1companies act-part i

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Mallar Law Consulting Ram Mallarwww.mallarlaw.com Prof. of Law & Corporate Governance

Welingkar Institute of Management,

Development & Research

PRIVATE & CONFIDENTIAL

HANDOUT

BUSINESS LAW

CONFIDENTIALITY NOTICE

This Hand-Out is intended solely for the management students of Professor Ram Mallar.

Access to this document by anyone else is unauthorized. If you are not the student, any

disclosure, copying, distribution or any action taken or omitted to be taken in reliance on it, is

prohibited and may be unlawful. Any opinions or advice contained in this document are subject

to the standard terms and conditions of confidentiality.

2008

Mallar Law Consulting

3, Silver Cascade, 110AA, Near Ruby Mills, Senapati Bapat Marg,

Dadar West. Mumbai 400 028. Tel. No.: 2432 2713 (4 lines)

Email: [email protected] - Website: www.mallarlaw.com

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number of members of a public company is reduced to less than seven or of a private

company to less than two and the company carries on business for more than six monthswhile the number is so reduced, every person who is member for the period beyond sixmonths will be severally liable for the debts of the company contracted during that periodand can be sued for such debts. Under Section 542 if in the course of winding up the Courtcomes to the conclusion that the business of the company has been carried on with a viewto defrauding creditors or any other persons or for any fraudulent purpose, the liability forfraudulent conduct would attached on any persons that the Court finds were knowinglyparties to the carrying on of the business in fraudulent manner and such person would bepersonally responsible without limitation of liability for all or any of the debts or otherliability of the company. The words any person in this section would cover in addition tothe directors of the company, its officers and shareholders if they were knowing parties to

the fraud.

Lifting the Corporate Veil

Apart from the specific provisions indicted above the Courts have in some cases heldthat it is justifiable to lift the Veil of corporate entity and pay regard to the economicrealities behind the legal facade. This can happen when the court is seeking to find out theperson who are actually in control if a company to make them liable. The corporate veilmay also be lifted where the question of trading with the enemy arises, or the nationality ofa company is to be determined. In other cases the corporate veil may be lifted where thequestion of evasion of taxes is involved. One of the earliest case on this point was

Deliminer Co. Ltd. Vs. Continental Type & Rubber Co. 1916 2 A.C. p.307 where the questionto be decided was whether one company was an Alien enemy. In that case, Lord Falmersaid the analogy is to be found in control. He held that a company registered in Englandmay be an alien enemy if its agents or the persons if defacto control of its affairs are alienenemies and in determining whether alien enemies have such control, the number of alienenemy shareholders is material.

An interesting case in India where the corporate veil was lifted was that of the IncomTax Commissioner, Marcras Vs. Meenakshi Mills, Madurai, A.T.R. 1967 S.C. p.800. In thiscase these mills concerned were engaged in the manufacture in the Princely State. TheMadurai Bank was formed, in which coincidentally the three mills and Mr. Chettar, anotherbulk shareholder in the Mills, once again held all the shares. The bank also established abranch at Pudukott into which the profits of the three mills were deposited. Against thesedeposits, the Bank granted loan facilities to the Mills at Madurai. The question arosewhether this amounted to a transfer of moneys from the princely state into the taxableterritories of British India. Lifting the corporate veil, the Supreme Court held that there wasa basic arrangement between the Mills Companies and the Bank that the money outsidetaxable to territory and this arrangement was possible because the companies had thecontrolling voice in the running and management of the Bank, the Pudukkotai was neither acotton producing area nor had it a market for cotton and there was nothing to recommendthe carrying on of business there except that it was a non-taxable territory.

Similarly, in Juggles and Kamapat Vs. Commissioner of Income Tax U. P. A.I.R. 1969

S.C. p.932, the Supreme Court held that the court is entitled to lift the mask of corporate

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entity if the concept is used for tax evasion or to circumvent tax obligation or to perpetrate

fraud. In this case, a company, which was promoted by the assesses firm, prematurelyterminated the Managing Agency Agreement with the firm and paid compensation for suchpremature determination. The Managing Agency was assigned to a new company in whichthe partners of the assessee firm held the controlling shares. The compensation wasdisallowed as a capital gains in the heads of the assessee.

Companies registration under the Companies Act, 1956 may be divided into thefollowing 3 categories on the basis of the liability of their members :

a) Companies limited by shares.

b) Companies limited by guarantee these may or may not have a share capital.

c) Companies having unlimited liability these again may or may not have sharecapital.

The Companies Act is mainly concerned with companies limited by shares. However,brief mention may be made of the other two types of companies. A company limited by

guarantee in one where the liability of the members is limited by the Memorandum to afixed amount in the event of the company being woundup (Sec. 12(2) (B)). Professionalassociations, trade associations and research associations favour this form or organisation.Such companies may, subject to the approval of the Central Government dispense with theword, Limited under section 25 of the Act. The Memorandum and Articles of Associationof such companies are required to be in the form set out in Schedule I-Tables C and D.

An unlimited company is one which does not place any limit on the liability of itsmembers (Section 12(2) (c)). Section 11 of the companies Act prohibits the formation ofpartnerships and unincorporated business association consisting of more than ten persons ifformed for the purpose of banking, or more than twenty persons if formed for carrying onany other business. Persons normally form partnerships or unincorporated larger form ofunlimited company, of their number is larger than ten or twenty as the case may be. TheMemorandum and Articles of Association of unlimited companies required to be in the formof Schedule I-Table E.

A company limited by shares is one where the liability of the members is limited bythe Memorandum to the amount, if any, unpaid on the shares held by them (Section 12(2)(a)). The Articles of Association of such a company are required to be in the form set out in

Schedule I-Table A. A company limited by shares obtains its working funds by the issue of

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shares which may be subscribed by the signatories to the Memorandum of Association, or

allotted to applicants for cash or for consideration other than cash e.g. for transfer ofmachinery or knowhow. In a company limited by shares, the shareholders may or may notpay the whole nominal amount to his share to the company when acquiring the shares. Thepractice is to pay some amount at the time of application, thereafter the Directors may callupon the shareholders at any time to pay up the unpaid portion of the nominal amount. Itis important to remember that the unpaid portion may be made payable either during theexistence of the company or on winding up.

Companies can also be classified on yet another basis. One category is closer to family

groups. It does not invite the public to contribute to its capital or join its activities. Itrestricts its memberships to fifty persons and even in respect of this small number, themembers are prohibited from freely transferring their shares. Such a company is called aprivate company. Loosely speaking a company which is the opposite of such company is apublic company.

Section 3(1) (iii) of the Companies Act defines a private company as a company which by itsarticles.

a) Restricts the right to transfer its shares, if any.b) Limits the number of its members to fifty not including :

i) Persons who are in the employment of the company and

ii) Persons who are having been formerly in the employment of the company,were members of the company while in that employment and have continuedto be members after the employment ceased and

c) Prohibits any invitation to the public to subscribe for any shares or debentures of thecompany.

A public company has not been specifically defined but Section 3(1) (iv) states that a PublicCompany means a company which is not a private company. It is unfortunate that thedefinition of private company omits one important distinguishing features between a privatecompany and a public company, viz. that the minimum number of members that a privatecompany is required to have is two against seven members required for a public company.This is given in Section 12.

Only shares and debentures of public companies can be dealt with on the Stock Exchange.However, the reverse is not true. The shares of all public companies are not quoted on theStock Exchange. A company that wishes to have its shares and debentures to be listed hasto obtain permission from the Stock Exchange to do so. This permission is granted on

condition that the rules and regulations of the Stock Exchange will be complied with. These

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generally involve the giving of information to the Exchange regarding allotment of shares,

closure of books, issue of certificates, bonus shares, dividend declaration, changes in theBoard etc. A listing Agreement would also have to be executed by the company with theStock Exchange for this purpose. Violation of any of the conditions of the agreement wouldresult in the companys shares being delisted, the restriction imposed by the Stock Exchangeare in addition to any statutory requirements that have to be complied with by a company.

