company law (module 1 paper 1)

8/13/2019 Company Law (Module 1 Paper 1)

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STUDY MATERIAL

EXECUTIVE PROGRAMME

COMP NY L W

PAPER 1

ICSI House, 22, Institutional Area, Lodi Road, New Delhi 110 003tel011-4534 1000, 4150 4444 fax+91-11-2462 [email protected] websitewww.icsi.edu
http://www.icsi.edu/http://www.icsi.edu/http://www.icsi.edu/http://www.icsi.edu/


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THE INSTITUTE OF COMPANY SECRETARIES OF INDIA

TIMING OF HEADQUARTERS

Monday to Friday

Office Timings 9.00 A.M. to 5.00 P.M.

Public Dealing Timings

Without financial transactions 9.30 A.M. to 5.00 P.M.

With f inancial transactions 9.30 A.M. to 4.00 P.M.

Phones

4150444,45341000

Fax

011-24626727

Website

www.icsi.edu

E-mail

[email protected]

Laser Typesetting by Delhi Computer Services, Dwarka, New DelhiPrinted at M.P. Printers/February, 2013/10,000
http://www.icsi.edu/http://www.icsi.edu/


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EXECUTIVE PROGRAMME

COMPANY LAW

In view of increasing emphasis on adherence to norms of good corporate governance,

Company Law assumes an added importance in the corporate legislative milieu, as it deals with

structure, management, administration and conduct of affairs of Companies. A thorough study

of various provisions of the Companies Act is a must for becoming a competent and efficient

Company Secretary. In the light of this, the study material has been published to impart

thorough knowledge to the students preparing for the Company Law paper of the CS Executive

Programme. The purpose of this study material is to develop an understanding of the regulation

of registered companies and to provide thorough understanding of the various provisions of the

Company Law as well as Schedules and Rules made thereunder including their interpretation

through case laws, departmental clarifications etc. Additionally this study material also provides

conceptual understanding of the principles of Cooperatives Law.

Company Secretaryship being a professional course, the examination standards are setvery high, with emphasis on knowledge of concepts, applications, procedures and case laws,

for which sole reliance on the contents of the study material may not be enough. Besides

Company Secretaries Regulations, 1982 requires the students to be conversant with the

amendments to the laws made upto six months preceding the date of examination. This study

material may therefore be regarded as basic material and must be read along with the Bare Act,

Rules, Regulations, Case Law, as well as suggested readings.

The amendments made upto December, 2012 have been incorporated in this study

material. However, it may happen that some developments might have taken place during the

printing of the study material and its supply to the students. The students are therefore advised

to refer to the 'Student Company Secretary', Chartered Secretary and other publications for

updation of study material. In the event of any doubt, students may contact the Directorate ofAcademics and Professional Development in the Institute for clarification.

Although due care has been taken in publishing this study material yet the possibility of

errors, omissions and/or discrepancies cannot be ruled out. This publication is released with an

understanding that the Institute shall not be responsible for any errors, omissions and/or

discrepancies or any action taken in that behalf.

Should there be any discrepancy, error or omission noted in the study material, the Institute

shall be obliged if the same are brought to its notice for issue of corrigendum in the 'Student

Company Secretary'.


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EXECUTIVE PROGRAMME

SYLLABUS

FOR

MODULE 1 - PAPER 1: COMPANY LAW (100 MARKS)

Level of Knowledge: Expert Knowledge

Objective: To acquire knowledge and develop understanding of the regulatory framework of companies

with reference to various provisions of Companies Act and its schedules, rules, notifications, circulars,

clarifications there under including case laws and Secretarial standards.

Detailed Contents:

1. Introduction

Historical Development of Concept of Corporate Law in India

Company Definition, Meaning, Nature and its Characteristics

Nature and Forms of Business

Company vis--vis other Forms of Business

Concept of Corporate Personality, Corporate Veil, Limited Liability and Citizenship

2. Incorpo ration and its Consequences

Types of Companies and their incorporation

Promoters Meaning, Position, Duties, Rights, Responsibilities and Liabilities

Formation of Companies Procedural Aspects

Memorandum of Association & Articles of Association and their Alteration

Contracts and Conversion of Companies

Commencement of Business

Doctrine of Ultra-Vires, Constructive Notice, Indoor Management, Alter Ego

3. Financial Structure

Concept of Capital and Financing of Companies Sources of Capital; Classes and Types of

Shares; Equity Shares with Differential Rights; Issue of Shares at Par, Premium and Discount;

Forfeiture and Surrender of Shares; Bonus Issues; Rights Issues; Issue of Sweat Equity Shares;

Employees Stock Option Scheme; Private Placement; preference shares and other forms of

securities

Alteration of Share Capital Reduction of Capital; BuyBack of Shares

Prospectus Definition; Abridged Prospectus; RedHerring Prospectus; Shelf Prospectus;

Information Memorandum; Contents, Registration; Misrepresentations and Penalties

Debt Capital Debentures, Debenture Stock, Bonds; Recent Trends and Dynamics of Corporate

Debt Financing; Debenture Trust Deed and Trustees; Conversion of and Redemption of

Debentures

Securing of Debts:Charges ; Creation, Modification and Satisfaction of Charges

Allotment and Certificates General Principles and Statutory Provisions related to Allotment;

Minimum Subscription; Irregular Allotment; Procedure of Issue of Share Certificates and Warrants


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4. Membership in a Company

Modes of Acquiring Membership

Rights and Privileges of Members, Register of Members

Dematerialisation and Rematerialisation of Securities

Transfer and Transmission of Securities in Physical and Dematerialized forms

Nomination

5. Management and Control of Companies

Directors Types, Directors Identification Number (DIN), Appointment/Reappointment,

Qualifications, Disqualifications, Vacation of Office, Retirement, Resignation and Removal of

Managing and WholeTime Directors and Manager

Role and Responsibilities of Directors

Powers and Duties

Loans to Directors

Remuneration of Directors

Office or Place of Profit Contracts in which Directors are Interested

Board of Directors and its Committees

Company Secretary Appointment, Role and Responsibilities

Company Secretary as a Key Managerial Personnel

Meetings:

Meetings of Board and Committees Frequency, Convening, Proceedings, Video Conferencing of

Board/Committee(s); Resolution by Circulation; Minutes and Evidence

General Meetings Kinds of Meetings; Law, Practice and Procedure Relating to Convening and

Proceedings at General and Other Meetings; Notice, Quorum, Chairman, Proxy, Voting including

Voting through Electronic Means; Resolutions, Circulation of Members Resolution, etc.; PostalBallot; Recording, Signing and Inspection of Minutes;

Distribution of Powers of a Company Division of Powers between Board and General Meetings;

Acts by Directors in Excess of Authority; Monitoring and Management

Sole Selling and Buying Agents Meaning, Appointment and Reappointment, Removal; Powers

of Central Government and Rules Framed for the Purpose

6. Investments, Loans and Deposits

Law relating to making investments in and granting loans to other bodies corporate and giving

guarantees and providing security

Acceptance of Deposits, Renewal, Repayment, Default and Remedies

7. Accounts and Audit

Books of Accounts

Financial Statements

Auditors Appointment, Resignation and Removal; Qualification and Disqualification; Rights,

Dutiesand Liabilities

Audit and Auditors Report

Cost Audit and Special Audit


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8. Dividends

Profit and Ascertainment of Divisible Profits

Declaration and Payment of Dividend

Treatment of Unpaid and Unclaimed Dividend

Transfer of Unpaid and Unclaimed Dividend to Investor Education and Protection Fund

Boards Report and Disclosures Contents and Annexure to Boards Report

Directors Responsibility Statement Preparation and Disclosures

Compliance Certificate Need and Objective; Issue and Signing by Practising Company

Secretary

Corporate Governance Report

9. Registers, Forms and Returns

Statutory Books and Registers prescribed under various provisions of the Company Law

Maintenance, Authentication Place of Keeping and Inspection

Filing of various Forms and Returns with the Authorities

Procedure and Penalties for Delayed Filing

Annual Return Nature and Significance; Contents; and Certification by Practising Company

Secretary

10. Inspection and Investigation

Inspection of Documents

Powers of the Inspector

Seizure of Books And Documents

Inspectors Report

Power of the Registrar of Companies

Investigation into Affairs of the Company

11. Majority Rule and Minority Rights

Law relating to Majority Powers and Minority Rights

Shareholder Remedies Actions by Shareholders; Statutory Remedies; Personal Actions

Prevention of Oppression and Mis-Management

12. Merger, De-merger, Amalgamation, Compromises and Arrangements An Overview

13. Producer Companies

Concept, Formation, Functioning and Dissolution

14. Limited L iability Partnerships

Concept, Formation, Membership, Functioning and Dissolution

15. Application of Company Law to Different Sectors

Banking

Insurance

Others


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16. Offences and Penalties

Introduction

Officer in Default

Penalties

17. Compounding of Offences

18. Winding up o f Companies An Overview

Concept and Modes

19. Striking Off Name of Companies

20. An Introduction to E-Governance and XBRL


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LIST OF RECOMMENDED BOOKS

MODULE I

PAPER 1 : COMPANY LAW

Readings:

1. Dr. Avtar Singh : Company Law; Eastern Book Company, 34, Lalbagh, Lucknow

226 001

2. C.R. Datta : Datta on the Company Law; Lexis Nexis, Butterworths Wadhwa,

Nagpur

3. A. Ramaiya : Guide to the Companies Act; Lexis Nexis, Butterworths Wadhwa,

Nagpur

4. K.C. Garg, R.C.

Chawla, Vijay Gupta

: Company Law; Kalyani Publishers, 1/1, Rajinder Nagar, Civil

Lines, Ludhiana 141 001.

