subject to the provisions of
may means authorized, issued and subscribed, or paid this Act, the Board of directors of a company shall be
up or reserve capital o the company. entitled to exercise all such powers, and to do all such
Classification of Capital: acts and things, as the company is authorised to
Authorized or nominal capital-This is the nominal exercise and do.
value of the shares which a company is authorized to Powers to be exercised at board meeting: The Board of
issue by its Memorandum of Association. directors of a company shall exercise the following
9
powers on behalf of the company, and it shall do so only fact within their knowledge the existence of which might
by means of resolutions passed at meetings of the in any degree affect the nature, or extent, or quality of
Board :- the privileges and advantages which the prospectus
(a) the power to make calls on shareholders in respect "holds out as inducements to take shares ".
of money unpaid on their shares; In brief the rule says that since the public is
(b) the power to issue debentures; invited to take shares on the faith of the representations
(c) the power to borrow moneys otherwise than on made in the prospectus, everything must be stated with
debentures; strict and scrupulous accuracy. As the public is at the
(d) the power to invest the funds of the company; and mercy of the company promoters, hence nothing should
(e) the power to make loans : be stated as fact which is not so, and no fact should be
Duties of a Director: omitted the existence of which might in any degree affect
To file return of allotments: a company must file with the nature or quality of the privileges and advantages
the Registrar, within a period of 30 days, a return of the which acted as an inducement to take shares. Thus the
allotments, stating the specified particulars. Failure to file true nature of the company’s venture should be
such return shall make the Directors liable as 'officer in disclosed. In addition to the mandatory information
default'. A fine, up to Rs.500 per day, till the default required to be given as per the Act, there must be
continues may be levied. voluntary disclosures of information as would reasonably
Not to issue irredeemable preference shares or constitute a fair representation of facts for the public to
shares, redeemable after 20 years: A company cannot act upon.
issue irredeemable preference shares or preference This principle is known as Golden Rule or
shares, redeemable beyond 20 years. Directors, making Golden Legacy.
any such issue, may be held liable as 'officer in default'
and, may be subject to a fine, up to Rs.1, 000. Q. 23. Explain the difference between company and
To disclose interest: A Director, who is interested in a HUF
transaction of the company, must disclose his interest to
the Board. The disclosure must be made at the first Difference between Company and Hindu Undivided
meeting of the Board, held after he has become Family (HUF)
interested. Company Hindu Undivided
Duty to attend Board meetings - A number of powers Family (HUF)
of the company are exercised by the Board of Directors Heterogeneous
in their meetings, held from time to time. Although, a (Members may
Director may not be able to attend all the meetings, but, Homogeneous
belong to
Membership (Members belong
if he fails to attend three consecutive meetings or, all different family,
meetings for a period of three months, whichever is to same family)
caste, religion,
longer, without permission of the Board, his office shall, country etc.)
automatically, fall vacant. Company itself
A Director's duties also include the following: has authority to
 To convene Statutory, Annual General Meeting (AGM) create debt
and also Extraordinary General Meetings; through its agent
 To prepare and place at the AGM, along with the Authority to subject to the Retains with
balance sheet and, profit and loss account, a report on create debt provisions of Karta only
the company's affairs, including the report of the Board Memorandum Of
of Directors; Association &
 To authenticate and approve annual financial Articles Of
statement; Association.
 To appoint first auditor of the company; By virtue of
 To appoint cost auditor of the company; Membership By virtue of birth
contract
 To make a declaration of solvency in the case of a Compulsory
Members' voluntary winding up; Not compulsory
Registration under Company
under any law
Laws
Q.22. Explain the principle of Golden Rule or Golden
Legacy.
