3.2 companies act, 1956

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COMPANIES ACT, 1956

Meaning and Definition of CompanyIn the ordinary common parlance, a company means a group of persons associated to achieve some commonobjective. Our object is to deal with a company which is formed for carrying on some business and providing for limited liability of its members. Keeping this type in mind we may define a company as a voluntary association for profit with capital divisible into transferable shares with limited liability, having a corporate body and common seal.

The Companies Act defines a company as “A company formed and registered under this Act or an existingcompany”. An “existing company” means a company formed and registered under any of the former Companies Act.

According to Lindley, L. J. “A company is an association of many persons who contribute money or money'sworth to a common stock, and employ it in some common trade or business (i.e., for a common purpose), andwho share the profit or loss (as the case may be) arising there from.” The common stock so contributed isdenoted in money and is the capital of the company. The persons who contribute it, or to whom it belongs, aremembers. The proportion of capital to which each member is entitled is his share. Shares are alwaystransferable although the right to transfer them is often more or less restricted.

Nature/Characteristics of a Company1) Incorporated Association: A company must be incorporated or registered under the Companies

Act. Minimum number required for the purpose is 7, in case of a public company, and 2, in case of a privatecompany [Section 12]. It may also be mentioned that as per Section 11, an association of more than 10persons, in case of banking business, and 20 in case of any other business, if not registered as a companyunder the Companies Act, or under any other law for the time being in force, becomes an illegal association.

2) Artificial Person: A company is created with the sanction of law and is not itself a humanbeing, it is, therefore, called artificial; and since it is clothed with certain rights and obligations, it is called aperson. A company is accordingly an artificial person.

3) Separate Legal Entity: A company is regarded as an entity separate from its members. Inother words, it has an independent existence. Any of its members can enter into contracts with it in thesame 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 belong to the company andnot to the shareholders (although the shareholders own the company).

4) Limited Liability: A company may be a company limited by shares or a company limited byguarantee. In a company limited by shares, the liability of members is limited to the unpaid value of theshares. For example, if the face value of a share in a company is Rs. 10 and a member has already paidRs. 7 per share, he can be called upon to pay not more than Rs. 3 per share during the lifetime of thecompany. In a company limited by guarantee, the liability of members is limited to such amount as themembers may undertake to contribute to the assets of the company, in the event of its being wound up.

5) Perpetual Existence: A company being an artificial person cannot be incapacitated by illnessand it does not have an allotted span of life. The death, insolvency or retirement of its members leaves thecompany unaffected. Members may come and go but the company can go forever. The saying “King isdead, long live the King” very aptly applies to the company form of organization.

6) Common Seal: A company being an artificial person is not bestowed with a body of naturalbeing. Therefore, it has to work through its directors, officers and other employees. But, it can be held

Chapter 3.2 Companies Act, 1956

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B - 144 Thakur MBA Second Semester HB (Business Laws)

bound by only those documents which bear its signature. Common seal is the official signature of acompany.

7) Capacity to Sue: A company can and be sued in its corporate name. It may also inflict or suffer wrongs. It can in fact do or have done to it most of the things which may be done by or to a humanbeing.

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Companies Act, 1956 (Chapter 3.2) B - 145

8) Separate Property: As a legal person, a company can own, enjoy and dispose of any propertyin its own name. A member does not even have insurable interest in the company’s property.

9) Transferability of Shares: Since business is separate from its members in a company form of organization, it facilitates the transfer of member's interests. The shares of a company are transferable inthe manner provided in the Articles of the company (S. 82). However, in a private company, certainrestrictions are placed on such transfer of shares but the right to transfer is not taken away absolutely.

Difference between Partnership and CompanyBasis Partnership Company

i) RegulatingAct

A partnership firm is governed by theprovisions of the Indian Partnership Act, 1932.

A company is governed by the provisions of theCompanies Act, 1956.

ii) Legal Entity A firm does not enjoy separate legalexistence. Partners are collectively termed asa firm and individually as partners.

It has a separate legal existence. A company isseparate from its members.

iii) Agency Every partner is an agent of the other partners, as well as of the firm.

A member is not an agent of the other members or of the company, his actions do not bind either.

iv) Liability Each partner has unlimited liability and ispersonally liable for all the debts of the firm.

Liability of its members is limited to the extent of thevalue of shares held by them.

v) Number of

membership

In the case of firms carrying on business other

than banking, the number must not exceed 20and in the case of banks such number mustnot exceed 10.

A private company may have as many as 50

members but not less than two and a public companymay have any number of members but not less thanseven.

vi) Transfer of shares

A share in a partnership cannot be transferredwithout the consent of all the partners.

A shareholder may transfer his shares, subject to theprovisions contained in its Articles. In case of publiccompany, a shareholder can transfer his sharesfreely without restriction.

vii) Distributionof profits

Profits are distributable among partners as per the partnership deed.

There is no such compulsion that profits must bedistributed. Only when dividends are declared thatthe members get a share of profits.

viii) Management All the partners of a firm are entitled to takepart in the management of the business.

The right to control and manage the business isvested in the Board of Directors elected by theshareholders.

ix) Registration A partnership firm may or may not be

registered.

A company registration is essential.

x) Winding up A partnership firm can be wound up at anytime by any partner, if it is ‘at will’, withoutlegal formalities.

No one member can require it to be wound up at willand winding up involves legal formalities.

Kinds/Classification of Companies

1) From the Point of View of Its Formation, Companies are of Three Kindsi) Chartered Companies: Those companies, which are incorporated under a special charter granted by the

King or Queen of England. For example, East India Co. A chartered company is governed by its charter which defines the nature of the company and at the same time incorporates it.

ii) Statutory Companies: These are the companies formed by a special Act of Parliament. For example,Reserve Bank of India. The state Bank of India, the Life Insurance Corporation, the Industrial financesCorporation, the Unit Trust of India. These are mostly concerned with public utilities, for example,

railways, tramways, gas and electricity companies and enterprises of national importance. Theprovisions of the Companies Act, 1956 apply to them, if they are not inconsistent with the provisions of the special Acts under which they are formed.

Classification of Companies

On the basis of Incorporation

On the basis of Liability

On the basis of No. of member

On the basis of control

On the basis of ownership

CharteredCompanies

StatutoryCompanies

RegisteredCompanies

LimitedCompanies

UnlimitedCompanies

GuaranteeCompanies

PrivateCompanies

PublicCompanies

HoldingCompanies

SubsidiaryCompanies

GovernmentCompanies

Non-Government/Foreign Companies

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iii) Registered Companies: Such companies, which are incorporated under Companies Act 1956, or wereregistered under any previous Companies Act.

2) From the Point of View of Liability, there are Three Types of Companiesi) Limited Company: In case of such companies the liability of each member (shareholder) is limited to

the extent of a face value of share held by him.

ii) Unlimited Companies: Section 12 specifically provides that any 7 or more persons (2 or more in caseof a private company) may form an incorporated company with or without limited liability [Section, 12(1)]. A company without limited liability is known as an unlimited company. In case of such a companyevery member is liable for the debts of the company, as in an ordinary partnership, in proportion to hisinterest in the company [Section 12 (2) (c)].

iii) Guarantee Company: Where the liability of the members of a company is limited to a fixed amountwhich the members undertake to contribute to the assets of the company in case of its winding up, thecompany is called a company limited by guarantee (Section 12 (2) (b)].

The liability of its members is limited. The articles of such company must state the number of memberswith which the company is to be registered [Section 27(2)].

3) From the Point of View of Control, there are Two Types of Companies

i) Holding Company: A company is known as the holding company of another company if it has controlover that other company. According to Section 4 (4), a company is “deemed to be the holding companyof another, but if only, that other is its subsidiary”.

ii) Subsidiary Company: A company is known as a subsidiary of another company when control isexercised by the latter (called holding company) over the former, called a subsidiary company.According to Section 4 (1), a company (say Company S) is deemed to be a subsidiary of another company (say, Company H) in the following three cases:a) Company controlling composition of Board of Directors.b) Holding of majority of shares.c) Subsidiary of another subsidiary.

4) From the Point of View of Ownership, there are Two Types of Companies werei) Government Company: A government company means any company in which at least 51 percent of the

paid-up share capital is held by the central government or by any state government or government, or partly by the central government and partly by one or more State governments. For example, “StateTrading Corporation” of India, and “Minerals and Metals Trading Corporation” of India is governmentcompanies. The subsidiary of a government company is also a government company.

ii) Foreign Company: It means any company incorporated outside India which has a place of business inIndia. For example, where representatives of a foreign company frequently come and stay in a hotel inIndia for purchasing machinery, cotton etc., the foreign company has a place of business in India.

Where a minimum of 50 percent of the paid up share capital (whether equity or preference or partly equityand partly preference) of a foreign company is held by one or more citizens of India or/and by one or moreIndian companies, singly or jointly such company shall comply with such provisions as may be prescribedas if it were an Indian company.

5) From the Point of View of Number of Members, Company may be of Two Kindsi) Private Company: A private company is one which by its Articles of Association.

a) Restricts the right of the members to transfer shares;b) Limits the number of members to fifty excluding past or present employees of the company who are

the members of the company;c) Prohibits any invitation to the public to subscribe for its shares or debentures.

A private company must have its own articles of association which contains the conditions as laid downin Section 3 (1) (iii).

ii) Public Company: Public company means a company, which is not a private company. In other wordsa public company means

A company which by its articles:

a) Does not restrict the right to transfer its shares. If any;b) Does not limit the number of its members; and

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c) Does not prohibit any invitation to the public to subscribe for any shares or debentures of the company.

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Special Privileges of a Private CompanyThe law bestows some benedictions on a private company by granting certain privileges to it. These privilegesare as follows:i) Number of Members [Section 12 (1)]: A private company may have only 2 members.

ii) Allotment before Minimum Subscription [Section 69]: It can commence allotment of shares before theminimum subscription is subscribed for or paid.

iii) Prospectus or a Statement in Lieu of Prospectus [Section 70 (3)]: It may allot shares without issuing aprospectus or delivering to the registrar a statement in lieu of prospectus.

iv) Issue of New Shares [Section 81 (3)]: When a public company offers new shares at any time after theexpiry of 2 years from the formation of a company or at any time after the expiry of 1 year from the data of first allotment, whichever is earlier, it has first to offer these shares to the existing equity shareholders on pro rata basis. However the members in a general meeting may decide otherwise. There is no suchrequirement in case of a private company.

v) Kinds of Shares [Sections 85 to 89]: A private company may issue share capital of such kinds, in suchforms, and with such voting rights, as it may think fit.

vi) Commencement of Business [Section 149 (7)]: It can commence business immediately on incorporation.

vii) Index of Members [Section 151 (1)]: It need not keep an index of members.

viii) Statutory Meeting and Statutory Report [Section 165 (10)]: Provisions relating to statutory report andstatutory meeting (which are applicable to public companies) are not applicable to private companies.

ix) Managerial Remuneration: The rule of overall maximum managerial remuneration does not apply to aprivate company which is not a subsidiary of a public company

x) Number of Directors [Section 252 (2)]: It need not have more than 2 directors.

xi) Rules Regarding Directors: In the case of a private company, the rules regarding directors are less stringent.

Conversion of Private Company into a Public Company1) Conversion by Default [Section 43]: Where adefault is made by a private company in complying with the essential requirements of a private company(viz., restriction on transfer of shares, limitation of the number of members to 50 and prohibition of invitationto the public to buy shares or debentures), the company ceases to enjoy some of the privileges of a privatecompany and the provisions of the Companies Act apply to it as if it were not a private company. The

Company Law Board may relieve the company from the consequences as aforesaid, if it is of opinion thatthe non-compliance was accidental or due to inadvertence or other sufficient cause. It may also grant relief if on some other grounds it is just and equitable.

2) Conversion by Operation of Law [Section 43-A]: Under section 43-A, a private company becomes a public company (known as deemed publiccompany):

i) Where at least 25 percent of its paid-up share capital is held by one or morebodies corporate.ii) Where its average annual turnover during the relevant period is Rs.10 crores or more.iii) Where the private company holds at least 25 percent share capital of a publiccompany, having a share capital.

iv) Where a private company invites, accepts or renews deposits from the public,such private company becomes a deemed public company from the date on which such invitation,acceptance or renewal, as the case may be, is first made as added by the Companies (Amendment)Act, 1988.

3) Conversion by Choice [Section 44]: If a privatecompany so alters its Articles that they do not contain the provisions, which make it a private company, itceases to be a private company as on the date of the alteration. It must then file with the Registrar, within30 days, either a prospectus or a statement in lieu of prospectus. When this is done, the private companybecomes a public company.

The private company, which so becomes a public company must also:i) File a copy of the resolution altering the Articles, within 30 days of passing thereof, with the Registrar;ii) Take steps to raise its membership to at least 7 if it is below that number on the date of conversion, and

also increase the number of directors to 3 if it is below that number;iii) Alter the regulations contained in the Articles, which are inconsistent with those of a public company.

