Company Law
Frequently Asked Questions on Company Law
Ans. First Period - Prior to the Bubble Act of 1720. - During this period the trading companies were usually incorporated either by the royal charters or by special Act of Parliament. The trade developed much and the need for collective enterprises became greater and, therefore, the unincorporated companies which were generally constituted by contracts came into existence in huge quantity. The business of these companies was generally conducted by managers or directors who were treated as the agents or the members thereof. The members of these unincorporated companies were fully liable for all debts and liabilities of the company. These companies were often used for speculative purposes.
Second Period - From 1720 to 1825. - In 1720 an Act, known as Bubble Act, was enacted to curb the development of unincorporated companies. The passage of the Bubble Act in 1720 marked the second period in the history of company law in England. The Bubble Act was designed to curb the development of unincorporated companies. The Bubble Act made it a criminal offence to act as a corporate body without the sanction of an Act of Parliament or a royal charter, The Bubble Act, Section 18. Since during this period the incorporation of a company was possible by a royal charter or an Act of Parliament, the Govt. had full control over the incorporation of the companies. The Govt. showed reluctance in granting incorporation and, therefore, it became very difficult for an association of persons to get incorporated. Consequently, the businessmen were compelled to find out an alternative device and this they found in the unincorporated companies. Thus the Bubble Act caused a rebirth of the unincorporated companies which it had sought to destroy. Thus, the Bubble Act failed to achieve its object and, therefore, it was repealed by the legislature in 1825.
Third Period - From 1825 to 1844. - The England Act of 1825 which repealed the Bubble Act provided that the members of a company should be liable for debts of the company to an extent the charter might provide. It is notable that the repeal of the Bubble Act was followed by disastrous slumps. Because of the repeal of this Act the companies were once more left free to be formed by contracts and thereby the unincorporated companies once again came into existence in huge quantity. In law an unincorporated company was treated as partnership and was not conferred on legal personality. Consequently, an unincorporated company was not entitled to sue or be sued in its own name. Thus it was very difficult to conduct a suit by or against an unincorporated company. Because of these defects it was felt necessary to check the formation of such companies. For this purpose, two Acts were passed in 1844.
Fourth Period - From 1844 to the present day. - The first Joint Stock Company Act of 1844 provided that all the companies formed after the date of the Act with more than twenty-five members or with shares transferable without the consent of all members must be registered under it. The Act also provided compulsory registration for all insurance companies. The Act laid down that a company might be incorporated on compliance with certain regulations contained in the Act and thus it did away with necessity of special application to the Crown for incorporation. Thus, after the enactment of this Act it was possible to form companies by mere registration under the Act without royal charter or special Act of Parliament.
It is notable that after 1844 a company could be incorporated by registration under the Act of 1844 but the liability of the members was still unlimited. For this, the Act of 1844 was criticised much and ultimately the right to trade with limited liability was granted by the Limited Liability Act of 1855. The Limited Liability Act remained in force a few months as it was repealed by the Joint Stock Companies Act of 1856.
The next important Acts were the Companies Act of 1862 and of 1908 which consolidated the law relating to the companies. Under the Act 1856 only those companies which had minimum number of seven members were allowed to limit the liability of their members but the Act of 1908 extended the principle of limited liability to the private companies and also which had at least two share-holders. Again the Companies Act was revised in 1929. The Act of 1929 for the first time provided that the annual profit and loss accounts must be laid before the share-holders. It made it necessary for the public companies to have at least two directors. Ultimately the Companies Act of 1948 was passed. The Companies Act of 1948 is the present statute in force.
Ans. History of Company Law in India. - The history of Company Law in India began with the Joint Stock Companies Act of 1850 which was enacted on the line of the English Companies Act of 1844. The Act of 1850 provided for the registration of joint stock companies. Every incorporated association of partners contained a provision in its articles that the shares of the said association were transferable without the consent of all partners and also every company established for any literary, scientific and charitable purpose was entitled to registration under this Act. The Act did not confer the privilege of limited liability on the members but it contained several important provisions relating to the formation and management of the joint stock companies. The Act prohibited a company to purchase its own shares or to grant loans to the directors and officers of the company. The Act also provided for the holding of one or more general meetings of members every year and also holding extra-ordinary meetings of members upon the request of seven or more members. It also contained provision relating to the transfer of shares. A company registered under this Act was conferred on legal personality distinct from that of its members. Thus a registered company could sue and be sued in its own name.
Again, in 1857 an Act was passed on the lines of the English Act of 1856. The Act of 1857 allowed incorporation and regulation of joint stock companies and other associations either with or without limited liability of their members. However, under this Act the privilege of limited liability was not extended to insurance and banking companies but even this restriction was removed by another Act passed in 1860 on the lines of the English Act of 1857.
In 1866 another Act repealing all the previous Acts was enacted following the English Act of 1862. The Act of 1866 was also repealed by the Act of 1882 which remained in force upto 1913.
In 1913 following the English Act of 1908 a comprehensive Act was passed in India. The Act of 1913 was repealed by the present Companies Act, 1956 which was enacted on the lines of the English Act of 1948. The present Companies Act (i.e. the Companies Act of 1956) is a consolidating Act and not an amending Act. This Act of 1956 has also been amended several times.
Ans. The word `company' has no strictly technical or legal meaning. In the terms of the Companies Act, a "company means a company formed and registered under" the Companies Act, Section 3(1). In common law a company is a "legal person" or "legal entity" separate from, and capable of surviving beyond the lives of, its members. "Like any juristic person, a company is legally an entity apart from its members, capable of rights and duties of its own and endowed with the potential of perpetual succession." But the "company" is not merely a legal institution. It is rather a legal device for the attainment of any social or economic and to a large extent publicly and socially responsible. It is, therefore, a combined political, social, economic and legal institution. Thus, the term has been variously described.
In a practical way, two or more persons who are desirous of carrying on joint business enterprises, have the choice of either forming a company or a partnership. Partnership is a suitable device for a small scale business which can be financed and managed by a small group of partners who take personal interest and there is mutual trust and confidence among them. But where the enterprise requires a rather greater mobilisation then company is the only choice. Even for a small scale business the choice of a company would be better, as this is the only form of business organisation which offers the privilege of limiting personal liability for business debts.
Ans. Kinds of Companies
1. Chartered Companies :- Under the Indian Companies Act, 1956 there is no provision for the establishment of Chartered Companies. Chartered Companies are the companies which are incorporated under a special charter granted by the King or Queen in exercise of the Royal Power to create a company.
East India Company established in 1600 and Bank of England established in 1694 as Chartered Companies in England are the examples of Chartered Companies.
2. Statutory Companies :- Statutory Companies are those companies which are created by a special Act of Parliament or State Legislature at the Central Government or at the State Government level. Reserve Bank of India, State Bank of India, The Life Insurance Corporation of India, The Industrial Finance Corporation of India and Unit Trust of India are the best examples of Statutory Corporations at the Central Government level. Punjab State Industrial Development Corporation and Punjab Financial Corporation are the best examples at the State Government level. The annual report on the working of these companies is placed on the table of the Parliament or the State Legislature as the case may be.
3. Registered Companies :- Registered Companies are those companies which are registered under the present Indian Companies Act, 1956 or they were registered with some earlier Act before the enactment of the present Companies Act, 1956, i.e. the existing companies at the time of enactment of this Act. These companies are of three types :-
(i) Companies Limited by Shares,
(ii) Companies Limited by Guarantee, and
(iii) Unlimited Companies.
(i) Companies Limited by Shares :- These companies are the most common among the existing companies. The Companies limited by shares are those companies in which the liability of its members is limited to the extent of amount which is unpaid on the shares held by a particular member. It means that where the shares are fully paid up, the liability of the share-holders holding such shares shall be small. But there is one exception to this rule under Section 45 of the Act. Where a company carries on business for more that than 6 months after the number of its members has been reduced below 2 in case of a private company and 7 in case of public company, every such member who knows this fact and carries on the business of that company after 6 months, shall be liable for the debts of the company contracted during that time i.e. after 6 months. Therefore the liability can be enforced during the existence of the company and also during the winding up of the company. A company limited by shares may be a Public Company or a Private Company. (ii) Companies Limited by Guarantee :- The Companies limited by guarantee are those companies in which the liability of the members is limited to a fixed amount which the members undertake to contribute to the assets of the company in case of its winding up. The liability of its members is limited up to the amount fixed by the members themselves. Companies limited by guarantee are not formed for the purpose of profit but for the promotion of art, science, culture, charitable hospitals and schools and sports. These companies may or may not have share capital. (iii) Unlimited Companies :- Unlimited companies are those companies which are incorporated without limited liability. In such companies, every member shall be liable for the debts of the company, irrespective of his interest in the company. An unlimited company may or may not have share capital. It may be a Public Company or a Private Company. Private Company And Public Company - As we have come to know that a Company Limited by Shares, a Company Limited by Guarantee and an Unlimited Company, all may be either a Public Company or a Private Company. Therefore, registered companies may be :-1. Private Company OR
2. Public Company.
1. Private Company Section 3(1) (iii) :- A Private Company is a company having a minimum paid-up Capital of Rs. 1,00,000, which by its Articles of Association :-(a) Restricts the right to transfer its shares;
(b) Limits the number of its members to FIFTY (excluding members in the employment of the company)
(c) Prohibits any invitation to the public to subscribe for any shares or debentures of the company.
(d) Prohibits any invitation or acceptance of deposits from the persons other than its members, directors or their relatives.
A Private Company must have its own Articles of Association which should contain these conditions laid down in Section 3(1)(iii). The Companies Amendment Act, 2000 has inserted a new sub-section (3) in Section 3 of the Act which provides that a private company existing on the commencement of Companies (Amendment) Act, 2000, with a paid-up capital of less than Rs. 1,00,000 shall, within a period of 2 years, enhance its paid-up capital to Rs. 1,00,000. In case of failure the company shall be deemed to be Defunct company under section 560 and its name shall be struck off by the Registrar from Register of companies. 2. Public Company Section 3(1)(iv) :- (a) A Public Company is a company which is not a Private Company. i.e. a company which :-- Does not restrict the right to transfer its shares,
- Does not limit the number of its member,
- Does not prohibit invitation to the public to subscribe for the Shares or Debentures of the company,
- Does not prohibit invitation to the public for deposits.
(b) Has a minimum paid-up capital of Rs. 5,00,000. (c) Subsidiary of a public company. As per Companies Amendment Act, 2000 every public company existing on the commencement of Companies (Amendment) Act, 2000, with a paid-up capital of less than Rs. 5,00,000 shall within a period of 2 years, enhance its paid-up capital to Rs. 5,00,000. In case of failure the company shall be deemed to be Defunct company under section 560 and its name shall be struck off by the Registrar from the register of companies. Shares of only Public Company are dealt in on the recognised Stock Exchanges of the country. A Public Company must have at least seven members and there is no limit on the maximum number of its members. There can be as many members as one can think of. Distinction Between A Public Company And A Private Company - Following are the main points of difference between a Public Company and a Private Company :- 1. Minimum Paid-up Capital :- A company to be incorporated as a Private Company must have a minimum paid-up capital of Rs. 1,00,000, whereas a Public Company must have a minimum paid-up capital of Rs. 5,00,000. 2. Minimum number of members :- Minimum number of members required to form a Private Company is 2, whereas a Public Company requires at least 7 members. 3. Maximum number of members :- Maximum number of members in a Private Company is restricted to 50, there is no restriction of maximum number of members in a Public Company. 4. Transferability of shares :- There is complete restriction on the transferability of the shares of a Private Company through its Articles of Association, whereas there is no restriction on the transferability of the shares of a Public Company. 5. Issue of Prospectus :- A Private Company is prohibited from inviting the public for subscription of its shares, i.e. a Private Company cannot issue Prospectus, whereas a Public Company is free to invite public for subscription i.e., a Public Company can issue a Prospectus. 6. Number of Directors :- A Private Company may have 2 directors to manage the affairs of the company, whereas a Public Company must have at least 3 directors. 7. Consent of the directors :- There is no need to give the consent by the directors of a Private Company, whereas the Directors of a Public Company must file with the Registrar a consent to act as Director of the company. 8. Qualification shares :- The Directors of a Private Company need not sign an undertaking to acquire the qualification shares, whereas the Directors of a Public Company are required to sign an undertaking to acquire the qualification shares of the Public Company. 9. Commencement of Business :- A Private Company can commence its business immediately after its incorporation, whereas a Public Company cannot start its business until a certificate to commencement of business is issued to it. 10. Share Warrants :- A Private Company cannot issue Share Warrants against its fully paid shares, whereas a Public Company can issue Share Warrants against its fully paid up shares. 11. Further issue of shares :- A Private Company need not offer the further issue of shares to its existing share-holders, whereas a Public Company has to offer the further issue of shares to its existing share-holders as right shares. Further issue of shares can only be offered to the general public with the approval of the existing share-holders in the general meeting of the share-holders only. 12. Statutory meeting :- A Private Company has no obligation to call the Statutory Meeting of the members, whereas a Public Company must call its statutory Meeting and file Statutory Report with the Registrar of Companies. 13. Quorum :- The quorum in the case of a Private Company is TWO members present personally, whereas in the case of a Public Company FIVE members must be present personally to constitute quorum. However, the Articles of Association may provide any number of members more than the required under the Act. 14. Managerial remuneration :- Total managerial remuneration in the case of a Public Company cannot exceed 11% of the net profits, and in case of inadequate profits a maximum of Rs. 87,500 can be paid. Whereas these restrictions do not apply on a Private Company. 15. Special privileges :- A Private Company enjoys some special privileges, which are not available to a Public Company.