Ans. The Golden Rule or Golden Legacy: It is the duty Q.24. Explain the procedure of Appointment of
of those who issue the prospectus to be truthful in all directors.
respect. The golden rule while framing the prospectus to Ans:Appointment of directors. Sec(152).
be issued was laid down by Kindersley, V. C., in the (1) Where no provision is made in the articles of a
case of New Brunswick and Canada Railway and Land company for the appointment of the first director, the
Co. v. Muggeridge in these words:---"Those who issue a subscribers to the memorandum who are individuals
prospectus holding out to the public the great shall be deemed to be the first directors of the company
advantages which will accrue to persons who will take until the directors are duly appointed and in case of a
shares in a proposed undertaking, and inviting them to One Person Company an individual being member shall
take shares, on the faith of the representations therein be deemed to be its first director until the director or
contained, are bound to state everything with strict and directors are duly appointed by the member in
scrupulous accuracy, and not only to abstain from ccordance with the provisions of this section.
stating as facts that which is not so, but to omit no one
10
(2) Save as otherwise expressly provided in this Act, (2) A special notice shall be required of any resolution, to
every director shall be appointed by the company in remove a director under this section, or to appoint
general meeting. somebody in place of a director so removed, at the
(3) No person shall be appointed as a director of a meeting at which he is removed.
company unless he has been allotted the Director (3) On receipt of notice of a resolution to remove a
Identification Number under section 154. director under this section, the company shall forthwith
(4) Every person proposed to be appointed as a director send a copy thereof to the director concerned, and the
by the company in general meeting or otherwise, shall director, whether or not he is a member of the company,
furnish his Director Identification Number and a shall be entitled to be heard on the resolution at the
declaration that he is not disqualified to become a meeting.
director under this Act. (4) Where notice has been given of a resolution to
(5) A person appointed as a director shall not act as a remove a director under this section and the director
director unless he gives his consent to hold the office as concerned makes with respect thereto representation in
director and such consent has been filed with the writing to the company and requests its notification to
Registrar within thirty days of his appointment in such members of the company, the company shall, if the
manner as may be prescribed: time permits it to do so,—
Provided that in the case of appointment of an (a) in any notice of the resolution given to members of
independent director in the general meeting, an the company, state the fact of the representation having
explanatory statement for such appointment, annexed to been made; and
the notice for the general meeting, shall include a (b) send a copy of the representation to every member
statement that in the opinion of the Board, he fulfils the of the company to whom notice of the meeting is sent
conditions specified in this Act for such an appointment. (whether before or after receipt of the representation by
Appointment of director elected by small the company), and if a copy of the representation is not
shareholders.Sec 151. sent as aforesaid due to insufficient time or for the
A listed company may have one director elected by such company’s default, the director may without prejudice to
small shareholders in such manner and with such terms his right to be heard orally require that the representation
and nditions as may be prescribed. shall be read out at the meeting:
Appointment of directors to be voted individually. (5) A vacancy created by the removal of a director under
Sec. 162. (1) At a general meeting of a company, a this section may, if he had been appointed by the
motion for the appointment of two or more persons as company in general meeting or by the Board, be filled by
directors of the company by a single resolution shall not the appointment of another director in his place at the
be moved unless a proposal to move such a motion has meeting at which he is removed, provided special notice
first been agreed to at the meeting without any vote of the intended appointment has been given under sub-
being cast against it. section (2).
(2) A resolution moved in contravention of sub-section (6) A director so appointed shall hold office till the date
(1) shall be void, whether or not any objection was taken up to which his predecessor would have held office if he
when it was moved. had not been removed.
(3) A motion for approving a person for appointment, or (7) If the vacancy is not filled under sub-section (5), it
for nominating a person for appointment as a director, may be filled as a casual vacancy in accordance with the
shall be treated as a motion for his appointment. provisions of this Act:
Option to adopt principle of proportional Provided that the director who was removed from office
representation for appointment of directors. Sec. shall not be re-appointed as a director by the Board of
163. Notwithstanding anything contained in this Act, the Directors.
articles of a company may provide for the appointment (8) Nothing in this section shall be taken—
of not less than two-thirds of the total number of the (a) as depriving a person removed under this section of
directors of a company in accordance with the principle any compensation or damages payable to him in respect
of proportional representation, whether by the single of the termination of his appointment as director as per
transferable vote or by a system of cumulative voting or the terms of contract or terms of his appointment as
otherwise and such appointments may be made once in director, or of any other appointment terminating with
every three years and casual vacancies of such directors that as director; or
shall be filled as provided in sub-section (4) of section (b) as derogating from any power to remove a director
161. under other provisions of this Act.