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Conversion of Public Company into a Private CompanyThere is no direct or express provision in the Act for the conversion of a public company into a private companyexcept a reference in the provison to Section 31 (1). A public company having a share capital, and membershipwithin the limits imposed upon private companies by Section 3 (1) (iii), may become a private company byfollowing the procedure as given below:1) The company in general meeting has to pass special resolution for altering the articles so as to include

therein the necessary restrictions, limitations and prohibitions, and to delete any provision inconsistent withthe restrictions. For instance, a private company has to put certain restrictions on the right of members totransfer their shares.

2) The word “Private” should be added before “Limited”.

3) The approval of the central government to the alteration in the articles for converting a public company intoa private company should be obtained.

4) Within one month of the date of the receipt of the order of approval, a printed copy of the altered articlesmust be filed with the Registrar.

5) Within 30 days of the passing of the special resolution, a printed or type-written copy thereof should be filedwith the Registrar.

Difference between Private and Public Companies

Basis Private Company Public Company1) Number of Members Minimum-2 Minimum-7

Maximum-50 Maximum-no limit

2) Name It is necessary to add the word ‘PrivateLimited’ after the name of the PrivateCompany.

It is essential to add the word ‘Limited’after the name of the Public Company.

3) Number of Directors A minimum number of 2 directors areessential.

A minimum number of 3 directors areessential.

4) Invitation to Public Private company cannot invite publicfor issuing shares and debentures.

Public company can invite public for issuing its shares and debentures.

5) Transfer of Shares There is no freedom to transfer sharesin a private company.

There is no restriction on the transfer of shares.

6) Issue of Prospectus Private company cannot issue

prospectus and statement in lieu of prospectus.

It is essential to issue statement in lieu

of prospectus in the absence of prospectus and send it to the Registrar.

7) Statutory Meeting It is not necessary for it to call statutorymeeting.

It is essential for it to call statutorymeeting.

One-Man CompanyThis is a company (usually private) in which one man holds practically the whole of the share capital of thecompany, and in order to meet the statutory requirement of minimum number of members, some dummymembers who are mostly his relations or friends hold one or two shares each. The dummy members areusually nominees of the principal shareholder who is the virtual owner of the business and who carries it on withlimited liability.

Example: A private company is registered with a share capital of Rs. 5,00,000 divided into 50,000 shares of Rs.

10 each. Of these shares 49,999 are held by A, and one share is held by A’s wife, B. This is a one-man company.

A one-man company, like any other company, is a legal entity distinct from its members.

Incorporation of a Company

Before a company is formed, certain preliminary steps arenecessary, for example, whether it should be a private company or apublic company, what its capital should be, and whether it isworthwhile forming a new company or taking over the business of analready established concern. All these steps are taken by certainpersons known as 'promoters'. They do the entire necessary

preliminary work incidental to the formation of a company.

Registration

Promotion

Certificate of Incorporation

Commencement of Business

Floatation

Figure: Stages of Formation of Company

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Any 7 or more persons (2 or more in case of a private company) associated for any lawful purpose may form anincorporated company with or without limited liability. They shall subscribe their names to a Memorandum of Association and also comply with other formalities in respect of registration (Section 12). A company so formedmay be:a) A company limited by shares, or b) A company limited by guarantee, or

c) An unlimited company.

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In the formation of a Company the various stages are involved as mentioned below.

PromotionThe promoters, who are pioneers and who conceive the idea of forming a company and making it a goingconcern have to secure the minimum membership which is two in the case of a private company and seven inthe case of a public company. They will have to prepare the memorandum of association; articles of association

and in the case of a public company, promoters will also have to prepare draft prospectus and an underwritingcontract. The promoters will have to approach the financiers to obtain their support to the floatation of a publiccompany by securing underwriting facilities from them.

The promoters will have to perform the preliminary work and with the help of the secretary and the solicitorsthey would have the following documents ready:1) Memorandum of Association: Laying down the constitution of the company.

2) Articles of Association: Prescribing regulations for internal management.

3) Prospectus: For public issue of capital.

4) Preliminary Contracts, i.e., contracts of purchase of property and assets.

5) Underwriting Contract: To insure capital issues.

RegistrationBefore a company is registered, it is desirable to ascertain from the Registrar of Companies (for the State Inwhich the registered office of the company is to be situated) if the proposed name of the company is approved.

Availability of NameSection 20 states that a company cannot be registered by a name, which in the opinion of the Central Governmentis undesirable. Therefore, it is advisable that promoters find out the availability of the proposed name of thecompany from the Registrar of Companies. For the purpose, three names in order of priority should be filed.These names should conform to the guidelines issued by the Department of Company Affairs in this regard.

ProcedureSection 12 states that, “any seven or more persons or where the company to be formed will be a privatecompany, two or more persons, associated for any lawful purpose may, by subscribing their names to a

memorandum of association and otherwise complying with the requirements of this Act in respect of registration, form an incorporated company, with or without limited liability.” Thus, the promoters will have to gettogether atleast seven persons in the case of a public company, or two persons in the case of a privatecompany to subscribe to the memorandum of association.

Documents to be DeliveredThen the following documents duly stamped together with the necessary fees are to be filed with the Registrar:1) Memorandum of Association: It should be duly stamped, signed by the subscribers, two for a private

company and seven for a public company, and attested by the signature of a witness. The subscribers tothe Memorandum are termed as original members of the company.

2) Articles of Association: This document should be properly stamped, duly signed by the signatories of theMemorandum and also attested (signed by a witness).

3) Notice of Address of Registered Office: This may be done within 30 days of registration also, if it cannot

be filed at the time of registration.

4) Statutory Declaration: This declaration will announce that all the requirements of the Act (and the Ruleswith regard to incorporation) have been duly fulfilled. It may be signed by an advocate, solicitor or by aproposed director or secretary named in the Articles, as such director or secretary of the company.

5) Return (In Duplicate) Containing the Particulars of First Directors of the Company: The return givingthe particulars of directors, etc., can also be filed within 30 days of their appointment. It is required for allcompanies so that at the Registrar’s office any one can know about the directors, etc., of any company.

6) Consent to Act as Director of a Company: A separate written consent is necessary to be signed by everyproposed director in the case of a public company limited by shared. This is, however, not necessary for other companies, other than public limited companies.

7) Undertaking of a Director to take and Pay for Qualification Shares with Necessary Stamp Duty: In the

case of a public limited company, this undertaking is necessary for directors other than those who have signedthe memorandum of association. A signatory to the Memorandum need not file a separate undertaking for qualification shares. This document is not required for private company or a company without share capital.

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The documents relating to the directors, viz. Numbers 6 and 7 are not required in the formation of privatecompanies. However first five documents are common for all companies.

Certificate of IncorporationWhen the requisite documents are filed with the Registrar, the Registrar shall satisfy himself that the statutoryrequirements regarding registration have been duly complied with. If the Registrar is satisfied as to the compliance

of statutory requirements, he retains and registers the Memorandum, the articles and other documents filed withhim and issues a “certificate of incorporation”, i.e., of the formation of the company [Section 33 (3)].

By issuing certificate of incorporation the Registrar certifies “under his hand that the company is incorporatedand in the case of a limited company, that the company is limited” [Section 34 (1)].

Conclusiveness of Certificate of IncorporationA certificate of incorporation given by the Registrar in respect of a company is conclusive evidence that all therequirements of the Companies Act in respect of registration have been complied with and nothing can beinquired into as to the regularity of the prior proceedings and the certificate cannot be disputed on any groundswhatsoever (Section 35).

The certificate of incorporation has been held to be conclusive on the following points:

1) Those requirements of the Act in respect of registration of matters precedent and Incidental thereto havebeen complied with. If after the receipt of certificate of incorporation by a company it is discovered that therewere certain irregularities with regard to its registration, these will not affect the validity of the company.

2) That the association is a company authorized to be registered under the Act, and has been duly registered.

3) That the date borne by the certificate of incorporation is the date of birth of the company, i.e., the date onwhich company comes into existence.

FloatationWhen a company has been registered and has received its certificate of incorporation, it is ready for ‘floatation’;that is to say, it can go ahead with raising capital sufficient to commence business and to carry it on satisfactorily.

We have seen earlier under ‘Classification of Companies’ that a private company is prohibited from inviting

public to subscribe to its share capital. Therefore, when a private company is formed, the necessary capital isobtained from friends and relatives by private arrangement.

In the case of a public company also, the promoters may not invite public to subscribe to its share capital and mayarrange the capital privately as in the case of a private company. In such a case, the intention of the promoters isto take advantages of incorporation not available to a private company, for example, to have unlimited number of members, to confer unrestricted right to transfer shares on the members, etc. However, by far the largest number of public companies raises their capital in the very first instance by inviting public to subscribe to its share capital.

Section 70 makes it obligatory for every public company to take either of the following two steps:1) Issue a prospectus in case public is to be invited to subscribe to its capital, or 2) Submit a ‘Statement in lieu of prospectus’ in case capital has been arranged privately. It must be done at

least 3 days before allotment.

Commencement of BusinessA private company may commence business immediately after obtaining the certificate of incorporation. Apublic company must obtain a ‘Certificate to Commence Business’ from the Registrar before it can commencebusiness. The Registrar will grant this certificate only when:1) The Minimum subscription has been allotted;2) The directors have taken up and paid for their qualification shares;3) The statutory declaration and the prospectus or statement in lieu of prospectus have been filed.

Any new business (as mentioned under other objects in the memorandum) can be started only after obtaining approvalof the shareholders by a special resolution, and after a declaration has been filed with the Registrar, verified by one of the directors or the secretary that the approval by special resolution has been given by the company in general meeting.

All contracts entered into between the date of incorporation and the dates of the commencement of businessare provisional and would bind the company only after it is entitled to commence business. If the company doesnot commence business within one year of its incorporation the Court may order it to be wound up.

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Memorandum of Association

The memorandum of association of a company is its charter, which contains the fundamental conditions upon whichalone the company can be incorporated. It tells us the objects of the company’s formation and the utmost possiblescope of its operations beyond which its actions cannot go. Thus, it defines as well as confines the powers of thecompany. If anything is done beyond these powers, that will be ultra vires (beyond powers of) the company and sovoid.

Purpose of Memorandum1) The prospective shareholders know the field in, or the purpose for, which their money is going to be used

by the company and what risk they are undertaking in making investment.2) The outsiders dealing with the company know with certainty as to what the objects of the company are and

as to whether the contractual relation into which they contemplate to enter with the company is within theobjects of the company.

Contents of Memorandum [Section 13]The memorandum of association is the constitution or a charter or a charter of the company. This is thefundamental document and states:1) The name of the company, with 'limited' as the last word of the name in the case of a public limited

company and with ‘Private Limited’ as the last words of the name in the case of a private limited company.

2) The State in which the registered office of the company is to be situated.

3) The object of the company which shall be classified as:a) The main objects of the company;b) Objects incidental or ancillary to the attainment of the main objects; andc) Other objects of the company not included in (a) and (b).

4) In the case of companies (other than trading corporations) with objects not confined to one State, the Statesto whose territories the objects extend.

5) Liability of the Members: The memorandum of a company limited by shares or by guarantee shall alsostate that the liability of its members is limited.

6) Share Capital: In the case of a company having share capital the memorandum shall state the amount of share

capital with which the company is to be registered and the division thereof into shares of a fixed amount.

The Memorandum shall conclude with the association and subscription clauses. Under this clause all thepersons intending to form the company shall undertake to subscribe for the share capital in the company andshall specify the number of shares that would be taken by each one of them on incorporation of the company.

Form of MemorandumThe memorandum of Association of a company shall be in such one of the forms in tables B, C, D and E inSchedule I as may be applicable to the case of the company or in a form as near thereto as circumstances admit.

The memorandum of association of a company shall be:a) Printed,

b) Divided into paragraphs numbered consecutively, andc) Signed by 7 (2 in case of a private company) subscribers.

Each subscriber shall sign (and add his address, description and occupation, if any) in the presence of at least1 witness who shall attest the signature and shall likewise add his address, description and occupation, if any(Section 15). Memorandum printed on computer laser printers is now accepted by the Registrar for registrationof a company provided it is neatly and legibly printed.