Ans. Corporate Personality. - From the date of its incorporation a company becomes in law a different person altogether from the members who compose it. Thus an incorporated company has a legal personality distinct from that of its members from the date of its incorporation.
In India the corporate personality of an incorporated company has been recognized since 1866 in In Re Kondoli Tea Ltd., (1966)1 I.L.R. Cal. 43. A company incorporated under the Companies Act is conferred on legal personality distinct from that of its members even if its all the shares are practically controlled by one person i.e. even if it is a one-man company. A company has a legal personality distinct from that of its members and the motives or intentions of the individual share-holders do not affect the existence of the company. It is to be noted that after incorporation a company has an independent corporate personality separate and distinct not only from the entities of its members but also from the entitles of its directors and other managerial personnel. Thus even if two or more than two companies are composed of the same group of share-holders and directors, they cannot be treated as one entity and each of them will have separate and independent legal personality. A managing director may appoint himself as a servant of the company and work in both capacities. Thus company is a legal person distinct from its members. It is capable of enjoying rights and being subject to duties which are not the same as those enjoyed or borne by its members. In Lee's Air Farming Ltd., (1961) A.C. 12 a managing director in that capacity appointed himself as a pilot of the company. While piloting an aircraft of the company in the course of its business, he was killed. He was held to be a worker and his widow recovered compensation under the Workmen's Compensation Act. The magic of corporate personality enables him to be master and servant both at the same time.
Ans. Advantages of the Corporate Personality are as follows :
(1) Separate property. - A company is the beneficial owner of its own property and it does not hold it as trustee for its members. Shareholders should be regarded not as proprietors of the company but merely as suppliers of capital entitled to no more than reasonable return. Because of being a legal person a company is capable of owning, enjoying and disposing of property in its own name and its members are not the private joint owners of its property. A member has no interest in the property of the company and therefore, he cannot insure it, but a share-holder can insure the success of an adventure in which the company is engaged. It is to be noted that a debenture-holder (unlike a share-holder) can insure the property of the company on which his debenture is secured, because a debenture-holder as a secured creditor has an interest in the property of the company. Thus, the doctrine of corporate personality enables the property of the company to be distinguished from that of its members. The shares of a company may be transferred without effecting the property of the company.
(2) Perpetual Succession. - Any change in the membership of a company does not affect the continuity of the company. An incorporated company is an entity and with perpetual succession. The corporate existence of the company is never affected by the insolvency of its individual members.
(3) Transferable Shares. - The doctrine of corporate personality facilitates the transfer of member's interest without the consent of the other members of the company. As Section 82 provides shares or other interest of a member in the company in movable property is transferable in the manner provided by the articles of the company. After the transfer of shares the transferor drops out and the transferee steps into his shoes.
(4) Suing and being sued. - An incorporated company being a legal person can sue and be sued in its own name. Thus, the corporate personality of the company has made the litigation convenient, cheap and easy.
(5) Limited liability. - Since a company is a separate person, its members are neither the owner of its assets nor liable for its debts. Under the Indian Companies Act a company may be registered with limited or unlimited liability. Where a company is registered with unlimited liability each of its members is liable to contribute to the debts of the company to the full extent of his property, but if a company is registered with the limited liability the liability of each of its members will be limited to a certain extent.
Disadvantages of the Corporate Personality are as follows :
After incorporation a company becomes legal person separate and distinct from its members. It has a corporate personality of its own with rights, duties and liabilities separate from those of its individual members. Thus, a veil of incorporation exists between the company and its members and due to this a company is not identified with its members. In order to protect themselves from the liabilities of the company its member often take the shelter of the corporate veil. Sometimes, this corporate veil is used as a vehicle of fraud or evasion of tax and statutory provisions. To prevent unjust and fraudulent acts, it becomes necessary to lift the veil or disregard the corporate personality to look into the realities behind the legal facade and to hold the individual member of the company liable for its acts or liabilities. Besides, the doctrine of corporate personality creates a serious problem of the determination of enemy character during the war and even for this purpose the corporate veil is required to be lifted. The doctrine of lifting the veil has been developed as a device to avoid the hardship of the lifting of corporate personality. The doctrine of lifting the veil may be understood as the identification of a company with its members and when the corporate veil is lifted the individual member may be held liable for its acts or entitled to its property.
In State of U.P. v. Renusagar Power Co., (1992)74 Comp. Cas. 128 (SC), the Court has held that the concept of the lifting the corporate veil is a changing concept. Its frontiers are unlimited. However, it depends primarily on the realities of the situation.
The Deputy Commissioner v. Cherian Transport Corporation, (1992)74 Comp. Cas. 563 (Mad.), the court has held that the company is a legal person distinct from its members. It is capable of enjoying rights and being subject to duties which are not the same as those enjoyed or borne by its members. In certain exceptional cases the court is entitled to lift the veil of corporate entity and to pay regard to the economic realities behind the legal facade.
The corporate veil has been lifted by the courts and legislatures both in the interests of justice, equity and good conscience.
Ans. Corporate Veil can be discussed under two headings :
(a). Lifting the Corporate Veil under Judicial Interpretation:
(1) Determination of character. - The corporate veil has been lifted by the courts to determine the enemy character of a company in time of war. The court will lift the veil for the purpose of finding out the person who in reality control the company's affairs and if the affairs of the company are found to have been controlled by enemy aliens, it will assume enemy character.
A leading case on this issue is Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (Great Britain) Ltd., (1916)2 A.C. 307 (H.L.) In this case the Continental Tyre and Rubber Co. was incorporated in England but all except one of its shares were held by persons resident in Germany. All of the directors were German national resident in Germany. After the outbreak of war between England and Germany in 1914 the Continental Tyre and Rubber Co. brought an action against the Daimler Co. for the payment of trade debt. The Daimler Co. alleged that the Continental Tyre and Rubber Co. was an alien enemy and, therefore, the payment of the trade debt would be a trading with the enemy and it could not bring action in the English court to recover the debt.
(b) Determination of Residence for Tax Purposes. - The determination of the residence of a company is important for tax purpose also because the assessment is usually made on the basis of its residential status. A company is usually considered to be residing at the place where its central management and control is situated. The court may lift the veil to find out the place where its central management and control is situated and generally the place will be that where the meetings of the board of directors are held.
(c) Fraud and evasion of contractual obligation. - The corporate existence cannot be allowed to be used as a vehicle of fraud. Where ever the corporate existence is used for fraudulent purposes as to defraud creditors or to avoid legal obligation, the courts will lift the corporate veil to see the realities behind it and strike down the transaction.
(d) Tax Evasion - Inference of agency to prevent it. - In certain exceptional circumstances a company may be treated as an agent of its members or of another company. Where there is an express agreement to this affect no difficulty arises but where the Courts are asked to infer implied contract between a company and its members or between one company and another company, the difficulty arises. Often the implied contract between one company and another company has been inferred by the Courts in order to prevent tax- evasion. Thus a number of cases may be mentioned where the corporate veil has been lifted and one company has been treated by the Courts as an agent of another company or of its members in order to prevent tax evasion or to protect revenue.
(e) Evasion of Statutory provisions. - Interference of agency to prevent it. - Where the corporate personality is used to avoid the provision of taxing and welfare legislation it becomes duty of the Court to lift the corporate veil to discover the true state of affairs where a subsidiary company was formed by a company to reduce its liability to pay bonus to its workers, the Court disregarded the separate personality of the subsidiary company.
(f) Trustees. - As a general rule a company does not hold its property on trust for its members or for another company but in some exceptional cases the courts avoided the general rule and held a company acting as a trustee for its members or another company. Thus, the concept of trust has also been used by the courts as a device to lift the corporate veil.
II. Lifting the Corporate Veil under Statutory Provisions. - In certain cases the Companies Act also disregards the corporate personality of the company and imposes personal liability on the members or directors of the company. The following are some of the instances where along with the company, its members or directors are also made personalty liable for its debts and liabilities:
(a) Reduction of the number of members. - Section 45 provides, "if at any time the number of a company is reduced, in the case of a public company, below seven or in the case of a private company, below two, and the company carries on business for more than six months while the number is so reduced, every person who is a member of the company during the time that it so carries on business after those six months and is cognizant of the fact that it is carrying on business with fewer than seven members or two members, as the case may be, shall be severally liable for the payment of the whole debts of the company contracted during that time, and may be severally sued therefor". A company does not cease to exist merely because of the reduction in its membership but it may be wound up under section 433.
(b) Mis-description of company. - The officers of the company are generally treated as the agents of the company and, therefore, they are not personally liable for the acts done by them on behalf of the company. But where an officer who contracts or acts on behalf of the company without indicating the name of the company as required by Section 17, as for example the word 'limited' is omitted or the company is described by wrong name, the officer actually doing the work or making the contract will be personally liable for the acts or contracts unless the company agrees to perform them. Where an officer signs or authorises the signature on behalf of the company on bill or exchange, promissory note, cheque, hundi or order for goods or money but the name of the company is not legibly mentioned thereon the officer will be personally liable to the holder for the amount due unless it is duly paid by the company.
(c) Fraudulent trading. - Under Section 542 also the corporate veil has been lifted to prevent fraudulent trading. In this section if in the course of the winding up of a company, it appears that the business of the company has been carried on with intention to defraud creditors of the company or the other persons or for any fraudulent purpose, the court may, if it thinks it proper to do so, declare that the persons who were knowing parties to such conduct of business shall be personally liable for all debts or other liabilities of the company.
(d) Holding and subsidiary company. - As a general rule a subsidiary company has a separate legal personality and its holding or parent company is not liable for its acts. However, in certain cases this general rule has been disregarded under the provisions of the Indian Companies Act to include in its balance-sheet certain particulars relating to its subsidiary companies and thus this section has compelled a holding company to disclose to its members the accounts of its subsidiary companies also. Thus Sections 212-214 require the companies in a group to present a joint picture and treats all companies within a group as part of the same entity and thereby disregards the principle that each subsidiary company has a separate legal personality.
Ans. 1. Private Company Section 3(1)(iii) :- A Private Company is a company having a minimum paid-up Capital of Rs. 1,00,000, which by its Articles of Association :-
(1) Restricts the right to transfer its shares;
(2) Limits the number of its members to FIFTY (Excluding members in the employment of the company)
(3) Prohibits any invitation to the public to subscribe for any shares or debentures of the company.
(4) Prohibits any invitation or acceptance of deposits from the persons other than its members, directors or their relatives.
A Private Company must have its own Articles of Association which should contain these conditions laid down in Section 3(1)(iii). The Companies Amendment Act, 2000 has inserted a new sub-section (3) in Section 3 of the Act which provides that a private company existing on the commencement of Companies (Amendment) Act, 2000, with a paid-up capital of less than Rs. 1,00,000 shall within a period of 2 years, enhance its paid-up capital to Rs. 1,00,000. In case of failure the company shall be deemed to be DEFUNCT company under Section 560 and its name shall be struck off by the Registrar from the Register of companies. 2. Public Company :- According to Section 3(1)(iv) a Public Company means a company : (a) Which is not a Private Company, i.e. it- Does not restrict the right to transfer its shares,
- Does not limit the number of its members,
- Does not prohibit invitation to the public to subscribe for Shares or Debentures of the company,
- Does not prohibit invitation to the public for deposits.
(b) Has a minimum paid-up capital of Rs. 5,00,000. (c) Subsidiary of a public company. As per Companies Amendment Act, 2000 every public company existing on the commencement of Companies (Amendment) Act, 2000, with a paid-up capital of less than Rs. 5,00,000 shall within a period of 2 years, enhance its paid-up capital to Rs. 5,00,000. In case of failure the company shall be deemed to be DEFUNCT company under section 560 and its name shall be struck off by the Registrar from the register of companies. Special Privileges of A Private Company - A Private Company enjoys some special exemptions and privileges over a Public Company, which are as under :- 1. Only TWO members are required to form a Private Company :- A Private Company can be formed by just TWO members, whereas a Public Company requires at least SEVEN members to form the company. 2. A Private Company can be formed with a Capital of Rs. 1,00,000 :- A Private Company can be formed with a capital of just Rs. 1,00,000 only whereas to start a Public Company there is a provision for a minimum paid-up capital of Rs. 5,00,000. 3. A Private Company can issue shares without issuing a Prospectus :- A Private Company need not issue any prospectus and the company can issue shares without issuing the prospectus, whereas a Public Company has to issue a Prospectus before issuing shares to the share-holders. Shares issued by a Public Company without issuing prospectus shall be considered as an irregular allotment. 4. A Private Company can issue shares without receiving Minimum Subscription :- The provision for issue of shares only after receiving minimum subscription is not applicable to a Private Company. It can issue shares without receiving the minimum subscription, whereas a Public Company cannot issue shares until it receives minimum subscription. 5. A Private Company does not require Certificate of Commencement of business :- A Private Company can start its business immediately after its incorporation, i.e. it does not require Certificate of Commencement of business whereas a Public Company cannot start its business until it gets a Certificate of Commencement of business to commence its business. 6. A Private Company need not call Statutory Meeting :- A Private Company need not call the statutory meeting of its share-holders, whereas a Public Company is required to call the statutory meeting of its share-holders and file a statutory report with the Registrar of the companies. 7. A Private Company can issue shares to New Members :- A Private Company need not offer its shares to the existing share-holders, whereas a Public Company has to offer its further issue of shares to its existing share-holders as right shares. A Public Company can offer shares to the general public only with the approval of the existing share-holders in the general meeting. 8. A Private Company requires only TWO Directors :- A Private Company requires only 2 Directors to manage the affairs of the company, whereas a Public Company must have at least 3 directors to manage the affairs. 9. Written Consent of the Directors of Private Company not required :- There is no need to file written consent with the Registrar by the Directors of a Private Company to act as its Director, whereas the Directors of a Public Company must file with the Registrar a consent to act as Director of the company. 10. Directors of a Private Company need not acquire Qualification shares :- The Directors of a Private Company need not sign an undertaking to acquire the qualification shares, whereas the Directors of a Public Company are required to sign an undertaking to acquire the qualification shares of the Public Company. 11. Single member of a Private Company can demand for a Poll :- In a Private Company even a single member can demand a poll, if not more than seven members are personally present, and if more than seven persons are personally present then two members can demand the poll. But this provision is not applicable in a Public Company. 12. Managerial remuneration restrictions does not apply on Private Companies :- Total managerial remuneration in the case of a Public Company cannot exceed 11% of the net profits, and in case of inadequate profits a maximum of Rs. 87,500 can be paid. Whereas these restrictions do not apply on a Private Company. 13. Private Company may issue any kind of Shares :- A Private Company may issue any kind of shares, with such voting rights as it may think fit, whereas a Public Company can issue only either Equity Shares or Preference Shares. 14. Only TWO members constitute a quorum :- Only TWO members are required to be present to constitute quorum, for the meeting of share-holders of a Private Company, whereas FIVE members must be present to constitute quorum for the meeting of share-holders of a Public Company.