Private companies enjoy certain advantages over Public Companies. The Act, however,treats private companies, which are subsidiaries of public companies, roughly on a par with

public companies, and the privileges enjoyed by the other private companies, viz. those thatate not subsidiaries of public companies are denied to them. The following are theadvantages enjoyed by all private companies whether they are subsidiaries of publiccompanies or not :

i) The minimum number of persons required to form private company is two as againstseven person required for a public company (Section 12 (1)).

ii) The prohibition regarding allotment of shares in certain cases unless statement inlieu of prospectus is delivered to the Registrar is not applicable to private companies(Section 10 (3)).

iii) The provisions relating to further issue of capital are not applicable to privatecompanies (Section 81).

iv) A private company is not required to comply with the conditions set but in Section149 relating to commencement of business.

v) A private company is not required to hold a statutory meeting (Section 165).

vi) As against five members required for a public company, in the case of a privatecompany, even one member present either in person or by proxy and having theright to vote on the resolution (if not more than seven such members are personallypresent) or two such members (if more that seven such members are personallypresent) is entitled to demand poll (Section 1/9 (1) (b)).

vii) The minimum number of directors required for a private company is two as againstthree required for a public company (Section 252).

Advantages enjoyed only by a private company which is not a subsidiary of a publiccompany in this referred to as purely private company.

Certain advantages are enjoyed only by a private company that is not a subsidiary of publiccompany and are denied to a private company that is subsidiary of a public company. In

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other words, both a public company and a private company that is a subsidiary of a public

company would be treated alike in respect of the following matters.

i) Neither public company nor a private company that is a subsidiary of a publiccompany can provide financial assistance to a part to enable such party to purchaseshare in the company (Sec 77(2)).

ii) Neither public company nor private company that is subsidiary of public companycan have preference shares that carry voting rights (Sec.90 (2)).

iii) A person not admitted as a shareholder by a public company can appeal to theCentral Govt. against such refusal. Not so to a shareholder of a purely private

company.

iv) The conditions governing notice for calling general meeting as well as thosegoverning the manner of conducting such meetings (which are contained in Section171 to 186) apply only to a public company and a private company that is asubsidiary of a public company not a public company and a private company that is asubsidiary of a public company, not to a purely private company.

v) The overall limit for managerial remuneration does not apply to purely privatecompanies. Further, Govts approval is not necessary for amending any of theprovision relating to whole-time directors. Nor is it necessary to obtain government

approval for the payment of remuneration to the managing directors or managers ofpurely private companies. (Sections 198, 268, 269, 309 to 311).

vi) A purely private company is entitled to appoint a firm or body corporate to an officeor place of profit for any period of time unlike the other two types of companies(Action 204).

vii) No person other than a member of a purely private company is entitled to inspect orobtain copies of the profit and loss account of the company. In respect of the othertwo types of companies the balance sheet and profit and loss account have to befiled with the Registrar and any person can inspect them (Section 220 (1) proviso).

viii) A person can be a director of more than twenty purely private companies (Section273).

ix) The restriction on the powers of directors regarding sale, lease, disposition ofproperty, investment, borrowing and contributions do not apply to a purely privatecompany (Section 293).

x) The registration on the grant of loans to directors applies only to a public companyand a private company that is a subsidiary of a public company (Section 295).

xi) The provision prohibiting a director from participation in the Boards proceedings,

when he is in credit, does not apply to a purely private company (Section 300 (2)).

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xii) A person cannot be a manager/managing director of more than two companies or tobe appointed for more than five years at a time only in the case of a public company,or a private company which is a subsidiary of a public company (Sections 316, 317(4) and 888 (A)).

xiii) In a purely private company there are no restriction on the company giving loans orguarantees to other companies or securities for loans granted to other companies orinvesting in other companies (Section 370 and 372).

xiv) The Central Govt. has no power to present a change in the composition of the Boardof a purely private company as in the case of a public company or a private company

that is a subsidiaries of public company.

Where a private company makes a default in complying with any of the provisions requiredto on included in its Articles under Section 3(1) (iii), it will cease to be entitled to theprivilege and exemptions conferred on private companies by the Act unless the Central lawBoard is satisfied that the failure to comply with the conditions was accidental or due toinadvertence to some other sufficient cause of that it is just and equitable to grant relief(Section 43).

There is one type of company of which mention must be made before the topic relating topublic and private companies is terminated and that is a section 43 A company. Thiscompany is peculiar to Indian law. Under Section 43 A, a private company is deemed tobecome a public company in the following circumstances :

1) If not less than twenty five percent of the capital of the private company is held byone or more bodies corporate (Section 43 a(1)).

2) If the average annual turnover of such a company for three consecutive financialyears is not less than much amount as may be prescribed (Section 43 a(IA)).

3) If such a company holds not less than twenty-five percent of the paid-up sharecapital of a public company (Section 43 A(1B)).

4) If such a company accepts, after an invitation is made by an advertisement orrenews deposits from the public, other than its members, directors or their relatives(Section 43 A (1C)).

Within three months of a private company becoming a public company in any of the aboveways, the company is required to inform the Registrar that it has become a public companyand thereupon the Registrar will delete the word private from the name of the company.

The Articles of Association of a 43A company may include provisions containing restriction

on the transfer of shares and the number of its members may at any time be reduced to

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less than seven. The number of members necessary to form a quorum in such a company

may have only two directors as against three required for a public company. For all otherpurposes, however, such company is treated as a public company and the restrictiveconditions which Govern public companies such as obtaining Governments approval forappointment of whole-time directors, payment of remuneration to them, etc. apply to suchcompany.

The rationale behind the section is that the privileges and exemptions granted to purelycompanies which are more in the nature of family concerns and there the public is notinterested should not be extended to companies in which public money is invested, or whichthroughout their investment in public companies influence such public companies.

It has been stated in Ramaiyas Guide to the Companies Act (Eight Edition) at page 100 thatafter the enactment of this section there can exist no such company as private companywhich is subsidiary of a public company and that expression used in several section has nomeaning. It is respectfully submitted that this view is incorrect. A company may besubsidiary of another company either by virtue of the later company holding the interest inthe shares or by virtue of the later being able to control the composition of the Board ofDirectors. It is quite possible that a company may hold less than twenty-five percent of thecapital of another company whose turnover may be less than rupees five crores and yet thefirst company may be able to control the composition of the Board of Directors of thesecond company. In such a case, the later company would be a subsidiary of the firstcompany. It is, therefore still possible to have a private company which is a subsidiary of a

public company in terms of the definition of subsidiary in Section 4 of the Act.

While dealing with this topic it would be useful to keep in mind the distinction between acompany and a body corporate. A body Corporate is defined by Section 2(7) and acompany by Section 3. A body corporate is a much wider term than a company andincludes not only a company which is only one class of body corporate i.e. the registrationby the required number of persons under the Companies Act, but other bodies which areincorporated under a statute in India or abroad. Examples of bodies corporate in India arethe Industrial Finance Corporation, the Industrial Development Bank of India, which areincorporated under their own Act. A body corporate also includes a company incorporatedoutside India whereas a Company under the Act means only an Indian company.

Many of the restrictive provisions of the Act are so worded as to cover not only companiesbut bodies corporate also. The prohibition against lending in Section 372 extends to bodiescorporate also. A contravention of the Act is likely if this aspect is not kept in mind all thetime.