Clause and Memorandum of Association1) Name Clause: The first clause of a memorandum shall state the name of the proposed company. The

name of a company establishes its identity and is the symbol of its existence. A company may subject tothe following rules, select any suitable name:i) Undesirable Name to be Avoided: A company cannot be registered by a name which, in the opinion

of the central government, is undesirable [Section 20 (1)]. Broadly speaking, a name is undesirable andtherefore rejected if it is either:a) Too similar to the name of another company; or

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b) Misleading

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ii) Injunction if Identical name adopted: If a company gets registered with a name which resembles thename of an existing company, the other company with whom the name resembles can apply to theCourt for an Injunction to restrain the new company from adopting the identical name.

iii) ‘Limited’ or ‘Private Limited’ as the last word or Words of the Name: The memorandum shall state.The name of the company with “Limited” as the last word of the name in case of a public limitedcompany, and with “Private limited” as the last words of the name in case of a private limited company.

iv) Prohibition of Use of Certain Names: The Emblems and Name (Prevention of Improper Use) Act, 1950prohibits, except with the previous permission of the central government, the use of, or registration of acompany or firm with, any name or emblem specified in the schedule to the Act. The schedule specifies,amongst others, the following items, i.e., the name, emblem or official seal of the U.N.O. and the W.H.O.,the Indian Flag, the name, emblem or official seal of the central government and state governments, thename and pictorial representation Mahatma Gandhi and the Prime Minister of India.

v) Use of Some Key Words According to Authorized Capital: If a company uses some key words in itsname, it must have a minimum authorized capital. For example, if a company uses the word‘Corporation' in its name, it must have a minimum authorized capital of Rs. 5 crores. Likewise, if acompany uses any of the words ‘International’, ‘Globe’, ‘Universal’, ‘Inter-Continental’, ‘Asiatic’ or ‘Asia’,as the first word of its name, it must have a minimum authorized capital of Rs. 1 crore. If any of thesewords is used within the name, it must have a minimum authorized capital of Rs. 50 lakhs.

2) Registered Clause: Every company shall have an office registered from the day on which it begins to carryon business, or as from the 30th day after the date of its incorporation, whichever is earlier. Allcommunications and notices are to be addressed to that registered office [Section 146 (1)]. Notice of thesituation of the registered office and every change shall be given to the Registrar within 30 days after the dateof incorporation of the company or after the date of change [Section 146 [2]|. If default is made in complyingwith these requirements, the company and every officer of the company who is in default shall be punishablewith line which may extend to Rs. 50 for every day during which the default continues [Section 146 (4)].

3) Objects Clause: The objects clause defines as well as confines the spheres of business activities that thecompany would engage in. Any activity, which is not specifically and explicitly allowed by the object clause,cannot be carried on by the company. Such activities will be treated as ultra vires, which means outside thecompetence of the company.

The object that would be pursued by the company is divided into three classes, namely:

i) The main objects to be pursued by the company on its incorporation;ii) The objects incidental or ancillary to the attainment of the main objects; andiii) Other objects, which are not included in the main objects of the company.

A company shall not commence business in respect of any object, which is not included in the main objects unless:a) The company has approve of the commencement of any such business by a specialresolution passed in that behalf it in general meeting; andb) There has been filed with the registrar a duly verified declaration by one of the directors or the secretary or, where the company has not appointed as secretary, a secretary in whole time practicethat the provisions relating to the commencement have been complied with.

4) Liability Clause: This clause states that the liability of members is limited by the face value of shares. Thechange in the liability can be brought by passing a special resolution to that effect. Directors may have anunlimited liability while members may have limited liability.

For a company limited by guarantee this clause will mention the amount which every member undertakes tocontribute to the assets of the company, for example, not exceeding Rs. 500/-, in the event of winding up.For unlimited company this clause is not needed.

5) Capital Clause: This clause states the amount of share capital with which the company is registered andthe mode of its division into shares of fixed valued, i.e., the number of shares into which the capital isdivided and the amount of each share. If there are both equity and preference shares, then the division of the capital is to be shown under these two heads.

6) Association Clause: At the end of the memorandum of every company there is an association or subscription clause or a declaration of association which reads something like this:

“We, the several persons whose name and addresses and occupations are subscribed, are desirous of being formed into a company in pursuance of this memorandum of association, and we respectively agreeto take the number of shares in the capital of the company set opposite our respective names”.

Then follows the names, addresses, descriptions, occupations of the subscribers, and the number of shareseach subscriber has taken and his signature attested by a witness.

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Alteration of Memorandum1) Change of Name: By special resolution. A company may change its name by a special resolution and with

the approval of the central government. A change of name which merely involves the deletion or addition of the word ‘Private’ on the conversion of a private company into a public company or vice versa does notrequire the approval of the central government (Section 21).

By Ordinary Resolution: If through inadvertence or otherwise, a company is registered by a name which, in theopinion of the central government, is identical with, or too nearly resembles, the name of an existing company:a) The company may change its name, by ordinary resolution and with the previous approval of the central

government.b) The company shall change its name if the central government so directs within 12 months of its first

registration or registration by its new name, as the case may be.

2) Change of Registered Office: This may involve:a) Change of registered office from one town to another town in the same state.b) Change of registered office from one state to another state.

In case (a), a notice is to be given within 30 days of the change to the Registrar (Section 146(2)].

In case (b), a special resolution is required to be passed at a general meeting of the shareholders and a

copy of it is to be filed with the Registrar within 30 days. Then within 30 days of the removal of the office, anotice has to be given to the Registrar of the new location of the office.

3) Alteration of Objects: The objects clause is the most important clause in the memorandum. The legalpersonality of a company exists only for the particular purposes of incorporation as defined in the objects clause.By Section 17 (1), the objects of a company may be altered by a special resolution so as to enable the company:a) To carry on its business more economically or more efficiently.b) To attain its main purpose by new improved means.c) To enlarge or change the local area of its operations.d) To carry on some business which under existing circumstances may conveniently or advantageously be

combined with the objects specified in the memorandum.e) To restrict or abandon any of the objects specified in the memorandum.f) To sell or dispose of the whole or a part of the undertaking, or any of the undertakings of the company; or

g) To amalgamate with any other company or body of persons.4) Change in Liability Clause: A company limited by shares or guarantee cannot change its memorandum so as

to impose any additional liability on the members or to compel them to buy additional shares of the companyunless all the members agree in writing to such change either before or after the change (Section 38).

Articles of Association

Meaning and Purpose Articles of AssociationThe articles of association of a company and its byelaws are regulations, which govern the management of itsinternal affairs and the conduct of its business. They define the duties, rights, powers and authority of theshareholders and the directors in their respective capacities and of the company, and the mode and form inwhich the business of the company is to be carried out.

Contents of ArticlesArticles usually contain provisions relating to the following matters:1) Share capital, rights of shareholders, variation of these rights, payment of underwriting commission.2) Lien on shares.3) Calls on shares4) Transfer of shares.5) Transmission of shares.6) Forfeiture of shares.7) Conversion of shares into stock.8) Share warrants.9) Alteration of capital.

10) General meetings and proceedings there at.11) Voting rights of members, voting and poll, proxies.12) Directors, their appointment, remuneration, qualifications, powers and proceedings of Board of Directors.

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13) Manager.14) Secretary.15) Dividends and reserves.16) Accounts, audit and borrowing powers.17) Capitalization of profits.18) Winding up.

Companies, which must have their Own Articles [Section 26]The following companies shall have their own articles, namely:1) Unlimited companies.2) Companies limited by guarantee,3) Private companies limited by shares.

Registration of ArticlesSection 26 states that a public company limited by shares may register articles of association signed by thesubscribers to the memorandum. If, however, it does not register its own articles, then the articles given inTable A, of Schedule I automatically become applicable. Further, even if it does register articles of its own,Table A will still apply automatically unless it has been excluded or modified. There are actually three possible

alternatives in which such company may adopt articles:i) It may adopt Table A in full,ii) It may wholly exclude Table A and set out its own regulations in full, or iii) It may set out its own articles and adopt part of Table A.

The alternatives (ii) and (iii) are often employed; and partial adoption of Table A has particular advantage for smallcompanies, because of economy in printing and also because any provision of Table A is legally beyond any doubt.

As regard a company limited by guarantee and unlimited liability company and, a private company limited byshares, Section 26 provides for compulsory registration of articles prescribing regulations for the company.However, they may adopt any of the appropriate regulations of Table A.

In any case, the articles of a company must be:

i) Printed,ii) Divided into paragraphs, numbered consecutively,iii) Signed by subscribers to the memorandum in the presence of at least one witness who shall attest the

signatures. Also, articles are to be stamped with requisite stamp and filed along with the memorandum (Section3).

Alteration of ArticlesCompanies have been given very wide power to alter their articles. It is a statutory power and any provision inthe Articles making the articles unalterable is regarded as bad in law. If, for example, the articles of a companycontain any restriction that the company shall not alter its articles it will be contrary to the Companies Act andtherefore inoperative.

Procedure for AlterationA company may, by passing a special resolution, alter regulations contained in its articles anytime. Again anynew regulations in the Articles may be adopted which could have been lawfully included in the original articles.A copy of every special resolution altering the articles shall be filed with the register within 30 days of itspassing. Any alteration so made in the articles shall be as valid as if originally contained in the articles.

Limitations of Alteration1) Must not be inconsistent with the Act.2) Must not conflict with the memorandum.3) Must not sanction anything illegal.4) Must be for benefit of the company.5) Must not increase liability of members.6) Alteration by special resolution only.

7) Approval of central government when a public company is converted into a private company.8) Breach of contract9) No power of the Court to amend Articles

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10) Alteration may be with retrospective effect.

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Articles and MemorandumTheir Relation1) The Articles are subordinate to Memorandum. The Articles cannot give powers to a company which are not

conferred by the Memorandum nor can they purport to create rights which are inconsistent with theMemorandum. This is so because the object of the Memorandum is to state the purpose for which thecompany has been established, while the Articles provide the manner in which the internal management of the company is to be carried.

2) The Memorandum must be read in conjunction with Articles. This is the case when it is necessaryi) To explain any ambiguity in the terms of the Memorandum or ii) To supplement the Memorandum upon any matter about which it is silent except as regards matters

which must by Statute be provided by the Memorandum. The Articles may explain or supplement theMemorandum, but can not extend or enlarge its scope.

3) The terms of the Memorandum cannot be modified or controlled by the Articles. If, however, there is anyambiguity in the Memorandum. The Articles may be referred to for clarification. But so far as the fundamentalconditions in the Memorandum are concerned, they cannot .be explained with the aid of the Articles.

Distinction between Articles and Memorandum of AssociationBasis Memorandum of Association Articles of Association

1) Scope Constitution of the company, defines itsobjects and powers.

Rules and regulations for day-to-day working of the company.

2) Drafting or Necessity

Every company must prepare and file it. A public company limited by shares may adoptTable A.

3) Purpose To define the objects and powers of acompany.

To lay down rules and regulations for management of internal affairs.

4) Status Main document – Constitution of thecompany.

Subsidiary to Memorandum.

5) Provisions Must not contain anything contrary to theCompanies Act.

Must not contain anything contrary to theCompanies Act and the memorandum.

6) Relationship Regulates relations between the companyand outsiders.

Regulates relations between company andmembers, members and members.

7) Alteration Difficult, permission of Central Government

or Company Law Board necessary.

Easy, a special resolution of the company

required.8) Legal effects Anything done beyond it is void. Anything done beyond i t can be ratified by a

special resolution.

Legal Effect of Memorandum and ArticlesThe memorandum and the articles, when registered, bind a company and the members thereof to the sameextent as if they respectively had been signed by the company and each member.

The effect of these provisions is to constitute, through memorandum and Articles of Association of thecompany, a contract between each member and the company. The legal implications of these documents maybe discussed as to how far these documents bind:1) Members to the Company: As between the members and the company, the Memorandum and Articles

constitute a binding contract. The effect of this is that each member is bound to the company to conform tothe memorandum and the articles as if each member has actually signed the same.

2) Company to the Members: A company is bound to the members in the same manner as the members arebound to the company. It can therefore, exercise its rights, as against any member, only in accordance withthe Memorandum and the articles. A member can obtain an injunction restraining a company from doing anultra vires act.

3) Members Inter Se: As between the members inter se (among themselves) the Memorandum and theArticles constitute a contract between them and are also binding on each member against the other or other. Such a contract can, however, be enforced through the medium of the company.

4) Company to the Outsiders: The Articles do not constitute any binding contract between the company andan outsider. An outsider cannot take advantage of the Articles to found a claim thereon against thecompany. This is based on the general rule of law that a stranger to a contract cannot acquire any rights

and liabilities under that contract. If the Articles provide that the company on incorporation shall purchasecertain property and appoint the vendor as one of the directors, the vendor, on becoming a shareholder,cannot sue the company on the basis of the articles.

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Prospectus

Definition of a ProspectusA prospectus, as per Section 2 (36), means any document described or issued as prospectus and includes anynotice, circular, advertisement or other document inviting deposits from the public or inviting offers from the

public for the subscription or purchase of any shares in or debentures of a body corporate. Thus, a prospectusis not merely an advertisement; it may be a circular or even a notice. A document shall be called a prospectus if it satisfies two things:1) It invites subscriptions to share or debentures or invites deposits.2) The aforesaid invitation is made to the public.

Registration of Prospectus [Section 60]A prospectus can be issued by or on behalf of a company or in relation to an intended company only when acopy thereof has been delivered to the Registrar for registration. The registration must be made on or beforethe date of publication thereof. The copy must be signed by every person who is named therein as director or proposed director of the company, or by his agent authorized in writing. Further, the prospectus must state onthe face of it that a copy of it has been delivered to the Registrar for registration. It must also specify thatnecessary documents and consent of the experts have been attached to or indorsed on the copy so delivered.