Q.25.Describe the procedure of Removal of

Q.26.What is the procedure of appointment of
directors. liquidator? Briefly explain his powers and duties.
Ans: Sec.169. (1) A company may, by ordinary
resolution, remove a director, not being a director Ans. Sec.310. Appointment of Company Liquidator.
appointed by the Tribunal under section 242, before the : The company in its general meeting, where a resolution
expiry of the period of his office after giving him a of voluntary winding up is passed, shall appoint a
reasonable opportunity of being heard: Company Liquidator from the panel prepared by the
Provided that nothing contained in this sub-section shall Central Government for the purpose of winding up its
apply where the company has availed itself of the option affairs and distributing the assets of the company and
given to it under section 163 to appoint not less than two recommend the fee to be paid to the Company
thirds of the total number of directors according to the Liquidator. Where the creditors have passed a
principle of proportional representation.
11
resolution for winding up the company under sub-section availing of tax benefits. Merger means an arrangement
(3) of section 306, the appointment of the Company whereby one or more existing companies merge their
Liquidator under this section shall be effective only after identity in to another existing company or form a distinct
it is approved by the majority of creditors in value of the new entity. Any proposal of merger or amalgamation
company: begins with the process of due diligence which is a very
essential step in carrying out the whole merger or
Provided that where such creditors do not amalgamation.
approve the appointment of such Company Liquidator, SECTION-232- PROCEDURE OF MERGER &
creditors shall appoint another Company Liquidator. The AMALGAMATION:
creditors while approving the appointment of Company [SECTION 232(1)]- Filing an application to the Tribunal
Liquidator appointed by the company or appointing the in Form AMG.1 along with Notice of admission
Company Liquidator of their own choice, as the case supported by an affidavit for order of meeting under
may be, pass suitable resolution with regard to the fee of section 230 for sanctioning of scheme of compromise or
the Company Liquidator. On appointment as Company arrangement.
Liquidator, such liquidator shall file a declaration in the  If a meeting is proposed to be called then company
prescribed form within seven days of the date of shall order a meeting of the creditors or class of
appointment disclosing conflict of interest or lack of creditors or members or class of members to be
independence in respect of his appointment, if any, with called, held or conducted in the manner as the
the company and the creditors and such obligation shall Tribunal directs.
continue throughout the term of his or its appointment.  The notice of meeting pursuant to the order of
Sec.314. Powers and duties of Company Liquidator Tribunal to be given in the manner as provided shall
in voluntary winding up.:The Company Liquidat or be in Form AMG 4 and advertisement of notice
shall perform such functions and discharge such duties in Form AMG. 2.
as may be determined from time to time by the company  A notice of the meeting shall also be sent to Central
or the creditors, as the case may be. Government, SEBI, RBI and such other regulatory
 The Company Liquidator shall settle the list of authorities in Form AMG. 5.
contributories, which shall be prima facie evidence of  The report shall state accurately the number of
the liability of the persons named therein to be creditors or class of creditors or the number of
contributories. members or class of members, as the case may be,
 The Company Liquidator shall call general meetings who were present and who voted at the meeting
of the company for the purpose of obtaining the either in person or by proxy, their individual values
sanction of the company by ordinary or special and the way they voted. The report shall be in FORM
resolution, as the case may require, or for any other NO. AMG.6
purpose he may consider necessary. [SECTION 232 (2)]-Circulation of following
 The Company Liquidator shall maintain regular and documents for the meeting:
proper books of account in such form and in such  Proposed draft scheme adopted by the directors of
manner as may be prescribed and the members and merging companies;
creditors and any officer authorised by the Central  Confirmation of filing the draft copy of scheme with
Government may inspect such books of account. the Registrar;
 The Company Liquidator shall prepare quarterly  Valuation Report, if any;
statement of accounts in such form and manner as  Report adopted by the directors of the merging
may be prescribed and file such statement of companies explaining the effect of the compromise;
accounts duly audited within thirty days from the  Supplementary accounting statement if the last
close of each quarter with the Registrar, failing which annual accounts of any of the merging company
the Company Liquidator shall be punishable with fine relate to a financial year ending more than six months
which may extend to five thousand rupees for every before the first meeting of the company summoned
day during which the failure continues. for the purposes of approving the scheme.