5. A.K. Mujumdar, Dr.

G.K. Kapoor

: Company Law and Practice; Taxmann, 59/32, New Rohtak Road, New

Delhi-110 005.

6. V.S. Datey : Guide to Tax and Corporate Laws; Taxmann, 59/32, New Rohtak

Road, New Delhi-110 005.

7. M.C. Kuchhal : Modern Indian Company Law; Shri Mahavir Book Depot, 2603,

Nai Sarak, Delhi-110 006.

8. H.K. Saharay : Company Law; Universal Law Publishing Co., C-FF-1A, Dilkhush

Industrial Estate, G.T. Karnal Road, Delhi. -110033.

References:

1. D.K. Jain : Company Law Ready Reckoner; Bharat Law House Pvt. Ltd.; T-

1/95, Mangolpuri Industrial Area, Delhi-110083.

2. R. Suryanarayanan : Company Law Ready Reckoner; Commercial Law Publishers,

151, Rajinder Market, Opp. Tis Hazari Court, Delhi-110054.

3. Palmer : Company Law (Vol. 1); Stevens & Sons Ltd., London.

4. L.C.B. Gower : Principles of Modern Company Law; Stevens & Sons Ltd.,

London.

5. Taxmanns : Circulars & Clarifications on Company Law; Taxmann, 59/32, NewRohtak Road, New Delhi-110 005.

6. Bare Act : Corporate Laws; Taxmann, 59/32, New Rohtak Road, New Delhi-

110 005.

The Companies Act, 1956; Universal Law Publishing Co., C-FF-

1A, Dilkhush Industrial Estate, G.T. Karnal Road, Delhi. -110 003.


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Journals:

1. Chartered Secretary : ICSI, New Delhi

2. Student Company

Secretary

: ICSI, New Delhi

3. Corporate Law Adviser : Corporate Law Advisers, 613, Metro View Apt., Sector 13, Pocket

B, Dwarka, New Delhi-110075.

4. Company Law Journal : Company Law Journal (India) Pvt. Ltd., 53/15, Old Rajinder

Nagar, Post Box No. 2844, New Delhi-110060.

Note:The latest edition of all the books referred to above should be read.


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ARRANGEMENT OF STUDY LESSONS

PAPER 1: COMPANY LAW (100 Marks)

Lesson No. Subject

1 INTRODUCTION

2 TYPES OF COMPANIES3 PROMOTION AND INCORPORATION OF COMPANIES

4 MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION

5 CONTRACTS AND CONVERSIONS

6 CONCEPT OF CAPITAL AND FINANCING OF COMPANIES

7 ALTERATION OF SHARE CAPITAL

8 PROSPECTUS

9 DEBT CAPITAL

10 CREATION AND REGISTRATION OF CHARGES

11 ALLOTMENT AND ISSUE OF CERTIFICATES

12 MEMBERSHIP IN A COMPANY

13 TRANSFER AND TRANSMISSION OF SECURITIES

14 INSTITUTION OF DIRECTORS

15 POWERS AND DUTIES OF DIRECTORS

16 MANAGING DIRECTOR, WHOLE-TIME DIRECTOR AND MANAGER

17 COMPANY SECRETARY

18 MEETINGS

19 INTERCORPORATE LOANS AND INVESTMENTS

20 DEPOSITS

21 ACCOUNTS AND AUDIT

22 DIVISIBLE PROFITS AND DIVIDENDS

23 SOLE SELLING AND SOLE BUYING AGENTS24 BOARDS REPORT AND DISCLOSURES

25 REGISTERS, FORMS AND RETURNS

26 INSPECTION AND INVESTIGATION

27 MAJORITY RULE AND MINORITY RIGHTS

28 MERGER, DE-MERGER, AMALGAMATION, COMPROMISE ANDARRANGEMENTS AN OVERVIEW

29 PRODUCER COMPANIES

30 LIMITED LIABILITY PARTNERSHIPS

31 APPLICATION OF COMPANY LAW TO DIFFERENT SECTORS

32 OFFENCES, PENALTIES AND THEIR COMPOUNDING

33 WINDING UP OF COMPANIES

34 STRIKING OFF NAME OF COMPANIES

35 AN INTRODUCTION TO E-GOVERNANCE AND XBRL

36 SECRETARIAL STANDARDS

TEST PAPERS


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EXECUTIVE PROGRAMME

COMPANY LAW

CONTENTS

LESSON 1

INTRODUCTION

Page

Learning Objectives/Lesson Outline 1

Meaning of a Company ... 2

CompanyIts Nature and Characteristics ... 3

Development of Company Law in India and England 10

Brief History of Company Law in England ... 11

Development of Indian Company Law ... 13Amendments made to the Companies Act by the Depositories Act, 1996 ... 15

The Companies (Amendment) Act, 1999Salient Features ... 16

The Companies (Amendment) Act, 2000Salient Features ... 16

The Companies (Amendment) Act, 2002 and Companies (SecondAmendment) Act, 2002Salient Features ... 17

The Companies (Amendment) Act, 2006 18

Highlights of Companies Bill, 2012 20

Distinction between Company and Partnership ... 20

Distinction between Company and Hindu Joint Family Business ... 21

Distinction between Company and Corporation ... 21

Distinction between Company and Limited Liability Partnership 22Lifting or Piercing the Corporate Veil ... 23

Lifting of Corporate Veil under Judicial Interpretation ... 23

Use of Corporate Veil for Hiding Criminal Activities ... 26

Citizenship 26

Personal Liability of Directors or Members ... 28

Illegal Association ... 29

Lesson Round-Up 31

Glossary 32

SELF-TEST QUESTIONS ... 32

LESSON 2

TYPES OF COMPANIES


Classification of Companies ... 36

Private Company ... 37


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Page

Privileges and Exemptions of Private Company ... 38

Special Obligations of a Private Company ... 40

Consequences of Infringement of the Articles of Private Companies ... 41Public Company ... 41

Limited Company ... 42

Companies Limited by Shares ... 42

Companies Limited by Guarantee ... 42

Unlimited Company ... 43

Association not for Profit ... 44

Government Companies ... 45

Exemption to Government Companies from applicability ofnotified provisions of Companies Act, 1956 46

Audit in Government Companies ... 47

Foreign Companies ... 47Holding and Subsidiary Companies ... 49

Determination of Holding-subsidiary relationship and shareholding ... 50

Investment Companies ... 51

Producer Companies 51

Finance Companies ... 52

Public Financial Institutions ... 53

A Brief Study of Statutory Corporations ... 54

Which Corporations are State ... 56

Lesson Round-Up 56

Glossary 57


LESSON 3

PROMOTION AND INCORPORATION OF COMPANIES


Definition of the term Promoter ... 60

Promoters contract - Ratification thereof 61

Legal Position of a Promoter ... 61

Duties of a Promoter ... 62Termination of Promoters Duties ... 63

Remedies available to the Company against the Promoter ... 63

Liabilities of Promoters ... 64

Rights of Promoters ... 66

Formation of Companies 67

Application for Availability of Name of Company ... 67

Preparation of Memorandum and Articles of Association ... 68


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Vetting of Memorandum and Articles, Printing, Stamping and Signing of the same ... 68

Page

Power of Attorney ... 69

Additional Documents Required ... 69Payment of Registration Fees ... 70

Certificate of Incorporation ... 70

Conclusive Evidence ... 70

Online Incorporation of Companies within 24 Hours 71

Lesson Round-Up 71

Glossary 72


LESSON 4

MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION


Memorandum of Association ... 74

Purpose of Memorandum ... 75

Form of Memorandum of Association ... 75

Contents of Memorandum ... 75

Name Clause ... 76

Situation Clause ... 78

Objects Clause ... 78

Doctrine of Ultra Vires ... 80

Shareholders right in respect of ultra viresacts 83

Effects of ultra viresTransactions ... 83

Liability Clause ... 84

Capital Clause ... 84

Association Clause and Subscription ... 85

Printing and Signing of Memorandum 85

Alteration of Memorandum of Association ... 85

Alteration of Name Clause ... 86

Effect of Change ... 87

Alteration of Registered Office Clause ... 87

Alteration of Objects Clause of the Company ... 90Registration of Alteration ... 92

Alteration of Liability Clause ... 94

Alteration of Capital Clause ... 94

Articles of Association ... 95

Registration of Articles ... 96

Statutory Requirements ... 97

Contents of Articles ... 97


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Provision in articles as regards expulsion of a member 98