The prospectus must be issued within 90 days of the date on which a copy thereof is delivered for registration.If a prospectus is not issued within this period, it is deemed to be a prospectus, a copy of which has not beendelivered to the Registrar.

Penalty for Non-Registration of ProspectusIf a prospectus is issued without a copy thereof being delivered to the Registrar for registration, or without thenecessary documents or the consent of the experts, the company and every person, who is knowingly a partyto the issue of prospectus, shall be punishable with fine which may extend to Rs. 5,000.

Objects of RegistrationThese are:1) To keep an authenticated record of the terms and conditions of issue of shares or debentures, and2) To pinpoint the responsibility of the persons issuing the prospectus for statements made by them in the prospectus.

The object of the promoters or directors in issuing a prospectus is to make it as attractive as possible. Theobject of the Legislature is to prevent the public from being mislead and defrauded.

Contents of a ProspectusProspectus is the window through which an investor can look into the soundness of a company’s venture. Theinvestors must, therefore, be given a complete picture of the company’s intended activities and its position. Thisis done through prospectus which must secure the fullest disclosure of all material and essential particulars andlay the same in full view of all the intending purchasers of shares.

Section 56 lays down that a prospectus issued shall:

1) State the matters specified in Part I of Schedule II, and2) Set out the reports specified in Part II of Schedule II.

The provisions as stated above have effect subject to the provisions contained in Part III of Schedule II.

The Government has revised the format of prospectus given in Schedule II of the Companies Act, 1956. Therevised format is effective from Ist November, 1991.

Part I of Schedule II1) General Information: Under this head information is given about:

i) Name and address of registered office of the company.ii) Name/(s) of stock exchange/(s) where application for listing is made.iii) Declaration about refund of the issue if minimum subscription of 90 per cent is not received within 90

days from closure of the issue.iv) Declaration about the issue of allotment letters/refunds within a period of 10 weeks and interest in case

of any delay in refund, at the prescribed rate, under section 73.

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v) Date of opening of the issue.vi) Date of closing of the issue.vii) Name and address of auditors and lead managers.viii) Whether rating from CRISIL or any rating agency has been obtained for the proposed debentures/

preference shares issue. If no rating has been obtained, this should be answered as ‘No’.ix) Names and address of the underwriters and the amount underwritten by them.

2) Capital Structure of the Companyi) Authorized, issued, subscribed and paid-up capital.ii) Size of the present issue, giving separately reservation for preferential allotment to promoters and others.

3) Terms of the Present Issuei) Terms of payment.ii) How to apply.iii) Any special tax benefits.

4) Particulars of the Issuei) Objects.ii) Project cost.iii) Means of Financing (including contribution of promoters).

5) Company Management and Projecti) History and main objects and present business of the company.ii) Promoters and their background.iii) Location of the project.iv) Collaborations, if any.v) Nature of the product(s) export possibilities.vi) Future prospects.vii) Stock market data for share/debentures of the company including high and low price in each of the last

three years and monthly high and low during the last six months, if applicable.

6) Certain prescribed particulars in regard to the company and other listed companies under the samemanagement which made any capital issue during the last 3 years.

7) Outstanding litigations relating to financial matters or criminal proceedings against the company or directors

under Schedule XII.8) Management perception of risk factors (e.g., sensitivity to foreign exchange rate fluctuations, difficulty in

availability of raw materials or in marketing of products, cost/time over-run, etc.).

Part II of Schedule IIGeneral Information1) Consent of Directors, Auditors, etc., their names and addresses.2) Change, if any, in directors and auditors during the last 3 years, and reasons thereof.

The following reports shall also be set out in the prospectus:1) Report by the Auditors: A report by the auditors of the company with respect to:

i) Its profits and losses (distinguishing items of non-recurring nature) and assets and liabilities; andii) The rates of dividends paid by the company during the preceding 5 financial years.

If, however, no accounts have been made up in respect of any part of the period of 5 years ending on a date 3months before the issue of the prospectus, the report shall contain a statement of that fact. If the company hassubsidiaries, the report shall, in addition, deal with either the combined profits and losses and assets andliabilities of its subsidiaries or each of the subsidiaries, so far as they concern the members of the company.

2) Reports by the Accountantsi) A report by the accountants (who shall be qualified under the Act for appointment as auditors of a

company and who shall be named in the prospectus) on the profits or losses of the business for thepreceding 5 financial years, and on the assets and liabilities of the business on a date which shall notbe more than 120 days before the date of the issue of the prospectus. This report is required to begiven if the proceeds of the issue of the shares or debentures are to be applied directly or indirectly inthe purchase of any business.

ii) A similar report on the accounts of a body corporate by an accountant (who shall be named in theprospectus) if the proceeds of the issue are to be applied in the purchase of shares of a body corporateso that the body corporate becomes a subsidiary of the acquiring company.

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Statutory and Other Information1) Minimum subscription.2) Expenses of the issue giving separately fee payable to:

i) Advisors.ii) Registrars to the issue.iii) Managers to the issue.

iv) Trustees for the debenture-holders.3) Previous public or rights issue, if any: (during last 5 years)

i) Date of Allotment: Closing Date:Date of Refunds: Date of listing on the stock exchange:

ii) If the issue is at premium or discount, the amount thereof.iii) Premium, if any, on each share which had been issued within the 2 years preceding the date of the prospectus.

4) Commission or brokerage on previous issue.5) Issue of shares otherwise than for cash.6) Debentures and redeemable preference shares and other instruments issued by the company outstanding

as on the date of prospectus.7) Details of Purchase of Property: If the company proposes to acquire a business which has been carried on

for less than 3 years, the length of time during which the business has been carried on.8) Details of directors, proposed directors, whole-time directors, their remuneration, appointment and

remuneration of managing directors, Interests of directors, their borrowing powers and qualification shares.9) Rights of members regarding voting, dividend, lien on shares and the process for modification of such rights

and forfeiture of shares.10) Restrictions, if any, on transfer of shares/debentures.11) Revaluation of assets, if any (during last 5 years).12) Material contracts and inspection of documents.

Part III- Provisions Applying to Parts I and II of Schedule II1) Every person shall, for the purposes of this Schedule, be deemed to be a vendor who has entered into any

contract, absolute or conditional, for the sale or purchase of any property to be acquired by the company, inany case where:i) The purchase money is not fully paid at the date of the issue of the prospectus;ii) The purchase money is to be paid or satisfied, wholly or in part, out of the proceeds of the issue offered

for subscription by the prospectus;iii) The contract depends for its validity or fulfillment on the result of that issue.

2) In the case of a company which has been carrying on business for less than 5 financial years, reference to5 financial years means reference to that number of financial years for which business has been carried on.

3) Reasonable time and place at which copies of all balance sheets and profit and loss accounts on which thereport of the auditors is based, and material contracts and other documents may be inspected.

Note: Term ‘year’ wherever used herein earlier means financial year.

Declaration: That all the relevant provisions of the Companies Act, 1956 and the guidelines issued by theGovernment have been complied with and no statement made in the prospectus is contrary to the provisions of the Companies Act, 1956 and rules thereunder.

The prospectus shall be dated and signed by the directors.

Mis-Statements in the Prospectus [Section 65]Every person authorizing the issue of prospectus has a primary responsibility to see that the prospectus containsthe true state of affairs of the company and does not give any fraudulent picture to the public. People invest in thecompany on the basis of the information published in the prospectus. They have to be safeguarded against allwrongs or false statements in prospectus. Prospectus must, therefore, make full and honest declaration of material facts without concealing or omitting any relevant fact. This is known as the Golden Rule. The true natureof company’s venture should be disclosed. The statements which do not qualify to the particulars mentioned in theprospectus, or any information is intentionally and wilfully concealed by the directors of the company, would beconstrued as mis-statement. They are, in other words, either false or untrue statement in the prospectus, or information which ought to have been disclosed is concealed, or omission of any material fact. Statements whichproduce wrong impression of actual facts would also be construed as mis-statements.

Mis-statements include:1) Untrue statements;2) Statements which produce wrong impression;

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3) Statements which are mis-leading;4) Concealment of material facts; and5) Omission of facts.

The prospectus must make all statements with absolute accuracy and not state the facts which are not strictlycorrect. A statement may be false not only because of what it states but also because of what it conceals or omits.

A statement included in a prospectus shall be deemed to be untrue, if:1) The statement is mis-leading in the form and context in which it is included; and2) The omission from a prospectus of any matter is calculated to mislead.

Misleading ProspectusThe prospectus which contains mis-statements or misleading statements is called ‘Misleading Prospectus’.

LiabilityThe liability may be civil or criminal.

Who are Liable for Mis-Statements in the Prospectus? [Section 62]1) Every person who is a director of the company at the time of the issue of the prospectus;2) Every person who has authorized himself to be named and is named in the prospectus either as a director

or as having agreed to become a director, either immediately or after an interval of time;3) Every person who is a promoter of the company; and4) Every other person who has authorized the issue of the prospectus [Section 62].

Civil Liability1) Compensation: The above persons shall be liable to pay compensation to every person who subscribes for any

shares or debentures for any loss or damage sustained by him by reason of any untrue statement included therein.

It has been held that the measure of the damages is the loss suffered by reason of the untrue statements,omissions, etc., the difference between the value which the shares would have had and the true value of the shares at the time of the allotment.

2) Damages for Deceit or Fraud: Any person induced to invest in the company by fraudulent statement in aprospectus can sue the company and person responsible for damages. The shares should be firstsurrendered to the company before the company is sued for damages.

Fraud occurs when any statement is made without belief in the truth or carelessly. A statement made withknowledge that it is false, will constitute fraud or deceit. In the leading case on the point, it has been heldthat if the person making the statement honestly believes it to be true, he is not guilty of fraud even if thestatement is not true. The facts of this case were:

The Tramway Company had power by special Act to make tramways and to use steam power with theconsent of the Board of Trade. The plans of the company were approved. The directors of the companyhonestly believed that since the plans were approved, permission to use steam power from Board of Tradewas only a formality and would be granted. Prospectus was issued wherein the directors stated that theconsent to use steam power was obtained by the company. Subsequently, the consent was refused and the

company had to be wound up. On the action by plaintiffs for deceit it was held that the directors were not liablefor fraud as they honestly believed that the consent would be obtained, though the statement was untrue.

3) Recission of the Contract for Misrepresentation: Recission means avoiding the contract. Any personcan apply to the Court for recission of the contract if the statements on which he has taken the shares arefalse or caused by misrepresentation whether innocent or fraudulent.

The misrepresentation must be false. It must be of material fact and not of law. The applicant of sharesmust have acted on the statements contained in the prospectus or must have been induced to act on thestatements. It should be noted that a person cannot claim recission of contract on misrepresentation, if hehad the means of discovering the truth with ordinary diligence.

4) Liability for Non Compliance with Section 56: A director or other person responsible for not setting outmatters and reports required to be set out in the prospectus as provided under Section 56 of the Act, shallbe punishable with fine which may extend to Rs. 50,000.

5) Liability under General Law: Any person responsible for the issue of prospectus may be held liable under the general law or under the Act for mis-statements or fraud.

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6) Penalty for Contravening Sections 57 or 58: If any prospectus is issued in contravention of Section 57(experts to be unconnected with formation or management of company), or Section 58 (expert’s consent toissue of prospectus containing statement by him), the company and every person who is knowingly a partyto the issue thereof, shall be punishable with fine which may extend to Rs. 50,000 [Section 59(1)].

7) Penalty for Issuing the Prospectus without Delivering for Registration: If a prospectus is issued withouta copy thereof being delivered to the Registrar, the company and every person who is knowingly a party to theissue of the prospectus shall be punishable with fine which may extend to Rs. 50,000 [Section 60(5)].

Criminal Liability [Sections 63(1) and 68]Every person who authorizes the issue of prospectus shall be punishable for untrue statements withimprisonment for a term which may extend to 2 years or with fine which may extend to Rs. 50,000 or with both.

Fraudulently Inducing Persons to Invest Money: Any person who either knowingly or recklessly makes anystatement, promises or forecasts which is false, deceptive or misleading or by any dishonest concealment of material facts, induces or attempts to induce another person to enter into:1) Any agreement with a view to acquiring, disposing of, subscribing for, or underwriting shares or debentures; or 2) Any agreement, the purpose of which is to secure a profit to any of the parties from the yield of shares or

debentures, or by reference to fluctuations in the value of shares or debentures; shall be punishable with impris-onment for a term which may extend to 5 years or with fine which may extend to one lac rupees or with both.