 The Company Liquidator shall pay the debts of the [SECTION 232 (3)]-The Tribunal may by order sanction
company and shall adjust the rights of the the Scheme of merger or amalgamation in Form AMG.
contributories among themselves. 10, if satisfied that the procedure specified in sections
 The Company Liquidator shall observe due care and 232(1) & 232(2) has been complied or the Tribunal can
diligence in the discharge of his duties. make provisions for the following matters by giving
subsequent orders:
 If the Company Liquidator fails to comply with the
provisions of this section except sub-section (5) he  To transfer the whole or any part of the undertaking
shall be punishable with fine which may extend to ten property or liabilities to the Transferor company to the
lakh rupees. Transferee Company;
 To allot or appropriate any shares, debentures or
other like instruments under the merger or
Q.27.Explain the procedure of Merger and
amalgamation by the Transferee Company to or for
Amalgamation of Companies.
any person;
Ans. Merger and Amalgamation is a restructuring tool
 Dissolution , without winding-up of any Transferor
available to Indian conglomerates aiming to expand and
company;
diversify their businesses for various reasons whether it
is to gain competitive advantage, reduce costs or

12
  The continuation of any legal proceedings by or 2. If the company has by special resolution resolved that
against any Transferor company or Transferee the company be wound up by the tribunal.
company; 3. If the company has acted against the interest of the
 The provisions for any persons who are dissent from integrity or morality of India, security of the state, or has
the scheme of merger or arrangement; spoiled any kind of friendly relations with foreign or
 The allotment of shares of the Transferee company to neighboring countries.
the non- resident shareholder shall be in the manner 4. If the company has not filled its financial statements or
specified in the order; annual returns for preceding 5 consecutive financial
 Transfer of employees of the Transferor company to years.
the Transferee company; 5. If the tribunal by any means finds that it is just &
 Such incidental, consequential and supplemental equitable that the company should be wound up.
matters as are deemed necessary to secure that the 6. If the company in any way is indulged in fraudulent
merger or amalgamation is fully effective and carried activities or any other unlawful business, or any person
out; or management connected with the formation of
The Companies Act, 2013 requires that all companies company is found guilty of fraud, or any kind of
must obtain an auditor’s certificate and shall also file with misconduct.
the Tribunal that the scheme is in conformity with the Filing of Winding up petition: Section 272 provides that a
accounting standards. winding up petition is to be filed in the prescribed form
[SECTION 232 (4)]-If the Tribunal order to transfer any no 1,2 or 3 whichever is applicable and it is to be
property or liabilities then that properties and liabilities submitted in 3 sets. The petition for compulsory winding
shall be transferred to the Transferee Company by the up can be presented by the following persons:
Transferor Company.
[SECTION 232 (5)]-Filing a certified copy of the order  The company:
with the Registrar for registration within thirty days of the  The creditors:
receipt of the certified copy of the order.  Any contributory or contributories:
[SECTION 232 (6)]-Scheme shall indicate clearly the  By the central or state govt.:
Appointed Date from which it shall be effective.  By the registrar of any person authorized by central
[SECTION 232 (7)]-A statement certified by a Company govt. for that purpose.
