UNIT - 2

Corporate Incorporation and

Management
 Contents
• Definition of company,
• characteristics ,
• types of company,
• lifting of corporate veil
• (i) Incorporation of company
• (ii) Memorandum and Articles of Association
• (iii) Doctrine of Ultra Vires
• (iv) Doctrine of Indoor Management and constructive notices Management
• (i) Directors: Appointment, Removal, Position, Powers and Duties of Directors.
• (ii) Auditor and audit Committee: Its Role. Directors – qualification and
Appointment, Liabilities and duties
Definition of Company
• An organization of individuals conducting a commercial or industrial
enterprise. A corporation, partnership, association, or
joint stock company.

• Any formal business entity for profit which may be a corporation, a

partnership, association or individual proprietorship.
• Often people think the term "company" means the business is incorp
orated, but that is not true. In fact, a corporation usually
must use some term in its name such as "corporation,"
"incorporated,"
WHAT IS COMPANY
A company is an artificial person created by law.

A company means a group of persons associated together for the

attainment of a common end, social or economic.

Section 3(1)(i) of the Companies Act, 1956 defines a company as: “a

company formed and registered under this Act or an existing
Company”.

‘Existing Company’ means a company formed and registered under

any of the earlier Company Laws.
Characteristics of a company
• Separate legal entity
• Limited liability
• Perpetual succession
• Common seal
• Transferability of shares
• Separate property
SEPARATE LEGAL ENTITY
• A company is in law regarded as an entity separate from its members. It
has an independent corporate existence.

• Any of its member can enter into contracts with it in the same manner
as any other individual can and he cannot be held liable for the acts of
the company even if he holds virtually the entire share capital.

• The company’s money and property belongs to it and not to the

shareholders (although the shareholders own the company)
LIMITED LIABILITY
• A company may be a company limited by shares or a company
limited by guarantee. In a company limited by shares, the liability of
members is limited to the unpaid value of the shares.

PERPETUAL SUCCESSION
• Being an artificial person a company never dies, Nor does its life
depend on the life of its members.
• Members may come and go but the company can go on forever.
• It continues to exist even if all its members are dead. The existence of
company can be terminated only by law.
• I t means that a company’s existence persists irrespective of the
change in the composition of its membership.
Common Seal
Since a company has no physical existence, it must act through its
agents and all such contracts entered into by its agents must be under a
seal of the company. The common seal acts as the official signature of
the company.
TRANSFERABILITY OF SHARES
The capital of a company is divided into parts called shares. These
shares are, subject to certain conditions, freely transferable, so that no
shareholder is permanently wedded to the company. When the join
stock companies were established the great object was that the shares
should be capable of being easily transferred.
SEPARATE PROPERTY:
As a company is a legal person distinct from its members,
It is capable of owning, enjoying and disposing of property in its own
name.
Although its capital and assets are contributed by its shareholders,
they are not the private and joint owners of its property.
The company is the real person in which all its property is vested and
by which it is controlled, managed and disposed of.
ON THE BASIS OF INCORPORATION

Statutory companies
These are the companies which are created by a special Act of the
legislature e.g. RBI, SBI, LIC, etc. These are mostly concerned
with public utilities as railways, tramways, gas and electricity
companies and enterprises of national level importance.

Registered companies
These are the companies which are formed and registered
under the Companies Act,1956 .
ON THE BASIS OF LIABILITY

Companies with limited liability:

LIMITED BY SHARES:
Where the liability of the members of a company is limited to the
amount unpaid on the shares ,it is known as company limited by shares.
If the shares are fully paid, the liability of the members holding such
shares is nil. It may be a public or a private company.
LIMITED BY GUARANTEE:

 Where the liability of the members of a company is

limited to a fixed amount which the members
undertake to contribute to the assets of a company in
the event of its being wound up, the company is
called a company limited by guarantee.