Defences against Civil Liability [Section 62(2)]Every person made liable to pay compensation for any loss or damages may escape such liability by proving that:1) Withdrawal of Consent before Issue: Having consented to become a director of the company, he withdrew

his consent before the issue of the prospectus and that it was issued without his authority or consent;

2) Issued without Knowledge: The prospectus was issued without his knowledge or consent and that onbecoming aware of its issue, he forthwith gave reasonable public notice that it was issued without hisknowledge or consent; or

3) Withdrawal of Consent after Issue: After the issue of prospectus, and before allotment thereunder, he, onbecoming aware of any untrue statement therein withdrew his consent to the prospectus and gavereasonable public notice of the withdrawal and the reasons therefore; or

4) Reasonable Belief: As regards every untrue statement not purporting to be made on the authority of an expert

or of a public official document or a statement, he had reasonable ground to believe, and did upto the time of theallotment of the shares or debentures, as the case may be, believe that the statement was true; and

5) Statement by an Expert: As regards every untrue statement purporting to be a statement by an expert or contained in what purports to be a copy or an extract from a report or valuation of an expert, the personcharged can escape liability on proving that:i) It was correct and fair representation of the statement; or ii) A correct copy of, or a correct and fair extract from the report or valuation; andiii) He had reasonable ground to believe, and did up to the time of the issue of the prospectus believe, that

the person making the statement was competent to make it; andiv) That the person (expert) had given the consent to the issue of prospectus and had not withdrawn that

consent before delivery of a copy of the prospectus for registration or before allotment.

6) Statement by an Official Person or Extract from a Public Official Document: As regards every untrue

statement made by an official person or contained in what purports to be a copy of or extract from a publicofficial document, it was a correct and fair representation of the statement, or a correct copy of, or a correctand fair extract from the document.

Defenses against Criminal Liability [Section 63(1)]Any person made criminally liable can escape the same on proving that:1) The statement was immaterial; or 2) He had reasonable ground to believe and did upto the time of the issue of the prospectus believe that the

statement was true.

Defenses to an Expert and any Person Authorizing Issue of Prospectus [Section 62 (3)]: An expert givinghis consent to the issue of a prospectus can escape his liability by proving that:1) Having given his consent, he withdraws it in writing before delivery of a copy of the prospectus for registration;

2) After delivery of a copy of the prospectus for registration and before allotment thereunder, he on becomingaware of the untrue statement, withdrew his consent in writing and gave reasonable public notice of thewithdrawal and of the reason therefore; or

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3) He was competent to make the statement and that he had reasonable ground to believe, and did upto thetime of the allotment of the shares or debentures believe that the statement was true.

Personation for Acquisition, of Shares [Section 68A]Any person who:1) Makes in a fictitious name an application to a company for acquiring or subscribing for any shares therein, or

2) Otherwise induces a company to allot, or register any transfer of shares therein to him, or any other personin a fictitious name, shall be punishable with imprisonment for a term which may extend to five years. Thisprovision shall be prominently reproduced in every prospectus issued by the company and in every form of application for shares which is issued by the company to any person.

Statement in Lieu of Prospectus [Section 70]A company having a share capital which does not issue a prospectus or, which has issued a prospectus buthas not proceeded to allot any of the shares offered to the public for subscription, shall not allot any of itsshares or debentures, unless at least 3 days before the allotment of shares or debentures, there has beendelivered to the Registrar for registration a ‘statement in lieu of prospectus’ signed by every person who isnamed therein as a director or a proposed director of the company or by his agent authorized in writing, in theform and containing the particulars set out in Part I of Schedule III and setting out the reports specified in Part IIof Schedule III subject to the provisions contained in Part III of that Schedule.

Statement in lieu of Prospectus by a Private Company on Becoming Public [Section 44(2) (b)]A private company on becoming a public company shall deliver to the Registrar a statement in lieu of prospectus in the form containing the particulars specified in Part I of Schedule IV with Reports set out in Part IIof Schedule IV subject to the provisions contained in Part III of that Schedule.

Liability1) If a company allots shares or debentures without so delivering to the Registrar a statement in lieu of

prospectus and every director who willfully authorizes or permits such allotment, shall be punishable withfine which may extend to Rs. 10000 [Section 70(4)].

2) Where a statement in lieu of prospectus includes any untrue statement, any person who authorized the deliveryof the statement in lieu of prospectus for registration shall be punishable with imprisonment for a term which may

extend to 2 years or with fine which may extend to Rs. 50000 or with both, unless he proves either that thestatement was immaterial or that he had reasonable ground to believe and did up to the time of the delivery for registration of the statement in lieu of prospectus believe, that the statement was true. The civil and criminalliability for mis-statements or misrepresentations is the same as in the case of a prospectus [Section 70(5)].

Management of Companies

Separation of Management from OwnershipIn the world of business, ownership, managerial right and risk-bearing function generally go together and allthese three aspects are unite in one and the same person in proprietary forms of business organizations suchas sole trader and partnership.

However, in company organization we find almost complete separation or divorce between the ownership onthe one side and management on the other side.

The following are the reasons for a clear-cut separation between ownership and management:1) Distinctive Legal Personality: The people who organize a corporate enterprise are not the corporationbut merely owners of the enterprise. The corporation so created as a form of organization has anindependent legal status of life and it is absolutely separable from the owners, i.e., general body of members as well as separable from the managers, i.e., Board of Directors.

2) Very Large Membership: A public limited company may have thousands or lacs or shareholders. Allmembers obviously cannot actively participate in company management. Hence, we generally adopt arepresentative form of management. Directors are the chosen or elected representatives of members andthey form a Board of Directors to look after the management of a company.

3) Wide Distribution of Membership: Not only the membership is very large, but also it may be widelyscattered or diffused over a very wide area. It is physically impossible for all the proprietors of the companyto look after the routine management of the company even in the Jambo-jet age.

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4) Uninterested Members: Investors invest their savings in the shares of a number of companies not for securing management rights but to secure steady and rising income on their financial investments. Theyare primarily interested in income or dividends and not in the day-to-day management of the company.

5) Ever-Changing Membership: Shares of a public limited company can be quoted on a stock exchangeand they are considered as transferable as well as marketable assets. Hence, membership may be ever changing. How can members, therefore, be called upon to manage the business of the company?

6) Specialized Management: Company organization is very suitable for a big business because itprovides ample scope for division of labor and specialization in management. All owners cannot bespecialists or experts in business management. It demands the services of able and competent managersand technicians. Owners may not possess the requisite ability and skill to manage the company’s business.

Pattern of Company ManagementIn practice, company management has a decentralized and pyramidal character and the flow of authority andpowers flow from the top to the bottom, whereas, the flow of responsibility goes in the reverse direction, i.e.,from the bottom to the top. Authority and powers flow from the top to the bottom through delegation or transfer of managerial rights and functions.

1) Shareholders (as Company’s Proprietors): Owners, i.e., shareholders enjoy fundamental and ultimate voice

in the company management. They elect periodically their agents or representatives who are called the directorsor members of a governing council of management. On certain vital or important matters general meetingsanction is essential and members are given necessary voting rights to exercise their voice in the management.

2) Directors: Individually neither a member nor a director may have any managerial powers. But collectivelymembers as well as directors can exercise managerial powers of the company, in a body, i.e., through a meetingand through resolutions passed at such meetings. Subject to the Company’s Act, Memorandum of Associationand Articles of Association, Board of Directors enjoy wide and very comprehensive powers of management.

3) Company Executives: The emergence of professional managerial executives in business administrationand industrial management has brought about a silent managerial revolution.

Directors [Section 252]A company is an artificial person, invisible, intangible and existing only in the eyes of Law. It has neither a mind

nor a body of its own. Hence, we have to entrust its business to human agents. Therefore control of itsmanagement and the exercise of its powers must necessarily be delegated. Directors have to act as agents of the company which delegates to them most of its powers through the memorandum and articles of association.The general body of shareholders entrust the management and the conduct of the business of the company totheir representatives who form the Board of Directors. The directors are responsible for contemplating anddetermining the general policy of management and directing the company’s business in the best manner possible.

Section 2 (13) defines a director as including “any person occupying the position of director, by whatever namecalled”.

Number of DirectorsThe articles of a company generally prescribe the number of directors that may be appointed, but a public

company must have at least three directors, and a private company including a private company which isregarded as a public company under Section 43A, must have at least two directors (Section 252). Only anindividual – A man or a woman – Can be a director (Section 253).

Appointment of Directors1) First Directors:

i) The Articles of a company usually name the first directors by their respective names or prescribe the method of appointing them.ii) If the directors are not named in the Articles, the number of directors and the names of the firstdirectors are determined in writing by the subscribers of the memorandum or a majority of them.iii) If the first directors are not appointed in the above manner, the subscribers of the memorandumwho are individuals become directors of the company. They hold office until directors are dulyappointed in the first annual general meeting.

2) Appointment of Directors by Company: According to Section 255, directors must be appointed bythe company in general meeting.

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The appointment of directors by company in general meeting is governed by the following provisions:i) At the first annual general meeting of a public company or a private company which is a subsidiary of a

public company, held after the general meeting at which the first directors are appointed and at everysubsequent annual general meeting, 1/3rd (or the number nearest to 1/3rd) of the directors liable toretire by rotation must retire from office.

ii) The directors to retire by rotation at every annual general meeting must be those who have been

longest in the office since their last appointment.iii) At the annual general meeting at which a director retires by rotation, the company may fill up the

vacancy (thus created) by appointing the retiring director or some other person.iv) If the place of the retiring director is not filled up, the meeting stands adjourned till the same day in the

next week. If at the adjourned meeting also, the place of the retiring director is not filled up, the retiringdirector is deemed to have been re-appointed at the adjoined meeting unless:

a) At the meeting or at the previous meeting a resolution for the re-appointment of suchdirector is put to the meeting and lost; or b) The retiring director has, by a notice in writing addressed to the company or its Board of Directors, expressed his unwillingness to be so reappointed; or c) He is not qualified or is disqualified for appointment or d) A special or ordinary resolution is required for appointment or re-appointment.

v) If a new director is to be appointed, a notice by him or some member intending to propose him in writing

should be given to the company at least 14 days before the meeting along with a deposit of Rs. 500.The deposit shall be refunded if the person succeeds in getting elected as a director. In case he is notelected as a director, the amount deposited shall be forfeited by the company.

vi) Every person (other than a director retiring by rotation) proposed as a candidate for the office of a director must sign and file with the company his consent in writing to act as a director if appointed (Section 264).

vii) Appointment of directors of a public company must be done individually by separate ordinary resolutions.

3) Appointment of Directors by the Board of Directors: The Board of Directors may appoint directors:i) As Additional Directors [Section 260]: Such additional directors hold office only up tothe date of the next annual general meeting of the company.ii) In a Casual Vacancy [Section 262]: In the case of a public company, or a privatecompany which is a subsidiary of a public company, the office of any director appointed by thecompany in general meeting may be vacated before his term of office expires in the normal course. In

such a case, the resulting casual vacancy may be filled by the Board of Directors at a meeting of theboard.iii) As Alternate Director [Section 313]: The Board of Directors of a company may, if soauthorized by its articles or by a resolution passed by the company in general meeting, appoint analternate director. He is to act for a director, called ‘the original director’, during his absence for a periodof at least three months from the state in which meetings of the board are ordinarily held.

4) Appointment of Directors by Third Parties: The articles under certain circumstances give power to thedebenture-holders or other creditors, for example, a banking company or a financial corporation, who haveadvanced loans to the company to appoint their nominees to the board. The number of directors so appointedmust not exceed 1/3rd of the total number of directors, and they are not liable to retire by rotation.

5) Appointment of Directors by Proportional Representation: The Articles of a company may providefor the appointment of not less than 2/3rd of the total number of directors of a public company, or of a

private company which is a subsidiary of a public company, according to the principle of proportionalrepresentation, whether by the single transferable vote or by a system of cumulative voting or otherwise.The appointment must be made once in 3 years and internal casual vacancies must be filled in the manner as provided in the Articles (Section 265).

6) Appointment of Directors by the Central Government [Section 408]: The central government mayappoint such number of directors on the board of a company as the Company Law Board may specify asbeing necessary to effectively safeguard the interest of the company, its shareholders or the public interest.The period of appointment shall not succeed 3 years on any one occasion.

Powers of Directors [Section 291 and 292]The Board of Directors derives their powers from:i) The Companies Act;ii) Articles of Association;iii) Board resolutions;iv) Resolutions in general meetings;

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v) Agreements or contracts with the company.

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1) General Powers of the Board (Section 291): The Board of Directors of a Company is entitled to exerciseall powers and to do all acts and things which the company is authorized to exercise and do. This ishowever subject to the provisions of the Act. This means that the powers of the Board of Directors are co-extensive with those of the company. The proposition is, however, subject to two conditions:i) First, the Board shall not do any act which is to be done by the company in General Meeting.ii) The Board shall exercise its powers subject to the provisions contained in that behalf in the Companies

Act, or in the Memorandum or the Articles of the company or in any regulations made by the companyin General Meeting [section 29 (1)]. Further, no regulation made by the company in general meetingshall invalidate any prior act of the Board which would have been valid if that regulation had not beenmade [Section 291 (2)].