Ans. Conversion of A Private Company Into A Public Company :- A Private Company may become a Public Company in the following cases :-
1. Conversion by default (Section 43),
2. Conversion by choice (Section 44).
1. Conversion by default (Section 43) :- Where any default is made by a Private Company in complying with the provisions of Section 3(1)(iii), the Private Company loses the privileges and exemptions and it shall be converted into a Public Company, and this conversion is called conversion by default, where a Private Company makes a default in respect of any of the following provisions :-(1) Private Company transfers the shares of its members, or
(2) Number of members crosses the limit of 50 members, or
(3) Private Company invites public for subscription.
(4) Private Company invites deposits from Public.
Conversion by operation of law which was known as Deemed Public Company under Section 43-A has been deleted with effect from December 13, 2000 by the Companies (Amendment) Act, 2000. A new Section 43A(2A) has been inserted by Companies (Amendment) Act, 2000 to change the character of present Deemed Public Companies to that of a Private Company again. The Existing Deemed Public Companies shall submit their Certificate of Incorporation to the Registrar of Companies. The Registrar shall reconvert these Deemed Public Companies into Private Companies again and add the word `PRIVATE' before the word `Limited' in its name in the certificate. It shall be done by the Registrar within Four Months from the date of application without charging any fees. 2. Conversion by Choice (Section 44) :- Where a Private Company chooses to become a Public Company by choice, it may follow the following procedure :-(1) It shall have to remove all the Four restrictions from its Articles of Association made under Section 3(1)(iii) by passing a special resolution to alter its Articles.
(2) It shall have to comply with all the provisions of the Companies Act, applicable to a Public Company.
(3) Within 30 days of its becoming a Public Company, it shall file with the Registrar a copy of the prospectus or a statement in lieu of prospectus and a copy of the special resolution.
(4) Where the number of members is less than the required number of SEVEN members, it must be raised to seven.
(5) Where the number of directors is less than THREE, it must be raised to at least three.
(6) The word "Private" shall be deleted before word "Limited" in its name.
Conversion of Public Company Into A Private Company :- In the Indian Companies Act, 1956 there is no procedure laid down for the conversion of a Public Company into a Private Company like Section 44, but there is also no restriction on the conversion of a Public Company into a Private Company.(1) A Public Company may be converted into a Private Company by altering the Articles of Association, incorporating the FOUR restrictions as per the Section 3(i)(iii) by passing a special resolution as under :-
(i) Restricts the right to transfer its shares;
(ii) Limits the number of its members to FIFTY (Excluding members in the employment of the company)
(iii) Prohibits any invitation to the public to subscribe for any shares or debentures of the company.
(iv) Prohibits any invitation or acceptance of deposits from the persons other than its members, directors or their relatives.
Some alterations shall have to be made in the Articles relating to the other provisions also, like provision of the issue of share warrants shall have to be deleted as a private company cannot issue share warrants. (2) A copy of the special resolutions passed to alter the Articles of Association of the company shall be filed with Registrar within 30 days of passing the special resolution. (3) Name of the company shall also be changed and the word "Private" shall be added before the word "Limited". (4) A printed copy of the altered Articles of Association shall be filed with the Registrar within one month.
Ans. Government Companies - A Government Company means any company in which at least 51% of the paid up share capital is held by the
(i) Central Government, or
(ii) Any State Government or Governments, or
(iii) Partly by Central Government and partly by one or more State Governments.
State Trading Corporation of India and Minerals & Metals Trading Corporation of India are the examples of Government Companies. The subsidiary of a Government Company is also a Government Company. Rules regarding Government Companies :- Following special rules have been laid down in the Indian Companies Act, 1956 regarding the Government Companies :- 1. Appointment of Auditors :- The appointment of auditors of a Government Company shall be made by the Central Government on the recommendation and advice of the Comptroller and Auditor-General of India. The Comptroller and Auditor-General of India may direct the auditors to audit the accounts of the Government Company in the manner it thinks fit. A test audit or a supplementary audit may also be conducted at its directions. 2. Audit report to be submitted to Comptroller and Auditor-General of India :- The audit report of the Government company shall be submitted by the auditors to the Comptroller and Auditer-General of India, who can comment or supplement on the report, which shall be placed before the Annual General meeting of the Government Company. 3. Audit report to be placed before Parliament :- Where the Central Government is a member of the Government Company it shall cause an annual report on the working and affairs of the company to be prepared within 3 months of its Annual General meeting, which shall be placed before the both houses of Parliament along with the copy of the audit report. Where a State Government is also a member of the company, the State Government shall cause a copy of the above documents to be laid before the State Legislature. But where Central Government is not a member of the company, State Government shall cause the above documents to be prepared within the specified time. 4. Provisions of Section 619 to apply to certain more companies :- The Provisions of Section 619 (Audit of Government Companies) shall apply to a company in which at least 51% of the paid up share capital is held by one or more of the following:-(i) The Central Government and one or more Government Companies;
(ii) Any State Government or Governments and one or more Government Companies;
(iii) The Central Government, one or more State Government and one or more Government Companies;
(iv) The Central Government, and one or more corporations owned or controlled by the Central Government;
(v) The Central Government or one or more State Governments and one or more Corporations owned or controlled by the Central Government;
(vi) One or more Corporations owned or controlled by the Central Government or the State Government;
(vii) More than one Government Companies.
5. Certain provisions of Companies Act not applicable on Government Companies :- The whole of the provisions of Indian Companies Act, 1956 are also applicable on the Government Companies. But the Central Government, by notification in the Official Gazette, may direct that any of the provisions of the Act:-(i) Shall not apply any Government Company; or
(ii) Shall apply to any Government Company with such exceptions, or modifications, as may be specified in the notification.
(Except for the above noted provisions i.e., Rules Regarding Government Companies shall always be applicable on Government Companies).
Ans. Foreign Companies - Foreign Company is a company which is incorporated outside India but which :
(i) HAD a place of business in India before the enactment of the Indian Companies Act, 1956 or
(ii) HAS established a place of business in India after the enactment of the Indian Companies Act, 1956.
Where a minimum of 50% of the paid up share capital of a foreign company is held by one or more Indian Citizens and/or one or more Indian Companies, such company shall have to comply with the provisions of Indian Companies Act as if it were a company incorporated in India. It means that such company shall comply with the rules of a foreign company and shall follow the provisions of Indian Companies Act as well. Where a company is incorporated in India it shall always be an Indian Company even if it is promoted by the promoters of foreign nationality. Rules regarding Foreign Companies :- The Indian Companies Act, 1956 provides for the following rules which are applicable on the Foreign Companies :- 1. Documents to be filed with Registrar :- Within 30 days of establishment of its business place in India, every foreign company shall file the following documents with the Registrar of the companies :-(i) A certified copy of the Charter, Statute, Memorandum and Articles of the Company in English.
(ii) Full address of the Registered Office of the company.
(iii) Full address of the place of business in India.
(iv) A list of Directors and Secretary of the company.
(v) Name/names and address/addresses of person/persons resident in India, who is/are authorised to accept notices on behalf of the company in India.
Where any change is made in the above documents of the company, it shall file a return of alterations with the Registrar. These documents are to be filed by a Foreign Company with the Registrar of Companies at New Delhi and also to the Registrar of the State in which the principal place of business of the company is situated. 2. Accounts of the company :- A foreign company shall prepare its Profit & Loss Account and Balance Sheet of the company every year and file three copies translated in English language with the Registrar of Companies. 3. To exhibit the name of the company :- Every foreign company shall exhibit its name and the country of its incorporation outside every business place in the English language and one of the local languages. The same information shall also be printed on all office letters and documents of the company like bill heads and business letters etc. 4. Issue of Prospectus :- Where a Foreign Company wants to issue a prospectus inviting subscriptions for shares or debentures, its prospectus must contain the following particulars along with the other particulars :-(i) Name of the company & country in which it is incorporated;
(ii) Liability of its members whether limited or unlimited;
(iii) Date of its incorporation and address of its Registered Office;
(iv) Address of its principal business place/s in India;
(v) The instrument defining the constitution of the company.
5. Registration of charges :- The provisions relating to Registration of charges in respect of charges created on property in India shall also be applicable on Foreign Companies. Similarly the provisions of Annual Returns, Inspections of Books of Accounts, Special Audit, Audit of Cost Accounts and Investigations, shall also be applicable on Foreign Companies as they are applicable on a Company incorporated in India. 6. Winding up of the business of Foreign Company :- Where a Foreign Company, which was carrying on its business in India, ceases to carry on its business in India, it may be wound up as an unregistered company under the Indian Companies Act, 1956. 7. Penalty :- Where a Foreign Company fails to comply with the above noted provisions, the company and its officials in default shall be liable for fine up to Rs. 10,000 and Rs. 1000 per day as further fine if the default continues.
Ans. Formation or incorporation of A Company - For the formation of a company, a company passes through the following three stages :-
1. Promotion Stage.
2. Incorporation stage.
3. Commencement of business stage.
1. Promotion Stage :- The stage of conceiving an idea and its working is termed as promotion of a company. The person involved in this task is termed as "Promoter". There are certain important decisions which are taken before the formation of the company. The first important matter to decide could be either :-(1) To start a new business altogether, or
(2) To acquire an already running business, if it is available at considerable attractive terms and conditions. Some time it does happen that some people may start a business without having sufficient knowledge or sufficient experience or sufficient funds and later on they decide to dispose of that business to avoid huge losses. In such a case it may be better to acquire a running business with favourable terms and conditions and it may prove to be a good decision.
The other important matters be decided before the formation of the company could be the decision regarding the product to be produced, the size of the company, the capital involved in the project, the sources of the capital and whether it shall be a Private Company or a Public Company. Any of the above decisions i.e., to start a new business altogether or to acquire an already running business, along with the other matters shall have to be taken by some person or persons who are at the helm of the affairs. They are called PROMOTERS. Where it has been decided to form a Private Company 2 persons and where it has been decided to form a Public Company at least 7 persons shall subscribe their names to a Memorandum of Association and they shall also comply with the other formalities in respect of the registration of the company under the Indian Companies Act, 1956. Documents to be filed with the Registrar :- It is desirable to ascertain from the Registrar (Registrar of the State in which the Registered office of the company shall be situated) of the companies that whether the proposed name of the company shall be approved if registration is sought for a new company with such name. Where already a company with such name is existing, it shall not be allowed by the Registrar, because two companies with the similar name cannot be registered. But if he says yes, because no other company is registered with that name, an application for the registration of the company should be presented to the Registrar of the State in which the Registered office of the company shall be situated. The application along with necessary fee shall be presented along with the following documents :-(1) The Memorandum of Association,
(2) The Articles of Association, if any which should be signed by the subscribers to the Memorandum of Association.
(3) Any agreement with the individual persons who are proposed to be appointed as Managers, Directors or Managing Director of the company.
(4) A statement of the nominal capital of the Company.
(5) A notice of address of the registered office of the company.
(6) A list of the Directors who have agreed to become the first Directors of the company along with their consent to act as Directors and to take up the qualification shares of the company in the case of a public company.
(7) A declaration that all the requirements of the Companies Act have been complied with, shall also be submitted, which shall be signed by one any of the following persons:-
(i) An advocate of the Supreme Court or High Court, or
(ii) An attorney or a pleader entitled to appear before a High Court, or
(iii) A Secretary or a Chartered Accountant in whole time practice in India, who is engaged in the formation of the company, or
(iv) A person named in the Articles as a Director, Manager or Secretary of the company.