Alteration of Articles of Association ... 98

Page

Effect of altered Articles 100Distinction between Memorandum and Articles ... 100

Legal Effect of Memorandum and Articles ... 101

Constructive Notice of Memorandum and Articles ... 102

Money Payable by Members is a Debt ... 103

Interpretation of Memorandum and Articles ... 103

Doctrine of Indoor Management ... 104

Exceptions to the Doctrine of Indoor Management ... 105

Doctrine of Alter Ego 107

Lesson Round-Up 107

Glossary 108


LESSON 5

CONTRACTS AND CONVERSIONS


Preliminary Contracts ... 112

Pre-incorporation contracts ... 112

Provisional Contracts ... 113

Contracts made after issue of Certificate of Commencement of Business in the case of

Public Company, and after Incorporation in the case of Private Company ... 114Common Seal ... 114

Conversion of a Private Company into a Public Company ... 115

Private Company (which is a subsidiary of public company) deemed to be a Public Company ... 116

Conversion of a Public Company into a Private Company ... 116

Commencement of Business ... 116

Commencement of New Business by an Existing Company ... 118

Lesson Round-Up 118

Glossary 119


LESSON 6

CONCEPT OF CAPITAL AND FINANCING OF COMPANIES


Meaning of the term Capital ... 122

Use of the word Capital indifferent senses ... 122


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Meaning and Nature of a Share ... 124

Kinds of Shares ... 125

Preference Shares or Preference Share Capital ... 126

Types of Preference Shares ... 127

Page

Preference Shares Compared with Equity Shares ... 128

Issue of Sweat Equity Shares ... 129

Sources of Capital ... 130

Public Issue of Shares ... 131

SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 ... 131

Preferential Issue by Existing Listed Companies ... 134

Issue of Shares at a Premium ... 136

Issue of Shares at a Discount ... 137

Further issue of shares ... 139

Judicial Pronouncement relating to further issue of shares 140Bonus Shares ... 141

Employee Stock Option Scheme ... 142

Lesson Round-Up 143

Glossary 144


LESSON 7

ALTERATION OF SHARE CAPITAL


Alteration of Share Capital ... 146

Judicial Pronouncement ... 147

Nature of Stock ... 148

Difference between Share and Stock ... 148

Reduction of Share Capital ... 149

Judicial Pronouncement on reduction of share capital 150

Reduction of share capital without sanction of the Court ... 151

Difference in Alteration in Share Capital and reduction of share capital 152

Creditors Right to Object to Reduction ... 152

Confirmation and Registration ... 153Conclusiveness of certificate for reduction of capital ... 153

Diminution of share capital is not a reduction of capital ... 153

Liability of Members in respect of Reduced Share Capital ... 154

Company Prohibited to Buy its Own Shares or to Finance their Purchase ... 154

Power of Company to Purchase its Own Securities ... 155

Conditions for Buy-back ... 156

Prohibition for Buy-Back in Certain Circumstances ... 158


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Lesson Round-Up 158

Glossary 159


Page

LESSON 8

PROSPECTUS


Meaning and Definition of Prospectus ... 162

Invitation to Public ... 162

When Prospectus is not required to be issued ... 163

Statement in lieu of Prospectus ... 164Dating and Registration of Prospectus ... 164

When Registrar Must Refuse Registration ... 165

Shelf Prospectus ... 166

Information Memorandum ... 167

Red-Herring Prospectus 167

Manner of Disclosures in the Offer Documents 168

Application with Prospectus ... 168

Abridged Prospectus ... 168

Voluntary Statement in Prospectus ... 169

The Golden Rule or Golden Legacy ... 169

Liability for Untrue Statement ... 170

Remedies for Misrepresentation in Prospectus ... 170

Remedies Against Directors or Promoters ... 171

Criminal Liability for Mis-statement in Prospectus ... 174

Who is Entitled to Remedies ... 174

Penalty for Fraudulently Inducing to Invest Money ... 175

Prohibition of Allotment of Shares in Fictitious Name ... 175

Lesson Round-Up 176

Glossary 176


LESSON 9

DEBT CAPITAL


Borrowing ... 180

Power of Company to Borrow ... 180


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Unauthorised or Ultra Vires Borrowing ... 180

Intra viresBorrowing but Outside the Scope of Agents Authority ... 181

Judicial pronouncement relating to borrowing powers of company 181

Types of borrowing 183

Borrowing on Security of Property ... 184Charge on Uncalled Capital ... 185

Debentures 185

Page

Judicial pronouncement about debentures 186

Pari passu clause in case of debentures 187

Kinds of Debentures ... 187

Regulatory framework for debt securities 189

Debentures Trust Deed ... 191

Appointment of Debenture Trustees and Duties of Debenture Trustees ... 192

Liability of Company to Create Security and Debenture Redemption Reserve ... 193Debenture Redemption Reserve (DRR) 193

Register of Debentureholders ... 194

Remedies Open to Debentureholders ... 194

Debenture-holders claim ... 197

Distinction Between Debentures and Shares ... 197

Redemption of Debenture ... 198

Re-issue of Redeemed Debentures ... 198

Public Sector Bonds ... 198

Foreign Bonds ... 199

Recent Trends in Corporate Debt Financing ... 199New Instruments in Money Market ... 201

Lesson Round-Up 201

Glossary 201


LESSON 10

CREATION AND REGISTRATION OF CHARGES


Definition of a Charge ... 204Kinds of Charges ... 204

Judicial pronouncements ... 205

Crystallisation of Floating Charge ... 206

Postponement of a Floating Charge ... 207

Registration of Charges ... 208

Particulars to be filed with the Registrar in case of series of Debentures ... 210

Effect of Registration ... 211


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Conclusive Nature of the Certificate of Registration ... 212

Consequences of non-registration ... 213

Register of Charges ... 214

Extension of Time and Rectification of Register of Charges ... 215

Modification of Charges ... 216Satisfaction of Charges ... 216

Purchase or Acquisition of a Property Subject to Charge ... 217

Properties Situated Abroad and Subject to Charge ... 217

Page

Difference between Mortgage and Charge ... 218

Lesson Round-Up 218

Glossary 219


LESSON 11

ALLOTMENT AND ISSUE OF CERTIFICATES


Allotment of Shares ... 222

Notice of Allotment ... 222

General Principles Regarding Allotment ... 222

Statutory Provisions regarding Allotment ... 223

Effect of Irregular Allotment ... 226

Revocation by applicant/allottee ... 228

Ultra vires allotment ... 228

Allotment Procedure ... 228

Return of Allotment ... 229

Judicial pronouncement 230

Share Certificate ... 231

Share Warrant ... 236

Share Certificate and Share Warrant Distinguished ... 237

Personation of Shareholder ... 238

Calls and Forfeiture ... 238

Forfeiture of Shares ... 241

Re-issue of Forfeited Shares ... 243Surrender of Shares 243

Lesson Round-Up 244

Glossary 244


LESSON 12


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MEMBERSHIP IN A COMPANY


Who are Members ... 248

Modes of Acquiring Membership ... 249Who may become a Member ... 250

Joint Members ... 252

Registration of Shares in the name of Public Office ... 253

Minimum Number of Members ... 254

Cessation of Membership ... 254

Page

Expulsion of a Member ... 255

Personation and Penalty ... 255

Register of Members ... 256

Judicial pronouncement 256Place of Keeping and Inspection of the Registers ... 257

Remedy if inspection is refused ... 258

Registerprima facieevidence ... 258

Rectification of a register of Members ... 258

Closing of Register of Members ... 260

Foreign Register ... 261

Preservation of Registers, etc. ... 261

Power of the Central Government to Investigate into the Ownership of Shares ... 262

Declaration by Persons not holding Beneficial Interest in any Share ... 262

Rights of Members ... 263

Individual Rights ... 263

Collective Membership Rights ... 264

Voting Rights of Members ... 265

Shareholders Pre-emptive Rights ... 265

Variation of Members Rights ... 266

Rights of Dissentient Members ... 266

Liability of Members ... 266

Lesson Round-Up 267

Glossary 267


LESSON 13

TRANSFER AND TRANSMISSION OF SECURITIES


Introduction ... 270

Provisions under Companies Act regulating transfer of securities 270


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Nomination of shares/debentures 270

Power to refuse registration and appeal against refusal 272

Statutory Remedy against refusal under Section 111 ... 272

Transfer of Securities of a Public Company (Section 111A) ... 272

Stamp Duty Payable and Affixation/Cancellation of Stamps ... 273Lost Transfer Deeds ... 274

Delegation of Powers for Transfer ... 274

Transfer of Debentures ... 274

Transfer of Shares to a Minor ... 274

Transmission of shares ... 275

Distinction between Transfer and Transmission ... 276

Page

Compliance with Section 108 A mandatory provision 283

Certification of Transfer ... 285

Blank Transfer ... 285Transfer of Shares during winding up ... 286

Forged transfer 287

Transposition of Name ... 288

Death of transferor or transferee before registration of transfer ... 289

Rights of Transferor ... 289

Effects of Transfer ... 291

Companys lien on shares ... 292

Transfer and Transmission of Debentures ... 293

Transfer of Shares registered with Depository Mode ... 294

Legal Framework for Depository System 294The Depositories Act, 1996 : An Analysis ... 295