Secretary or Chartered Accountant or Cost Accountant
in practice indicating whether the scheme has complied At the time of filing petition, it shall be accompanied with
with the orders of the Tribunal every year until the the state of affairs in form no 4. The petition shall state
completion of scheme shall be filed in Form AMG.11. the facts up to a specific date which shall not more
[SECTION 232 (8)]-If any of the company contravenes than15 days prior to the date of making the statement.
the provisions of this section shall be punishable with After preparing the statement it shall be certified by a
fine not less than Rs. 1, 00,000/- may extend to Rs. 25, practicing chartered accountant . This petition shall be
00,000/- and every officer in default shall be punishable advertised in not less than 14 days before the date fixed
with fine not less than Rs. 1, 00,000/- may extend to Rs. for hearing in both of the newspapers English and any
3, 00,000/- or imprisonment which may extend for a term other regional language.
of 1 year or with both. Final order and its contents: The tribunal after hearing
the petition has the power to dismiss it or to make an
interim order as it think appropriate or it can appoint the
Q. 28. What is Winding up of a company? What is the law provisional liquidator of the company till the passing of
governing the procedure of Winding up in India? winding up order. An order for winding up is given in
Ans. Winding up of a company is the process through form 11.
which life of a company comes to an end and its
property is administered for the benefit of its members & Voluntary Winding up of a company: The winding up of a
creditors. An Administrator, called a liquidator is company can also be done voluntarily by the members
appointed and he takes control of the company, collects of the Company, if:
its assets, pays its debts and finally distributes any  If the company passes a special resolution for
surplus among the members in accordance with their winding up of the Company.
rights.  The company in general meeting passes a
Procedure of Winding up in India: Section 270 of the resolution requiring the company to be wound
Companies Act 2013, lays down the procedure for up voluntarily as a result of the expiry of the
winding up of a company. It provides two ways of period of its duration, if any, fixed by its articles
winding up - of association or on the occurrence of any event
 By the tribunal in respect of which the articles of association
 Voluntary provide that the company should be dissolved.
Procedures involved in Voluntary Winding up of a Company:
Winding up By the tribunal: Step 1 - Conduct a board meeting with 2 Directors and
thereby pass a resolution with a declaration given by
As per new Companies Act 2013, a company can be directors that they are of the opinion that company has
wound up by a tribunal in the below mentioned no debt or it will be able to pay its debt after utilizing all
circumstances: the proceeds from sale of its assets
1. When the company is unable to pay its debts

13
Step 2 - Issues notices in writing for calling of a General some major changes were brought up in the companies
Meeting proposing the resolution along with the act 2013. Under the new provisions of the companies
explanatory statement. act, the financial year of the company incorporated after
Step 3 - In General Meeting pass the ordinary resolution 1st January of a year would be 31st March of the
for the purpose of winding up by ordinary majority or following year and in other cases, it would be the period
special resolution by 3/4th majority ending on the 31st March. One can understand this from
Step 4 - Conduct a meeting of creditors after passing the the following example. In a case a company is
resolution, if majority creditors are of the opinion that incorporated on 5th January 2016, the first financial year
winding up of the company is beneficial for all parties of the company would end on 31st of March 2017, and it
then company can be wound up voluntarily. should with respect to Section 96 which deals with
Step 5 - Within 10 days of passing the resolution, file a annual general meeting hold it’s AGM on or before 31st
notice with the registrar for appointment of liquidator. December 2017. In the same example if the company is
Step 6 - Within 14 days of passing such resolution, give incorporated on 20th December 2015 or on any date
a notice of the resolution in the official gazette and also before 1st January 2016 then the first financial year
advertise in a newspaper. would close on 31st March 2016 irrespective of the
Step 7 - Within 30 days of General meeting, file certified question whether the time frame is of 1 year or not and
copies of ordinary or special resolution passed in in such a circumstance the AGM should be held on or
general meeting. before 31st of December 2016(which is within 9 months
Step 8 - Wind up the affairs of the company and prepare from the closure of first financial year). In any other case,
the liquidators account and get the same audited. the AGM should be held within 6 months from the date
Step 9 - Conduct a General Meeting of the company. of close of the financial year. Also, the registrar may for
Step 10 - In that General Meeting pass a special the special reason extend the time of AGM, other the
resolution for disposal of books and all necessary first AGM by a period not exceeding 3 months. Under
documents of the company, when the affairs of the the new Act, AGM can be held on any day including
company are totally wound up and it is about to dissolve. Saturdays, Sundays and public holiday except National
Step 11 - Within 15 days of final General Meeting of the Holidays(26th January, 15th August and 2nd October)
company, submit a copy of accounts and file an between 9 a.m to 6 p.m.