Where the Registrar of Companies is satisfied that all the requirements have been complied with, he will register the company and enter the name of the company in the Register of Companies. 2. Incorporation Stage :- Where the Registrar of Companies is satisfied that all the requirements have been complied with, he will register the company, and enter the name of the company in the Register of Companies. When a company is registered and its name is entered in the register of companies, the Registrar will issue a Certificate of Incorporation in which he certifies that the company is incorporated under his hand and in the case of a limited company that the company is a Limited Company. Effects of Registration and Incorporation :- When a company is registered and a Certificate of Incorporation is issued by the Registrar, it shall have the following effects :-(1) The company shall become a Separate Legal Entity from the date mentioned on the Certificate of Incorporation, which is considered as date of birth of the company.
(2) The Company acquires Perpetual Succession. The members may come, members may go, but it goes for ever.
(3) The company becomes the owner of its property and the Promoters or Shareholders have the right to share in the profits of the company.
(4) The company can sue and can be sued in its own name.
Ans. A certificate of incorporation issued by the Registrar in respect of a company is a conclusive evidence that all the requirements of the Companies Act in respect of registration of the company have been complied with and nothing can be inquired about the prior proceedings and therefore the certificate of incorporation cannot be disputed on any grounds whatsoever.
Once a company is registered and it starts its business entering into contracts, it shall be disasterous if the existence of a company is now disputed. This rule is also known as Rule in Peel's Case.
Barned's Banking Company v. Peel- The Memorandum of Association of a proposed company was materially changed without the knowledge and authority of the subscribers after the signatures of the subscribers but before it was filed with the registrar for registration of a company. The company was duly registered and the Registrar issued a Certificate of incorporation. It was objected by one of the subscribers that the registered document i.e. Memorandum of Association was not signed by him, and the provision of the Act had not been complied with. But Lord Cairns observed and held that once the certificate of incorporation is issued, nothing can be inquired into the regularity of the prior proceedings.
Jublee Cotton Mills Ltd. v. Lewis - An application was delivered for the registration of a company along with the necessary documents on 6th of January. On 8th of January the Registrar issued the certificate of incorporation, but it was dated 6th January instead of 8th January, its actual date of issue. Company had already issued some shares on 6th of January to Lewis i.e., before the receipt of the certificate of incorporation. Lewis questioned the validity of the allotment of shares in the court on the ground that shares were issued before the receipt of the certificate of incorporation and therefore the allotment of shares should be declared as void. It was held that the certificate of incorporation is a conclusive evidence that the company had come into existence on 6th January and therefore the allotment was declared as valid.
A certificate of incorporation shall be considered as conclusive evidence to the effect that the company was duly registered even if the signatures to the Memorandum were written by one person or were all forged. Even if the signatories were also infants, the certificate of incorporation shall be considered as conclusive.
Moosa Gulam Arif v. Ebrahim Gulam Arif
A company was registered with a Memorandum of Association which was signed by two adult persons and by one guardian of the five others, making a separate signature for each minor, who were actually minors at that time and they could not become the member of a company due to their inability to make a valid contract. But the Registrar registered the company and issued a certificate of incorporation. The plaintiff contested the validity of the certificate of incorporation and filed a suit that this certificate of incorporation should be declared as void. But the Privy Council held that the certificate of incorporation was conclusive, and no evidence could be admitted against it.
Therefore we can conclude that once the company is registered and a certificate of incorporation is issued, the certificate is conclusive and it can not be disputed on any ground whatsoever.
3. Commencement of Business Stage :- A Private Company can start its business immediately on getting the certificate of incorporation. But a Public Company cannot start the business unless it also obtain a certificate of commencement of business from the Registrar. The Certificate of commencement of business shall be issued by the Registrar under the following circumstances :-
(1) Companies having share capital and had issued Prospectus :- Where a Public company has a share capital and had issued the prospectus inviting the general public to subscribe for the shares or debentures, it cannot be issued a certificate of commencement of business and it cannot commence its business until:-
(i) Shares have been allotted to the extent of the minimum subscription;
(ii) Directors have paid Application and Allotment money on the shares taken by them;
(iii) Shares have been allowed to be dealt with a recognised stock exchange;
(iv) A statutory declaration duly verified by one of the Directors or the Secretary of the company or a Secretary in the whole time practice in the prescribed form that the above conditions have been complied with has been filed with the Registrar.
(2) Companies having share capital and has not issued Prospectus :- Where a Public company has a share capital and has not issued the prospectus inviting the general public to subscribe for the shares or debentures, it cannot be issued a certificate of commencement of business and it cannot commence its business until :-(i) A Statement in lieu of prospectus has been filed with the Registrar;
(ii) Directors have paid Application and Allotment money on the shares taken by them;
(iii) A statutory declaration duly verified by one of the Directors or the Secretary of the company or a Secretary in the whole time practice in the prescribed form that the above conditions have been complied with has been filed with the Registrar.
Where a Public Company fulfills the above noted requirements, the Registrar shall issue a certificate of commencement of business and the company shall become eligible to commence its business. Where a company commences its business in contravention of these provisions i.e., starts business before acquiring certificate of commencement of business, every person responsible for it shall be fined with a fine of Rs. 5,000 for every day during which the default continues.
Ans. Promoter - The word "Promoter" has not been defined in the Companies Act. The person or persons who has actually conceived the idea of formation of the company and who had done preliminary work incidental to the formation of the company are called PROMOTERS. Therefore promoter is a person who brings a company into existence. Where a company is to be promoted with the purchase of an existing business, it is the promoters who negotiate for the purchase of the existing business. A company may have one or more promoters, which may also be an individual or a body corporate i.e. a company. A company may promote another new company.
Main Functions of Promoters
1. To conceive an idea of starting a business and explore its possibilities.
2. To conduct negotiations for the purchase of a business where it is intended to purchase an existing business.
3. To collect requisite number of persons i.e. TWO in case of a Private Company and SEVEN in case of a Public Company, who can sign the Memorandum and Articles of Association of the proposed company.
4. One of the main functions of the promoters is that the promoter settles the name of the proposed company and ascertain that the name shall be accepted by the Registrar of Companies.
5. The promoters settle the details of the company's Memorandum of Association and arranges its printing.
6. The promoters settle either to acquire the Table A as its Articles of Association or to settle the details of its own Articles of Association and arranges its printing.
8. The promoters settle the nomination of Directors, Solicitors, Bankers, Auditors and Secretary and Registered Office of the company.
9. Where a public issue is necessary, the promoters shall issue prospectus.
10. The promoters shall arrange the registration of the company, in fact he is responsible for bringing into existence means to achieve the desired objectives.
Remuneration of promoters :- Unless there is a contract to the contrary, the promoters have no right to get remuneration or compensation from the company for his services in promoting the company. If there is no contract, he is not entitled to any remuneration or compensation. But in practice a promoter may take remuneration for his services in lump-sum from the company or in any of the following ways :-
1. The promoter may sell his own property to the company at a profit provided he makes a disclosure to this effect.
2. The promoter may be given an option to buy a certain number of shares in the company at par.
3. He may take a commission on the shares sold by the company.
Legal Status of Promoter :- The Promoter is neither an agent nor a trustee of the company under incorporation but certain fiduciary duties have been imposed on him under the Companies Act, 1956. The promoter is not an agent because there is no principal born by that time and he is not a trustee because there is no person for whom he is trustee in existence.
Ans. - Fiduciary position of promoters :- The promoter stands in a fiduciary relation to the company which he promotes. The fiduciary position of the promoter may be summed up as under :-
1. Promoter not to make any profit at the cost of the company :- The promoter should not make, directly or indirectly, any profit at the expenses of the company which is being promoted by him. If any secret profits are made by the promoters in violation of this rule, the company may on discovering it compel him to account for and surrender such secret earned profits.
2. Promoter to give benefits of negotiations to the company :- The promoter must give to the company the benefit of any negotiations or contracts into which the promoter enters in respect of the company. Where a promoter purchases some property for the company, he should not sell that property to the company at a price higher than he had given for it. If he does so, the company may, on discovering it, rescind the contract and recover the purchase price from the promoters.
3. Promoters not to make unfair use of position :- The promoter must not make an unfair or unreasonable use of his position and he must take care to avoid any thing which looks like undue influence or fraud on the part of the promoter.
4. Consequences of non-disclosure of interest or profit :- Where a promoter fails to make full disclosure of the profit he has made, the company may sue him for damages for breach of his fiduciary duty and may also recover from him any secret profits. The measure of damages shall be the actual loss suffered by the company as a result of the transaction in question which seems to be doubtful.
Ans. Preliminary or Pre-Incorporation Contracts :- Before the incorporation of the company, the promoters may enter into various contracts to acquire some property, to install Plant & Machinery, to construct building for the company which is yet to be promoted. Such contracts are called preliminary or pre- incorporation contracts. The legal position regarding these contracts is that the company shall not be liable for these contracts, because the promoters cannot bind a company as an agent, which has not yet come into existence.
Therefore the company is not liable for the contracts made by the promoters before its incorporation.
But in most of the cases the companies do honour the contract made by the promoters before its incorporation as gentleman's promise.
Position of the promoters as regards Preliminary Contracts :-
1. The company shall not be bound by the Preliminary Contracts :-
A company after coming into existence shall not be bound by the preliminary contracts even where the company has taken the benefit out of the contracts entered into by the promoters on its behalf.
2. Company also cannot enforce the Preliminary Contracts :-
A company after coming into existence cannot enforce the contracts after its incorporation which were made before its incorporation.
3. Promoters shall be personally liable where a company refuses to adopt and honour the preliminary contracts :-
The promoters shall be personally liable on all contracts made on behalf of the company not yet into existence and where the company refuses to honour them. Such contracts are deemed to have been entered into personally by the promoters.
4. A company cannot ratify a contract entered into by the promoters on its behalf before its incorporation :-
The doctrine of ratification does not apply in the case of companies. It applies only if an agent contracts for a principal who is in existence and the principal is competent to contract at the time of making the contract made by such agent.
Ans. Definition of Memorandum of Association
According to Section 2(28) of the Companies Act, 1956
"Memorandum of Association of a company as originally framed or as altered from time to time in pursuance of any provisions of company law or this Act."
This definition does not give us any idea about the nature of this document and it does not disclose the role of this document in the life of the company. This is one of the important documents which are filed with the Registrar at the time of incorporation of the company. The Memorandum of Association of a company is a fundamental document of the company because it contains fundamental conditions upon which alone the company is allowed to be incorporated under the present Indian Companies Act, 1956. After the registration of the company it becomes a public document. It is also known as the charter of the company which defines the reason for the incorporation of the company and lays down the area of operation of the company. The basic purpose of the Memorandum of Association is to regulate the external affairs of the company with the outsiders who want to do some business with the company. Therefore it defines the scope of operation of the company, beyond which the company shall not be allowed to operate under any circumstances. Objectives or Purposes of Memorandum of Association (i) The share-holders of the company must know that where the company is going to invest their money and what type of risks they are taking in making the investment in the company. (ii) The outsiders must know the area of operation. It is important to note that they are supposed to know the scope of the company and any contract with the company outside its scope shall not be binding on the company. Form of Memorandum Memorandum of Association may be in the Form of Table B, C, D and E in Schedule I as may be applicable for the following companies :-Table - B : For companies limited by shares.
Table - C : For companies limited by guarantee having no share capital.
Table - D : For companies limited by guarantee having share capital.
Table - E : For the unlimited companies.
Contents of Memorandum of Association The Memorandum of Association of every company must contain the following clauses:- 1. Name Clauses :- Following rules should be observed while adopting the name of a company :-(i) The 1st clause of memorandum of association of the company shall state the name of the proposed company. Every company must have its separate name because company is a legal person in the eyes of law separate from every other company and even separate from its members.
(ii) A company should not use or adopt a name which is prohibited under the Emblems and Names (Prevention of Improper use) Act, 1950, such as United Nations, World Health Organisation, Names of any State or the Central Government, Indian National Flag, Mahatama Gandhi, President and Prime Minister of India.
(iii) Every Public Company must write the word "Limited" after its name and every Private Company must write the word "Private Limited" after its name.
(iv) Every company is required to write its name outside its registered office and outside every place of its business in English and in the local language of the State in which they are situated.
2. Registered Office Clause :- Under the Indian Companies Act, 1956 every company shall have its Registered Office from the day on which it commences to carry on its business or 30th day of its incorporation, which ever is earlier. Every company shall state in its Registered Office Clause about the name of the STATE in which the registered office of the company shall be situated. This clause determines the domicile and nationality of a company and the company shall keep its all registers at its registered office and it is the place at which all notices and communications shall be sent. 3. Objects Clause :- The most important clause of memorandum of association is the Objects Clause which actually establishes scope of its operations and the basis for the relationship of the company with the outsiders. On one hand share-holders of the company must know that where the company is going to invest their money and what type of risks they are taking in making the investment in the company, and on the other hand the outsiders must know the area of operation. They are supposed to know the scope of the company and any contract with the company outside its scope shall not be binding on the company and they themselves shall be responsible for the loss suffered by them on account of such contracts. The object clause of the companies which shall be registered under the present Indian Companies Act, 1956 shall consist of :-(i) Main Objects of the Company :- This part of the clause shall state the main objects of the company and objects incidental to the main objects.
(ii) Other Objects :- This part of the clause shall state other objects which are not included in the main objects of the company. In case of non- trading companies and confined to one State, must state the names of other States in which the objects are extended.