Safeguards on transfer of securities in demat form 301

Lesson Round-Up 304

Glossary 305


LESSON 14

INSTITUTION OF DIRECTORS

Learning Objectives/Lesson Outline 307Concept of Director ... 308

Definition of Director ... 308

Types of Directors ... 309

Legal Position of Directors ... 311

Qualifications of Directors ... 313

Companies [Disqualification of Directors under Section 274(1)(g) ofthe Companies Act, 1956] Rules, 2003 315


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Qualification Shares ... 316

Number of Directors ... 318

Appointment of Directors ... 319

Restriction on Appointment or Re-appointment of Directors ... 320

Director Identification Number 320Appointment of First Directors ... 321

Appointment of Directors by Members in General Meeting ... 322

Appointment of Person other than Retiring Director ... 324

Appointment of Directors to be voted individually ... 325

Principle of Proportional Representation ... 326

Appointment of Directors by the Board ... 326

Appointment of Directors by Central Government ... 330

Page

Application to the Company Law Board to Prevent Oppression and Mismanagement ... 331Appointment of Directors by Third Parties (Nominee Directors) ... 332

Appointment of a Director by Small Shareholders ... 333

Removal of Directors ... 334

Retirement of Directors ... 338

Resignation of Directors ... 338

Penalty for Wrongful Withholding of Companys Property ... 340

Vacation of Office of Directors ... 343

Remuneration of Directors ... 345

Remuneration of non-executive directors 348

Office or Place of Profit ... 356

Important Clarifications ... 359

Lesson Round-Up 362

Glossary 363

SELF-TEST QUESITONS ... 364

LESSON 15

POWERS AND DUTIES OF DIRECTORS


Distribution of Powers of a Company ... 366

Exercise of Powers ... 366

Powers to be Exercised only at Board Meetings ... 368

Other Powers to be Exercised at Board Meetings ... 369

Powers Which Must be Exercised by Unanimous Vote ... 370

Powers of the Board Exercisable with the Approval of the Company in General Meeting ... 370

Borrowings ... 373

Prohibitions and restrictions regarding political contributions ... 374

Loans to Directors ... 375

Application for ApprovalInformation to be Stated therein ... 377


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Boards sanction for contracts in which Directors are Interested ... 378

Disclosure of Interest by Directors ... 382

Position of Interested Director ... 383

Duties of Directors ... 383

Liabilities of Directors ... 387

Directors Liability for Acts of Co-directors ... 392

Criminal Liability ... 392

Liability as an Officer in Default ... 394

Courts Power to grant Relief in Certain Cases ... 396

Compounding of certain OffencesSection 621A ... 398

Monitoring and Management ... 399

Lesson Round-Up 400

Glossary 401


Page

LESSON 16

MANAGING DIRECTOR, WHOLE-TIME DIRECTOR AND MANAGER


MANAGING DIRECTOR 404

Appointment of Managing Director ... 405

Qualifications of Managing Director ... 410

Powers of Managing Director ... 411

Duties of a Managing Director ... 413

Liabilities ... 413

EXECUTIVE DIRECTOR/WHOLE-TIME DIRECTOR 413Appointment ... 414

Role and Powers of Executive/Whole-time Director ... 414

Duties of a Whole-time Director ... 415

Liabilities ... 415

MANAGER 416

Number of Managers in a Company ... 416

Director as Manager ... 416

Appointment ... 417

Disqualification ... 417

Term of Office ... 417

Restriction on the Number of Companies of Which a Person may be Appointed Manager ... 417Restriction on Appointment of Manager ... 417

Distinction between Manager and Managing Director ... 417

Remuneration ... 418

Powers ... 418

Duties ... 418

Liabilities ... 419

Relationship with the Board of Directors ... 419

Compensation for loss of office ... 423


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CHAIRMAN 424

Election of Chairman ... 424

Appointment of Chairman ... 424

Removal of Chairman ... 425

Role of Chairman ... 425

Whole-time and part time Chairman ... 426

Duties and Responsibilities ... 426

Chairmans Power under Common Law ... 428

Amendments to Resolution ... 428

Adjournment of Meetings ... 428

Chairmans Declaration as to result to voting ... 429

Liabilities ... 429

Lesson Round-Up 429

Glossary 430


Page

LESSON 17

COMPANY SECRETARY


Who is a Secretary ... 432

Who is a Company Secretary ... 432

Statutory Requirement ... 433

Importance of Secretary ... 434

Position of the Secretary ... 434

Companies (Appointment and Qualifications of Secretary) Rules, 1988 ... 436

Appointment of a Secretary ... 438

Dismissal of a Secretary ... 439

Powers of a Secretary ... 440

Duties of a Secretary ... 440

Statutory Duties ... 441

General Duties ... 442

Liabilities of Secretary ... 443

Rights of Secretary ... 445

Role of Company Secretary ... 446

COMPANY SECRETARY IN PRACTICE 454Who can Practice as a Company Secretary ... 454

Areas of Practice ... 455

Professional Duties and Code of Conduct ... 461

Rules Applicable to a Company Secretary in Practice ... 461

Professional Misconduct ... 462

Quality Review Board 463

Peer Review 463


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Lesson Round-Up 464

Glossary 464


LESSON 18

MEETINGS



Meaning of a Meeting ... 468

Kinds of Company Meetings ... 469

Statutory Meeting ... 469

Statutory Report ... 470

Annual General Meeting ... 471

Extension of Validity Period of AGM 472

Page

Time and Place for holding an Annual General Meeting ... 473

Participation by shareholders or directors in meetings through electronic mode 474

Default in holding Annual General Meeting ... 475

Consideration of Accounts of more than One Year at AGM 477

Canceling/Postponing of Convened General Meeting ... 477

Object of holding an Annual General Meeting ... 477

Business transacted at an Annual General Meeting ... 478

Applicability of Provisions of Sections 171 to 186 ... 478

Extraordinary General Meetings ... 478

Types of Business Transacted at Extraordinary General Meeting ... 478

Who May Convene Extraordinary General Meetings ... 478

Calling of Extraordinary General Meeting on Requisition ... 479

Calling of Extraordinary General Meeting by Company Law Board ... 480

Class Meetings ... 482

Meetings of Debentureholders ... 482

Meeting of Creditors ... 482

Meeting of Board of Directors ... 482

Notice of Board Meetings ... 484

Time and Place of Board Meetings ... 485Agenda ... 486

Resolution Passed by Circulation by Directors ... 487

Minutes of Board Meetings ... 488

Quorum of Directors ... 490

Disclosure of Interest ... 491

Chairman of Board Meeting ... 492

Meetings of Committee of Directors ... 492


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Provisions of relating General Meetings 493

Requisites of Valid Meeting ... 493

General Meetings to be Convened by Directors ... 494

Notice of Meeting ... 494

Venue of the Meeting ... 497Notice of Adjourned Meeting ... 498

Agenda ... 498

Quorum ... 498

Proxy ... 500

Voting at General Meeting ... 504

Voting and Demand for Poll ... 504

Chairman ... 507

Duties and Role of Chairman ... 508

Motion ... 509

Amendment ... 509

General Rules Regarding Amendments ... 510

Methods of Exercising Shareholders Rights with regard to Voting ... 510

Page

Resolutions ... 511

Resolution Requiring Special Notice ... 512

Resolutions Passed at Adjourned Meeting ... 512

Circulation of Members Resolution ... 512

Registration of Resolutions and Agreements ... 513

Passing of Resolutions by Postal Ballot ... 514

Companies (Passing of the Resolution by Postal Ballot) Rules, 2011 515Adjournment ... 516

Postponement ... 517

Dissolution ... 518

Minutes of Proceedings of Meetings ... 518

Lesson Round-Up 520

Glossary 521


LESSON 19

INTERCORPORATE LOANS AND INVESTMENTS



Inter-corporate Loans and Investments ... 524

No blanket permission from shareholders ... 526

Circular 526

Register of loans made, guarantees given, securities provided and investments made ... 527


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Inspection of Register ... 527

Penalties ... 527

Exemptions ... 528

Investments to be held in Companys own name ... 528

Register of Investments not held in company own name ... 530Penalty 531

Lesson Round-Up 531

Glossary 532


LESSON 20

DEPOSITS


Invitation and Acceptance of Deposits ... 534Application of Provisions of Section 58A to Guarantee Companies and Section 25 Companies ... 535

Non-Banking Non-Financial Companies ... 535

Exemptions from applicability of Section 58A ... 536

Page

Nomination by Depositors ... 537

Companys Right to Reject Application ... 538

Deposit from NRIs ... 538

Provisions Relating to Prospectus Apply to Issue of Advertisement ... 540

Companies (Acceptance of Deposits) Rules, 1975 ... 540

Deposits and Loan ... 543

Deposit and Debenture ... 544

Depositor ... 544

Ceiling Limits for Acceptance of Deposits ... 544

Ceiling on Rate of Interest ... 546

Rate of Brokerage ... 546

Maintenance of Liquid Assets ... 546

Constitutional Validity of Section 58A of the Act and Rule 3A of Deposit Rules ... 547