 These companies are not formed for the purpose of

profit but for the promotion of art, science, charity,
sports or for some similar purposes. They may or
may not have a share capital.
Companies with unlimited liability
Sec 12 specifically provides that any 7 or more persons may form an
incorporated company with or without limited liability. In such case every
member is liable for the debts of the company.

unlimited company may or may not have a share capital. If it has a share
capital, it may be a public company or a private company. It must have its
own Articles of Association.
ON THE BASIS OF NUMBER OF MEMBERS

PRIVATE COMPANY-
A company which has a minimum paid-up capital of Rs 1,00,000 or such higher paid up
capital as may be prescribed, and by its articles

• Restricts the right to transfer its shares, if any

• Limits the number of its members to 50.
• Prohibits any invitation to the public to subscribe for any shares in, or debentures of, the
company,

• Prohibits any invitation or acceptance of deposits from persons other than its members, directors
or their relatives.
PUBLIC COMPANY:

A public company means a company which-

• Has a minimum paid-up capital of Rs. 5 lakh or such higher paid-up
capital, as may be prescribed;
• Is a private company which is a subsidiary of a company which is
not a private company;
Every public company, existing on the commencement of the Companies
Act, 2000, with a paid-up capital of less than Rs. 5 lakh, within a period of
two years from such commencement, enhance its paid-up capital to Rs. 5
lakh.
ON THE BASIS OF CONTROL

Holding company
A company is known as the holding company of another company
if it has the control over that other company. A company is deemed to be
the holding company of another if, but only if, that other is its
subsidiary.
Subsidiary company
A company is known as a subsidiary of another company when
control is exercised by the holding company over the former called a
subsidiary company.
 ON THE BASIS OF OWNERSHIP

Government company
A government company means any company in which not less than 51% of the paid-up share
capital is held by-
a) The central government, or
b) Any state government, or governments, or
c) Partly by central government and partly by one or more state government.

Foreign company
It means any company incorporated outside India which has an established place of business
in India.Where a minimum of 50% of the paid up share capital of a foreign company is held
by one or more citizens of India or/and by one or more bodies corporate incorporatedin
India, whether singly or jointly, such company shall comply with such provisions as may be
prescribed as if it were an Indian company.
Corporate Veil
• A legal concept that separates the personality of a corporation from the
personalities of its shareholders
• Protects them from being personally liable for the company’s debts and other
obligations.
• The Corporate Veil Theory is a legal concept which separates the identity of
the company from its members. Hence, the members are shielded from the
liabilities arising out of the company’s actions.
• Therefore, if the company incurs debts or contravenes any laws, then the
members are not liable for those errors and enjoy corporate insulation.
• In simpler words, the shareholders are protected from the acts of the
company.
Lifting of Corporate Veil
• At times it may happen that the corporate personality of the company
is used to commit frauds and improper or illegal acts.
• Since an artificial person is not capable of doing anything illegal or
fraudulent, the facade of corporate personality might have to be
removed to identify the persons who are really guilty.
• This is known as ‘lifting of corporate veil’.
• It refers to the situation where a shareholder is held liable for its
corporation’s debts despite the rule of limited liability and/of separate
personality.
• The veil doctrine is invoked when shareholders blur the distinction between
the corporation and the shareholders.
• A company or corporation can only act through human agents that
compose it.
• As a result, there are two main ways through which a company becomes
liable in company or corporate law:
• firstly through direct liability (for direct infringement) and secondly through
secondary liability (for acts of its human agents acting in the course of their
employment).
• lifting or piercing the corporate veil possible?
• If yes, then what are the scenarios and the rules that govern piercing
the corporate veil?
• Lifting the Corporate Veil means looking beyond the company as a
legal person.
• Or, disregarding the corporate identity and paying regard to the
humans instead.
• In certain cases, the Courts ignore the company and concern
themselves directly with the members or managers of the company.
• This is called Lifting the corporate veil.
• Usually, Courts choose this option when the case involves a question
of control rather than ownership.
Scenarios under which the Courts consider lifting the
corporate veil are as below
• 1] To Determine the Character of the Company
• 2] To Protect Revenue or Tax
• 3] If trying to avoid a Legal Obligation
• 4] Forming Subsidiaries to act as Agents
• 5] A company formed for fraud or improper conduct or to defeat
the law
Case Study
• Q: ABC Limited purchases shares of XYX Limited by investing Rs. 20
lakh. The dividend received on these shares reflects in the profit and
loss account of the company. Further, the workers of the company
receive an annual bonus and the dividend amount is taken into
account in calculating the overall bonus figure.
• A few years later, ABC Limited transfers the shares of XYZ Limited to
LMN Limited, which is a wholly owned subsidiary of ABC Limited. Post
transferring of the shares, the dividends do not reflect in the accounts
of ABC Limited. This leads to a reduction in the overall bonus amount
figure. Is ABC Limited legally allowed to do so?
Solution
• In this case, the Court will observe that LMN Limited has no assets of
its own, except those transferred to it by ABC Limited. Also, LMN
Limited has no business or income of its own except receiving
dividends from the said shares.