application to the tribunal for passing an order for Notice for Annual General Meeting
dissolution. For a general meeting not less than a clear notice of 21
Step 12 - If the tribunal is of the opinion that the days either in writing or through electronic mode should
accounts are in order and all the necessary compliances be given. But a general meeting may be called after
have been fulfilled, the tribunal shall pass an order for giving a shorter notice if consent by not less than 95% of
dissolving the company within 60 days of receiving such the members entitled to vote at such meeting is given in
application. writing or by electronic mode. The notice of such
Step 13 - The appointed liquidator would then file a copy meeting should consist of place, day, date and the
of order with the registrar. proper hour of the meeting and should also contain a
Step 14 - After receiving the order passed by tribunal, statement stating business which is to be transacted at
the registrar then publish a notice in the official Gazette such meeting. The notice should be circulated to every
declaring that the company is dissolved. member of the company, legal representative of
deceased and assignee of insolvent member, auditor
Q.29. What are the Laws relating to meetings under and every director of the company. Section 101 of the
Companies Act, 2013 ? Companies act 2013, deals with the provision of Notice
Ans. A company being artificial per son cannot act by for the annual general meeting.
itself. It has no power of decision making. It can act only Quorum of meeting
through its two principal organs, namely (i) the board of As provided under section 103 of the companies act the
directors and (ii) the shareholders. The Board of quorum of the company in case of public company
directors take decision relating to day to day activities should be five personally present in case the total
based on the resolutions of shareholders at general member on date of the meeting does not exceed 1000,
meetings. 15 in case more than thousand but less than five
Broadly the meetings of companies are classified (i) thousand and 30 in case of more than 5000 members on
Annual General meeting,(ii) Extraordinary General the date of meeting. While in the case of a private
Meeting and(iii) the meeting of Board of Directors. company only 2 members if personally present will make
1. Annual general meeting: Provided under Section 96 up the quorum of the meeting. It has been also provided
of the companies act “Annual General Meeting” every that in case the quorum is not fulfilled within half an hour
company other than a One person company shall each the scheduled time of the meeting then the meeting
year hold a general meeting as annual general meeting would be adjourned to the same day of the next week. In
other than any other kind of meetings and the company case the quorum is not filled within half an hour in the
should make sure that there should not be a gap of more adjourned meeting then the present members would
than fifteen months between two annual general form the required quorum for the meeting. In the case of
meetings. the meeting by requisition under section 100, the
First annual general meeting meeting stand cancelled in case of lack of quorum as
With respect to first AGM, it should be held within the provided under section 103(2).
time frame of nine months from the date of closing of the
first financial year. Now one of the biggest dilemmas is 2. Extraordinary General Meeting:i) Under Section
with respect to first financial year of the company as 100(1) of the Companies Act, the board may whenever it
14
deems fit may call an extraordinary meeting of the by at least one independent director. The quorum for the
company. board meeting is 1/3rd of the total strength of the board
of director or two, whichever is highest.
ii) Section 100(2) lays down the procedure for calling an 5. Meeting of audit committee: Audit committee has
extraordinary general meeting in case of the requisition. formation, rights and liabilities have been provided under
In case of the company who has share capital(basically section 177 of the Act. It consists of a minimum of three
the company limited by shares ), should be voted upon directors along with independent directors forming a
by such number of members who on the date of receipt majority. They can hold a meeting with respect to the
of the requisition holds not less than one-tenth of such of discussion of audit reports.