Form and Particulars of Advertisement ... 549

Delivery of the Text of Advertisement to the Registrar ... 550

Statement in Lieu of Advertisement ... 551Signing of Advertisement ... 551

Form of Application for Deposits ... 551

Furnishing of receipts to Depositors ... 552

Register of Deposits ... 552

General Provisions regarding Premature Repayment of Deposits ... 552

Exemption ... 553

Power of the Central Government ... 553


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Return of Deposits ... 553

Renewal of Deposits ... 554

Repayment of Deposits 554

Penalties ... 556

Defaults in Repayment of Deposits to Small Deposit holders ... 557Remedy if the Company Fails to Repay on Due Date ... 558

Powers to Grant Extension of Time and Exemption ... 559

Guidelines for filing Statutory Application under Section 58A(8) of Companies Act, 1956 559

Lesson Round-Up 560

Glossary 560


LESSON 21

ACCOUNTS AND AUDIT


ACCOUNTS 564

Requirement of Keeping Books of Account ... 564

Place of Keeping Books of Account ... 565

Page

Books of Accounts in Respect of Branch Office ... 565

True and Fair View ... 565

Preservation of Books of Accounts ... 565

Inspection of Books of Accounts ... 565

Maintenance of Costing Records and Stock Records ... 567

Persons Responsible for Keeping Books of Accounts ... 567

Statutory Books ... 568

Statistical Books ... 569

Annual Accounts: Balance Sheet and Profit and Loss Account 570

Meaning of Balance Sheet 570

Preparation of Balance Sheet and Profit and Loss Account 571

Form of Balance Sheet 571

Meaning of Profit and Loss Account 573

Form of Profit and Loss Account 574

Annual Accounts to Comply with Accounting Standards ... 575IND AS 575

National Advisory Committee on Accounting Standards ... 575

Laying of Accounts ... 577

Default in Laying of Accounts ... 577

Approval and Signing of Balance Sheet and Profit and Loss Account ... 578

Penalty 579

Authentication of Annual Accounts by Secretary 579


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Authentication of Annual Accounts when only one Director is available 580

Time Gap between authentication of accounts and signing by auditor 580

Approval of Annual Accounts by Delegation 581

Circulation of Balance Sheet and Auditors Report ... 581

Adoption of Accounts at Annual General Meeting ... 584Filing of Annual Accounts with the Registrar ... 585

Clarifications issued by MCA with respect of filing of Annual Accounts 586

Investor Education and Protection Fund 588

Inspection of Annual Accounts in case of Private Companies ... 588

Duty of officer to make Disclosure of Payments ... 588

Accounts of Holding and Subsidiary Company 589

AUDIT 592

Appointment of Auditor ... 593

Qualifications and Disqualifications of Auditors ... 593

Method of Appointment of Auditors ... 594

Appointment of First Auditors ... 594

Subsequent Appointment of Auditors ... 595

Ceiling on Appointment as Auditor ... 595

Reappointment of Auditors ... 596

Appointment of Auditor Other Than a Retiring Auditor ... 596

Rights of Retiring Auditors ... 597

Page

Filling of Casual Vacancy ... 597

Power of Central Government to Appoint Auditors ... 597

Appointment of Auditors by Special Resolution ... 597Remuneration of Auditors ... 599

Term of Office ... 599

Resignation by an Auditor ... 600

Removal of Auditors ... 600

Status of the Auditors ... 601

Auditors of Government Companies ... 601

Rights and Powers of Auditors ... 603

Duties of Auditors ... 604

Judicial pronouncements on the duties of auditors 605

Liabilities of an Auditor ... 608

Audit of Branch Accounts ... 609Special Audit ... 610

Cost Audit ... 611

Cost Audit Report 612

Social Audit 613

Proper Books of Accounts ... 614

True and Fair View ... 615

Notes on Accounts ... 615


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Guidelines for Filing Statutory Applications 616

Annexure: Companies (Auditors Report) Order, 2003 618

Lesson Round-Up 621

Glossary 622


LESSON 22

DIVISIBLE PROFITS AND DIVIDENDS


Definition and Meaning of Dividend ... 626

Difference between Dividend and Interest ... 626

Types of Dividend ... 626

Final Dividend ... 626

Interim Dividend ... 626Dividend on Preference Shares ... 627

Dividend on Equity Shares ... 627

Restrictions on Declaration of Dividend and Purpose Behind it ... 627

Ascertainment of Divisible Profits and Dividends ... 628

Depreciation ... 628

Loss of Previous Year(s) to be Set off against Profits of Current Year or Previous Years ... 630

Page

Transfer of Profits to Reserves ... 630

Dividend in case of Absence or Inadequacy of Profits ... 631

Declaration of Dividend ... 632

Revocation of Declared Dividend ... 632

Payment of Dividend in Cash or in Kind ... 633

Liability of Directors, Shareholders and Auditors for improper Dividend ... 633

Shareholders Right to Dividend ... 633

Who is eligible to receive dividend ... 633

When dividend is Payable ... 634

Establishment of Investor Education and Protection Fund ... 636

Dividend Warrants ... 636

Dividend Mandate ... 637

Use of Information Technology in Cash Transaction of Listed Companiesfor Payment of Dividends ... 637

Can Dividends be Paid out of Capital ... 637

Payment of Interest out of Capital ... 638

Payment of Dividend out of Capital Profits ... 639

Remittance of Dividend or Interest or Sale Proceeds to NRIs,Foreigners and Foreign Companies ... 639

Rate of Dividend on Preference Shares ... 639


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Lesson Round-Up 640

Glossary 640


LESSON 23

SOLE SELLING AND SOLE BUYING AGENTS


Sole Selling Agents-Meaning ... 644

Appointment of Sole-selling Agents ... 644

Powers of the Central Government to Investigate Terms of Appointment ... 645

Companys Duty in Investigation ... 647

Penalty ... 647

Power of the Central Government to Prohibit the Appointment of Sole Selling Agent

in Certain Cases ... 647Re-appointment of Sole Selling Agents ... 650

Duties of a Secretary ... 650

Condition to form part of Agreement 651

Remuneration of Sole Selling Agents ... 651

Sole Buying or Purchasing Agents ... 651

No Compensation to Sole Selling Agent for Loss of Office ... 652

Meaning of Relative ... 652

The Companies (Appointment of Sole Agents) Rules, 1975 ... 653

Page

Guidelines for filing statutory applications under Section 294AA of the Companies Act, 1956 655Lesson Round-Up 655

Glossary 656


LESSON 24

BOARDS REPORT AND DISCLOSURES


Introduction 660

Disclosures under Companies Act 660

Disclosure under Section 217(1) 660

Disclosure under Section 217(2) 662

Particulars in respect of certain employees [Section 217(2A)] 662

Directors Responsibility Statement [Section 217(2AA)] 663

Comment on Auditors Report [Section 217(3)] 665

Other Disclosures 664

Disclosures pursuant to the Listing agreement of Stock Exchanges 664


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Disclosures pursuant to employee stock option and employees stock purchase schemes 667

Disclosures pursuant to Directions of RBI 667

Approval of the Boards Report 668

Signing and dating of the Boards Report 668

Filing of the Boards Report 669Right of Members to copies of Balance Sheet, Boards Report, etc. 670

Liability for Mis-statement 670

Chairmans Speech 671

Compliance Certificate under Section 383A 671

Need for Compliance Certificate 672

Scope of Compliance Certificate 673

Penalty for Non-Compliance 673

Mode and period of Appointment of PCS 673

Certification with Qualification 674

Penalty for false compliance certificate 674

Professional Responsibility 675

Lesson Round-Up 675

Glossary 676


LESSON 25

REGISTERS, FORMS AND RETURNS


Statutory Books/Registers ... 678

Secretarial Standards ... 679

Page

Statutory Books ... 679

Register of Investments not held in Companys name 679

Register of deposits 679

Register of Securities bought back 681

Register of Charges 681

Register of Members 682

Index of Members 684

Register of debenture holder 684

Index of debenture holders 684Register and Index of beneficial owners 685

Foreign register of members and debentureholders 685

Annual Return 686

Minutes Book 689

Register of Postal Ballot 691

Books of Account 691

Cost Records 692


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Register of Particulars of Contracts in which directors are interested 692

Register of Directors 693

Register of Directors Shareholding 694

Register of Investment, Loan made, guarantee given or security provided

to other body corporate 694Register of renewed and duplicate certificate 695

Register of records and documents destroyed 695

Register of Sweat Equity Shares 696

Procedure for Keeping Registers and Returns at a Place other than the Registered Office ... 696