• Hence, ABC Limited has created a subsidiary and transferred the

shares to it with an intention of reducing the amount paid to its
workers as a bonus. The Court will opt for piercing of corporate veil
and conclude that ABC Limited has created LMN Limited with the
intention of avoiding its legal obligation. Hence, the Court voids the
separate existence of the subsidiary company (LMN Limited).
Registration and Incorporation of a Company
• The Companies Act, 2013 details the regulations and company registration papers
essential for the incorporation of a company.
• To begin with, let’s define the promoters of a company.
• Promoters
• Section 2(69) of the Companies Act, 2013, defines promoters as an individual who:-
• Is named as a promoter in the prospectus or in the annual returns of the company.
• Controls the affairs of a company, directly or indirectly.
• Advises, directs, or instructs the Board of Directors.
• Hence, we can say that promoters are people who originally come up with the idea
of the company, form it and register it. However, solicitors, accountants, etc. who
act in their professional capacity are NOT promoters of the company.
Formation of a Company
• Section 3 of the Companies Act, 2013, details the basic requirements of
forming a company as follows:

• Formation of a public company involves 7 or more people who subscribe

their names to the memorandum and register the company for any lawful
purpose.

• Similarly, 2 or more people can form a private company.

• One person can form a One-person company.

Filing of company registration papers with the registrar

• To incorporate a company, the subscriber has to file the following company

registration papers with the registrar within whose jurisdiction the location of
the registered office of the proposed company falls.
• The Memorandum and Articles of the company. All subscribers have to sign
on the memorandum.
• The person who is engaged in the formation of the company has to give a
declaration regarding compliance of all the requirements and rules of the Act.
• A person named in the Articles also has to sign the declaration.
3. Each subscriber to the Memorandum and individuals named as first
directors in the Articles should submit an affidavit with the following details:
• Declaration regarding non-conviction of any offense with respect to the
formation, promotion, or management of any company.
• He has not been found guilty of fraud or any breach of duty to any company
in the last five years.
• The documents filed with the registrar are complete and true to the best of
his knowledge.
• Address for correspondence until the registered office is set-up.
• If the subscriber to the Memorandum is an individual, then he needs to
provide his full name, residential address, and nationality along with a proof
of identity. If the subscriber is a body corporate, then prescribed documents
need to be provided.
• Individuals mentioned as subscribers to the Memorandum in the Articles
need to provide the details specified in the point above along with the
Director Identification Number.
• The individuals mentioned as first directors of the company in the Articles
must provide particulars of interests in other firms or bodies corporate
along with their consent to act as directors of the company as per the
prescribed form and manner.
Issuing the of Certificate of Incorporation
Once the Registrar receives the information and company registration
papers, he registers all information and documents and issues a
Certificate of Incorporation in the prescribed form.

Corporate Identity Number (CIN)

The Registrar also allocates a Corporate Identity Number (CIN) to
the company which is a distinct identity for the company. The
allotment of CIN is on and from the company’s incorporation date.
The certificate carries this date.
Maintaining copies of Company registration papers

• The company must maintain copies of all information and documents until
dissolution.

Furnishing false information at the time of incorporation

During the formation of a company, an individual can:
• Furnish incorrect or false information
• Suppress any material information in the documents provided to the Registrar
for the incorporation, on purpose
• In such cases, the individual is liable for action for fraud under section 447.
The company is already incorporated based on false information
• If a company is already incorporated but it is found at a later date that the
information or documents submitted were false or incorrect, then the
promoters, first directors, and persons making a declaration is liable for action
for fraud under section 447.

Order of the National Company Law Tribunal (NCLT)

• If a company is incorporated by furnishing false or incorrect information or
representation or suppressing material facts or information in the documents
furnished, the Tribunal can pass the following orders (if an application is made
and the Tribunal is satisfied with it):
• Pass an order to regulate the management of the company. It can include
changes in its Memorandum and Articles if required. This order is either in
public interest or in the interest of the company and its members and
creditors.
• Make the liability of its members unlimited
• Order removal of the name of the company from the Registrar of Companies
• Order the company to wind-up
• Pass any other order as it deems fit
• Before passing an order, the Tribunal has to give the company a reasonable
opportunity state its case. Also, the Tribunal should consider the transactions
of the company including obligations contracted or payment of any liability.
 Memorandum and Articles of Association
The memorandum of association and articles of association are the two
charter documents, for setting up of the company and its operations
thereon.