This is an interesting question in the context of fundamental rights granted under theconstitution. Under part III of the Constitution, certain fundamental rights are conferred onany person which others are conferred on citizens alone. For example, Article 14 providesthat the State shall not deny to a person equality before the law or the equal protection of

the law. Article 15 states that the State shall not discriminate against any citizens on

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ground of only religion, race, caste, sex etc. and Article 16 states that there shall be equality

of opportunity for all citizens in matters relating to employment to any office under theState. Until the passing of the Citizenship Act, 1955, there were conflicting decisions of thedifferent High Courts whether a company was a citizens. In Jupiter General Insurances Co.Vs. V. A. Rajagopalan, 1952, Pune, p.11, the court held that Articles 5 (a) and (b), 6, 8 and19 (c) to (e) could not apply to corporations, that the expression citizen meant men andwomen and consequently a corporation was not a citizen. In a Bombay case, the state ofBombay Vs. R.M.D. Chamarbagwalla 1955 Bom. p. 630 C. J. Chagla struck a new line inholding that a company, the majority of whose shareholders were Indian citizens, was acitizen. In 1955 the Citizenship Act was passed. This prescribes the conditions under whicha person can be a citizen, and it expressly provides that a person does not include acorporation.

The different kinds of companies that may be formed have been described earlier.Whatever the type of company proposed to be promoted, the mode of forming the companyis the same, viz., it is formed, when even or more persons (in the case of a public company)by or two or more persons (in the case of private company) subscribe their names to theMemorandum of Association. The Memorandum is the constitution or the fundamentaldocument or charter of the company. In sets cut, inter-alia the liability of the membersdepending on the type of company that is proposed to be formed, viz. whether it is limitedby shares, limited by guarantee, or an unlimited company (Section 32).

Anyone may be a subscriber. A bankrupt may be a subscriber so can a company, providedit has the necessary power. Several persons may jointly be subscribers. However, a firm isnot person, and therefore cannot be a subscriber; if it wishes to subscribe, the individualpartners would have to do so. A person resident outside India (whether a Citizen of India ornot) or a person who is not citizen of India, but is resident in India cannot be a subscriber tothe Memorandum without the permission of the Reserve Bank of India in terms of Section29 (1) (b) of the Foreign Exchange Regulation Act, 1973.

A subscriber may subscribe the Memorandum in his own hand or through an agent dulyauthorised by him. In addition to the name and the signature of the signatory, his addressand occupation must also be mentioned. It is advisable to pay great attention to detailswhen registering the Memorandum. If the handwriting is not clear or all the requisite detailsare not given, the registrar may return the document for rectification.

The signature of cash subscriber to the Memorandum has to be attested by at least onewitness. It would be in order for one person to witness the signature of all subscribers, inwhich case, the attestation clause would read as follows :

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The address and occupation of the witness or witnesses must also be mentioned.

The Articles of Association contain the detailed regulations for the conduct of the business ofthe company. Section 28 states that the Articles of Association of company limited byshares may adopt all or any of the regulations contained in Schedule I Table A. Threecourses are therefore open to a company (i) to adopt Table A wholly. In this case all that isnecessary is for the Articles to state that Table A shall be the Articles of the company, (ii) tohave a set of Articles which are complete by themselves and exclude Table A wholly. In thiscase it is capable forthwith or exercising the functions of an incorporated company and

having perpetual succession and contribute to the assets of the company in the event of itsbeing wound up as is mentioned in the Act, Section 33 (3) and 34.

Section 35 states that a certificate of incorporation shall be conclusive evidence that all therequirements of the Act have been complied with in respect of registration and mattersprecedent and incidental thereto. This means that it is not open to a subscriber, after thecertificate is obtained, to allege that he was induced to subscribe to a memorandum bymispresentation or fraud. Before the grant of the certificate, a subscriber would have usualremedies for his representation of the company. But after the certificate is obtained, wouldnot be affected by any irregularity in connection with subscription such as that less than theprescribed number of persons have subscribed to the memorandum.

Even if the company ceases to carry on business it continue exist as a corporate entity. Infact, in some cases, it is deliberately decided to retain the share of an otherwise defunctcompany rather the wind it up in the event of the company at some future time undertakingsome business. This would obviate having to pay registration charges once again.

It must be noted that Section II prohibits more than ten persons carrying on the business ofbanking unless the body of persons whether a company association or partnership isregistered under the Act. The same section also prohibits more that twenty persons fromcarrying on any other business the object of which is the acquisition of gain by thecompany, association on partnership, unless such body is registered under the Act. Thisbeing so, and taking into account some of the disadvantages that attach to partnerships, thefavoured vehicles of business in the future will in all probability be a company registeredunder the Company Act.

As mentioned earlier, the Memorandum of Association is the charter of the company. TheMemorandum, however, cannot or can the Articles (which in any case are subordinate instatus to the Memorandum) override the provisions of the Act, an any provision void(Section 9).

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In view of its importance, it is worth describing the salient features of the Memorandum and

Making mention of some important aspects relating to it.

The Memorandum of Association should be in one of the forms set out in Schedule to theCompanies Act depending on the kind of company that is being promoted viz. whether it is acompany limited by shares or guarantees or an unlimited company (Section 14).

Section 13 and 15 set put the essential features of a Memorandum. Section 15 whichdescribes its format states that

a) The Memorandum must be printed :b) It should be divided into paragraphs numbered consecutively;

c) It should be signed by the requisite number of persons whose signatures must beattested,.

Section 13, which deals with the essential components, provides that Memorandum muststate :

a) The name of the company. If the company is a public limited company, the namemust have the word Limited as the last word of the name; if it is a private limitedcompany, the name must be followed by the words Private Limited.

b) The state in which the registered office of the company is situated;

c) The objects to be pursued by the company. Where the company is formed after thecommencement of the Company Act, 1956, the object have to be divided into (i) themain objects and objects incidental or ancillary to the attainment of the main objectsand (ii) other objects;

d) Where the objects extend to more that one state the Memorandum must mentionthe States to which the objects extend. This does not apply to trading corporations.

e) Where the liability of the members if limited by guarantee the memorandum muststate (1) that the liability of the members is limited and (2) the amount to which it islimited.

f) In the case of a company having a share capital and limited liability, thememorandum must in addition to stating that the liability of the members is limitedalso state the amount of share capital with which the company is to be registeredand the division of the capital into shares of a fixed amount. Further, eachsubscriber must be indicated against his name his share.

While the Articles of Association can be altered by a mere Special resolution (except wherethe effect of the altering is to convert a public company into a private company with further

approval of the Central Government is necessary), the Memorandum approval of the Central

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Government is necessary), the Memorandum of Association cannot be altered in its

essentials excepts in accordance with prescribed procedure. Section 18 states that thoseconditions which are required by Section 18 or by any other specific provision in the Act tobe set out in the Memorandum can only be altered in the mode and to the extent forwhich express provision is made in the Act. The other provisions can be altered in the samemanner as the Articles of Association, viz. by special resolution.

The procedure for alteration is set out in Sections 17 and 18. Briefly, the procedure is that aspecial resolution has to be passes, approving of the alternations and the further approval ofthe company Law Board must be obtained which approval the board will give only if it issatisfied that notice has been given by the company to the debenture holders and creditorsof the company as well as to those person whose interests would be effected by the

alteration and that such persons have no objection to the alteration. The Board on its partis also required to give notice to the Registrar to ensure that he has no objection to thecompany Law Board confirming the alteration, as well as the printed copy of theMemorandum as latered must be failed by the company with the Registrar.

It is important to note that it is not enough that the procedure for amendment is followed.The alteration must be affected for any one of the reasons mentioned in Section 17 (1) viz.to enable the company to (a) carry on its business more economically or more efficiently or(b) to attain its main purpose by new or improvements or (c) to enlarge or some businesswhich may conveniently be combined with the business of the company or (d) to restrict orabandon any of the objects specified in the memorandum or (e) to sell or dispose of the

whole or any part of the undertaking of the company or (g) to amalgamate with any othercompany or body of persons.