Other Registers ... 697

Electronic Forms 709

Filing of Various Forms/Returns with Registrar of Companies ... 710

Preparation and Filing of Returns with the Registrar of Companies ... 713

Returns on Occurrence of Certain Events ... 716

Filing Fee for Companies Registered in India ... 719

Filing Fee by Foreign Companies ... 719Payment of fees ... 720

Company Secretarys Role in Filing and Filing Returns and Forms ... 720

Guidelines for Preparing/Filing Forms, Documents, Returns etc. ... 721

Defective Forms/Documents ... 722

Condonation of Delay 722

Procedure for Condonation of Delay by Central Government inRelation to Filing of Documents with Registrar of Companies ... 723

Penalty for Filing False Documents/Statements with Registrar ... 723

Lesson Round-Up 723

Glossary 724


Page

LESSON 26

INSPECTION AND INVESTIGATION


INSPECTION 728

Introduction 728

Nature of Inspection 728

Inspection by whom 728

Directors right to make inspection 729

Right of Members to make inspection 729

Time and Place of Inspection 730

Inspection of Books of Account and other books and papers 730

Notice for Inspection 730

Duties of Directors, other Officers and Employees 730


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Powers of Inspector 730

Inspection Report 730

Follow-up Action on the Report of Inspecting Officer 732

Penalty for Default 732

Note on Strategy on Inspection 732Preparation by Company Secretary to face Inspection 735

Powers of Registrar to call for Information or Explanation 736

Reports of Registrar 738

Seizure of documents by Registrar 738

INVESTIGATION 738

Meaning and Object 738

Kinds of Investigation 739

Investigation of the Affairs of a Company by the Central Government 739

Only Individual to be appointed as Inspector 743

Powers of Inspectors 743

Penalty for Default 745

Inspectors Report 746

Follow-up Action on the Report 746

Expenses of Investigation 748

Preparation by a Company Secretary to face Investigation 748

Investigation of the Ownership of Company 750

Restrictions on Shares and Debentures 751

Saving for disclosure by Legal Advisor or Banker 752

Protection of the Employees of Company during Investigation 752

Lesson Round-Up 753

Glossary 754SELF-TEST QUESTIONS ... 754

Page

LESSON 27

MAJORITY RULE AND MINORITY RIGHTS


SHAREHOLDER'S DEMOCRACY 758

MAJORITY POWERS AND MINORITY RIGHTS 759Powers of Majority ... 759

The Principle of Non-interference (Rule in Foss v. Harbottle) ... 760

Justification and Advantages of the Rule in Foss v. Harbottle ... 761

Exceptions to the Rule in Foss v. Harbottle Protection of Minority Rights andShareholders Remedies ... 762

Actions by Shareholders in Common Law ... 762

Statutory Remedies (under the Companies Act) ... 765


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PREVENTION OF OPPRESSION AND MISMANAGEMENT 766

Prevention of Oppression ... 767

Meaning of Oppression ... 767

Oppression must be of a continuous Nature ... 769

Prejudicial to Public Interest ... 770Winding up Order under Just and Equitable Clause ... 770

Winding up Would Unfairly Prejudice the Petitioners ... 770

Prevention of Mismanagement ... 771

Persons Entitled to Apply ... 772

Powers of the Company Law Board ... 774

Consequences of Termination or Modification of Agreements ... 775

Powers of the Central Government to Prevent Oppression or Mismanagement ... 775

Power to Prevent Changes in the Board ... 778

Lesson Round-Up 778

Glossary 779


LESSON 28

MERGER, DE-MERGER, AMALGAMATION, COMPROMISE AND

ARRANGEMENTSAN OVERVIEW


Concept of Merger and Amalgamation 782

Demerger under the Companies Act, 1956 783

Section 390 provides the interpretation of section 391 and 393 783

Scope of Section 391 784

Sanctioned Arrangement binding on all Concerned Parties 785

Need for Reports from Registrar of Companies 785

When Courts do not sanction a Scheme 786

Page

Explanatory statement to the notice of meeting 787

Powers of the Court to Supervise the Implementation of the Scheme 788

Powers of the Court to Sanction Modification of the Terms of a Scheme 789

Powers of the Court to order a Winding up while considering a Scheme 789

Powers of the Court to make Consequential Orders 789Powers and Duty to acquire Shares of Shareholder dissenting from Scheme orContract Approved by Majority 790

Lesson Round-Up 793

Glossary 793


LESSON 29


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PRODUCER COMPANIES


Genesis 796

Objects of Producer Company 796Formation of Producer Company and its Registration 797

Membership and voting rights of members of Producer Company 798

Benefits to Members 798

Memorandum of Association, Articles of Association 798

Contents of Memorandum of Producer Company 799

Contents of Articles of Association of Producer Company 799

Amendment to Memorandum and Articles 801

Option to Inter-State Co-operative Societies to become Producer Companies 801

Vesting of undertaking in Producer Company 802

Concession, etc. to be deemed to have been granted to Producer Company 802

Provisions in respect of Officers and other employees of Inter-State Co-operative Society 802

Number of Directors 802

Appointment of Director 803

Vacation of Officer by Directors 803

Powers and functions of Board 803

Matters to be transacted at the General Meeting 804

Liability of Directors 804

Committee of Directors 805

Meetings of the Board and Quorum 805

Chief Executive and his functions 805

Secretary of Producer Company 805Quorum of the General Meeting 806

Voting Rights 806

Annual General Meetings [Section 581ZA] 806

Share Capital 807

Transferability of shares and attendant rights 807

Surrender of shares 807

Page

Books of account 807

Internal Audit 808

Donation or Subscription by Producer Company 808General and other reserves 808

Issue of Bonus Shares 809

Loan, etc., to Members [Section 581ZK] 809

Investment in other companies, formation of subsidiaries etc. [Section 581ZL] 809

Amalgamation, merger or division, etc., to form new Producer Companies 809

Disputes 810

Striking off name of Producer Company 810


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Re-conversion of producer company to Inter-State Co-operative Society 810

Lesson Round-Up 810

Glossary 812


LESSON 30

LIMITED LIABILITY PARTNERSHIPS


Introduction 814

Salient Features 814

Distinction between LLP and Partnership 815

Distinction between LLP and Company 816

Comparison of LLP with Private Limited Company 816

Incorporation of Limited Liability Partnership 817

LLP agreement 818Partners and Designated Partners 819

Responsibilities of Designated Partners 821

Partners obligation 821

Advantage and Disadvantages of LLP 822

LLP for the Professionals 822

Valuation of Capital Contribution 822

Maintenance of Books of Account 822

Audit of Limited Liability Partnership Accounts 823

Filing of Annual Returns 823

Electronic Filing of Documents 824

Investigation of the Affairs of LLP 824

Foreign LLP 825

Winding up of LLP 825

Foreign Direct Investment in LLP 826

Lesson Round-Up 827

Glossary 827


Page

LESSON 31

APPLICATION OF COMPANY LAW TO DIFFERENT SECTORS


Application of Companies Act to different sectors 830

Banking Companies 830

Insurance Companies 831

Insurance Regulatory and Development Authority (IRDA) 832


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Exception of Public Financial Institution from Section 211 832

Lesson Round-Up 833


LESSON 32

OFFENCES, PENALTIES AND THEIR COMPOUNDING


Introduction 836

Officer in default 836

Types of Penalty 837

Compounding of offences under Section 621A of Companies Act, 1956 837

Procedure for Compounding 838

List of Sections Imposing Penalty 839

Lesson Round-Up 853Glossary 853


LESSON 33

WINDING UP OF COMPANIES


Introduction 856

Individual Insolvency vs. Corporate Insolvency 856

Winding up and Dissolution 857

Modes of winding up 857

Winding up by the Court 858

Grounds on which a company may be wound up by the Court 858

Who may file petition for winding up 860

Jurisdiction of Court for entertaining winding up petition 861

Voluntary winding up 861

Kinds of voluntary winding up 862

Members voluntary winding up 862

Page

Creditors voluntary winding up 863

Distinction between Members and Creditors voluntary winding up 863

Powers of the Court to Intervene in voluntary winding up 863

Commencement of winding up 864

Lesson Round-Up 865



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LESSON 34

STRIKING OFF NAME OF COMPANIES


Meaning of Striking off 868

When a Company is still in operation 868

Procedure for Striking off a company 869

Fast Track Exit Mode by MCA 870

Restoration of the Companies Name 871

The rights of person aggrieved by the company having been struck off the register 872

Effect of Restoration Order 872

Mode of Sending Letter/Notice 873

Who can apply? 873

Lesson Round-Up 874


LESSON 35

AN INTRODUCTION TO E-GOVERNANCE AND XBRL


Introduction 876

Organisation of ROC offices under MCA-21 876

Front office 876

Virtual front office 876

Physical Front office 877Back office 877

Important features of e-filing of Documents under MCA21 System 877

Director Identification Number 877

Corporate Identity Number 878

Digital Signature Certificate 878

Other Features of e-filing of documents under MCA21 System 879

Mode of payment 879

Service Request Number 880

Payment of stamp duty 880

Categories of e-forms 880

Page

Annual filing 883

Pre-certification of e-forms 884

Terms used while e-fling the e-forms 884

Online Inspection of Documents 885

Introduction of New e-form 68 886


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Key benefits of MCA21 Project 886