‘Memorandum of Association‘ abbreviated as MOA, is the root document

of the company, which contains all the basic details about the company.

‘Articles of Association‘ shortly known as AOA, is a document containing all

the rules and regulations designed by the company.
• MOA sets out the company’s constitution, and so it is the cornerstone
on which the company is built.
• AOA comprises of bye-laws that govern the company’s internal affairs,
management, and conduct. Both, MOA and AOA, requires
registration, with the Registrar of companies (ROC), when the
company goes for incorporation.
Definition of Memorandum of Association
• Memorandum of Association (MOA) is the supreme public document which
contains all those information that are required for the company at the time
of incorporation.
• It can also be said that a company cannot be incorporated without
memorandum.
• At the time of registration of the company, it needs to be registered with the
ROC (Registrar of Companies).
• It contains the objects, powers, and scope of the company, beyond which a
company is not allowed to work, i.e. it limits the range of activities of the
company.
Any person who deals with the company like shareholders, creditors, investors,
etc. is presumed to have read the company, i.e. they must know the company’s
objects and its area of operations.
The Memorandum is also known as the charter of the company.
There are six conditions of the Memorandum:
• Name Clause – Any company cannot register with a name which CG may
think unfit and also with a name that too nearly resembles with the name of
any other company.
• Situation Clause – Every company must specify the name of the state in
which the registered office of the company is located.
• Object Clause – Main objects and auxiliary objects of the company.
• Liability Clause – Details regarding the liabilities of the members of the
company.
• Capital Clause – The total capital of the company.
• Subscription Clause – Details of subscribers, shares taken by them, witness,
etc.
Definition of Articles of Association
• Articles of Association (AOA) is the secondary document, which defines the
rules and regulations made by the company for its administration and day to
day management.
• In addition to this, the articles contain the rights, responsibilities, powers and
duties of members and directors of the company. It also includes the
information about the accounts and audit of the company.
• Every company must have its own articles.
• However, a public company limited by shares can adopt Table A
instead of Articles of Association.
• It comprises of all the necessary details regarding the internal affairs
and the management of the company.
• It is prepared for the persons inside the company, i.e. members,
employees, directors, etc.
• The governance of the company is done according to the rules
prescribed in it.
• The companies can frame its articles of association as per their
requirement and choice.
 MEMORANDUM OF
BASIS FOR COMPARISON ARTICLES OF ASSOCIATION
ASSOCIATION
Meaning Memorandum of Association is Articles of Association is a
a document that contains all document containing all the
the fundamental information rules and regulations that
which are required for the governs the company.
incorporation of the company.

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

Type of Information contained Powers and objects of the Rules of the company.
company.
Status It is subordinate to the It is subordinate to the
Companies Act. memorandum.
Retrospective Effect The memorandum of The articles of association can
association of the company be amended retrospectively.
cannot be amended
retrospectively.

Major contents A memorandum must contain The articles can be drafted as

six clauses. per the choice of the company.
Doctrine of Ultra-Vires
• Companies have to borrow funds from time to time for various projects in
which they are engaged.
• Borrowing is an indispensable part of day to day transactions of a company,
and no company can be imagined to run without borrowing from time to time.
• Balance sheets are released every year by the companies, and you will hardly
find any balance sheet without borrowings in the liabilities clause of it.
• However, there are certain restrictions while making such borrowings.
• If companies go beyond their powers to borrow then such borrowings may be
deemed as ultra-vires.
Doctrine of Ultra-Vires

It is a Latin term made up of two words “ultra” which means beyond and “vires”
meaning power or authority.

So we can say that anything which is beyond the authority or power is called
ultra-vires.