The above seven situations together encompass a wide field and a prime facie case couldtherefore generally be made out that the alteration of the Memorandum is for one of thesereasons. However, the discretionary powers of the Company Law Board under this Sectionare very wide and the Board may refuse to confirm the alteration, or confirm it only in partor only subject to such terms and conditions as it thinks fit. Before confirming thealteration, the Board would have to be satisfied not only that the interest of the creditorsand the member will not be affected but that the interest of the other category of personsmentioned above will not suffer. In exercising its discretion the Company Law Board wouldalso have regard to considerations of business, morality, national interest, etc.

The object Clause is obviously the most important clause of the Memorandum for it has atwo fold purpose ( I ) It define the powers of the company and (ii) it limits the powers ofthe company to those that are specifically set out in the Memorandum. Further, linked withthe object clause is the ultra vires doctrine. A company exits the only for the particularpurpose of its incorporation as defined in its object clause. An Act which is ultra vires,neither the company nor the other contracting party can act on it. The main purpose of thisdoctrine in early times was to protect the investor against a misuse of funds of company, bypreventing the company from frittering them on objects unrelated to the authorised objects.

In the word of professor Gower, "Would not be dissipected in authorized enterprises.

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However this inaudible object can result in great disadvantages if the object clause is

interpreted too strictly.

A distinction must be made between acts which are ultra vires the company and acts whichare ultra vires the directors. An act which is ultra vires the company is null and void, an actultra vires the directors may be regularized. For example, Articles may place certainrestrictions on the powers of directors and such powers are nevertheless exercised by thedirectors, it is open to the shareholders to ratify them not if the acts are ultra vires thecompany.

The essential features of the Articles of Association have been dealt with at several differentplaces earlier whenever a reference to such features was necessary. It has been mentionedthat the Articles of Association are the detailed regulation of the company relating to theinternal management of the company and the conduct of its business. This document willtherefore, define the respective powers of the shareholders and the directors as also therights of the company in relation to its shares such as forefeiture, lien etc. For convenience,those essential features and the relevant provisions relating to the articles are recaptitulatedand summarized below :-

1) The Articles of Association cannot overide the provisions of the Act, (Section 9).

2) It is not necessary for a company limited by shares to have a separate set of Articlesof Association, where such a company does not have its own set of articles, theprovisions of Table A would apply (Section 28).

3) Where the company does have its own Articles of Association, they must be in theform mentioned in section 80 and be registered (Section 28).

4) Even where a company has its own set of articles, it may adopt some of theprovisions of Table A in Schedule I. In fact, if there is no specification that Table 'A'is excluded, then Table A will apply to the extent that provision is not made in thearticles in respect to the matters dealt with in Table A (Section 28 (2) ).

5) The Memorandum and the Articles, when registered bind the company and themembers as if they had been signed by the company and by each memberseparately (Section 36).

6) The Articles of Association of a private company must contain the restrictions set outin section 3 (1) (iii).

7) This articles of Association may be altered by a special resolution where thealteration result in a public company becoming a private company in which case

further approval of the Central Government is necessary (Section 81).

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The matters dealt with in the Articles of Association are generally the following :-

i) : The amount of capital of the company method of increasingand reducing capital, rights of different classes of shareholders, rights of thecompany vis--vis shareholders, frequency of calls, lien on party paid shares,forfeiture of shares, conversion of shares into stock, procedure for transfer andtransmissions.

ii) : Manner of convening general meetings, length and manner ofgiving notice, preocedure for conducting meetings, viz., appointment of the

Chairman, manner of voting, i.e. form of proxy, etc.

iii) : The number of directors, their qualification remuneration. Powers,method of appointment and removal, procedure to be followed at Board meetings,any special provision for appointment of nominees director, provisions relating towholetime directors.

iv) : Provisions relating to dividends books of accounts where they are to bekept, right of inspection of such books, manner of signing accounts, capitalization ofreserves stc.

v) : The manner of affixing the common seal.

vi) : Provision relating to audit of accounts, appointment, qualifications,remuneration, rights and duties of auditors, etc.

vii) : Indemnity to officers of the company, authenticationand service of documents, etc.

The articles of a company are subordinate to and controlled by the Memorandum of

Association, which is the dominant instrument. The Memorandum contains the conditionsupon which the company is granted incorporation, conditions which are fundamental, butsome of which are alterable by the correct procedure. The articles are the internalregulations of the company, and over these the members have full control, and may alterthem from time to time as they think fit, subject only to this, that they keep within the limitsspecified by the Memorandum of Association and the Act.

While a private company can commence business, immediately after it is incorporated, apublic company having a share cannot commence business company or exercise any

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borrowing powers unless it has obtained from the Registrar the "certificate to commence

business". This certificate is granted after the company issues a prospectus or a statementin lieu of prospectus and has complied with the further conditions laid down in section 149(section 149).

Prospectus means "Any document described or issued as a prospectus and includes anynotice, circular, advertisement or other document inviting deposits from the public orinviting offers from the public for the subscription or purchase of any shares or debentures.

A Company issue a prospectus when it invites offers from the public for subscription orpurchase of shares or debentures. However, where a company has made arrangements forits shares or debentures to be taken up by private parties or financial institution, so that it is

not necessary to make an offer to the public, the company will not issue a prospectus butwill file a statement in lieu of prospectus with the Registrar. The statement is required to bein the form set out in Schedule III of the Act.

Section 67 of the Act describes what constitutes an offer of shares or debentures to thepublic. An offer to a section of the public can also be deemed to be an offer to the public.However, if the offer or invitation does not result in the shares or debentures being availablefor subcription or purchase by persons other than those receiving the offer, or can otherwisebe treated purely as domestic concern of the persons making and receiving the offer, theoffer is not deemed to be made to the public. This subject, as the circumstances underwhich it is necessary to file a prospectus, will be discussed in detail late which deals

exclusively with prospectus.

After the company has issued a prospectus or filed a statement in lieu of prospectus, thecompany has issued a prospectus or filed a statement in lieu of prospectus, the companycan commence business only after the following conditions are fulfilled. (Section 149).

A prospectus is issued, (a) after the minimum subscription laid down in the prospectus hasbeen received and shares have been allotted. (b) every director of the company has paid tothe company in respect of the shares taken or contracted to be taken by him for which he isliable to pay in cash, the amount payable on application and allotment. (c) permission hasbeen obtained from the relevant stock exchange for dealing in the shares or debentures and(d) there has been filed with the Registrar a declaration by one of the directors or thesecretary or where the company has not appointed a secretary, a secretary in whole timepractice, that the above conditions have been complied with. Where a company has notissued a prospectus but filed a statement in lieu of prospectus only conditions (b) and (d)mentioned above have to be complied with.

The declaration to the Registrar must be filed in Form 19 or Form 20 depending on whethera prospectus is issued or a statement in lieu of prospectus is filed.

The minimum subscription is that the amount which in the opinion of the directors isnecessary to provide the money for the following (unless part of the expenditure is proposedto be defrayed in any other manner).

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i) The Purchase price of any property.

ii) Preliminary expenses and commission payable for subscribing to the shares of thecompany.

iii) Re-payment of money borrowed for the above two.

iv) Working Capital.

v) Any other expenditure of which the nature and purpose must be stated (section69).

On complying with the conditions mentioned above, the registrar will certify that thecompany is entitled to commence business and such certificate will be conclusive evidencethat the company is so entitled. (Section 149 (3)). Until the company received such acertificate, any contract made by the company is provisional only and not binding on thecompany. After the receipt of such a certificate, the contract is binding on the company.