4. Capital Clause :- In the case of the companies limited by shares, the company must state the amount of its authorised capital with which the company is being registered. It shall also state the kinds and amount of nominal value of its shares. The company shall not be allowed to issue shares more than its authorised share capital and the shares can be either equity shares and/or preference shares only. But an independent Private Company may issue shares of any kind even with disproportionate rights. 5. Liability Clause :- The Memorandum of Association of the companies limited by shares or guarantee shall also state that the liability of its members is limited. In the case of companies limited by shares, the members are liable to the amount of unpaid on the shares taken by them. Where the shares are fully paid up, the liability of the share-holders shall be NIL. 6. Association Clause or Subscription Clause :- The association clause states :-"We, the several persons whose names and addresses are subscribed are desirous of being formed into a company in pursuance of this Memorandum of Association, and we respectively agree to take the number of shares in the capital of the company written against our respective names."
The Memorandum of Association shall be signed by at least 7 subscribers in the case of a Public Company and at least by 2 members in the case of a Private Company. This should be followed by the names and addresses of the subscribers and the number of shares taken by each one of them. The signatures of each subscriber shall be attested by at least ONE witness. One subscriber cannot attest the signatures of the other subscribers.
Ans. Alteration of Memorandum of Association
For the alteration of Memorandum of Association of a company, there are rigid conditions and procedures which should be followed by every company for the alteration of its memorandum. The idea behind the strict conditions/procedure is to prevent alteration of memorandum too easily.
1. Change of Name Clause :- Name Clause of a company can be altered in the following two ways :-
(1) By Special Resolution :- Where a company wants to change its name it can do so by passing a Special Resolution and it shall also obtain the approval of the Central Government in writing. For the deletion or addition of the word "Private" on conversion of a Private Company into a Public Company or vice- versa only a special resolution is required, passed by 3/4th majority of those voting at a meeting of the share-holders.
(2) By Ordinary Resolution :- Where a company is registered with a name which in the opinion of the Central Government is identical with or resembles the name of an existing company, the company may change its name by :-
(1) On its own, by passing an ordinary resolution with the approval of the Central Government OR
(2) On the directions of Central Government, within 12 months of its registration, Company must change its name within 3 months.
An Ordinary Resolution is passed by a simple majority of 51% of those voting at a meeting of the share-holders. Fresh Certificate of Incorporation Where the company has changed its name, the Registrar shall register its new name in place of the old name in the register of companies and a fresh certificate of incorporation shall be issued to the company. The Registrar shall also make necessary changes in the Memorandum of Association of the Company. 2. Change of Registered Office :-I. When the alteration in the Memorandum of Association is not required, and
II. When the alteration in the Memorandum of Association is required.
I. When the alteration in the Memorandum of Association is not required Under the following two circumstances the alteration in Memorandum of Association is not required :-(i) Change of Registered Office of a company from one place to another place in the same city :- Board of Directors shall pass a resolution and inform the Registrar within 30 days.
(ii) Change of Registered Office from one city to another city within the same State :- A Special Resolution is required to be passed in the general meeting of the share-holders of the company and a copy of the resolution is to be filed with the Registrar within 30 days.
II. When the alteration in the Memorandum of Association is required (i) Change of Registered Office from one State to another State :- Where a company wants to change its registered office from one State to another State, it shall follow the following procedure :-(a) Special Resolution :- A Special Resolution shall be passed by the company in the general meeting of the share-holders and a copy of the resolution shall be sent to the Registrar within 30 days.
(b) Confirmation by Company Law Board :- Confirmation from the Company Law Board is required to change the registered office of the company from one State to another State. The Company Law Board will give the opportunity to the members, creditors and unions of the employees of the company before confirming the resolution passed by the company. The copy of the order passed by the Company Law Board confirming the resolution shall be filed with the Registrar of both the States involved. All the records of the company shall be transferred to the Registrar of the State in which the registered office is shifted by the Registrar of the State from which the registered office was shifted.
3. Change in the Objects Clause :- The objects clause is the most important clause of the Memorandum of Association of a company. Therefore the alteration of the objects clause is subject to many restrictions and limitations which are intended to protect the interests of the share-holders and the creditors of the company. The power of a company to alter its objects clause is subject to two type of limits :-(1) Justification or Substantive Limits, and
(2) Procedural Limits.
(1) Justification or Substantive Limits :- A company intending to change its object clause shall have to give justification for the change in the objects clause, so for as it is necessary for any of the following reasons :-(i) To carry on its business more economically or more efficiently :- The alteration in this clause should not change the main business of the company, but only such changes in the mode or method of conducting the business can be made which will enable it to be carried on more economically and more efficiently.
(ii) To attain its main purposes by new or improved means :- To attain its main objective laid down in the memorandum of association of the company, it may alter its objects clause to include some new or improved means. Therefore, a company cannot alter its main object, but some new or improved means to attain the main object can be introduced.
(iii) To enlarge or change the local area of its operations :- Where a company has defined its area of operation in the memorandum of association and later on it feels that the area of operation may be enlarged or changed in the interest of the company, it may be allowed to alter its memorandum of association.
(iv) To carry on some business which may be advantageously combined with the existing business of the company :- Where a company finds later on that some other business can also be advantageously and conveniently combined with the existing business of the company with little more efforts, the company may be allowed to alter its memorandum of association. Even a company may be allowed to start a new business altogether along with the existing business of the company.
(v) To sell or dispose of the whole or any part of the undertaking of the company :- Where it is in the interest of the company to sell whole or any part of undertaking of the company, alteration in the memorandum of association may be allowed if the company justifies its action.
(vi) To restrict or abandon any of the objects specified in the memorandum of association :- Where it is in the interest of the company to restrict or abandon any of its objectives, the company may be allowed to alter its memorandum of association.
(vii) To amalgamate with any other company :- Where two companies decide to amalgamate in each other and form a strong company it is called amalgamation. The company which is merged with the other is called amalgamated company and the resultant company is called amalgamating company. Amalgamating company may be allowed to alter its memorandum of association to include the objects of the amalgamated company.
(2) Procedural Limits :- To alter the memorandum of association of a company, it shall have to follow the procedural limits as under :-(i) Special Resolution :- The company shall have to call the general meeting of the share-holders and a special resolution shall be passed to alter the memorandum of association of the company. The company shall also mention the reason for the alteration as per the Substantive Limits to justify the alteration.
(ii) Confirmation by the Company Law Board :- The Company Law Board must confirm the alteration in the objects clause of the company on petition. The Company Law Board must be satisfied that sufficient notice has been given to every creditor, debenture holder and to every such person whose interest is likely to be affected by the proposed alteration and their consent has been obtained or his claim must be satisfied.
The Company Law Board shall cause a notice of petition to the Registrar, so that the Registrar is given reasonable opportunity to appear before the Company Law Board and state his objections and suggestions with respect to the proposed alteration. After considering these factors the Company Law Board may make an order confirming the alteration.
(iii) Filing of copies of the Resolution, Confirmation Order of the Company Law Board and altered Memorandum of Association with the Registrar :- A copy of the Special Resolution and Confirmation Order shall be filed with the Registrar of the company within 30 days along with the printed altered copy of the Memorandum of Association. The registrar shall register the new memorandum of association and certify the registration within 30 days of its filing with him.
4. Change in Capital Clause :- The capital clause can be altered only if the Articles of Association of the company so provide. Alteration may be to increase the authorised capital of the company or for the reduction of the capital or Capital structure can also be reorganised.
Ans. Doctrine of Ultra-Vires - The object clause of the Memorandum of Association of a company defines the area of operation of the company i.e. the scope of its activities, beyond which the company cannot do any business even if ALL ITS MEMBERS agree to do so. Any body who want to have any business with the company should go through the memorandum of association of the company before approaching the company for any business to be conducted.
The phrase Ultra-Vires is a Latin Phrase which is made of two separate words, "Ultra" and "Vires". The word ultra means beyond and the word vires means legal powers. Therefore, the term Ultra-Vires means doing of acts which are beyond the legal powers and authority of a company.
Doctrine of Constructive Notice
The doctrine of ultra-vires is based on another maxim which is called Doctrine of Constructive Notice. This doctrine explains that because of the fact that company is an Artificial Person without any body or soul, it is the duty of the outsiders who want to approach a company for any business that they should go through the objects clause of the memorandum of association of the company. A company shall presume that any body who has come to deal with the company has the knowledge of these documents, as he is deemed to have gone through the memorandum of association of the company and has understood them in the same sense in which it has been written. It is called Doctrine of Constructive Notice.
Where an act is ultra-vires the company, it does not create any legal relationship and such acts are absolutely void and even all the members and for share-holders cannot ratify it and make it binding on the company in any manner. Therefore, the result will be that the company shall not be liable for ultra-vires acts, and the outsiders i.e. the person who has made this contract with the company shall bear the whole loss of such transaction, which a company cannot perform at all. This principle is known as Doctrine of Ultra-Vires.
In 1875 the Doctrine of Ultra-vires was first demonstrated by the House of Lords in the following famous case :-
Ashbury Railway Carriage And Iron Company Ltd. vs. Riche. - The Object Clause of the Memorandum of Association of the Ashbury Railway Carriage and Iron Co. Ltd. had the following objectives :-
(i) To make, sell or lend or hire, railway carriages and wagons;
(ii) To carry on the business of mechanical engineers and general contractors;
(iii) To purchase, lease, work and sell mines, minerals, land and buildings.
The Company entered into a contract with Riche for the financing and construction of a railway line in Belgium, where Riche had taken the contract to lay down the railway line. The company had no power to make such contracts as per the memorandum of association of the company. Therefore, the company passed a special resolution to ratify the contract undertaken by the company. Later on the Directors of the company repudiated the contract. The company was sued for the breach of contract. The company took the plea that the contract was ultra-vires the company and therefore company is not liable for it. The House of Lords held that the contract was ultra-vires of the company and hence void, so that not even the whole body of share-holders could ratify it. Lord Cains observed in this case, "It is not a question whether the contract was ever ratified or was not ratified. It was a contract void in the beginning because the company could not enter into this contract, being ultra vires the company. Therefore an ultra-vires contract cannot be ratified and make it binding on the company." The Doctrine of Ultra-vires has been affirmed by the Supreme Court of India in the case of :- Lakshmanswami Mudaliar v. Life Insurance Corporation of India. - The Directors of the company were authorised to make payments towards any charitable object. In accordance with the share-holders resolution, the Directors paid Rs. Two Lakhs to a trust formed for the purpose of promoting technical and business knowledge. But the business of the company was taken over by the Life Insurance Corporation of India. The petition was filed against the company. The payment was held to be ultra-vires. The Court held that the Directors cannot spend the company's money on any charitable object which they might choose. They could spend for the promotion of only such charitable objects as would be useful for the attainment of the company's own objects. The Company's business having been taken over by the Life Insurance Corporation, it had no business left to be promoted now. The Directors were held personally liable to compensate the company. Deuchar v. Gas Light & Coke Co. - The Gas Company was empowered to make and supply gas, manufacture and sell residuals arising from gas making. To convert a particular residual, caustic soda was required. After purchasing caustic soda for a number of years the company decided to manufacture its own caustic soda. When a case for injunction was filed against the company, it was held that manufacturing of caustic soda was not Ultra-vires the Company as it is collateral to the main objective of the company to have its own caustic soda.
Ans. Effects or Consequences of an Ultra-Vires Act - Following are the effects or consequences when a company does an ultra-vires act or transaction, which was not covered by its objects clause of the memorandum of association:-
1. Injunction :- Where a company does anything which is ultra-vires i.e. beyond the scope of its activities covered in the objects clause of its memorandum of association, an injunction order can be passed against such a company restraining the company for such ultra-vires acts. A decided case on this point is :-
London Country Council v. Attorney General - The Council had the power to run the Tramways. But to feed the tramways it started running omnibuses. A case was filed for injunction against the company from running omnibuses. It was held that the running of omnibus was ultra-vires and the Council was restrained from running the omnibus.
2. Breach of Warranty of authority :- The Directors are the agents of the company. It is the duty of the directors as agent to act within the scope of their authority. If a Director goes beyond the scope of his authority, he will be personally liable for breach of warranty of authority. A decided case on this point is :-
Weeks v. Property - A company had already exhausted its borrowing powers. The Directors invited proposals for the issue of debentures. Mr. Weeks offered a loan of 500 pounds, which was accepted and debentures were issued. When the company refused to redeem the debentures on maturity Mr. Weeks filed a suit for recovery of the amount. The loan being ultra-vires was held to be void and it was held that the directors by inserting the advertisement had warranted that they have the power to borrow which actually they had not. Therefore, the Directors were held personally liable for the breach of warranty.
3. Personal liability of the Directors :- It is the duty of the Directors to ensure that the capital of the company is used for the authorised acts of the company. If any part of it is used for any other purpose by the Directors of the company, they shall be personally liable for it and they shall be forced to indemnify the company.
In the case of Lakshmanswami Mudaliar v. Life Insurance Corporation of India, the Directors of the company were authorised to make payments towards any charitable object. In accordance with the share-holders resolution, the Directors paid Rs. Two Lakhs to a trust formed for the purpose of promoting technical and business knowledge. But the business of the company was taken over by the Life Insurance Corporation of India. The petition was filed against the company. The payment was held to be ultra-vires. The Court held that the Directors cannot spend the company's money on any charitable object which they might choose. They could spend for the promotion of only such charitable objects as would be useful for the attainment of the company's business having been taken over by the Life Insurance Corporation, it had no business left to be promoted now. The Directors were held personally liable to compensate the company.