In the context of the company, we can say that anything which is done by the
company or its directors which is beyond their legal authority or which was
outside the scope of the object of the company is ultra-vires.
• Memorandum of association is considered to be the constitution of the
company.
• It sets out the internal and external scope and area of company’s operation
along with its objectives, powers, scope.
• A company is authorized to do only that much which is within the scope of
the powers provided to it by the memorandum.
• A company can also do anything which is incidental to the main objects
provided by the memorandum.
• Anything which is beyond the objects authorized by the memorandum is an
ultra-vires act.
Origin of the doctrine
• The doctrine of ultra-vires first time originated in the classic case of
Ashbury Railway Carriage and Iron Co. Ltd. v. Riche, (1878) L.R. 7
H.L. 653, which was decided by the House of Lords.
• In this case the company and M/s. Riche entered into a contract where
the company agreed to finance construction of a railway line.
• Later on, directors repudiated the contract on the ground of its being
ultra-vires of the memorandum of the company.
• Riche filed a suit demanding damages from the company.
• According to Riche, the words “general contracts” in the objects
clause of the company meant any kind of contract.
• Thus, according to Riche, the company had all the powers and authority to enter and
perform such kind of contracts.
• Later, the majority of the shareholders of the company ratified the contract.
• However, directors of the company still refused to perform the contract as according
to them the act was ultra-vires and the shareholders of the company cannot ratify
any ultra-vires act.
• When the matter went to the House of Lords, it was held that the contract was ultra-
vires the memorandum of the company, and, thus, null and void.
• Term “general contracts” was interpreted in connection with preceding words
mechanical engineers, and it was held that here this term only meant any such
contracts as related to mechanical engineers and not to include every kind of
contract.
• They also stated that even if every shareholder of the company would have ratified
this act, then also it had been null and void as it was ultra-vires the memorandum of
the company.
• Memorandum of the company cannot be amended retrospectively, and any ultra-
vires act cannot be ratified.
What is the need or purpose of the doctrine of ultra-vires?
• This doctrine assures the creditors and the shareholders of the company that
the funds of the company will be utilized only for the purpose specified in the
memorandum of the company.
• In this manner, investors of the company can get assured that their money will
not be utilized for a purpose which is not specified at the time of investment.
• If the assets of the company are wrongfully applied, then it may result into the
insolvency of the company, which in turn means that creditors of the company
will not be paid.
• This doctrine helps to prevent such kind of situation.
• This doctrine draws a clear line beyond which directors of the company are
not authorized to act.
• It puts a check on the activities of the directors and prevents them from
departing from the objective of the company.
Difference between an Ultra-Vires and an Illegal act

• An ultra-vires act is entirely different from an illegal act.

• People often mistakenly use them as a synonym to each other, while they are
not.
• Anything which is beyond the objectives of the company as specified in the
memorandum of the company is ultra-vires.
• However, anything which is an offense or draws civil liabilities or is
prohibited by law is illegal.
• Anything which is ultra-vires, may or may not be illegal, but both of such acts
are void.
 Doctrine of Indoor Management

• The ‘Doctrine of Indoor Management’ which is famously known as the

‘Turquand’s Rule’ is an old established principle
• came to be recognized 150 years ago in the context of ‘Doctrine of Constructive
Notice’.
• The Doctrine of Indoor Management is an exception to the Doctrine of
Constructive Notice.
• The doctrine of Constructive Notice seeks to protect the company from the
outsider whereas the Doctrine of Indoor Management seeks to protect the
outsider from the company.
• This doctrine emphasizes on the concept that an outsider whose actions are
in good faith and has entered into a transaction with a company can have a
presumption that there are no irregularities internally and all the
procedural requirements have been complied with by the company.
• This is the protection which is provided by the Doctrine of Indoor
Management.
• Though it is necessary for the outsider to be well versed with the
Memorandum and Articles of Association of the company in order to seek
remedy for the same.
• The government authorities are also within the purview of this doctrine.
• The Doctrine of Indoor Management has originated from an English case
called Royal British Bank v. Turquand [1]. Hence, the alternative name to this
doctrine is the ‘Turquand Rule’. In this case, the directors of the company had
been authorized by the Articles to borrow on bonds that sum of money as they
should from time to time by passing a special resolution in a General Meeting of
the company. A bond under the seal of the company which was signed by the
secretary and the two directors were given to the plaintiff to draw on the
current account without the authority of any resolution. Turquand sought to
bind the company’s action on the basis of such bond. Thus, the main question
of law in this matter was whether the company can be held liable for that bond.
The court, in this case, held that the bond was binding on the company as
Turquand was entitled to presume that the resolution of the company has been
passed in the general meeting.
• The Memorandum and Articles of Associations are Public documents
and hence can be inspected by the public.
• But whatever is happening internally in the company is not known to
the public.
• An outsider is oblivious to the internal procedures of the company
and hence the outsiders are entitled to presume that all the internal
procedures are catered by the company.
Position under the Indian Companies Act
The Doctrine of Indoor management can also be traced
in the Indian Companies Act, 2013 which is explained as
follows:
Validity of acts of Directors
• Acts done by a person as the director shall/can be valid notwithstanding that
later it may be discovered that his appointment was invalid due to any
disqualification or defect or was terminated by any provision of the Act or the
Articles.
• Provided that nothing in the section shall give validity to any of the acts done
by a director after his appointment has been shown to the company to be
invalid or terminated.
Judicial Interpretation of Doctrine of Indoor Management