The following matter may be kept in mind in connection with the commencement ofbusiness by a company :

i) : A company must have registered office from the day on whichit begins to carry on business or from the thirteenth day after its incorporation, whichever is

earlier and the notice of the situation of the registered office must be given to the Registrar(Section 146). The Memorandum of Association merely mentioned the State in which theRegistered office will be situated. The decision regarding actual location of the office maytherefore taken later on, but before the expiry of the period mentioned above. Theregistered office has some importance and status in as much as certain documents arerequired to be kept under the Act at the Registered Office only. Some of the documentswhich are required to be kept at the Registered Office are :-

a) Register of Members,b) Index of Membersc) Register and Index of Debenture holders.d) Register of chargese) Copies of annual returns under section 159 and 160 (section 163).

ii) Appointment of the first directors ; Generally the first directors of the Company arenamed in the Articles of Association. If this has not been done the subscribers to theMemorandum of Association would appoint the first directors. In the alternative thesubscribers, who are individuals, shall be deemed to be directors until the directors areappointed.

iii) Appointment of solicitors : It is customary to appoint a firm of solicitors to whom allthe legal work of the company would be referred.

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iv) Appointment of Baanners ; The Company would have to decide in which bank it will

open its accounts. Further such bank will have to be intimated the names of officers whowill be operating the accounts on behalf of these company. The company will also probablyhave overdraft facilities with certain banks and the Boards approval would be required forthis purpose also.

v) Common Seal : The design of the common seal would have to be approved by theBoard and arrangements would have to be made for its safe custody.

vi) Execution of agreement previously entered into by promoters ; It has beenmentioned above that until the company obtained a certificate to commence business anyagreement entered into by the company. It is customary to place such agreements

before the Board and have them confirmed after the certificate to commence businesshas been obtained.

vii) Statutroy book : It may be descriable to obtain the Boards approval to the forms ofthe various registers and books that are required to be maintained under the Act. Suchas the register of investment, register of charges, minutes book, register of contracts,register of directors etc.

I have mentioned earlier that company which invites offers from the public for subscription

or purchase of any shares is required to issue a prospectus.

The provision relating to a prospectus, are some of the most confusing in the CompaniesAct, and present difficulty in their interpretation not only to the students but sometimes tothe lawyers also. It may be some consolation to know that the provision of the English lawon the subject are very similar.

Prospectus is defined by section 2(30) as any document described or issued as a prospectusand includes any notice, circular advertisement or other documents, inviting deposits fromthe public or inviting offers from the public for subscription or purchased of any share in, ordebentures of, a body corporate.

The question that naturally arises for consideration is when is it necessary to issue aprospectus ? or When is and document deemed to be a prospectus ? The answer to thatquestion is found in section 64, which sets out the circumstances under which this liabilityarises. Section 64 states Where a company allots or agrees to allot any of these shares ordebentures being offered to be a prospectus of any company .

The provisions governing prospectus are summarised below :-

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1. A prospectus is required to be dated and the date on the prospectus will be assumed

to be the date of publication of the prospectus. (Section 55). The date ofpublication of the prospectus must be construed as the date of issue of theprospectus. The date of issue is the date on which the prospectus first appears as inadvertisement.

2. A prospectus is required to state the matters specified in Part I of Schedule II and toset out the reports specified in Part II Schedule II and is further subject to theconditions in Part III of that Schedule (Section 56 (1)).

3. Every form of application of shares or debentures must be accompanied by amemorandum containing such salient features of a prospectus as may be prescribed.

However copy of prospectus will be required to be furnished on a request beingmade be any person before closing of the subscription list. The provision of thissection does not apply where the application form is issued (a) in connection with aninvitation to a person to enter into an underwriting agreement with respect to theshares or debentures or (b) in relation to share or debentures not offered to thepublic (Section 56 (3)).

4. The application need not be accompanied by a prospectus and the prospectus neednot comply with the requirement mentioned above, if issued to existing members ordebenture-holders of the company or (b) the issue of the prospectus or applicationrelated to shares or debentures which will be in all respects uniform with the shares

or debentures previously issued, and are dealt with an a stock exchange. (Section 56(5)).

5. Where the prospectus includes a statement purporting to be made by an expert, theexpert must be a person who is not connected with or interested in the promotion orthe management of the company. An expert includes an engineer, a valuer, or anaccountant and any other person whose profession gives authority to statementmade by him. (Section 57 and 59 (2)). A statement purporting to be made by anexpert can be included in a prospectus only if the expert has approved the form ofthe statement and the context in which it is included and had given his writtenconsent to the issue of the prospectus with the statement in such form, and furtherstatement appears in the prospectus that the expert has given his consent and hasnot withdrawn it. (Section 53).

6. If the company issue the prospectus knowing that the expert is connected with theformation of the management of the company or the statement is not in the formapproved by him or he was withdrawn his consent to the issue of the prospectus, thecompany and every person who is a party to the issue is punishable with a finewhich may extent the rupees five thousand (Section 59).

7. A Prospectus cannot be issued unless before its publication there has been deliveredto the Registrar, for registration a copy of the prospectus signed by every personwho is named in the prospectus as a director or proposed director of the company or

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by the agent of such director and unless further the following documents are

attached.a)The consent of the expert to the issue of the prospectus. This consent may beeither attached to the prospectus or endorsed on it (Section 601 91) (a)).

b) The consent of every person named in the prospectus as an advisor, legal advisor,attorney, solicitor, banker, or broker of the company(Section 60 (3))

c) A copy of every material contract entered into by the company in the last twoyears, not being a contract in the ordinary course of Business, and a copy of everycontract appointing or fixing the remuneration of a managing director or manager(Section 60 (1) (b) (1)).

d) Where any adjustments have been indicated by auditors or accountant in theirreport a written statement signed by such persons setting out the adjustments andindicating the reasons for such adjustments (Section 60 (1) (b) (ii)).

8. The prospectus must on the face of it state that a copy has been delivered to theRegistrar and specify the documents which are attached to the copy (Section 60(2)).

9. Register the prospectus after being satisfied that all the requirements have beencomplied with (Section 60 (3)).

10. A prospectus cannot be issued more than 90 days after the copy is delivered forregistration to the Registrar. (It will be noted that the English Act contains no suchtime limits). The reason for imposing the limit is that if the issue of the prospectusis delayed too long, conditions may alter and what is stated in the prospectus mayno longer be valid. (Section 60 (4)).

11. The various reports and contracts referred to in the prospectus can be inspected byany member of the public, at the office of the Registrar for a period of 14 daysbeginning with the date of publication of the prospectus (Section 610).

12. The term of any contract referred to in the prospectus cannot be varied by acompany except with the concept of the shareholders in general meeting (Section61).

13. A prospectus shall be deemed to include an unture statement if (a) the statement ismisleading in the form and context in which it is included or (b) there is anadmission in the prospectus of any matter and such admission is calculated tomislead the public (Section 65).

Section 62 states that if there is any untrue statement included in the prospectus, the

following persons, are liable to pay compensation to every person who subscribed to any

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shares or debentures on the faith of the prospectus for any loss or damage he may have

sustained by reason of any untrue statement :

a) Every person who is a director of the company at the time of the issue of the prospectusor has authorised himself to be named as a director or as having agreed to become adirector.

b) Every promoter of the company.c) Every person who has authorised to issue of the prospectus.

It is to be noted that liability for compensation is only towards those persons whosubscripted for the shares or debentures on the faith of the prospectus and does not extendto any person who may have purchased shares in the market. Under Section 63 criminal

liability attached for any untrue statement to every person who authorised the issue of theprospectus. These two sections also set out the grounds on which the person mentionedabove may escape liability.

The application for and allotment of shares is equivalent to an offer and acceptance in acontract and generally the same provision that apply to a contract would apply to theapplication for and allotment of shares.