the paid-up share capital of the company as on that date
carries the right of voting and in case of the company Q.30. Appointment of Directors, their appointment
who does not have a share capital(basically the terms and procedural formalities under Companies
company limited by guarantee who don’t have share Act, 2013
capital) should be voted upon by such number of Ans: Day-to-day affairs of a company are run by its
members who on the date of receipt of the requisition directors and employees. The companies act recognizes
holds not less than one-tenth of the total voting power of the board of directors and key managerial personnel in
all the members having on the said date a right to vote. the company as the persons responsible to execute the
One of the basic feature of the call for meeting by activities of the company. Some directors may also have
requisition is that in case the board within twenty-one an employment relationship with the company. For
days of the receipt of requisition fails to proceed to call example, the office of the Chief Executive Officer, the
for meeting for the consideration of that matter on a day Chief Financial Officer or the Chief Operating Officer
not later than forty-five days from the date of receipt of positions may be offered to persons who are also
such requisition then the meeting cab be called by the directors. This chapter explains the provisions relating to
requisitionists themselves as per the process in which the directors of the company.
board holds the meeting and the cost of the same would Number of directors
be borne by the company. The Companies Act, 2013 fixes the minimum and
3. Meeting called by tribunals: Under Section 98 of the maximum number of directors a company can appoint.
Companies Act tribunal has been endowed with power Under the 2013 Act, a private company is required to
to call for meetings on application by the member of the appoint at least two directors; while a public company
company or any director who is entitled to vote at such a must appoint at least three directors and a one person
meeting. It is basically done in the case where it is not company is required to appoint at least 1 director. A
practically possible for the company to hold a meeting company can appoint a maximum of 15 directors (a
other than an annual general meeting. It can pass any maximum of 12 directors were allowed under the
ancillary or consequential order as the tribunal may feel Companies Act, 1956).It is possible for a company to
important. Also, under section 97 of the Act Tribunal can increase the number of directors beyond 15 by passing a
call an annual general meeting in case of default of the special resolution to this effect. Moreover, one of the
company. It can pass any ancillary or consequential directors of the company must be resident in India, that
order as the tribunal feels expedient to do. is, he must have stayed in India for a period of not less
4. Board meetings: Under Section 173 of the Act, this than 180 days in the previous calendar year.
provision of the board meeting is applicable to all types How are directors appointed?
of companies including one person company. The first Generally for a private company, typically the promoters
board meeting is mandatory to be held within thirty days (i.e. the founders who are signatories to the articles of
of the incorporation of the company and subsequent to association) of the company become the first directors of
that the company should hold a minimum of four the company.
meetings of the board of directors. One of the most Although the articles of association should ideally
important aspects is that not more than 120 days gap mention names of the first directors of the company, if
should be there between two such meetings. One that is not done, the subscribers to the memorandum
Person Company shall convene at least 1 board meeting (that is, the initial shareholders who incorporate the
in half calendar year and the gap between two meeting company) shall be considered as the directors. In all
should not exceed by more than 90 days. The meeting other cases, the directors can be appointed by the
can be done by way of video conferencing or any other company through a resolution passed in the general
audio-video means. The central government may decide meeting. However, before such appointment can be
upon exceptions, modifications or conditions of the made, the members must be informed by either email or
companies or class of companies to be excluded from through postal communication at least seven days
the applicability of this section and it can also decide before the meeting about the candidature of the person
which matters can’t be decided upon by way of video as a new director.
conferencing. How to accept appointment as director
Notice and quorum for board meeting A person who is intended to become a director must
A minimum notice of not less than seven days has to be apply to the Registrar for obtaining a Director
provided to every director of the company about the Identification Number (DIN) in Form No DIR-3. The
meeting at his registered address in the company by prospective director should give a declaration to the
way of post or by e-mode. The meeting can be called at company that he holds a DIN and is not otherwise
a shorter notice. In the case of absence of the disqualified to become a director. A person who has
independent director, decisions of such meeting should been appointed as a director must notify the company
be circulated to every director and should also be ratified about his consent to act as director in Form No DIR-2
15
and to the Registrar within thirty days of appointment in can be re-appointed only after a gap of three years
Form No DIR-12. (provided that the person was not appointed or
Failure to notify the Registrar of one’s associated with the company during these three years).