2) Powers to be Exercised only at Meeting (Section 292): The Board of Directors of a company (public aswell as private) must exercise the following powers on behalf of the company by means of resolutionspassed at meetings of the Board, viz., the powers to:i) Make calls on shares;ii) Issue debentures;iii) Borrow money otherwise than on debentures (say public deposits);iv) Invest the funds of the company; andv) Make loans.

There are certain other powers which must be exercised only at the meeting of the Board. These powers are:i) To fill vacancies in the Board (Section 262);ii) To sanction or give consent for certain contracts in which particular directors, their relatives and firms

are interested (Section 297);iii) To receive notice of disclosure of directors’ interest in any contract or arrangement with the company

(Section 299);iv) To receive notice of disclosure of shareholdings of directors (Section 308);v) To appoint as managing director or manager a person who is already managing director or manager of

another company (Section 316 and 386);vi) To make investments in companies in the same group (Section 372).

Restrictions on Powers of Directors [Section 293]:Section 293 provides that the Board of Directors of a public company or a private company which is asubsidiary of a public company cannot exercise the following powers without the consent of the shareholders ingeneral meeting:1) Sell, lease or otherwise dispose of the whole, substantially the whole, of the undertaking of the company, or

where the company owns more than one undertaking, of the whole or substantially the whole, of any suchundertaking.

However, this restriction does not apply to the case of a company whose ordinary business is to sell or lease properly.

2) Remit or give time for the re-payment of any debt due by a director except in the case of renewal or of continuance of an advance made by a banking company to its director in the ordinary course of business.

3) Invest, otherwise than in trust securities, the amount of compensation received by the company in respectof compulsory acquisition of any fixed assets of the company.

4) Borrow money exceeding the aggregate of the paid-up capital of the company and its free reserves. “Borrowing”does not include temporary loans obtained from the company’s bankers in the ordinary course of business.

5) Contribute in any year, to charitable and other funds not directly relating to the business of the company or the welfare of its employees, any amount exceeding Rs. 50,000 or 5% of its average net profit for the lastthree financial years, whichever is greater.

However, contributions of National Defence Fund or any other fund approved by the Central Governmentfor the purpose of national defence are exempted from the above provisions. Any amount may becontributed without obtaining the sanction of the company in general meeting.

Duties of DirectorsDuties of directors may be divided under two heads:1) Statutory Duties:

i) To File Return of Allotments: Section 75 charges a company to file with the registrar, within a period of 30 days, a return of the allotments stating the specified particulars. Failure to file such return shall makedirectors liable as ‘officer in default’. A fine upto Rs. 500 per day till the default continues may be levied.

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ii) Not to Issue Irredeemable Preferences Shares or Shares Redeemable after 10 Years: Section 80,forbids a company to issue irredeemable preference shares or preference shares redeemable beyond10 years. Directors making any such issue may be held liable as ‘officer in default’ and may be subjectto fine upto Rs. 1,000.

iii) To Disclose Interest [Ss.299-300]: A director who is interested in a transaction of the company mustdisclose his interest, to the Board. The disclosure must be made at the first meeting of the Board held

after he has become interested. This is because a director stands in a fiduciary capacity with the companyand therefore, he must not place himself in a position in which his personal interest conflicts with his duty.Interest should be such which conflicts with the duties of the director towards the company.

iv) To Disclose Receipt from Transferee of Property: Section 319 provides that any money received bythe directors from the transferee in connection with the transfer of the company's property or undertaking must be disclosed to the members of the company and approved by the company ingeneral meeting. Otherwise the amount shall be held by the directors in trust for the company. Thismoney may be in the name of compensation for loss of office but in essence may be on account of transfer of control of the company. But if it is bona fide payment of damages of the breach of contract,then it is protected by section 321(3).

v) To Disclose Receipt of Compensation from Transferee of Shares: If the loss of office results fromthe transfer (under certain conditions) of all of the shares of the company, its directors would not

receive any compensation from the transferee unless the same has been approved by the company ingeneral meeting before the transfer takes place (section 320). If the approval is not sought or theproposal is not approved, any money received by the directors shall be held in trust for theshareholders who have sold their shares.

Section 320 further provides that in pursuance of any agreement relating to any of the above transfers,if the directors receive any payment from the transferee within one year before or within 2 years after the transfer, it shall be accounted for to the company unless the director proves that it is not by way of compensation for loss of office.

Section 321 further provides that if the price paid to a retiring director for his shares in the company is inexcess of the price paid to other shareholders or any other valuable consideration has been given tohim, it shall also be regarded as compensation and should be disclosed to the shareholders.

2) General Duties of Directorsi) Duty of Good Faith: The directors must act in the best interest of the company. Interest of the

company implies the interests of present and future members of the company on the footing that thecompany would be continued as a going concern.

A director should not make any secret profits. He should also not exploit to his own use the corporateopportunities.

ii) Duty of care: Directors should carry out their duties with such care, skill and diligence as is reasonablyexpected from persons of their knowledge and status. If they fail to exercise due care in the exercise of their duties, they are guilty of negligence. The standard of care, skill and diligence would, however, vary with:a) The type and nature of work;b) The division of power between directors and other officers;c) The general usages and customs of that type of business; and

d) Whether directors work gratuitously or remuneratively.iii) Duty to Attend Board Meetings: A number of powers of the company are exercised by the Board of

Directors in their meetings held from time to time. Although a director is not expected to attend all themeetings but if he fails to attend three consecutive meetings or all meetings for a period of threemonths, whichever is longer, without permission, his office shall automatically fall vacant.

iv) Duty not to Delegate: Director being an agent is bound by maxim ‘delegate’s non protest delegate’which means a delegate cannot further delegate. Thus, a director must perform his functionspersonally. A director may, however, delegate in the following cases:a) Where permitted by the Companies Act or articles of the company;b) Having regarded to the exigencies of business certain functions may be delegated to other officials

of the company.

Some other duties are; to convene statutory, annual general meeting and also extraordinary general

meeting when required by the shareholders of the company; to prepare and place at the AGM alongwith the balance sheet and profit and loss account a report on the company’s affairs; to make adeclaration of solvency in the case of a Member’s voluntary winding up.

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The duties of the directors are usually regulated by the company’s articles. While performing their duties, they must display reasonable care, honesty, good faith, skill and diligence. As they stand in afiduciary relationship to the company and they are agents and trustees in certain respects, they arebound to exercise in the performance of their duties a reasonable degree of skill and care.

Liabilities of Directors

1) Liability to Third Parties: This may arise:i) Under the Act: Liability of directors to third parties may arise in connection with the issue of a

prospectus which does not contain the particulars required by the Act, or which contains materialmisrepresentations. They may also incur such liability:

a) Where they fail to repay application money if minimum subscription has not been subscribed[Section 69 (5)].

b) Where the allotment of shares has been irregular [Section 71(3)].

c) Where they fail to repay application money if the application for the securities to be dealt in on arecognized stock exchange is not made or is refused [Section73 (2)].

ii) Independently of the Act: Directors, as agents of a company, are not personally liable on contractsentered into as agents on behalf of the company. For whatever an agent is liable, those directors wouldbe liable; where the liability would attach to the principal only, the liability is the liability of the company.

In general, the directors, who contract as agents, incur no personal liability, but there are a number of exceptions to this rule. If they fail to exclude personal liability, for instance, while signing a negotiableinstrument without mentioning the company’s name, they are personally liable to the holder of suchinstrument. They are also personally liable if they act in their own name.

2) Liability to the Company: The liability to the company may arise from:i) Breach of Fiduciary Duty: Where a director acts dishonestly in disregard to the interests of the

company, he will be held liable for breach of fiduciary duty. Most of the powers of directors are ‘powersin trust’ and therefore, should be exercised in the interest of the company and not in the interest of thedirectors or any section of members Thus, where the directors, in order to forestall a take-over bid,transferred the unissued shares of the company to trustees to be held for the benefit of the employeesand an interest-free loan from the company was advanced to the trustees to enable them to pay for theshares, it was held to be a wrongful exercise of the fiduciary powers of the directors

ii) Ultra-Vires Acts: Directors are supposed to act within the parameters of the provisions of theCompanies Act, Memorandum and Articles of Association since these lay down the limits to theactivities of the company and accordingly to the powers of the Board of Directors. The directors shall beheld personally liable for acts beyond the aforesaid limits, being ultra-vires. Thus, where the directorspay dividends or interest out of capital, they will be liable to indemnify the company for any loss or damage suffered due to such act.

iii) Negligence: The directors shall be deemed to have acted negligently in discharge of their duties andconsequently liable for any loss or damage resulting there from where they fail to exercisereasonable care, skill and diligence. However, error of judgment will not be deemed as negligence. Itmay be noted that the directors cannot be absolved of the liability for negligence by any provision inthe Article (section 201). The court may award relief to directors against such liability under section633.

iv) Misfeasance: Directors are also liable to the company for misfeasance which means ‘misconduct’ of directors for which they may be sued in a Law Court. But in order to amount to misfeasance, themisconduct must be willful. Where any director, or for that matter any officer of the company (and alsopromoter or liquidator) has misapplied or retained money or property of the company or has been guiltyof breach of trust or misfeasance, the Court may examine into his conduct and order him to repay or restore the money or property or to pay compensation.

3) Liability for Breach of Statutory Duties: There are numerous provisions of the Companies Act which isthe duty of the directors to carry out. Most of these duties relate to maintenance or proper accounts, filing of returns or observance of certain statutory formalities. If they fail to perform these statutory duties, theyrender themselves liable to penalties.

4) Liability for Acts of his Co-Directors: A director is not liable for the acts of his co-directors of which hehas no knowledge and in which he has taken no part. This is because his co-directors are not his servantsor agents who can be their acts impose liability on him.

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Disqualifications of Directors [Section 274]The following persons are disqualified for appointment as directors of a company:

1) A person of unsound mind.2) An undischarged insolvent.3) A person who has applied to be adjudicated as an insolvent and his application is pending.4) A person who has been convicted by a Court of any offence involving moral turpitude (say,

conviction under Foreign Exchange Regulation Act, 1973) and sentenced to imprisonment for a minimumperiod of 6 months and a period of 5 years has not passed from the date of expiry of the sentence.5) A person whose calls in respect of shares of the company held by him have been in arrear for more than 6 months.6) A person who is disqualified for appointment as director by an order of the Court under Section 203 on the ground of fraud or misfeasance (improper performance of a legal act) in relation to acompany.

Removal of DirectorsDirectors may be removed by:1) Shareholders (Section 284): The shareholders may, by passing an ordinary resolution at their general

meeting, remove a director (not being a director appointed by the Central Government) before the expiry of his period of office. A special notice (a clear cut 14 days’ notice) is required of any proposed resolution to

remove a director. On receipt of notice, the company must inform the members of the proposed resolution.It must also forthwith send a copy thereof to the director concerned.

2) Central Government (Sections 388-B to 388-E): The Central Government may state a case against a director of a company and refer the same to the Company Law Board with a request that the Company Law Board mayinquire into the case and record a finding whether he is a fit or proper person to hold the office of director.

The central government may exercise this power where in its opinion there are circumstances suggesting:a) That the director concerned in the conduct and management of the affairs of the company is or has

been guilty of fraud, misfeasance, persistent negligence or default in carrying out his obligations andfunctions under the law, or breach of trust: or

b) That the business of the company is not or has not been conducted and managed by the director inaccordance with sound business principles or prudent commercial practices; or

c) That the company is or has been conducted and managed by the director in a manner which is likely to

cause, or has caused, serious injury or damage to the interest of the trade, industry or business towhich such company pertains; or

d) That the business of the company is or has been conducted and managed by the director with intent todefraud its creditors, members or any other person or against public interest.

3) Company Law Board (Section 402): Where, on an application to the Company Law Board for preventionof oppression (under Section 397) or mismanagement (under Section 398), the Company Law Board findsthat the relief ought to be granted, it may by an order provide for the termination, setting aside or modification of any agreement between the company and the director. When the appointment of a director is so terminated or set aside, he cannot sue the company for damages or compensation for loss of office.

Meetings of DirectorsDirectors of company exercise most of their powers at the meetings of the board. The Companies Act contains

the following provisions relating to Board meetings:1) Number of Meetings [Section 285]: In the case of every company (public as well as private), a meeting of its Board of Directors must be held at least once in every 3 months and at least 4 such meetings must beheld in every year. The central government may, by notification in the official gazette, direct that thisprovision shall not apply in relation to any class of companies.

Example: The meetings of Board of Directors of Cherry Ltd., a public company, were held on 1st January,30th June, 1st July, and 31st December, during the calendar year 1990. The requirements of Section 285are met as one meeting was held in each quarter and 4 such meetings were held during the year.

2) Notice of Meetings [Section 286]: Notice of every meeting of the Board of Directors of a company mustbe given in writing to every director for the time being in India, and at his usual address in India.

3) Quorum for Meetings:i) The quorum for a meeting of the board is 1/3rd of its total strength (any

fraction contained in that 1/3rd being rounded off as one), or 2 directors, whichever is higher.