Under the English law an application for shares can be oral, However, the Indian Law in

terms of section of 41 (2) a person must agree in writing to become a member of thecompany. As in the case of a contract, a person may withdraw his offer (Application)provided the withdrawal is made before the allotment of shares. Similarly, a person mayapply through his agent and the allotment would be as effective as if the application weremade personally. The application form issued by companies are so worded that the offer isthat of a certain number of shares, or any smaller number of share by the company thatapplied for may amount to a refusal of the offer. In other words, the acceptance must beunconditional.

The following relating to allotment may be summarized as follows :-

1) No allotment of shares offered to the public can be made by a company unless theminimum amount intended to be raised by the issue has been subscribed and thesum payable on application for the amount so stated has been paid to and receivedby the company. (Section 69 (1)).

2) The amount payable on application must be not less than five percent of the nominalvalue (Section 89 (3)).

3) All the moneys received from the applicants must be kept in a schedule bank until(a) the certificate to commence business has been obtained or (b) if the certificate

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has already been obtained, until the minimum subscription has been received

(Section 69 (4)).

4) If the company has not obtained the certificate to commence business or notreceived the amount payable on shares in respect of the minimum subscriptionwithin one hundred and twenty days after the issue of the prospectus, it must returnthe money without interest. If the money is not returned within one hundred andthirty days after the issue of the prospectus, interest at six percent would be payableon such moneys from the expiry of the one hundred and thirtieth day (Section 69(5)).

It should be noted that the above conditions apply only to shares and not to

debentures. Further, these conditions (Except condition (2) do not apply to theallotment of shares subsequent to the first allotment offered to the public forsubscription.

5) No allotment shall be made of shares or debentures until the beginning of the fifthday after the issue of the prospectus. If however, before such day, any personassociated with the prospectus (director or promoter) gives a public notice limiting orexcluding his responsibility, the five days will be counted from the day of suchnotice. The prospectus is deemed is to be issued on the day of such notice. Theprospectus is deemed is to be issued on the day on which it first appears as anewspapers advertisement, and the fifth day after the issue of the prospectus or any

later date specified in the prospectus is the day of opening of the subscription list.(Section 72).

6) An application for shares or debentures in pursuance of a prospectus can be revokedonly on the expiry of 5 days after the opening of the subscription list. (Section 72(5)).

7) A person who makes an application for acquiring shares in fictitious name or inducesa company to allot or register a transfer of shares to him in a fictitious name wouldbe punishable with imprisonment. (Section 68 A).

8) A company has to file a return to allotment within thirty days of the allotment of itsshares, and where shares have been allotted as fully or partly paid up otherwise thanin cash, it has to file with the Register copies of the contract in terms of which theallotment was made (Section 75 (1) (b)).

9) Allotment to non-residents and foreigners would be subject to the approval of theReserve Bank Of India.

10) A company limited by shares and a company limited by guarantee andhaving a share capital cannot buy its own shares.

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11)A public company and a private company which is a subsidiary of a public company

cannot give financial assistance to any person for purchase of its own shares of itsholding company (Section 77 (22)).

12) In computing the various time limits mentioned above, any day which is a holidayunder the negotiable Instruments Act, 1881, should be excluded. (Section 7).

In on a Stock Exchange (Section 73).

1. Every company intending to offer shares or debentures to the public for subscription

by issue of prospectus is required to make an application to one or more recognizedstock exchange for listing permission.

2. Where a prospectus states that an application has been made for permission for theshares or debentures to be dealt in on the stock exchange the prospectus mustmention the name of the exchange or exchanges.

3. The permission so applied for listing in one or more recognized stock exchangesmust be obtained within ten weeks from the closing of the subscription list. If theseconditions are not complied with, any allotment made will be void.

4. Where an appeal against decision of any recognized Stock Exchange refusingpermission for the shares or Debentures to be dealt in on that Stock Exchange hasbeen preferred under section 22 of the Securities Contracts (Regulation) Act, suchallotment shall not be void until the decision of the appeal.

5. Where company has not applied for listing permission to Stock Exchange/s hasstated in (1) above or such permission having been applied for has not been granted(As stated in (3)) above the company must forthwith repay all the moneys receivedon application and if the company does not do so within eight days, the directors ofthe company will be jointly and severally liable to repay such moneys with interestranging from 4% to 15% as may be prescribed having regard to the length of theperiod of delay in making payment.

6. All the moneys received on application must be deposited in a separate bank accountmaintained with a schedule bank. The moneys in this account are to be utilized onlyafter allotment of shares or repayment of money where permission has not beenapplied for or where it has been applied for but refused.

The provisions of section 73 requiring permission for compulsory listing of all public issueswith recognized stock exchanges, the making of any allotment is void if such permission isnot obtained.

In union India V. Allies International Product Ltd., and other A.I.R. 1981 S.C.P. 251, the

Court held that if the company makes applications to several exchanges and is unable to

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obtain permission for enlistment from any exchange, the allotment will be invalid. But if

permission is secured from any exchange, the allotment will not be invalid just becauseanother exchange has not granted the permission.

The Act does not indicate anywhere when the subscription list should be closed. It istherefore left to the company concerned to set out in the prospectus the number of days forwhich the list will remain open. The general practice it to keep it open for atleast threedays.

It is important to remember that an irregular allotment does not automatically make an

allotment void. It would be possible to distinguish three kinds of irregular allotments.

a) An allotment made before the minimum amount is subscribed or the certificate tocommence business has been received or the statement in lieu of prospectus is filedis voidable at the instance of the applicant. The allotment however must be avoidedwithin the time-limit prescribed. i.e within two months of the holding of the statutorymeeting or where the meeting is not required to be held or the allotment is madeafter such meeting, within two months after the date of the allotments. (Section71).

b) Where the allotment is made before the beginning of the fifth day after the issue of

the prospectus. The validity of the allotment is not affected, although every officerof the company who is in default is liable to fine for violating the provisions.

c) Where no application has been made to the exchange or the application is rejected,the allotment is void.

What has been described above applies to the issue of shares to the public, Section 81however, stipulates that where the subscribed capital of a company is increased byallotment of further shares at any time after the expiry of two years from the formationof the company for one year from the allotment of its shares made for the first timeafter its formation, whichever is earlier. The shares should be offered to the existingshareholders in proportion to their share holding unless the article/s provide otherwise.The offer would include a right to resource the share in favour of any other person. Itis, however open to the shareholders to waive this right granted to them by law bypassing a special resolution to this effect, or by passing an ordinary resolution andobtaining government confirmation that it would be in the interest of the company thatthe shares should be offered to one other than the existing shareholders. The sharesare however, not required to be of credit to the existing shareholders. Preferenceshares are those of a private company where the increase in the capital results from theconversion of loans or debentures granted to the company into shares of one company.The conditions laid down in section 81 would have to be followed whether the issue is

that of equity shares or preference shares.

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The application for transfer may be made either by the transferor or the transferee andwhere the application is made by the transferor and relates to partly-paid shares, thetransfer is not to be registered unless the company gives notice of the application to thetransferee and he makes no objection to the transfer within two weeks from the receiptof the notice, (Section 11A).

A transfer is incomplete until it is registered and the transferee becomes the legal owneronly when his name is entered on the register. It should be noted however that Section108 prescribes the conditions that have to be complied with before a companyregistered any transfer of shares. Non-compliance with these formalities does not nullifya sale which becomes complete as soon as the property in the shares is intended to be

transferred and which intention has to be gathered from the facts of each particularcase, See Unity company limited V. Diamond Sugar Mills and another, ATR 1971 Cal 18.

The company is required to complete and have ready for delivery the certificate ofshares or debentures within three months of allotment of the shares and debentures ofwithin two months of the application for registration of transfer. However, CompanyLaw Board has been empowered to extend the time limit for issue of debenturescertificate, up to period of nine months on an application made by the company on thisbehalf (Section 113).

This particular condition is today observed more in the breach. Any person who has

purchased shares recently will vouch for the fact that he does received the certificate forthe share purchased sometime for period as long as six months or one year. The brokerputs the blame on the company concerned and the companies when contacted do notgive satisfactory explanation. It is fit matter to be taken up by the shareholders as abody.