appointment as a director is an offence – if a director Resignation and removal of directors: A director can
fails to notify the Registrar of his appointment within the by giving a notice in writing to the company and the
specified dates as mentioned in the previous paragraph, board, resign from the post of director. The effect of
he is punishable with imprisonment for a period of six resignation will take place from the date when such
months or may have to a pay fine which may extend to notice has been received by the company or on such
fifty thousand rupees and if the non-compliance date as the director has conveyed to the company,
continues he might have pay an additional fine of rupees whichever is later. Moreover, a director must convey the
five hundred per day of non-compliance. notice of resignation along with reason for resignation to
Block A person cannot be a director in more than twenty the Registrar in Form No DIR-11 within thirty days from
companies (out of which a person can be a director in a the date of resignation. The company in a similar
maximum of ten public companies) at the same time. manner has to inform the Registrar and post the
However, a company is allowed to fix any lesser number information on the website of the company about the
of companies a director is allowed to act as directors, by resignation of the director within thirty days from the date
passing a special resolution. of notice of resignation in Form No DIR-12.
A director can be removed at any time by passing an
Special requirements for public companies ordinary resolution (at least 51 % of the shareholders
The new Companies Act has imposed additional must pass the resolution) at a shareholders meeting, at
requirements with respect to appointment of any time before the completion of the term of the
independent directors and women directors on public director. However, the director must be given reasonable
companies (whether they are listed or not). All listed opportunity of being heard before the decision is taken.
companies are required to appoint special categories of For this purpose, a shareholders meeting (called a
directors like independent directors, small shareholders general meeting) can be specifically called (see the
(minority) directors and woman directors in the Board. chapter on meetings for further details). The notice that
Some of these requirements even apply to unlisted must be given to shareholders is called a ‘special notice’.
public companies, if certain share capital, debt or
turnover thresholds are exceeded.
Independent Director – All listed public companies Q.31. Explain the procedure of dissolution of a
must appoint independent directors (i.e. those who are company.
not related to the promoters of the company and do not
have a financial relationship with the company) as per Ans: Sec. 302. Dissolution of company by Tribunal.
the listing agreement, however, the proportion of 1. When the affairs of a company have been
independent directors cannot fall below more than one- completely wound up, the Company Liquidator
third of the toal directors, for better transparency and shall make an application to the Tribunal for
good governance. dissolution of such company.
Unlisted public companies must appoint at least two
independent directors in the following circumstances: 2. The Tribunal shall on an application filed by the
i. If their paid up share capital exceeds Rs. 10 crores. Company Liquidator under sub-section (1) or
ii. If their turnover exceeds Rs. 100 crores. when the Tribunal is of the opinion that it is just
iii If the aggregate of all the outstanding loans, and reasonable in the circumstances of the case
debentures and deposits exceeds Rs 50 crores. that an order for the dissolution of the company
Woman director – All listed companies and other public should be made, make an order that the
companies having a paid-up share capital of more than company be dissolved from the date of the
Rs 100 crores or turn-over of more than three hundred order, and the company shall be dissolved
crore must appoint atleast one woman director. accordingly.
Director appointed by minority shareholders– To 3. A copy of the order shall, within thirty days from
have a fair representation of the minority shareholders in the date thereof, be forwarded by the Company
a listed company (a shareholder having shares whose Liquidator to the Registrar who shall record in
nominal value is less than twenty thousand rupees), the the register relating to the company a minute of
minority shareholders may elect one director. the dissolution of the company.
Term of appointment of directors: Generally a director
is appointed in the Annual General Meeting (AGM), and 4. If the Company Liquidator makes a default in
can hold the post till the next AGM. However, the articles forwarding a copy of the order within the period
of the company can provide for appointment of specified in sub-section (3), the Company
permanent directors in the articles of the company. In Liquidator shall be punishable with fine which
case of a public company or its subsidiaries, only one- may extend to five thousand rupees for every
third of the directors can be appointed as permanent day during which the default continues. Arrest of
directors, rest of the directors must retire by rotation at person trying to leave India or abscond.
the AGM of the company. An independent director can
be appointed for a period of consecutive five years. Such
directors can be re-appointed after passing a special
resolution by the Board for a period of another 5 years.
After two consecutive terms, an independent director
16