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ii) If a meeting of the Board cannot be held for want of quorum, itautomatically stands adjourned till the same day in the next week. However, the Articles may provideotherwise.iii) Where a meeting of the Board is called but could not be held for wantof quorum, there is no contravention of Section 285.

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Meetings

Meaning of MeetingApart from face-to-face communication with individuals, another vital application of oral communication inbusiness is the meeting—the best medium for group discussion and group decisions in an organization. A

meeting means the act of coming together of two or more than two persons (by previous notice or by mutualarrangement) for discussion and transaction of some lawful business.

Kinds of MeetingsThe meeting of shareholder can be classified in the following ways as shown in figure below:

1) Meeting of Shareholdersi) Statutory Meeting (Section 165): This is the first meeting of the shareholders of a public company. It must

be held within a period of not less than 1 month or more than 6 months from the date at which the companyis entitled to commence business. It is held only once in the lifetime of a company. A private company and acompany limited by guarantee and not having a share capital need not hold such a meeting.

The Board of Directors must, at least 21 days before the day on which the meeting is to be held,forward a report, called the 'statutory report’ to every member of the company. This report contains allthe necessary information relating to formational aspects of the company for the information of theshareholders.

Object of the Meeting and Report: The purpose of a statutory meeting with its statutory report is toput the shareholders of the company in possession of all the important facts relating to the newcompany, what shares have been taken up, what moneys received, etc. This also provides anopportunity to the shareholders of meeting and discussing the whole situation, the management andprospects of the company.

ii) Annual General Meetings: The annual general meetings are held periodically every year to enable themembers, who are the owners of the company, to exercise an ultimate control over the affairs andmanagement of the company. Many powers of the company can be exercised only through generalmeetings of members. The directors are obliged to submit their annual report and accounts every year to the annual general meeting for approval.

Importance of Annual General Meeting: It is only at the annual general meeting of a company that theshareholders can exercise any control over its affairs. The shareholders also get an opportunity to discussthe affairs and review the working of the company. They can also take the necessary steps for theprotection of their interests. Appointment of auditors is also made at the annual general meeting. Annualaccounts are presented for consideration of the shareholders and dividends are declared in this meeting.

iii) Extraordinary General Meeting [Section 169): Any general meeting other than an annual generalmeeting is called an extraordinary general meeting (Art. 47 of Table A, Schedule I). It is called for transacting some urgent or special business which cannot be postponed till the next annual generalmeeting. It may be convened:a) By the Board of Directors on its own or on the requisition members;b) By the requisitionists themselves on the failure of the Board to call the meeting.

The Board of Directors may call such a meeting whenever it thinks fit.

iv) Class Meetings: The class meetings may be held for securing the consent of a particular class of

shareholders for altering their rights and privileges or for conversion of one class into another. Theremay be a meeting of the preference shareholders for reducing their rate of dividends, a meeting of thedeferred shareholders for conversion of deferred shares into ordinary shares, etc.

Classification of Meeting

Meeting of Shareholders Meeting of Creditors Meeting of Director

Statutory Meeting

Annual General Meeting

Extraordinary General Meeting

Class Meeting

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2) Meetings of Creditors: The meetings of debenture holders and creditors may be required to secure their

support in effecting some scheme of compromise or arrangement in which they may be required tosurrender their rights partially by way of voluntary sacrifice in order to enable the company to extricate itself from some financial embarrassment. In the scheme of reorganization, reconstruction and amalgamation wemay have such meetings of debenture holders and creditors. At the time of winding up also creditorsmeetings may be convened from time to time when the winding up is under the supervision of creditors.

3) Meetings of Directors: The meetings of the directors are required for setting the general business policyand over-all supervision of management. All major questions of policy are discussed at board meetings,which are held at regular intervals either once in a fortnight or once in a month. Many powers of thecompany are to be exercised by the directors as per articles of association. These powers can be exercisedonly in a body and hence, there must be a meeting of the directors unless the articles provide for a circular resolution. If the power of delegation is granted by the articles, the board may appoint from time to timesmall committees of the management and administration.

Requisites of Valid MeetingsIt is necessary for you to understand that the following conditions must be satisfied for a meeting to be called avalid meeting:1) It must be properly convened. The persons calling the meeting must be authorized to do so.

2) Proper and adequate notice must have been given to all those entitled to attend.3) The meeting must be legally constituted. There must be a chairperson. The rules of quorum must be

maintained and the provisions of the Companies Act, 1956 and the articles must be complied with.4) The business at the meeting must be validly transacted. The meeting must be conducted in accordance

with the regulations governing the meetings.

Resolutions [Section 189]Resolutions mean decisions taken at a meeting. A motion, with or without amendments is put to vote at ameeting. Once the motion is passed, it becomes a resolution. A valid resolution can be passed at a properlyconvened meeting with the required quorum.

1) Ordinary Resolution [Section 189(1)]: An ordinary resolution is one which can be passed by a simplemajority i.e. if the votes (including the casting vote, if any, of the chairman), at a general meeting cast bymembers entitled to vote in its favor are more than votes cast against it. Voting may be by way of a show of hands or by a poll provided 21 days notice has been given for the meeting.

2) Special Resolution [Section 189(2)]: A special resolution is one in regard to which is passed by a 75 %majority only i.e. the number of votes cast in favor of the resolution is at least three times the number of votes cast against it, either by a show of hands or on a poll in person or by proxy. The intention to proposea resolution as a special resolution must be specifically mentioned in the notice of the general meeting.Special resolutions are needed to decide on important matters of the company. Examples where specialresolutions are required are:i) To alter the domicile clause of the memorandum from one State to another or to alter the objects clause

of the memorandum.ii) To alter / change the name of the company with the approval of the central governmentiii) To alter the articles of association

iv) To change the name of the company by omitting “Limited” or “Private Limited”. The Central Governmentmay allow a company with charitable objects to do so by special resolution under section 25 of theCompanies Act, 1956.

3) Resolution Requiring Special Notice [Section 190]: There are certain matters specified in theCompanies Act, 1956 which may be discussed at a general meeting only if a special notice is givenregarding the proposal to discuss these matters at a meeting. A special notice enables the members to beprepared on the matter to be discussed and gives them time to indicate their views on the resolution. Incase special notice of resolution is required by the Companies Act, 1956 or by the articles of a company,the intention to propose such a resolution must be notified to the company at least 14 days before themeeting. The company must within 7 days before the meeting give the notice of the proposed resolution toits members. Notice of the resolution is required to be given in the same way in which notice of a meeting isgiven, or if that is not practicable, the company may give notice by advertisement in a newspaper having an

appropriate circulation or in any other manner allowed by the articles, not less than 7 days before themeeting. The following matters requiring Special Notice before they are discussed before the meeting:i) To appoint at an annual general meeting appointing an auditor a person other than a retiring auditor.

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ii) To resolve at an annual general meeting that a retiring auditor shall not be reappointed.iii) To remove a director before the expiry of his period of office.iv) To appoint another director in place of removed director.v) Where the articles of a company provide for the giving of a special notice for a resolution, in respect of

any specified matter or matters. Please note that a resolution requiring special notice may be passedeither as an ordinary resolution (Simple majority) or as a special resolution (75 % majority).

Circulation of Member’s ResolutionGenerally, the Board of Directors prepares the agenda of the meeting to be sent to all members of the meeting.A member, by himself has very little say in deciding the agenda. However, there are provisions in theCompanies Act which enable members to introduce motions at a meeting and give prior notice of their intentionto do so to all other members of the company. If members having one twentieth of the total voting rights of allmembers having the right to vote on a resolution or if 100 members having the right to vote and holding paid-upcapital of Rs1,00,000 or more, require the company to do so, the company must:1) Give to the members entitled to receive notice of the next annual general meeting, notice of any resolution

which may be properly moved and is intended to be moved at that meeting; and2) Circulate to members entitled to have notice of any general meeting sent to them, any statement of not

more than 1,000 words with respect to the matter referred to in any proposed resolution, or any business tobe dealt with at that meeting.

The expenses for this purpose must be borne by the requisitionists and must be tendered to the company. Therequisition, signed by all the requisitionists, must be deposited at the registered office of the company at least 6weeks before the meeting in the case of resolution and not less than 2 weeks before the meeting in case of anyother requisition together with a reasonable sum to meet the expenses. However, where a copy of therequisition requiring notice of resolution has been deposited at the registered office of the company and anannual general meeting is called for a date six weeks or less after the requisition is deposited, the copy thoughnot deposited within the prescribed time is deemed to have been properly deposited.

The company is required to serve the notice of resolution and/ or the statement to the members as far aspossible in the manner and so far as practicable at the same time as the notice of the meeting ; otherwise assoon as practicable thereafter.

However, a company need not circulate a statement if the Court, on the application either of the company or any other aggrieved person, is satisfied that the rights so conferred are being abused to secure needlesspublicity or for defamatory purposes. Secondly a banking company need not circulate such statement, if in theopinion of its Board of directors, the circulation will injure the interest of the company. It is required to register the resolutions and agreements.

Registration of Resolutions and AgreementsA copy of each of the following resolutions along with the explanatory statement in case of a special businessand agreements must, within 30 days after the passing or making thereof, be printed or typewritten and dulycertified under the signature of an officer of the company and filed with the Registrar of Companies who shallrecord the same:1) All special resolutions.2) All resolutions which have been unanimously agreed to by all the members but which, if not so agreed,

would not have been effective unless passed as special resolutions.3) All resolutions of the board of directors of a company or agreement executed by a company, relating to the

appointment, re-appointment or renewal of the appointment, or variation of the terms of appointment, of amanaging director.

4) All resolutions or agreements which have been agreed to by all members of any class of members butwhich, if not so agreed, would not have been effective unless passed by a particular majority or in aparticular manner and all resolutions or agreements which effectively bind all members of any class of shareholders though not agreed to by all of those members.

5) All resolutions passed by a company conferring power upon its directors to sell or dispose of the whole or any part of the company’s undertaking; or to borrow money beyond the limit of the paid-up share capitaland free reserves of the company; or to contribute to charities beyond Rs50000 or 5 per cent of the averagenet profits.

6) All resolutions approving the appointment of sole selling agents of the company.7) All copies of the terms and conditions of appointment of a sole selling agent or sole buying or purchasing agent.8) Resolutions for voluntary winding up of a company.

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Winding Up of a Company

Meaning of ‘Winding Up’Winding up is a process to bring about the dissolution or end of the company. All assets of the company arecollected and realized. The amount so recovered is used for the payment of all debts and obligations of the

company. If there be any surplus amount, it is duly returned to its members. In this way the affairs of thecompany are wound up and its life as a legal entity is terminated.

According to Professor Gower , “Winding up of a company is the process whereby its life is ended and itsproperty administered for the benefit of its creditors and members.” An administrator, called a liquidator, isappointed and he takes control of the company, collects its assets, pays its debts and finally distributes anysurplus among the members in accordance with their rights.

Modes of Winding upThere are three modes of winding of a company, viz.1) Winding up by the Court; or 2) Voluntary winding up. This may be:

i) Members’ voluntary winding up, or ii) Creditors’ voluntary winding up.3) Winding up subject to the supervision of the Court.

Winding up by the Court [Section 433]It is sometimes called compulsory winding up. The following are the circumstances in which a company may bewould up by the Court:

1) Special Resolution: Special resolution for winding up by the Court is passed by the members in ageneral meeting.

2) Default in Statutory Meeting/Report: If a default is made in delivering the statutory report of a publiccompany to the Registrar or in holding the statutory meeting of the company, the Court may make a winding uporder.

3) Commencement of Business: A company is wound up on this ground if it does not commence itsbusiness within a year from its incorporation or suspends its business for a whole year, unless:i) There are reasonable prospects of the company starting business within a reasonable time, andii) There are good reasons for the delay as, for example, when the company is waiting for the trade

depression to pass.

4) Membership below Minimum Limit: Reduction of membership below the legal minimum limit, i.e.,below 7 in a public company and 2 in a private company. The company may be ordered to be wound up.

5) Inability to Pay its Debts [Section 433 [e)]: A company may be ordered to be wound up, if it is unableto pay its debts. A company is deemed to be unable to pay its debts:i) If a creditor for a sum exceeding Rs. 500 has served on the company at its registered office a demand

for payment and the company has for 3 weeks thereafter neglected to pay or otherwise satisfy him. Thedebt must be presently payable and the company should not have any bona fide dispute about it.

ii) If execution or other process issued on a decree or order of any Court in favor of a creditor of the

company is returned unsatisfied in whole or in part.iii) If it is proved to the satisfaction of the Court that the company is unable to pay its debts. In determining

whether a company is unable to pay its debts, the Court must take into account the contingent andprospective liabilities of the company also (Section 434).

6) Just and Equitable Clause: If the Court is of opinion that it is just and equitable that the companyshould be wound up.

Petition [Section 439]An application to the Court for compulsory winding up of a company shall by a petition. Only the followingpersons are entitled to apply to the Court:

i) The companyii) Any creditor of the company—Secured or unsecured.

iii) A contributory.iv) Aforesaid parties together—all or any two.v) Registrar of Companies with the previous sanction for the Central Government.