Where shares pass by transmission by operation of law, these provisions relating totransfer do not apply although it would be necessary for the legal representative toestablish proof of his title and follow the procedure laid down by the company for thispurpose. A transfer of shares by a legal representative would be as valid as if made bya member (Section 108 (1) second provision and section 109).

The question is often raised In what circumstances is the Board of Directors of acompany is justified in refusing to register the transfer of share ? The power given tothe directors under the Articles to refuse to register a transfer must be exercisedreasonably and in good faith. In Bajaj Auto Limited V.N.A. Firodia reported in A.I. R.1971 S.C. at page 321 their Lordships of the Supreme Court have laid down thefollowing three broad tests for deciding this question

a) Whether the directors acted in the interest of the company.b) Whether the directors acted on a wrong principles or with corrupt motive.

c) Whether they acted with an oblige motive or for an collateral purpose.

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Where the directors bonafide decide, that in the interest of the company it would not bedesirable to register a transfer , the decision would be justified.

Where any notice, advertisement or official publication mentions the authorized capitalof a company, it must also mention its subscribed and paid-up capital.

Section 34 states that from the date of incorporation mentioned in the Certificate of

Incorporation of a Company, the subscribers of the memorandum and other personswho are members shall be a body corporate by the name contained in the memorandumcapable of exercising all the functions of an incorporated company and having perpetualsuccession and a common seal. The seal, therefore is an essential feature of acompany. On this seal, as mentioned earlier, the name of the company must beengraven. A document may be executed on behalf of a company either under thecommon seal of the company or under the authority of any person authorized toexercise such document. Where a document is executed under the seal, it is necessaryto check that the seal is affixed in the manner set our in ARTICLES. The Articles willdescribe in detail the manner in which the seal of the company is to be affixed e.g. thatit should be affixed only under the authority of the Board in the presence of one or two

Directors, with or without any other counter signature. Where it is executed by anofficer acting on behalf of the company, it may be necessary to verify the authority ofthe person unless the status of the person carries with it an implied authority to executethe document e.g. the managing director may be assumed to have the power to executedocuments.

Under section 50, a company which carries on business outside India, also may ifauthorized by its articles, have an official seal for us outside India which is a facsimile ofthe common seal. An authority to affix the additional seal must be granted by thecompany. A document executed under the official seal is an authentic as a documentexecuted under the common seal.

The Provisions relating to meeting are covered by sections 165 to 197 or the CompaniesAct.

It is important to remember, however, that apart from the Statutory provisions, themeetings of a company are governed by its articles of association. Thus, while thearticles cannot contain provisions which would make an invalid meeting valid, they wouldcontain provisions on matters that the law leaves a for passing resolutions on matterslike borrowing investments, or the quorum necessary for constituting a meeting. It ispossible that the Articles of Association may impose on the company conditions, stricter

than these provided under the law, e.g. they may provide that a resolution should be

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passed by a special majority when the Act required it to be passed by an ordinary

majority.

Meeting of members may be classified into the following :1. Statutory meetings.2. Annual General meeting.3. Extra ordinary General meeting.4. Meetings of classes of shareholders.

Under section 146, a company is required to have a registered office from the day it

begins to carry on business or from the thirtieth day after its incorporation which ever isearlier. While the registered office may be moved within the limit of the city or down inwhich it is situated, it cannot be moved outside such city or town without the sanction ofthe shareholders obtained by a special resolution. Further intimation must be given tothe Registrar of the initial situation of the registered office and thereafter of everychange in the office. The notice is required to be given in form no. 18 of the companies(Central Governments) General Rule and Forms, 1956.

The registered office has significance as all communication addressed to a company atsuch office. Further the following important registers are required to be maintained atthis office.

1) The Registers of members and debentures of holders and the index of members anddebentures holders as well as copies of annual returns together with the certificatesand documents required to be attached to such annual returns (section 163). Thesemay, however, approve of their maintenance elsewhere by an intention to removethem elsewhere is given to the registrar.

2) The Registers containing the contracts or arrangements in which Directors areinterested (Section 301).

3) The Register of directors, managing directors, manager and secretary (section 303).4) The Register of charges (section 143).5) The books containing the minutes of the general meeting (Section 198)6) Books of Accounts (Section 209).

However, by a resolution of the Board, the Directors may decide to keep the booksat some other place in India in which case the decision to keep the books elsewheremust be intimated to the Registrar within seven days.

Where inspection of documents is permitted e.g. of Register of members, registerof charges and minutes of meetings, the inspection must take place at the registeredoffice.

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The name of the company and the address of the registered office is required to bepainted or affixed outside every office or place where the business of the company iscarried out in the locality. Further the name of the company is engraved in legiblecharacters on the seal, as well as bills, hundies, promissory notes, cheques and ordersfor money of goods. Failure to observe these provisions make the company and everyofficer in default liable to fine (Section 147)

Every public company limited by shares and every public company limited by guaranteeis required to hold a meeting known as The Statutory Meetings, within a period of not

less than one month, and not more than six months from the date on which it is entitledto commence business (section 165). As this requirements applied only to publiccompanies and not to private companies, the articles of incorporating a company initiallyas a private company and converting it into a public company after six months issometimes resorted to. The object of the statutory meetings is to put the shareholdersis possession of all important facts relating to the new company at an early date. Thenotice calling the Statutory Meeting must refer to the meeting as a Statutory Meeting(section 165 (1)).

A report known as the Statutory Report certified by atleast two of the Directors ofthe company is required to be sent to every member of the company, at least twenty

one days before the meeting unless all the members agree to have it forwarded later(Section 165 (2)). The matters that are required to be contained in this report are setout in sub-section (3) of this section. The report is required to be forwarded to theRegistrar immediately after it has been forwarded to the members (section 165 (5)). Itmay be noted that if the Statutory Re[ort is not delivered to the Registrar, the court mayorder a winding of the company. The Statutory Report has to be made out in Form 22of the Appendix I of the companies (Court) Rules 1959.

At the meeting, a list of members including their addresses and occupation and theshares held by them is to be kept available for the inspection of members. It isinteresting to note that at Statutory Meeting, members are at liberty to discuss anymatters relating to the formation of the company or arising out of the Statutory Reportwhether previous notice has been given or not although no resolution may be passed ofwhich notice has not been given in accordance with the Act, (section 165 (7)). TheStatutory Meeting may be adjourned from time to time. Further, at such adjournedmeeting any resolution may be passed even if such resolution was not intended to bepassed at the first proposed Statutory Meeting provided requisite notice of suchresolution had been given during the period between on adjourned meeting and thenext (section 165 (8)).

The notice required for such a meeting is also twenty one days as in the case of anyother general meeting.

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Section 166 of the companies Act provided that in addition to any other meetingthat may be held, a company shall held each year a general meeting as its AnnualGeneral Meeting. These are two cumulative conditions to be satisfied in this connection.

1) One meeting at least must be held in a calendar year, and (section 166 (1)).2) There must not be a gap of more than fifteen months between one meeting and

another (section 166 (1)).

Therefore, it would be a contravention of the section if the meeting is held inconsecutive calendar years, but there is a gap of more than fifteen months between onemeeting and another; equally there would be a contravention if the Meeting is not held

in each calendar year e.g. if one meeting is held in October 1977, and the next is held inJanuary, 1979.

There are two exception of the above, viz. a) the first Annual General Meeting ofCompany may be held within a period of not more than eighteen months from the dateof its incorporation. In that case it would not be necessary for the company to be heldany Annual General Meeting in the year of its incorporation or in the following year e.g.a company incorporated in the month of August of any year need not held meeting inthat year or in the subsequent year; (this provision enables a company to draw up itsaccounts for a period of more than one year and present them to the first AnnualGeneral Meeting and (b) the Registrar may extend the period of fifteen moths by a

further period of three months.