Clarifications issued by MCA 886

General structure of an e-form and e-filing process 887

Responsibility of Professionals Digitally Signing the e-forms 889

XBRL 889Benefits of XBRL 890

Lesson Round-Up 891


LESSON 36

SECRETARIAL STANDARDS


Secretarial Standards - issued for the first time in any country- a unique and pioneering effort 894

Secretarial Standard on Meetings of the Board of Directors (SS-1) 894Secretarial Standard on General Meetings (SS-2) 895

Secretarial Standard on Dividend (SS-3) 895

Secretarial Standard on Registers and Records (SS-4) 895

Secretarial Standard on Minutes (SS-5) 895

Secretarial Standard on Transmission of Shares and Debentures (SS-6) 896

Secretarial Standard on Passing of Resolutions by Circulation (SS-7) 896

Secretarial Standard on Affixing of Common Seal (SS-8) 896

Secretarial Standard on Forfeiture of Shares (SS-9) 896

Secretarial Standard on Boards Report (SS-10) 897

Guidance notes 897

Refrencer on Secretarial Audit 897

Procedure for Issuing Secretarial Standards 898

Conclusion 898

TEST PAPERS 2013

Test Paper 1/2013 ... 901

Test Paper 2/2013 ... 903

Test Paper 3/2013 ... 906


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Lesson 1

INTRODUCTION

Company as a business medium

Meaning and definition of term company

Nature and characteristics of a company

Historical Development of Concept ofCorporate Law in India

Development of Company Law in India andEngland

Highlights of Companies Bill, 2012

Companies vis--vis other Forms of business

Concept of Corporate Personality

Lifting of Corporate Veil

Citizenship

Personal liability of directors or members

Illegal association

LEARNING OBJECTIVES

The concept of Company or Corporation in

business is not a new phenomenon, but was dealt

with, in 4th century BC itself during Arthashasthra

days. Its shape got revamped over a period of time

according to the tunes of business dynamics.

Company form of business has certain distinctadvantages over other forms of businesses like Sole

Proprietorship/Partnership etc. It includes features

such as Limited Liability, Perceptual Succession etc.

After reading this lesson, you would be able to

understand the historical development in evolution of

corporate law in India and England, emerging

regulatory aspects including Companies Bill, 2012,

besides dealing with basic characteristics of

company and how it differs from other forms of

businesses.

The great problem of having corporate citizens is that they aren't like the rest of us. As Baron Thurlow in England is

supposed to have said, "They have no soul to save, and they have no body to incarcerate." Robert Monks

LESSON OUTLINE


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1. COMPANY AS A BUSINESS MEDIUM

Meaning of a Company

The word company is derived from the Latin word (Com=with or together; panis =bread), and it originally

referred to an association of persons who took their meals together. In the leisurely past, merchants tookadvantage of festive gatherings, to discuss business matters. Now a days, the business matters have

become more complicated and cannot be discussed at length at festive gatherings. Therefore, the word

company has assumed greater importance. It denotes a joint stock enterprise in which the capital is

contributed by a large number of people. Thus, in popular parlance, a company denotes an association of

like minded persons formed for the purpose of carrying on some business or undertaking. A company is a

corporate body and a legal person having status and personality distinct and separate from that of the

members constituting it.

It is called a body corporate because the persons composing it are made into one body by incorporating it

according to the law and clothing it with legal personality. The word corporation is derived from the Latin

term corpus which means body.Accordingly, corporation is a legal person created by the process other

than natural birth. It is, for this reason, sometimes called artificial legal person. As a legal person, a corporateis capable of enjoying many of the rights and incurring many of the liabilities of a natural person.

The incorporated company owes its existence either to a special Act of Parliament or to company legislation.

The public corporations like Life Insurance Corporation of India, SBI etc., have been brought into existence

through special Acts of Parliament, whereas companies like Tata Steels Ltd., Reliance Industries Limited

have been formed under the Companys Legislation i.e. Companies Act, 1956. The trading partnership which

is governed by Partnership Act is the most apt example of an unincorporated association.

Definition of Company

In the legal sense, a company is an association of both natural and artificial persons incorporated under the

existing law of a country. In terms of the Companies Act, 1956 (Act No. 1 of 1956) [hereinafter referred to as

the Act] a company means a company formed and registered under the Companies Act, 1956 or under theprevious laws relating to companies" [Section 3(1)(ii)]. In common law, a company is a legal person or

legal entity separate from, and capable of surviving beyond the lives of its members. However, an

association formed not for profit also acquires a corporate life and falls within the meaning of a company by

reason of a licence under Section 25(1) of the Act.

But a company is not merely a legal institution. It is rather a legal device for the attainment of any social or

economic end. It is, therefore, a combined political, social, economic and legal institution. Thus, the term

company has been described in many ways. Itis a means of cooperation and organisation in the conduct of

an enterprise. It is an intricate, centralised, economic and administrative structure run by professional

managers who hire capital from the investor(s).

Lord Justice James has defined a company as an association of many persons who contribute money ormoneys worth to a common stock and employ it in some trade or business and who share the profit and loss

arising therefrom. The common stock so contributed is denoted in money and is the capital of the company.

The persons who form it, or to whom it belongs, are members. The proportion of capital to which each

member is entitled is his share.

From the foregoing discussion it is clear that a company has its own corporate and legal personality distinct

and separate from that of its members. A brief description of the various attributes is given here to explain

the nature and characteristics of the company as a corporate body.


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Lesson 1 Introduction 3

NATURE AND CHARACTERISTICS OF A COMPANY

Since a corporate body (i.e. a company) is the creation of law, it is not a human being, it is an artificial person

(i.e. created by law); it is clothed with many rights, obligations, powers and duties prescribed by law; it is

called a person. Being the creation of law, it possesses only the properties conferred upon it by its

Memorandum of Association which is the charter of the company. Within the limits of powers conferred by

the charter, it can do all acts as a natural person may do.

The most striking characteristics of a company are:

(i) Corporate personality

The company incorporated under the Act is vested with a corporate personality quite distinct from individuals

who are its members. Being a separate legal entity it bears its own name and acts under a corporate name.

It has a seal of its own. Its assets are separate and distinct from those of its members. It is also a different

person from the members who compose it. As such it is capable of owning property, incurring debts,

borrowing money, having a bank account, employing people, entering into contracts and suing or being sued

in the same manner as an individual. Its members are its owners but they can be its creditors simultaneously

as it has a separate legal entity. A shareholder cannot be held liable for the acts of the company even if he

holds virtually the entire share capital. The shareholders are not the agents of the company and so they

cannot bind it by their acts. The company does not hold its property as an agent or trustee for its members

and they cannot sue to enforce its rights, nor can they be sued in respect of its liabilities. Thus,

incorporation is the act of forming a legal corporation as a juristic person. A juristic person is in law also

conferred with rights and obligations and is dealt with in accordance with law. In other words, the entity acts

like a natural person but only through a designated person, whose acts are processed within the ambit of law

[Shiromani Gurdwara Prabandhak Committeev. Shri Sam Nath DassAIR 2000 SCW 139].

CASE EXAMPLE

The case of Salomon v.Salomon and Co. Ltd., (1897) A.C. 22

The above case has clearly established the principle that once a company has been validly constituted underCompanies Act, it becomes a legal person distinct from its members and for this purpose it is immaterial

whether any member has a large or small proportion of the shares, and whether he holds those shares

beneficially or as a mere trustee.

In the case, Salomon had, for some years, carried on a prosperous business as a leather merchant and boot

manufacturer. He formed a limited company consisting of himself, his wife, his daughter and his four sons as

the shareholders, all of whom subscribed for 1 share each so that the actual cash paid as capital was 7.

Salomon sold his business (which was perfectly solvent at that time), to the Company formed by him for the

sum of 38,782. The companys nominal capital was 40,000 in 1 shares. In part payment of the purchase

money for the business sold to the company, debentures of the amount of 10,000 secured by a floating

charge on the companys assets were issued to Salomon, who also applied for and received an allotment of

20,000 1 fully paid shares. The remaining amount of 8,782 was paid to Salomon in cash. Salomon wasthe managing director and two of his sons were other directors.

The company soon ran into difficulties and the debentureholders appointed a receiver and the company went

into liquidation. The total assets of the company amounted to 6050, its liabilities were 10,000 secured by

debentures, 8,000 owning to unsecured trade creditors, who claimed the whole of the companys assets,

viz., 6,050, on the ground that, as the company was a mere alias or agent for Salomon, they were entitled

to payment of their debts in priority to debentures. They further pleaded that Salomon, as principal

beneficiary, was ultimately responsible for the debts incurred by his agent or trustee on his behalf.