4. Ultra-Vires contracts :- A contract which is ultra-vires of the company is wholly void and shall not be binding on the company which shall have no legal effect. No party can seek specific performance of such a contract. On one hand company is not liable because it is outside its scope and on the other hand the outsider is deemed to have the knowledge of the memorandum of association of the company as per the principle of constructive notice.
5. Ultra-Vires acquired property :- Where the money of the company was spent ultra-vires on purchasing the property for the company, the company can protect its property acquired by such ultra-vires expenditure. An asset of the company though wrongfully acquired, represents the capital of the company.
6. Ultra-Vires lending :- Where a company makes any ultra-vires lending, the money lent can be recovered. The money of the company lent without authority must be recovered for the benefit of the company.
7. Ultra-Vires torts (Civil Wrongs) :- A company is not liable for the torts (civil wrongs) committed by its agents or servants during the course of the transactions which are ultra-vires the company. The company shall be liable for only those torts which are committed within the course of his employment and ultra-vires the company.
Ans. Memorandum of Association
Section 2(28) of the Companies Act defines a Memorandum of Association :
"Memorandum of Association of a company as originally framed or as altered from time to time in pursuance of any provisions of company law or this Act."
The basic purpose of the Memorandum of Association is to regulate the external affairs of the company with the outsiders who want to do some business with the company. Therefore, it defines the scope of operation of the company, beyond which the company shall not be allowed to operate under any circumstances. Articles of Association Section 2(2) of the Companies Act defines a Articles of Association :"Articles of a company means Articles of Association as originally framed or as altered from time to time in pursuance of any provisions of company law or this Act."
This is also one of the important documents which are filed with the Registrar at the time of incorporation of the company. The Articles of Association are the rules, regulations and bye-laws for the internal management of the affairs of the company. The rules and bye-laws are framed with the object of carrying out the aims and objects as set out in the Memorandum of Association of the company. Adoption and application of Table A :- A Public Company limited by shares may adopt its Articles of Association :-1. Table A in full as its Articles of Association.
2. It may frame its own Articles of Association.
3. It may adopt part of Table A.
Companies which must have their own Articles of Association :- The following companies cannot adopt Table A as their Articles and therefore they must have their own Articles of Association :-1. Unlimited Companies,
2. Companies limited by guarantee (Public or Private),
3. Private companies limited by shares.
A Private Company must have its own Articles of Association which should contain FOUR CONDITIONS laid down in Section 3(1)(iii). Contents of Articles - Articles of Association usually contain the rules and bye-laws relating to the following matters of the company :-1. Share Capital, Share Certificate, Rights of share-holders.
2. Allotment of shares and Calls on shares.
3. Payment of Underwriting Commission.
4. Lien on shares.
5. Transfer of shares.
6. Transmission of shares.
7. Forfeiture of shares.
8. Conversion of shares into stock.
9. Issue of share warrants.
10. Alteration of share capital.
11. General Meetings of share-holders.
12. Voting rights, Proxies and Poll in meetings.
13. Directors of the company, their Appointment, Remuneration, Qualification Shares, Powers and proceedings of Board meetings.
14. Appointment of Managers and Secretary.
15. Dividends and Reserves.
16. Accounts and Audit.
17. Capitalisation of Profits.
18. Issue of Bonus Shares.
19. Adoption and execution of Preliminary Contracts.
20. Winding up of the company.
Distinction between Memorandum and Articles of Association - Following are the main points of distinction between Memorandum and Articles of Association :- 1. Memorandum is the Charter of the Company. It contains the fundamental conditions upon which the company is allowed to be incorporated. Whereas the Articles contains rules, regulations and bye-laws for the internal management of the company. 2. Memorandum is subordinate only to the Companies Act. Whereas the Articles is subordinate to the Act and the Memorandum also. 3. Memorandum defines the scope of activities of the company and area of its operations beyond which a company cannot operate. Whereas Articles carries the rules for carrying out the objectives of the company as set out in the memorandum. 4. Every company must have its own Memorandum of Association. Whereas a Public Company is limited by shares it need not have its own Articles of Association and it may adopt Table A. 5. Any act outside the scope of Memorandum is ultra-vires and shall be considered void which cannot be ratified. Whereas anything beyond the scope of Articles shall be irregular which can be ratified by the share-holders and make applicable on the company. 6. Alteration of Memorandum is strictly restricted. Whereas the Articles can be altered by a special resolution provided they do not confront with the provisions of Memorandum. 7. Memorandum is the supreme document of the company. Whereas Articles are subordinate to the Memorandum and they cannot alter the Memorandum.
Ans. Legal effects of Memorandum and Articles - When the Memorandum and the Articles are registered, they bind a company and members to the same extent as if they have been signed by the company and each member. The legal effect of these documents may be discussed in the following relations which bind :-
1. Members to the company.
2. Company to the members.
3. Members to the numbers.
4. Company to the outsiders.
1. Members to the company :- The Memorandum and Articles constitute a binding effect as a contract between the members and the company, the effect of which is that every member is bound to the company as if each member has signed the Memorandum and the Articles. Following is a decided case on this point :- Borland's Trustee v. Steel Bros. & Co. Ltd. - The Articles of Association of Steel Bros. & Co. Ltd. had a rule that if a share-holder of the company becomes bankrupt, his shares should be sold at fair price. Borland was a share-holder of the company who became bankrupt and his trustee claimed that he was not bound by the articles of association of the company and the shares should be handed over to the trustee. The trustee filed a suit against the company. It was held that Articles shows a personal contract between Borland and the company and therefore Borland and his trustee were bound by the Articles of the company. 2. Company to the members :- A company is also bound to the members in the same manner as the members are bound to the company. Therefore a member can obtain an injunction order against the company restraining the company from doing an ultra-vires act. A decided case on this point is given here :- Wood v. Odessa Water Works Co. - The Articles of Odessa Water Works provided that the Directors may declare and pay dividend with the sanction of share-holders at the general meeting of the members. Instead of paying dividend in cash to the share-holders, the directors passed a resolution to issue them debentures for the value of the dividend. A member share-holder Mr. Wood filed a suit against the company to issue injunction orders restraining the company from doing so, as it was not in accordance with the Articles of the company. Injunction orders were passed and the company was not allowed to do so. 3. Members to the members :- Members are also bound inter-se i.e., among themselves. There is no express agreement among the members but there is an implied agreement between the members of the company that they are bound by the Memorandum and Articles. However, such a contract can be enforced through the medium of the company only. A decided case on this point is quoted here :- Rayfield v. Hands - The Articles of a company provided that members wishing to transfer or sell their shares must inform the directors of the company and the directors must take the said shares equally between them as members of the company at fair price. Rayfield informed the directors of his intention to sell the shares but the directors refused to take the shares. He filed a suit against one of the directors as members of the company. The directors argued that Articles did not impose any liability on them as there is no agreement between the members as such. It was held that directors were liable to take the shares as the Articles imposed an obligation on them as members of the company through its Articles. 4. Company to the outsiders :- An outsider means a person who is not a member of the company. An Article does not constitute any binding contract between the company and the outsiders. This is based on the general principle that a stranger to a contract cannot acquire any rights and liabilities under such contract. Therefore an outsider is not entitled to enforce the Articles against the company for any breach of right conferred on him by the articles. Followings are the decided cases on this point :- Eley. v. Positive Govt. Assurance Co. - The Articles of Positive Govt. Assurance Co. provided that Mr. Eley should be the solitictor of the company for life and he shall not be removed from his office except on account of misconduct. Thereafter he also purchased the shares of the company and became the member of the company. After some time Mr. Eley was removed from the office of the solicitor without any misconduct. He sued the company for breach of contract and claimed damages. It was held that Articles did not constitute any contract between the company and the outsiders and therefore he is not entitled to any damages. Pritchand's Case. - The Articles of a company provided that the company on its incorporation shall purchase the property of Pritchand and he shall be appointed as one of the Directors of the company. But when he was not appointed as one of the Directors of the company, he sued the company for breach of contract. It was held that he cannot sue on the basis of Articles as an outsider acquires no rights against the company.
Ans. Doctrine of Constructive Notice of Memorandum And Articles - Memorandum and Articles of Association of a company shall become the public documents on the registration with the Registrar. Every outsider dealing with the company is deemed to have notice of the contents of the Memorandum and Articles.
This doctrine explains that because of the fact that a company is an Artificial Person WITHOUT ANY BODY OR SOUL, it is the duty of the outsiders who want to deal with the company for any business that they should go through the Memorandum and Articles of Association of the company.
Doctrine of constructive notice is the presumption that outsider has read Memorandum and Articles of Association. A company shall presume that any body who has come to deal with the company has the knowledge of these documents, as he is deemed to have gone through the memorandum of association of the company and has understood them in the same sense in which it has been written. It is called Doctrine of Constructive Notice.
However, the Doctrine of constructive notice of Memorandum and Articles of Association is not a positive doctrine but a negative one. It does not operate against the company and it operates against an outsider dealing with the company. It prevents the outsiders from suing the company on the ground that he did not know the Memorandum and Articles of the company against the ultra-vires acts of the company.
Doctrine of Indoor Management - The Doctrine of Indoor Management is the Exception (Limitation) to the Doctrine of Constructive Notice. Whereas the Doctrine of Constructive Notice protects the company against the outsiders, the Doctrine of Indoor Management protects the outsiders against the company in the same manner.
The outsiders dealing with the company are also entitled to presume that as far as the internal proceedings of the company are concerned, every thing has been regularly done, they need not inquire into the regularity of the internal proceedings.
The outsiders can also presume that the company must have followed those proceedings which are required to be followed by the company as per the Memorandum and Articles of Association of the company. The doors of management are closed for the outsiders, that is why it is called Doctrine of Indoor Managements.
This exception of the doctrine of constructive notice is known as "Doctrine of Indoor Management" or the rule in Royal British Bank v. Turquand or just Turquands Rule because it was laid down in this case.
Royal British Bank v. Turouand
The Directors of Royal British Bank had the power under the Articles of Association to issue the Bonds provided they were authorised by a resolution passed by the share-holders at a general meeting of the company. No such resolution was passed by the share-holders of the company and therefore no such power was given to the Directors of the company to issue any bonds. In this case the Directors of Royal British Bank invited applications for the issue of Bonds. Mr. Turquand applied for the bonds and the directors issued bonds to Mr. Turquand.
On maturity of the bonds, the company refused to redeem the bonds on the ground that the act of the company was ultra-vires and, therefore, the company is not liable. It was held that Mr. Turquand could recover the amount of bonds from the company on the ground that he was also entitled to assume that the resolution had been passed by the company, because it is the internal matter of the company for which the doors of the company are closed for the outsiders.
Another case decided on the Doctrine of Indoor Management is that of P.V. Damodara Reddi v. Indian National Agencies Ltd. The facts of this case are as under :-
P.V. Damodara Reddi v. Indian National Agencies Ltd.
The Articles of Association of a company had the provision that further issue of shares of the company shall be offered to the existing share-holders only. However if the directors want to make the allotment to the outsiders they could allot the shares provided they are authorised to do so by a special resolution in the general meeting of the share-holders.
The Company issued shares to P.V. Damodara Reddi without obtaining the consent of the share-holders in the general meeting of the company. The allotment was disputed by the existing share-holders on the ground that the allotment is void for want of resolution. But it was held that P.V. Damodara Reddi is entitled to allotment as he presumed that the Directors of the company in the general meeting must have been authorised and the allotment was held valid.
Ans. Exceptions To The Doctrine of Indoor Management
There are certain cases where the benefit of the Doctrine of Indoor Management is not available to the outsiders. The Doctrine of Indoor Management is subject to the following exceptions :-
1. Knowledge of irregularity :- Where a person dealing with the company has actual knowledge of irregularity as regards the internal management, he shall not be entitled to the benefit of the rule of indoor management. The facts of the case are as under :-
Howard v. Patent Ivory Company.
The Directors of Patent Ivory Company were empowered to borrow up to $ 1,000 and if they wanted to borrow more than this amount they shall have to take the consent of the share-holders in the general meeting of the company. Mr. Howard, one of the Directors of the company himself lent $ 3,500 to the company, in excess of the borrowing power of the company, without getting the resolution passed in the general meeting of the company. When the company refused to refund the money, Mr. Howard filed a suit against the company seeking the advantage of doctrine of indoor management. It was held that the Director himself had the knowledge of the irregularity, therefore the company is liable to $ 1,000 only and not liable for the balance amount in excess of the borrowing power of the company.
2. Negligence :- Where a person could discover the irregularity with a little effort on his part but negligently fails to do so, he shall not be entitled to the benefit of doctrine of indoor management. The facts of the case are under :-
Underwood v. Bank of Liverpool
A Director of the company was the principal share-holder of the company. He used to deposit the cheques favouring the company in his personal account. The Bank used to credit those cheques in his personal account instead of crediting in the account of the company. A suit was filed against Bank by the Company on behalf of the debenture holders. The Bank sought the protection of Doctrine of Indoor Management. It was held that the Bank is not entitled to the benefit of Doctrine of Indoor Management, because the Bank could have discovered the irregularity by little effort that why the cheques were being deposited in the personal account of Director.