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vi) A person so authorized by the Central Government to the basis of a report of Inspectors.

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Power of Court1) Power of Court to stay or Restrain Proceedings Against Company [Section 442]: At any time after the

presentation of a winding of petition and before a winding up order has been made, the company, or anycreditor or contributory, may apply to the Court for a stay of, or restraint of further, proceedings in the Court.

2) Powers of Court on Hearing Petition [Section 443]: On hearing a winding-up petition, the Court may:i) Dismiss it, with or without costs; or ii) Adjourn the hearing conditionally or unconditionally; or iii) Make any interim order that it thinks fit; or iv) Make an order for winding up the company with or without costs, or any other order as itthinks fit.

Consequences of Winding up Order by the CourtOnce, the Court makes an order for the winding up of a company, its consequences date back to thecommencement of winding up. These consequences are as follows:1) Intimation to Official Liquidator and Registrar: Where the Court makes an order for the winding up of a

company, it shall forthwith cause intimation to be sent to the Official Liquidator and the Registrar of theorder of winding up (Section 444).

2) Copy of Winding up Order to be filed with the Registrar: On the making of the winding up order it shall be

the duty of the petitioner in the winding up proceedings and of the company to file with the Registrar a certifiedcopy of the order within 30 days from the date of the making of the order. If default is made, the petitioner or,as the case may require, the company and every officer of the company who is in default shall be punishablewith fine which may extend to Rs. 100 for each day during which the default continues [Section 445 (1)].

3) Order for Winding up Deemed to be Notice of Discharge: The order for winding up shall be deemed tobe notice of discharge to the officers and employees of the company, except when the business of thecompany is continued [Section 445 (2)].

Where a servant of the company is on a contract of service for a fixed term and that term has not expiredon the date of the order of the winding up of the company, the order operates as a wrongful discharge anddamages are allowed as for breach of contract of service and the servant is free from his agreement not tocompete with the company.

4) Suits Stayed: When a winding up order has been made, no suit or other legal proceedings can becommenced against the company without the leave of the Court. Similarly, pending suits cannot beproceeded with except with the leave of the Court.

5) Powers of the Court: The Court, which is winding up the company has jurisdiction to entertain, or dispose of:i) Any suit or proceeding by or against the company;ii) Any claim made by or against the company;iii) Any application made under section 391 for compromise with creditors and members ;iv) Any question of priorities or any other question whatsoever whether of law or fact, which may relate to

or arise in course of the winding up of the company (Section 446).

6) Effect of Winding up Order: An order for winding up a company operates in favor of all the creditors andall the contributories of the company as if it had been made on the joint petition of a creditor and of acontributory (Section 447).

7) Official Liquidator to be Liquidator: On a winding up order being made in respect of a company, theofficial liquidator, by virtue of his office, becomes the liquidator of the company (Section 449).

Power of Liquidator 1) With the Court’s Sanctioni) To institute any suit (civil/criminal) on behalf of the company.ii) To carry on company’s business,iii) To sell property of the company,iv) To borrow on the security of assets,v) To do all such other things necessary for winding up.

2) Without the Court’s Sanctioni) On behalf of the company to do all acts and execute all deeds, receipts, and other documents.

ii) To use Company’s seal,iii) To inspect records and returns or the files of the Registrar without payment of any fee.iv) To prove, rank and claim in insolvency of any contributory for any balance against his property,

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v) To draw, accept, make or endorse any hundi, bill or pronote on behalf of the company,

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vi) To take out in his official name letters of administration of any dead contributory and to do any other actfor getting payment of money due from a contributory.

vii) To appoint an agent to do any business which the liquidator is unable to do himself.

Voluntary Winding upVoluntary winding up of a company means winding up by the members or creditors of the company without

interference by the Court. The object of a voluntary winding up is that the company, i.e., the members as wellas the creditors are left free to settle their affairs without going to the Court of law. They may, however, apply tothe Court for any directions, if any, when necessary (Section 518).

A company may be wound up voluntarily under the following circumstances:1) Expiry of the duration fixed by the articles of the happening of the event provided by the Articles and the

passing of a resolution for winding up voluntarily.2) Special resolution that the company be wound up voluntarily is passed at a general meeting.

Within 14 days of passing the resolution, the company shall give the public notice of resolution in the officialgazette and in local newspapers.

The voluntary winding up will commence from the date of the passing of the resolution. The company shall

cease to carry on its business except for the benefits of winding up proceedings.

Consequences of Voluntary Winding UpThe consequences of voluntary winding up are as follows:1) A voluntary winding up is deemed to commence at the time when the resolution for voluntary winding up is

passed (Section 486). This will be so even when after passing a resolution for voluntary winding up, apetition is presented for winding up by the Tribunal (Section 441).The company, from the commencement of winding up, must cease to carry on its business except so far as may be required to secure a beneficialwinding up although the corporate state and powers of the company continue until final dissolution (Section487).

2) All transfer of shares and alterations in the status of members, made after the commencement, are voidunless sanctioned by the liquidator (Section 536).

3) A resolution to wind up voluntarily operates as notice of discharge to the employees of the company except:

(a) when the liquidation is only with a view to ‘reconstruction’ or (b) when business is continued by theliquidator for the beneficial winding up of the company.

4) On the appointment of the liquidator, all the powers of the Board of Directors, managing director or ‘manager’ shall cease except (Section 491): (a) for the purpose of giving notice to the Registrar about thename of the liquidator appointed, or (b) in so far as the company in general meeting or the liquidator maysanction the continuance of their powers.

Types of Voluntary Winding UpUnder the Act there is a clear distinction between

i) Members’ voluntary winding up, andii) Creditors’ winding up when the company is insolvent.

1) Members’ Voluntary Winding Up: This is possible only in the case of a solvent company. A winding up in

the case of which a declaration has been made by the board and filled with the Registrar is referred to as‘members’ voluntary winding up.

Procedure of Members’ Voluntary Winding Upi) Appointment of liquidators: The Company in general meeting shall appoint one or more liquidators for

the purpose of winding up the affairs and distributing the assets of the company.

ii) Board's Powers to Cease on Appointment of Liquidator: On the appointment of a liquidator, all thepowers of the Board of Directors, and manager, if there be any of these, shall cease, except when thecompany in general meeting or the liquidator sanctions them to continue (Section 491).

iii) Power to Fill Vacancy in Office of Liquidator: If a vacancy occurs by death, resignation or otherwisein the office of any liquidator appointed by the company, the company in general meeting may fill thevacancy.

iv) Notice of Appointment of Liquidator to be given to Registrar: The Company shall give notice to theRegistrar of the appointment of a liquidator or liquidators within 10 days of the appointment (Section 493).

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v) Duty of Liquidator to Call Creditors’ Meeting in Case of Insolvency: If the liquidator is at any time of opinion that the company will not be able to pay its debts in full within the period stated in thedeclaration, he shall summon a meeting of the creditors and lay before it a statement of the assets andliabilities of the company [Sections 495 (1)]

vi) Duty to Call General Meeting at the End of the Year: The liquidator shall call a general meeting of thecompany at the end of every year from the commencement of the winding up.

vii) Final meeting and dissolution: As soon as the affairs of the company are fully wound up, the liquidator shall make up an account of the winding up, showing how the winding up has been conducted and howthe property of the company has been disposed of. He shall then call a general meeting of the companyand lay before it the accounts showing how the winding up has been conducted. This is the final meetingof the company.

2) Creditors’ Voluntary Winding Up: If the declaration of solvency has not been made by directors, thewinding up is referred to as ‘creditors’ voluntary winding up.’ In the absence of the solvency declaration,voluntary winding up will naturally be controlled and supervised by the creditors.

Procedure for the Creditors Voluntary Winding Upi) Meeting of Creditors: The Board of Directors will convene two separate meetings—one of members

and the other of creditors—either on the same day or one after the other, i.e., on the two consecutivedays. Both the notices will be simultaneously sent and advertised duly in the Official Gazette and also intwo regional newspapers.

ii) Notice of Resolution to be given: Within 10 days of the passing of the resolution for voluntary windingup at the creditors’ meeting, a copy of the same must be filed with the Registrar.

iii) Appointment of Liquidator: In the company meeting and the creditors’ meeting, resolution for voluntary winding up will be passed and each meeting will appoint a liquidator for winding up the affairsand distributing the assets of the company.

iv) Committee of Inspection: The creditors at their meeting may appoint a committee of inspection (notmore than 5 persons). On such a committee, the shareholders’ meeting may also nominate (not morethan 5 persons) as their representatives on the committee. The creditors may object to such members’

nominees and in that case the Court can be approached for the final decision.The committee of inspection shall have frequent meetings. Any member or liquidator can convene themeeting of the committee of inspection as and when necessary. The committee will consider theproblems arising out of winding up and give necessary guidance to the liquidator. The quorum for itsmeeting shall be 1/3rd of the total number of members or two, whichever is higher. Maximummembership of the committee shall be 12. The committee shall have the right to inspect the accounts of the liquidator.

v) Liquidator’s Remuneration: The remuneration of the liquidator will be fixed by the committee of inspection or by the creditors. There may be one or more liquidators. All the powers of the Board will betransferred to the liquidator. The committee of inspection or the creditors meetings shall, of course,control the activities of the liquidator.

vi) Board's Powers to Cease on Appointment of Liquidator: On the appointment of a liquidator, all the

powers of the Board of Directors shall cease. But the committee of inspection, or if there is no suchcommittee the creditors in general meeting, may sanction the continuance of the Board (Section 505).

vii) Duty of Liquidates to Call Meeting of Company and of Creditors at the End of Each Year: Theliquidator will call the meetings of members and creditors at the end of the first year and lay before themeeting his report and accounts.

viii) Final Meeting and Dissolution: As soon as the affairs of the company are fully wound up, he shall callthe final meetings and submit his final report. Within one week of such meetings, a copy of the accountwill be filed with the Registrar, within 3 months of the registration, the company shall be deemed to bedissolved.

Winding Up Under the Supervision of the Court [Section 522 – 527]

At any time after a company has passed a special resolution for voluntary winding up, the Court may make anorder that the voluntary winding up shall continue, but subject to the Court supervision, and on the terms andconditions specified by the Court.

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Any contributory, creditor or the voluntary liquidator himself may apply for a supervision order and the Courtmay permit for such a winding up under its supervision.

Winding up under the supervision of the Court will naturally protect the interests of all parties, viz., themembers, creditors and the company. The Court will protect the minority against any fraudulent or aggressivemajority of members or creditors. In case of need, the Court may also pass an order for the compulsory winding

up superseding the voluntary winding up.

Consequences of Winding Up1) Consequences as to Shareholders: In the case of Limited Company, the share are partly paidshares, the present as well as past members (called contributories on ‘A’ and ‘B’ Lists respectively) shall becalled upon to contribute to the extent of unpaid amount on the shares. For instance a share of Rs.100 ispaid up to the extent of Rs. 60. The members will be required to pay Rs.40 per share to meet thecompany’s debts and obligations. In the case of a Guarantee Liability Company, the member shall have topay the guaranteed amount as per Memorandum of Association.

2) Consequences as to Proceedings Against the Company: From the point of view of the company,winding up does not indicate the end or the dissolution. Even during the proceedings of winding up, thecompany enjoys separate legal existence. However, the management and administration of a company

under winding up shall be in charge of the Liquidator.

3) Consequences as to Creditors: i) The Company’s creditors cannot file suits or continue any pending suits against the company. They are

required to lodge their claims and prove their debts.ii) A secured creditor need not prove his debts in the Court, unless his securities are worthless. He may

rely on his security if it can recover his claim. He may realize his security, i.e., sell off the mortgagedproperty and prove for the balance. He may decide to surrender his security and act as an unsecuredcreditor proving his debt in the Court.

4) Consequences as to Servants and Officers: A winding up order by the Court (compulsory windingup) gives the notice to the company’s servants regarding the termination of their services. But this will notbe applicable to a voluntary winding up.

5) Consequences as to Board of Director: The Board of Directors ceases to function and their powerscome to an end. The Liquidator will take over all the powers and duties of the Board.

6) Consequences at to Company Assess: Any disposal of company’s property and assets shall beinoperative and void unless such disposals are permitted by the Court or the Liquidator.

7) Consequences as to Costs: All costs and expenses of winging up will be payable out of thecompany’s assets.

Winding up versus Dissolutioni) Winding up precedes dissolution. It is the first step and dissolution is the final step indropping the curtain over a company.ii) Winding up involves the collection and realization of the Company’s assets and the

distribution of the proceeds among the creditors and if there is a surplus, among the contributories.Dissolution announces that all these formalities are over at the date of the dissolution or end of theCompany.iii) The liquidator can represent the company in the process of winding up. On the dissolutionhe can no longer represent the company as it ceases to exist.iv) Creditors can prove their debts in the winding up but never on the dissolution of thecompany.