This section must be read together with section 210 (3) in terms of which are the periodfor which the accounts are submitted to a meeting should not precede the day of themeeting by more than six months or six months plus the extension of time granted bythe Registrar. It may, therefore, happen that an Annual Meeting may have to be heldbefore the expiry of the period of fifteen months from the previous meeting in order tocomply with the provisions of section 210. Equally it may be possible that the accountsmay not be ready to be held to comply with the condition that one meeting must be heldper year. In such a case the meeting should nevertheless be held within one statutorytime limit, but adjourned to a date when the accounts will be ready.

If default is made in calling the meeting in accordance with section 166, the CentralGovernment may on the application of member call the meeting or direct that themeeting be called. Default under section 166 is punishable with a fine upto fivethousand rupees which can be imposed separately on the company and the office indefault. (section 167 & 168).

The question is sometimes raised in this connection what is the consequence ofholding a meeting after the expiry of the time limit prescribed by the law? Would theresolutions passed at such a meeting be valid and the appointment of directors beeffective? The legal position would be that while penalty would undoubtedly be levied inview of the violation of the law, the resolution passed would be valid.

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The point that would arise for consideration, however when a meeting is held in the

year following the year of default would be, whether the meeting is the meeting of theyear of default, or that of the year in which it is actually held.

Palmers view is that the proper course would be for the shareholders to resolve atthe meeting that the meeting will be treated as the annual general meeting for bothyears and unless this is done the meeting will be treated as the annual meeting of theyear of the default and a second meeting have to be held for the year in which it isactually held.

Annual General Meeting must be called for a time during business hours, on a daythat is not a public holiday, and must be held either at the registered office of the

company or at some place within the city, town or village in which the registered officeis situated. The Central Government, however has the power to exempt any class orcompanies from these provisions.

Provisions (a) and (b) of the sub-section (2) of section 166 cast some doubt on thepoint on the point whether the articles of a company of the resolution passed by theshareholders at the Annual General Meeting can fix a time which falls outside businesshours. The correct view would be that this cannot be done. The condition requiringthe meeting to he held during business hours is intended to make it convenient for themajority of shareholders to attend a meeting which would not be possible if the meetingwere held outside business hours and this condition must still be complied with. It must

also be noted that while a private company which is not the subsidiary of a publiccompany can fix both the time and place of the meeting, a public company and a privatecompany which is subsidiary of a public company can fix only the time.

The definition of public holiday given in section 2 (38) should be noted. Thecompany is not in default if a public holiday is declared after the issue of the notice.

An extra-ordinary General Meeting is any general meeting (i.e. of the general bodyof shareholders as opposed to a particular class of shareholders), other than the annualgeneral meeting and the statutory meeting. Such meeting may be called for themanagement to transact any business of special character or may be called followingrequisition by shareholders under section 169 convened by the management on its own,and advance notice of twenty one days the Annual General Meeting is given. It shouldbe noted that the conditions that attach to an annual general meeting viz. be heldduring business hours, etc. do not attach to an extraordinary meeting

Section 173, states that all items transacted at an extraordinary general meetingshall be deemed to be special. The notice relating to an extraordinary meeting must,therefore, be accompanied by a statement setting out all the material facts relating tothe business to be transacted including in particular the nature of the interest in thatbusiness of every director and manager. If the business to be transacted concerns

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another company the extent of shareholdings of every director and manager in the

company must be stated provided the shareholding exceeds twenty per cent.

An extraordinary general meeting may be called if a requisition is made from any ofthe following.

i) In the case of a company having a share capital such number of members ashold not less than one-tenth of cash of the paid up capital of the company as atthat date carries the right of voting in regard to the matter.

ii) In the case of a company having a share capital such number of members ashave not less than one-tenth of total voting power of the members entitled to voteon that matter (section 169).

Section 169 contains an important right granted to minority shareholders viz.the right to compel directors to call meeting on the requisition of holders of only one-tenth of the paid up capital of a company.

The shares of a company are divided into various classes. Class meetings to beheld when the Act or the Articles of Association or the terms of issue of the sharesprovide that they should be called.

A general meeting must be convened by our under the authority of the Board. It iscustomary to pass the resolution at a meeting of the Board and not by circular, but therewould be nothing improper in convening a meeting by means of a circular resolutionalso. A meeting convened by the Manager Director or the secretary is invalid if notauthorized by the Board. However, if, before the meeting is actually held, the Boardratifies it, the meeting would be valid. The circumstances under which meetings may berequisitioned by shareholders have already been set out above.

In this connection, the provisions of section 186 which empowers the Company LawBoard to call a meeting (other than an annual general meeting) either on its ownmotion, or on the application of a director or member are relevant. Such a meeting canbe called by the Board (i) if, for any reason, it is impracticable to call a meeting or (ii) ifthe meeting cannot be held or conducted in the manner prescribed by the Act or thearticles of the company.

A meeting is not valid if the notice of the meeting has not been given in accordancewith the Act. It should also meet the requiring of the Articles. The following are theimportant provisions relating to a valid notice for a general meeting.

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i) At least twenty-one days notice must be given of the meeting. The meeting may

be held at shorter notice (a) in the case of an Annual General Meeting, if all themembers agree to such shorter notice and (b) in the case of any other meeting, ifmembers holding 95% of the share capital or 95% of the total voting powerconsent to such shorter notice. (Section 171).

ii) The notice should specify (a) the place (b) the date and the hour of meetingand (c) the business to be transacted at the meeting (Section 172).

iii) Notice of the meeting must be given to (a) every member (b) the personentitled to a share in consequence of the death of insolvency of member and (c) tothe auditors of the company (Section 172 (2)).

The question is often raised whether notice of the meeting should be given topreference shareholders who are in terms of the Act entitled to vote only on theseresolution which affect their own rights, strictly unless the articles specifyotherwise, only these persons who are entitled to attend and vote. Notice is givento all shareholders whether ordinary or preference. Where a company has takenlong-term loans from financial institutions, notice is required to be given to them interms of the agreement with them.

iv) Notice must be given in the manner indicated in section 53 viz. a) by serving itpersonally, or b) by sending it by post to their address registered with the company.

(if the document is sent by post, it must be ensured that the normal formalities ofposting are complied with viz. the letter is properly addressed and the necessarystamp affixed. The letter is not required to be sent under a certificate of posting orby registered post, unless specific instructions to that effect have been given. c) inthe case of shareholders who do not have registered address in India, notice isserved by advertising the Notice in a newspaper.

The words or if he has no registered address in India section 53 creates somedoubt whether a notice would have to be given by a company to a foreignshareholders who has not address in India and this view is supported by the fact thatunder English Law no notice is bound to be given to a foreign shareholders, althoughin practice a company may do so, and further that many articles of association ofEnglish companies specially provide that notice to such shareholders should not begiven. Section 53 (3) which states that a documents advertised in a newspaper willbe deemed to be served on members who have no registered address in India alsostrengthens this view.

iv) A notice given by post is deemed to be effected in the case of the notice ofmeeting, on the expiration of forty-eight hours after the letter is posted.

v) The accidental omission to give notice to any member entitled to the notice, or thenon-receipt of notice by any person does not invalid to the proceedings of themeeting.

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Section 173 of the Act indicates which business is deemed to be ordinary and whichis deemed to be special. At an annual general meeting all business shall be deemed tobe special with the exception of i) consideration of the accounts, balance sheet and thereport of the Directors and Auditors, ii) declaration of dividend, iii) the appointment ofDirectors in the place of those retiring, and iv) the appointment of and the fixing of theremuneration of the auditors. At any other meeting, viz. Extra-ordinary GeneralMeeting, Statutor

1companies act-part i

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