• The Judicial interpretation of the Doctrine of Indoor Management is viewed

in light of the purpose of this doctrine.
• Business is a field which demands the protection of all parties under a
contractual relationship.
• This doctrine of Indoor Management is apparently for protection of the
outsiders dealing with the company but additionally, it’s more important
purpose is to promote the investments in the business sector in order to
strike a balance between the business and the economy.
• Lord Simonds in the case of Morris v. Kanssen Stated that the people in the
business world would be shy in entering into transactions with companies if
they were to check into the depth of the internal workings of the company.
• An Investor only has a tendency to invest in companies if they are secured in
all aspects.
• If the Investors are not secured, then the companies will lack investments
which overall will negatively impact the economy.
• Thus, the protection given to the investors under this doctrine is a pertinent
step towards promotion of trade and commerce.
 Director : Appointment, Duties
Meaning of Managing Director:

• It is a common practice that the Board of Directors appoints one of its members
to manage the affairs of the company as a whole time officer and calls him the
Managing Director.
• He acts as the chief executive.
• He occupies a position of dual authority and responsibility.
• As a director, he attends the Board meetings and, as a manager, he performs the
managerial functions.
Managing Director
As defined by the Companies Act—means a director who—by virtue of
an agreement with the company or of a resolution passed by the
company in general meeting or by its Board of Directors or by virtue of
its Memorandum or Articles of Association—is entrusted with
substantial powers of management which would not otherwise be
exercisable by him and includes a director occupying the position of a
Managing Director, by whatever name called.
An analysis of the definition shows that:

(i) The managing director must be an individual,

(ii) He must be a member of the Board of Directors,
(iii) He must be appointed by virtue of an agreement with the company
or of a resolution passed by the company in general meeting or by its
Board of Directors or by virtue of its Memorandum or Articles of
Association,
(iv) He is entrusted with substantial power of management,
(v) He is not entrusted with powers of routine nature, and
(vi) He shall exercise his powers subject to superintendence, control
and direction of its Board of Directors.
Appointment of Director:

• A managing director is appointed by the Board of Directors subject to the

approval of the Central govt.
• He is appointed at the first instance for the period of five years which can
extend for a period of another five years.
• The appointment of a person as managing director in a public or its subsidiary
private company shall not have effect unless it is approved by the Central
Govt.
• In case of a new company, the approval must be made within three months of
his appointment.
The Central Govt. shall not accord its approval unless it is satisfied
that:

(i) It is the interest of the company to have a managing director,

(ii) The proposed incumbent is a fit and proper person for such appointment,
(iii) His appointment is not against public interest,
(iv) The terms and conditions of the appointment of the proposed managing
director is not against public interest.
If his appointment is not approved by the Central Govt., the incumbent must
vacate his office from the date of receipt of the disapproval of the Govt.
Disqualifications of Director:

No person can be appointed a director if:

(i) He is an un-discharged insolvent, or has at any time been adjudged an

insolvent,
(ii) He suspends or has at any time suspended, payment to his creditors,
(iii) He makes, or has at any-time made, a composition with his creditors,
or
(iv) He is, or has at any time, convicted by a Court of an offence involving
moral turpitude.
Powers of Directors
• The directors are considered as the head and brain of a company.
• When the brain functions, the company is said to function.
• For the proper functioning, the directors should be properly entrusted with
some powers.
• The directors generally acquire their powers from the provisions of
the Articles of Association and then from the Companies Act.
1. General Powers of a Company Director
As per Sec. 291 of the Act, the Board is entitled to exercise all such
powers and to do all such acts and things as the company is authorized to
do.
The exceptions are the acts, which can be done by the company only in
the general meetings of the members as required by law.
• As per Sec. 292, the following powers of the company shall be
exercised by the Board by means of resolution passed at the meeting
of the Board –
• to make calls,
• to issue debentures,
• to borrow moneys by other means,
• to invest the funds of the company, and
• to make loans.
• The last three powers cannot be delegated to the Manager or to a
Committee of Directors but must be exercised only at a Board meeting.
Powers of Director subject to the Consent of the Company

The directors of a public company or of a private company can exercise the following powers, :

1. To sell, lease or otherwise dispose of the undertaking of the company.

2. To remit or give time for repayment of any debt due to the company by a director.

3. To invest the sale proceeds of any property of the company in securities other than trust
securities.

4. To borrow moneys where the moneys already borrowed (other than temporary) exceeds the
total of the paid-up capital and free reserves of the company.

5. To contribute to charities and other funds not directly relating to the business of the company
or to the welfare of the employees in any year in excess of Rs.50,000 or 5% of the average net
profits of the three preceding financial years whichever is greater.
Powers of Director subject to the Consent of the Central
Government

As per Sec. 268, any provision relating to the appointment or

reappointment of a Managing Director can be altered by the Board with
the consent of the Central Government.

As per Sec. 295, the Board, subject to the Central Government’s consent,
has the power to appoint a person for the first time as a Managing
Director.
Definition of 'Audit'
Definition: Audit is the examination or inspection of various books of accounts
by an auditor followed by physical checking of inventory to make sure that all
departments are following documented system of recording transactions.
It is done to ascertain the accuracy of financial statements provided by the
organisation.

Description: Audit can be done internally by employees or heads of a particular

department and externally by an outside firm or an independent auditor.
The idea is to check and verify the accounts by an independent authority to
ensure that all books of accounts are done in a fair manner and there is no
misrepresentation or fraud that is being conducted.
All the public listed firms have to get their accounts audited by an independent
auditor before they declare their results for any quarter.

Who can perform an audit? In India, chartered accountants from ICAI or The
Institute of Chartered Accountants of India can do independent audits of any
organisation.
CPA or Certified Public Accountant conducts audits in USA.
• There are four main steps in the auditing process.

• The first one is to define the auditor’s role and the terms of engagement which is
usually in the form of a letter which is duly signed by the client.
The second step is to plan the audit which would include details of deadlines and
the departments the auditor would cover.
• Is it a single department or whole organisation which the auditor would be
covering. The audit could last a day or even a week depending upon the nature of
the audit.
The next important step is compiling the information from the audit. When an
auditor audits the accounts or inspects key financial statements of a company, the
findings are usually put out in a report or compiled in a systematic manner.
The last and most important element of an audit is reporting the result. The results
are documented in the auditor’s report.
 Audit Committee Role and Practices

• The primary purpose of a company’s audit committee is to provide oversight

of the financial reporting process, the audit process, the company’s system of
internal controls and compliance with laws and regulations.
• The audit committee can expect to review significant accounting and
reporting issues and recent professional and regulatory pronouncements to
understand the potential impact on financial statements.
• An understanding of how management develops internal interim financial
information is necessary to assess whether reports are complete and
accurate.
• The committee reviews the results of an audit with management and
external auditors, including matters required to be communicated to
the committee under generally accepted auditing standards.

• Controls over financial reporting, information technology security and

operational matters fall under the purview of the committee.

• The audit committee is responsible for the appointment,

compensation and oversight of the work of the auditor.

• Auditor reports directly to the audit committee, not management.

• Audit committees meet separately with external auditors to discuss matters
that the committee or auditors believe should be discussed privately.

• The committee also reviews proposed audit approaches and handle

coordination of the audit effort with internal audit staff.

• When an internal audit function exists, the committee will review and
approve the audit plan, review staffing and organization of the function, and
meet with internal auditors and management on a periodic basis to discuss
matters of concern that may arise.

• The audit committee is a central pillar of effective corporate governance and

is in the best position to offer effective oversight of the performance,
independence and objectivity of the auditor and the quality of the audit.