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Their Lordships of the House of Lords observed:

the company is a different person altogether from the subscribers of the memorandum; and though it may

be that after incorporation the business is precisely the same as before, the same persons are managers,

and the same hands receive the profits, the company is not in law their agent or trustee. The statute enacts

nothing as to the extent or degree of interest which may be held by each of the seven or as to the proportion

of interest, or influence possessed by one or majority of the shareholders over others. There is nothing in theAct requiring that the subscribers to the memorandum should be independent or unconnected, or that they or

any of them should take a substantial interest in the undertakings, or that they should have a mind or will of

their own, or that there should be anything like a balance of power in the constitution of company.

CASE EXAMPLE

The case of Lee v. Lees Air Farming Ltd. (1961) A.C. 12 (P.C.),

The above case illustrates the application of the principles established in Salomons case (supra). In this

case, a company was formed for the purpose of aerial top-dressing. Lee, a qualified pilot, held all but one ofthe shares in the company. He voted himself the managing director and got himself appointed by the articles

as chief pilot at a salary. He was killed in an air crash while working for the company. His widow claimed

compensation for the death of her husband in the course of his employment. The company opposed the

claim on the ground that Lee was not a worker as the same person could not be the employer and the

employee. The Privy Council held that Lee and his company were distinct legal persons which had entered

into contractual relationships under which he became, the chief pilot, a servant of the company. In his

capacity of managing director he could, on behalf of the company, give himself orders in his other capacity of

pilot, and the relationship between himself, as pilot and the company, was that of servant and master. Lee

was a separate person from the company he formed and his widow was held entitled to get the

compensation. In effect the magic of corporate personality enabled him (Lee) to be the master and servant at

the same time and enjoy the advantages of both.

The decision of the Calcutta High Court in Re. Kondoli Tea Co. Ltd., (1886) ILR 13 Cal. 43, recognised the

principle of separate legal entity even much earlier than the decision in Salomon v. Salomon & Co. Ltd. case.

Certain persons transferred a Tea Estate to a company and claimed exemptions from ad valorem duty on the

ground that since they themselves were also the shareholders in the company and, therefore, it was nothing

but a transfer from them in one name to themselves under another name. While rejecting this Calcutta High

Court observed: Thecompany was a separate person, a separate body altogether from the shareholders

and the transfer was as much a conveyance, a transfer of the property, as if the shareholders had been

totally different persons.

CASE EXAMPLENew Horizons Ltd. v. Union of India, (AIR 1994, Delhi 126)

The experience of a shareholder of a company can be regarded as experience of a company. The tender of

the company, New Horizons Ltd., for publication of telephone directory was not accepted by the Tender

Evaluation Committee on the ground that the company had nothing on record to show that it had the

technical experience required to be possessed to qualify for tender. On appeal the rejection of tender was

upheld by the Delhi High Court.


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The judgement of the Delhi High Court was reversed by the Supreme Court which observed as under:

Onceit is held that NHL (New Horizons Ltd.) is a joint venture, as claimed by it in the tender, the experience

of its various constituents namely, TPI (Thomson Press India Ltd.), LMI (Living Media India Ltd.) and WML

(World Media Ltd.) as well as IIPL (Integrated Information Pvt. Ltd.) had to be taken into consideration, if the

Tender Evaluation Committee had adopted the approach of a prudent business man.

Seeing through the veil covering the face of NHL, it will be found that as a result of re-organisation in 1992

the company is functioning as a joint venture wherein the Indian group (TPI, LMI and WML) and Mr. Aroon

Purie hold 60% shares and the Singapore based company (IIPL) hold 40% shares. Both the groups have

contributed towards the resources of the joint venture in the form of machines, equipment and expertise in

the field. The company is in the nature of partnership between the Indian group of companies and Singapore

based company who have jointly undertaken this commercial enterprise wherein they will contribute to the

assets and share the risk. In respect of such a joint venture company, the experience of the company can

only mean the experience of the constituents of the joint venture i.e. the Indian group of companies (TPI, LMI

and WML) and the Singapore based company (IIPL) (New Horizons Ltd. and another v. Union of India (1995)

1 Comp. LJ 100 SC).

Company as a personCompany is an artificial person created by law. It is not a human being but it acts only through human

beings. It is considered as a legal person which can enter into contracts, possess properties in its own name,

sue and can be sued by others etc. It is called an artificial person since it is invisible, intangible, existing only

in the contemplation of law. It is capable of enjoying rights and being subject to duties.

CASE EXAMPLE

Union Bank of Indiav. Khader International Construction and Other [(2001) 42 CLA 296 SC]

In this case, the question which arose before the Court was whether a company is entitled to sue as an

indigent (poor) person under Order 33, Rule 1 of the Civil Procedure Code, 1908. The aforesaid Order

permits persons to file suits under the Code as pauper/indigent persons if they are unable to bear the cost of

litigation. The appellant in this case had objected to the contention of the company which had soughtpermission to sue as an indigent person. The point of contention was that, the appellant being a public

limited company, it was not a person within the purview of Order 33, Rule 1 of the Code and the person

referred to only a natural person and not to other juristic persons. The Supreme Court held that the word

person mentioned in Order 33, Rule 1 of the Civil Procedure Code, 1908, included any company as

association or body of individuals, whether incorporated or not. The Court observed that the word person

had to be given its meaning in the context in which it was used and being a benevolent provision, it was to be

given an extended meaning. Thus a company may also file suit as an indigent person.

REVIEW QUESTIONS

State whether the following statement is Trueor FalseA shareholder cannot be personally held liable for the acts of the company

even if he holds virtually the entire share capital.

True

False

Correct Answer: True


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(ii) Limited Liability

Theprivilege of limited liability for business debts is one of the principal advantages of doing business under

the corporate form of organisation. The company, being a separate person, is the owner of its assets and

bound by its liabilities. The liability of a member as shareholder, extends to contribution to the assets of the

company up to the nominal value of the shares held and not paid by him. Members, even as a whole, are

neither the owners of the companys undertakings, nor liable for its debts. In other words, a shareholder isliable to pay the balance, if any, due on the shares held by him, when called upon to pay and nothing more,

even if the liabilities of the company far exceed its assets. This means that the liability of a member is limited.

For example, if A holds shares of the total nominal value of`1,000 and has already paid`500/- (or 50% of

the value) as part payment at the time of allotment, he cannot be called upon to pay more than `500/-, the

amount remaining unpaid on his shares. If he holds fully-paid shares, he has no further liability to pay even if

the company is declared insolvent. In the case of a company limited by guarantee, the liability of members is

limited to a specified amount mentioned in the memorandum.

Buckley, J. in Re. London and Globe Finance Corporation, (1903) 1 Ch.D. 728 at 731, has observed: The

statutes relating to limited liability have probably done more than any legislation of the last fifty years to further the

commercial prosperity of the country. They have, to the advantage of the investor as well as of the public, allowed

and encouraged aggregation of small sums into large capitals which have been employed in undertakings of

great public utility largely increasing the wealth of the country.

Exceptions to the principle of limited liability

As provided by Section 45 of the Companies Act, 1956, the members become personally liable if themembership falls below prescribed minimum and the business is carried on for more than six monthsthereafter.

It is also provided in the Act vide Section 323 that a limited company may, if so authorised by itsarticles, alter its memorandum by special resolution so as to render the liability of its directors or ofany of its director or manager as unlimited.

Further, where in the course of winding up it appears that any business of the company has beencarried on with intent to defraud creditors, the Court may declare the persons who were knowinglyparties to the transaction as personally liable without limitation of liability for all or any of thedebts/liabilities of the company.

When the company is incorporated as an Unlimited Company under Section 12(2)(c) of the Act.

(iii) Perpetual Succession

An incorporated company never dies except when it is wound up as per law. A company, being a separate

legal person is unaffected by death or departure of any member and remains the same entity, despite total

change in the membership. A companys life is determined by the terms of its Memorandum of Association. It

may be perpetual or it may continue for a specified time to carry on a task or object as laid down in the

Memorandum of Association. Perpetual succession, therefore, means that the membership of a company

may keep changing from time to time, but that does not affect its continuity.

The membership of an incorporated company may change either because one shareholder has transferred

his shares to another or his shares devolve on his legal representatives on his death or he ceases to be a

member under some other provisions of the Companies Act. Thus, perpetual succession denotes the ability

of a company to maintain its existence by the constant succession of new individuals who step into the shoes

of those who cease to be members of the company. Professor L.C.B. Gower rightly mentions, Members


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may come and go, but the company can go on forever. During the war all the members of one private

company, while in general meeting, were killed by a bomb, but the company survived not even a

hydrogen bomb could have destroyed it.

(iv) Separate Property

A company being a legal person and entirely distinct from its members, is capable of owning, enjoying anddisposing of property in its own name. The company is the real person in which all its property is vested, and

by which it is controlled, managed and disposed off. Their Lordships of the Madras High Court in R.F.

Perumal v. H. John Deavin,A.I.R. 1960 Mad. 43 held that no member can claim himself to be the owner of

the companys property during its existence or in its winding-up. A member does not even have an insurable

interest in the property of the company.

CASE EXAMPLE

Mrs. Bacha F. Guzdar v. The Commissioner of Income Tax, Bombay,A.I.R. 1955 S.C. 74

The Supreme Court in this case