3. Forgery :- The Doctrine of Indoor Management does not apply where a person relies upon a forged document. Therefore, the Turquand's rule does not apply on forgery. The facts of the case on this point are as under :-
Ruben v. Great Fingall Consolidated Co.
A share certificate was forged by the Secretary of the company by forging the signatures of two directors and issued to Mr. Ruben under the seal of the company without authority against a sum of money lent to the company. Later on the company refused to register the share certificate. Mr. Ruben filed a suit for damages and sought the benefit of Doctrine of Indoor Management. It was held that he is not entitled to the benefit of Turquand's rule because the rule does not apply in forgery i.e. where the document is forged.
4. Acts outside the apparent authority :- The Doctrine of Indoor Management does not apply where an officer of the company enters into a contract with a third party which is apparently outside his authority and the company shall not be liable for such contracts. The facts of the case on this point are as under :-
Anand Bihari Lal v. Dinshaw & Company
Anand Bihari Lal purchased the property of Dinshaw & Co. from its Accountant, who had apparently no authority to sell it. When the company refused to part with the property, Anand Bihari Lal filed a suit against the company and sought the benefit of Doctrine of Indoor Management. It was held that he is not entitled to the benefit of Doctrine of Indoor Management as the transaction was apparently beyond the scope of authority of the Accountant.
Ans. Prospectus - Prospectus is an invitation document issued by the company at the time of offering the shares or debentures to the public for subscription. A Private Company is prohibited by its Articles of Association from extending any invitation to the public to subscribe to its shares or debentures. Only a Public Limited Company can invite the general public for subscription to its shares or debentures.
It is the Prospectus through which the company invites public to subscribe for its shares or debentures. Prospectus is that document which tells the public and the prospective investors about the future prospects of the company and the purpose for which the capital or funds are required. This information will help the prospective investors to decide as to whether to invest in the shares or debentures of the company or not.
Definition of Prospectus
Section 2(36) of the Indian Companies Act, 1956 defines the Prospectus :
"Prospectus is any document described or issued as a prospectus and includes any notice, 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." Therefore any document inviting deposits from the public for purchasing the shares or debentures of a company is called a Prospectus.
Statement In Lieu of Prospectus However, it is not necessary for a Public Limited Company to issue a Prospectus for the issue of its shares or debentures. Where the Promoters, of the company are confident of raising the required capital or funds from their own sources or privately from their relative and friends by private placement, they need not invite general public for subscription by issuing a Prospectus. In such a case, the company shall have to file a Statement in Lieu of Prospectus with the Registrar of the companies instead of a copy of the Prospectus. Where a Public Limited Company does not invite public to subscribe for its shares or debentures but arranges the required money from its private sources, it need not issue a Prospectus to the public. In this case the promoters are required to prepare a draft prospectus which is known as "Statement in Lieu of Prospectus" which should contain the information required to be disclosed by Schedule III of the Act. A Public Limited Company having share capital, which does not issue a Prospectus, can allot any of its shares or debentures only when at least 3 days before the allotment of shares or debentures, a statement in lieu of Prospectus signed by all the Directors or proposed Directors of the company, has been delivered to the Registrar for registration.
Ans. Rules Regarding Issue of Prospectus - Following are the rules regarding the issue of Prospectus by a Public Limited Company :-
1. Dating of the Prospectus :- A Prospectus issued by or on behalf of a company must be dated and that date is taken as the date of publication of the Prospectus. The Prospectus must be signed by all the Directors in case of an existing company and by the proposed Directors in case it is issued by an intended company.
2. Registration of Prospectus :- Every company shall have to register its Prospectus with the Registrar of the Companies before issuing to the general public. No Prospectus shall be issued by or on behalf of a company or in relation to an intended company, unless a copy of the same has been delivered to the Registrar for registration. It must also specify that necessary documents and consent of the experts have been attached to the copy of the Prospectus delivered.
Every prospectus shall state on the face of it that a copy has been delivered to the Registrar for registration.
The Prospectus must be issued within 90 days of delivering its copy to the Registrar for registration. If the Prospectus is issued after the stipulated period of 90 days, it shall be deemed to be a new Prospectus issued, of which no copy has been delivered to the Registrar i.e., without being registered with the Registrar.
3. Penalty for non-registration of Prospectus :- Where a Public Limited Company has issued a Prospectus without a copy thereof being delivered to the Registrar for registration, or without consent of the experts, the company and every person responsible for the issue of such Prospectus shall be punishable with a fine which may be extended up to Rs. 50,000.
4. Purpose of Registration of a Prospectus :- The basic purpose of the registration of the Prospectus with the Registrar is :-
(i) To keep an authenticated record of the terms and conditions of issue of shares or debentures by the company, and
(ii) To fix the responsibility of the persons issuing that Prospectus. If a Prospectus signed by the Directors is registered with the Registrar, they cannot deny their responsibility merely by saying that the Prospectus was issued without their knowledge or they are ignorant of the contents of the Prospectus.
5. Registration by the Registrar :- If the Registrar is satisfied with the documents and the copy of the Prospectus, that they are in order, he shall register the Prospectus and thereafter the company is allowed to issue the shares or debentures. But under the following circumstances the Registrar must refuse the registration :-1. If the Prospectus is not dated.
2. If it does not contain the consent of the experts in writing whose statement are included in the Prospectus.
3. If it does not contain the consent in writing of the Auditor, Solicitor, Banker or Broker of the company who are named in the Prospectus.
4. If it does not contain the consent in writing of the Directors of the company who are ready to be the First Directors of the company.
6. When the Prospectus is not required to be issued :- Under the following circumstances, a Public Limited Company need not issue a Prospectus :-1. Where the shares or debentures are not offered to the general public.
2. Where the shares or debentures are being offered to the existing share-holders or debenture holders on rights basis.
3. Where an offer is made to the person or persons to enter into an underwriting agreement with respect to the issue of shares or debentures.
4. Where the shares or debentures offered are in all respect uniform with the shares or debentures previously issued and quoted on a recognised stock exchange.
Contents of Prospectus Part - I of Schedule II I. General Information about the company :-(1) Name and address of the registered office of the company.
(2) Main objects of the company.
(3) Name of Stock Exchanges where shares shall be listed.
(4) Date of opening of the issue, Date of closing and Date of earliest closing.
(5) The amount payable on application and allotment.
(6) Declaration about refund of money if minimum subscription of 90% is not received.
(7) Names and addresses of Lead Managers.
(8) Names and addresses of trustee under debenture issue deed.
(9) Rating from CRISIL or any rating agency.
(10) Names and addresses of the Underwriters and the amount underwritten by them.
II. Capital Structure of the Company :-(1) Authorised, Issued, Subscribed and Paid-up Capital.
(2) Size of the present issue giving separate reservation for preferential allotment to the promoters and others.
(3) Paid-up Capital after the present issue of shares and/or after conversion of debentures into shares if any.
III. Terms of the Issue :-(1) How to apply - availability of Prospectus, Application forms and mode of payment.
(2) Terms of payment.
(3) Rights of instrument holders.
IV. Objects and Particulars of issues :-(1) Objects of the present issue.
(2) Total Project Cost.
(3) Means of finance and contribution of Promoters.
V. Company, Management and Project :-(1) History, Main Objects and present business of the company.
(2) Promoters and their background.
(3) Names, Addresses and occupation of the Managing Director, Directors and Managers of the company.
(4) Location of the project and its details.
(5) Nature of Project, Future Prospectus - Expected Capacity Utilisation for the first 3 years of operation of the company.
VI. Particulars in regard to other companies under the same management. VII. Outstanding litigation pertaining to operations and finances of the company. VIII. Management perception of risk factors regarding :-1. Availability of Raw Material.
2. Marketing of Product.
3. Cost or Time Over-run.
4. Foreign Exchange rate fluctuations etc.
Part - II of Schedule II1. Consent of Directors, Auditors, their names and addresses.
2. Financial position of the company for the last 5 years.
3. Minimum subscription.
4. Expenses of the issue.
5. Issue of shares other than cash.
6. Previous Public or Rights Issues during the last 5 years.
7. Details of purchase of property.
8. Revaluation of assets during the last 5 years.
9. Restrictions (if any) on transfer of shares/debentures.
10. Material contracts undertaken by the company.
Ans. Golden Rule for framing Prospectus - While framing a Prospectus of every company, the Golden Rule must be observed, which was laid down in New Brunswick and Canada Rly. & Land Co. v. Muggeridge in 1860. A prospectus is a document which should tell its prospective share- holders as to what the company is and what it proposes to do and what are the future prospects of the business of the company. Therefore, there must be full, frank, and honest disclosure of all material facts in the prospectus and no material facts should be omitted or mis-stated. Omissions, Non-disclosures or Mis-statements in the Prospectus are not in the interest of the company as well. Shareholders and debenture-holders shall be deemed to have been cheated. Therefore, the greatest care is necessary in the preparation of the Prospectus of the company.
The obligation imposed on those responsible for the issue of the prospectus are not only to state accurately all the relevant facts, but also not to omit any fact which may be important for the investors to decide whether to invest in such a company or not. This is known as Golden Rule.
Omission and Mis-Statement in Prospectus - When a company knowingly omits some thing from the prospectus which could effect the investment decision of the share-holders or the debenture-holders, it is called omission. Had the company not omitted such information, i.e. Prospectus had disclosed those facts, the share-holders or debenture-holders would not have decided to invest in the company.
Whereas, when a company knowingly gives a wrong statement in the Prospectus to mislead the prospective investors, it is known as mis-statement which is given in the prospectus with the objective to deceive the prospective share-holders or debenture-holders.
Liability For Mis-Statement In A Prospectus - If there is any Omission or Mis-statement of material facts in the Prospectus there may arise the following two types of liabilities :-
1. Civil Liabilities, and
2. Criminal Liabilities.
1. Civil Liabilities :- Civil Liabilities can be the remedies :-(1) Against the Company, and
(2) Against the Directors, Promoters and Experts
(1) Remedies against the Company :- An investor has the following remedies against the company :-(i) Rescission of Contract, and
(ii) Claim for damages.
(i) Rescission of Contract :- Where a person has contracted to purchase the shares or debentures of a company on the faith of a Prospectus which contained Omission or Mis-statement in the prospectus, he can apply to a law court for the rescission of the contract. The Court may rescind the contract if the following conditions are satisfied :-(a) The statement must be a material mis-representation of fact.
(b) The statement must have induced the share-holders to take the shares or debentures.
(c) The statement must be proved untrue.
(d) The investor must have relied on the statement in the prospectus.
(e) Suit for rescission of the contract must be filed within a reasonable time.
(f) Suit for rescission must be filed before the winding up of the company begins.
(g) The share-holder must surrender the shares with the company.
A decided case on this point is stated here as under :- Greenwood v. Leather Shod Wheel Co. A prospectus was issued by a company manufacturing leather tired wheels for trolleys with the statement, "Orders have already been received from the House of Commons, to be followed by large orders later." In fact the person who used to supply refreshment to the House of Commons had only one trolley with these wheels and no other customer had placed any order to purchase these wheels. Greenwood filed a suit for the rescission of the contract on the ground of mis-statement in the prospectus. It was held that the Prospectus was misleading. Court may refuse to Rescind the contract in the following cases :- (1) Affirmation :- Where a Share-holder has affirmed the allotment by receiving dividend on shares, paying calls on shares, attending the meeting of the share-holders or executing transfer of shares. (2) Unreasonable delay :- Where the share-holder has taken unreasonable period of time to file suit after he has come to know the mis-statement in the prospectus. (3) Commencement of winding up :- Where the share-holder does not exercise the right of rescission and the winding up of the company starts, the right of rescission is lost. (ii) Claim for damages :- Where an investor is induced by a mis- statement or fraudulent statement in a prospectus to take the shares of a company, he can sue the company and claim damages also. The same conditions must be satisfied to claim damages which were required for the rescission of a contract. He must show that he has surrendered the shares and rescinded the contract after discovering the mis-statement in the prospectus of the company. (2) Remedies against the Directors, Promoters and Experts :- The following persons shall be liable to pay compensation for any loss or damages to the investors who have subscribed the shares or debentures on the basis of a prospectus which contained mis-statement :-(i) Directors or Persons who have authorised themselves to be named as Directors in the prospectus.
(ii) Promoters of the company.
(iii) Persons who have authorised the issue of the prospectus.
Following are the liabilities of these persons :-(1) Liability For damages for misrepresentation.
(2) Liability for compensation.
(3) Liability for damages under general law.
(1) Liability for damages for misrepresentation :- According to Section 56 every company must disclose the matters specified in Part-I and Part-II of the Schedule II. Any omission to disclose these matters in the prospectus shall give right to the investors to claim damages for omission and mis-statement in the prospectus. But the share-holder must prove that he has suffered-loss because of such omission. Ordinarily the investor cannot rescind the contract and he can claim damages only. (2) Liability for compensation :- According to Section 62 if a prospectus does contain an un-true statement, and a person has subscribed for the shares or debentures of the company relying on the faith of such statement he shall be entitled to claim damages. But the suit for damages must be filed within 3 years from the date of allotment. Defences available to Directors, Promoters & Experts :- These persons can escape their liabilities on the following grounds :-(i) Where the person has withdrawn his consent before the issue of the prospectus.
(ii) Where the person proves that the prospectus was issued without his knowledge.
(iii) Where the person has given a public notice after the prospectus was issued but before the allotment that he has withdrawn his consent on becoming aware of untrue statement in the prospectus.
(iv) Where the person has reasonable ground to prove that the statement was true and in fact he believed it to be true.
(v) The statement was an extract or copy of the statement made by an expert who has given his consent and has not withdrawn it.
(3) Liability for damages under general law :- Under the general Law of Contract, a share-holder can bring an action for deceit against these persons if there is any fraudulent representation in the prospectus of the company. A person is liable for fraud when the false representation has been made :- Criminal Liabilities :- Where a Prospectus contains any mis-statement, every person who had authorised such issue of the prospectus is punishable with imprisonment which may extend to 2 years or with a fine which may extend to Rs. 50,000 or with both. However he can escape his criminal liability under the following cases :-(i) Where he proves that the statement was immaterial, or
(ii) Where he has reasonable ground to believe that the statement was true when the prospectus was issued.
Where a person knowingly induces the others to subscribe for the shares or debentures of a company, with the intentional dishonest concealment of material facts, he shall be punishable with imprisonment, which may attend to 5 years or with a fine which may extend to Rs. 1,00,000 or with both.
Ans. Definition of a Share under Section 2(46) :- "Share means a share in the share capital of a company and include stock except where a distinction between stock and shares is accepted or implied."
Nature of shares - A share is a movable property which can be transferred, mortgaged or pledged but it is not a Negotiable Instrument.
Sale of Goods Act, 1930 includes shares in the definition of goods. "Goods' means any kind of movable property other than actionable claim and money, and includes "Shares and Stocks."
The evidence of the title of members to the shares held is the share certificate. It is issued by the company under its common seal specifying the number of shares held by a member. Every share certificate issued by a company has to be numbered so that one share certificate may be distinguished from another, with distinctive numbers.
Kinds of Shares
The Companies Act, 1956 permits a company to issue two kinds of shares :
1. Preference shares, and
2. Equity or Ordinary shares.
1. Preference shares [Section 85(1)] Preference Shares are those shares which have a preferential right for :1. Payment of dividend to be paid as a fixed amount or amount calculated at a fixed rate during the life time of the company.
2. Repayment of capital at the time of winding up of the company.
Preference Shares can be classified on the following bases :-I. On the basis of payment of dividend.
II. On the basis of share in surplus profits.
III. On the basis of convertibility into equity shares.
IV. On the basis of redemption.
I. On the basis of payment of dividend With regard to the payment of dividend, preference shares may be :-(a) cumulative or
(b) non-cumulative preference shares.
(a) Cumulative preference shares :- The company pays dividend if it has sufficient profits. In case the company does not have sufficient profits, dividend on cumulative preference shares goes on accumulating till it is fully paid off. Such arrears are carried forward to the next year and are actually paid out of the subsequent years' profits. (b) Non-cumulative preference shares :- Non-cumulative preference shares are those shares on which the arrears of dividend do not accumulate i.e., the holder of non-cumulative preference shares will get a fixed amount or a fixed percentage of dividend out of the profits of each year. If no profits are available in any year and the company does not pay dividend, it gets lapsed and the share-holders cannot claim the unpaid dividend in any subsequent year. II. On the basis of share in surplus profits :- With regard to surplus profits the preference shares may be :-(a) Participating Preference Shares, or
(b) Non-participating Preference Shares.
(a) Participating Preference Shares :- Participating preference shares are those shares which carry the right to share surplus profits left after paying the preference and equity dividends at a fixed rate. For example, if after paying preferential dividend, the equity share-holders have been paid dividend at the rate of 20% and still there is some surplus profit for distribution, the participating preference share-holders and equity share-holders will share the surplus profit in the agreed ratio. (b) Non-participating Preference Shares :- Non-participating preference shares are those shares which do not carry the right to claim a share in the surplus profits left after paying dividend to the equity share-holders or in surplus assets on the winding up of the company. These shares are entitled only to a fixed amount or fixed percentage of dividend. Unless expressly provided for, preference shares are presumed to be non-participating preference shares. III. On the basis of convertibility :- On the basis of convertibility preference shares may be :-(a) Convertible Preference Shares or
(b) Non-convertible Preference Shares.
(a) Convertible Preference Shares :- Convertible preference shares are those preference shares which can be converted into equity shares or ordinary shares after a certain period. (b) Non-convertible Preference Shares :- Non-convertible preference shares are those preference shares which cannot be converted into equity shares. Holders of such shares have no right of conversion into equity shares. Unless otherwise stated, the preference shares are assumed to be non-convertible. IV. On the basis of redemption :- On the basis of redemption the preference shares may be :-(a) Redeemable preference shares, or
(b) Irredeemable Preference shares.
(a) Redeemable preference shares :- A company limited by shares may, if so authorised by its Articles, issue preference shares which are, or at the option of the company are, liable to be redeemed either on a fixed date or after a certain period of time during the life time of the company. (b) Irredeemable Preference shares :- Where there is no provision made while issuing the preference shares for the redemption of the shares in the life time of the company, they are called irredeemable preference shares. 2. Equity shares [Section 85(2)] Equity shares are those shares which are not preference shares. These shares do not enjoy any preferential rights. They rank after the preference shares for the purpose of dividend payment and repayment of capital. The rate of dividend is also generally not fixed and may vary from year to year depending upon the profits of the company. This rate of dividend is recommended by the directors of the company. Sweat Equity Shares under Section 79A(1) :- A public company can issue sweat equity shares to its Directors or Employees at heavy discount or for consideration other than cash for providing know-how or Intellectual Rights. For this purpose an ordinary resolution shall be passed by the share-holders, specifying the persons, to whom shares are to be issued with number and value of such shares. The only condition is that this can be done after one year of the certificate of commencement of business is received by the company.
Ans. - (a) Shares and Stock - Stock is an aggregate of fully paid shares that have been legally consolidated into one mass for the sake of convenience. Such consolidated amount can be divided into fractions of any amount regardless of the face value of shares.
According to Section 94(i)(c).
"A limited company having a share capital, may, if so authorised by its Articles, convert all or any of its fully paid up shares into stock and reconvert that stock into fully paid-up shares of any denomination."
This means that partly paid up shares cannot be converted into stock until they are fully paid. A company can not issue stock directly. First of all it must issue fully paid up shares, then the shares can be converted into stock. After the conversion, notice has to be given to the Registrar within 30 days and the register of members shows the amount of stock held by each member. (b) Difference between Shares and Stock :- 1. Shares have a nominal value and bear distinctive numbers. Whereas stock is the consolidated value of share capital and does not bear any distinctive number. 2. All shares are of equal denomination. Whereas Stock may be of unequal denominations. 3. Shares may or may not be fully paid. Whereas Stock is always fully paid. 4. Shares are issued directly to the public. Whereas Stocks cannot be issued directly to the Public. Only fully paid shares can be converted into stock. 5. Shares cannot be transferred in a fractional amount. Whereas Stock can be a fraction. However, the Articles may provide for the minimum fractional amount of stock which can be transferred. Difference between Preference Shares and Equity Shares:- 1. Preference shares are entitled to a fixed rate of dividend. But the rate of dividend on equity shares varies from year to year and depends upon the amount of profits available. 2. Dividend on preference shares is paid before the payment of dividend on equity shares. 3. Preference shares have a preferential right to the return of capital on the winding up of the company. Only after the payment of capital to the preference share-holders in full, the return of capital is to be made to the equity share-holders. 4. In case the preference shares are cumulative and the company does not pay dividend, the dividend goes on accumulating. No dividend will be paid to the equity share-holders till the arrears of such accumulated dividend are paid to the preference share-holders. 5. The company may issue redeemable preference shares and such shares may be redeemed by the company. But equity shares cannot be redeemed except under a scheme involving reduction of capital. 6. The holders of equity shares can vote on all matters affecting the company whereas preference share-holders can vote only on the resolutions which directly affect the rights attached to their preference shares or when dividend has remained unpaid. 7. A company may issue rights shares or bonus shares to the existing equity share-holders of the company. Whereas the holders of the preference shares are not entitled to any rights or bonus shares.
Ans. - Share Certificate - "Every person whose name is entered as a member in the register of members shall be entitled to receive the Share Certificate for all his shares without any payment within three months after the allotment of shares or within two months after the application for the registration of transfer is lodged with the company."
Every share certificate shall be issued under the common seal of the company and shall specify the number of shares to which it relates and the amount paid thereon. In respect of any shares held jointly by several persons, the company shall not be bound to issue more than one share certificate. Delivery of the share certificate to one of the several joint holders shall be considered as delivery to all the share-holders.
The share certificate must be signed by at least two directors and the secretary. One of the signatures must be made manually.
Time within which the share certificate is to be issued - According to Section 113, every company shall deliver the certificate of all shares, debentures and of share stock or debenture stock within :-
(a) Three months after the allotment of any of its shares, debentures or shares/debenture stock; and
(b) Within two months after the application for the registration of the transfer of any such shares, debentures or shares stock or debenture stock.
If default is made in complying with the provisions the company and every officer of the company who is in default, shall be punishable with fine which may extend to Rs. 5,000 for every day during which the default continues. Purpose and Effects of a share certificate - A certificate, under the common seal of the company, specifying shares held by any member, shall be prima facie evidence of the ownership of the member to such shares. The share certificate is a statement by the company that the person whose name is written on it was the legal owner of the shares specified in it and those shares were paid up to the extent of the amount specified therein. Following are the effects of a Share Certificate :- 1. Estoppel as to the title :- A share certificate is a declaration by the company to the whole world that the person who is named in the share certificate and to whom it is given is a registered share-holder of the company. The company is estopped from denying the title of the registered share-holder. But if an officer of the company, who has no authority to issue share certificates issues a forged certificate, then there is no estoppel i.e. the company will not be liable. Ruben v. Great Fingall Consolidated Mr. Ruben agreed to lend money to the secretary of the company on the security of a share certificate. The secretary signed in his own name on the certificate, affixed the seal of the company and forged the signatures of 2 directors. It was held that the certificate was fraudulently issued and the company was not bound by it. 2. Estoppel as to the payment :- The company is estopped from alleging that the amount stated in the share certificate as having been paid on the shares has not been paid. If the certificate states that the shares are fully paid up, the company is estopped from alleging that they are not fully paid up. It may be noted that such estoppel can be exercised only by a bonafide purchaser.
Ans. A Public Company, limited by shares, if so authorised by its Articles may issue share warrants under its common seal, with the previous approval of the Central Government against its fully paid up shares stating that the bearer of the warrant is entitled to the shares therein specified. It may also be provided by company for the payment of the future dividents on the shares specified in the warrant. The shares specified in the warrant may be transferred by delivery of the warrant as as a negotiable instrument. A private company is not entitled to issue share warrants.
Thus a share warrant can be issued only if the following exist : (1) The issue of share warrant has been authorised by the articles of the company; (2) The previous approval of the Central Government for issuing the share warrant has been obtained; (3) The shares (in respect of which the warrant is to be issued) are fully paid up; (4) The company issuing the share warrant is a public company limited by shares.
Share warrants and entries in the register of members :- When a share warrant is issued, the company shall strike out the name of the member from its register of members, who held the shares now comprising the share warrant. It shall enter in that register the following particulars :-
(a) The fact of the issue of the share warrant.
(b) A statement of the shares specified in the warrant, distinguishing each share by its number.
(c) The date of the issue of the warrant.
If the Articles of Association of a company provides the bearer of the share warrant can surrender the share warrants for cancellation and his name be entered as a member in the register of members. For this, he will have to pay such fee to the company as the Board of Directors may determine. On the surrender of the shares warrant, the date of surrender shall be entered in the register of members. The bearer of the share warrant may, if the Articles of the company so provide, be deemed to be a member of the company. If default is made in complying with the provisions, the company and every officer of the company who is in default, shall be punishable with fine which may extend to Rupees 500, for every day during which the default continues. The bearer of a share warrant cannot sign a requisition for calling a extra- ordinary meeting of the company. He is not entitled to receive any notice of the meetings of the share-holders of the company.
Ans. - Difference between a Share Certificate and a Share Warrant
Following are the main points of difference between a Share Certificate and Share Warrant :-
1. Membership rights :- The holder of a Share Certificate is a registered member of the company whereas the bearer of a share warrant is not a member of the company.
2. Issue Conditions :- A Share Certificate may be issued in respect of partly or fully paid shares, whereas a Share Warrant can be issued only when the shares are fully paid up.
3. Issue Authority :- Only Public Companies are authorised to issue Share Warrants but Share Certificates are issued by both Public and Private Companies.
4. Transferability :- A Share Warrant is transferable by delivery only and no transfer deed and registration of transfer with the company is required. But a Share Certificate is transferred only in pursuance of a transfer deed along with the delivery of the Share Certificate. The transfer of a Share Certificate must be registered with company.
5. Negotiability :- A Share Warrant is a negotiable instrument as it is transferable by delivery only. But a share certificate is not a negotiable instrument.
6. Transfer Fees :- Stamp duty is payable for the transfer of a Share Certificate but no stamp duty is payable in the case of transfer of a Share Warrant.
7. Central Government's permission :- The permission of the Central Government is not necessary for the issue of Share Certificates but Share Warrants can be issued only if allowed by the Articles and with the prior permission of the Central Government.
8. Director's Qualification :- The holder of a Share Warrant does not qualify to become a Director of the company (where qualification shares are required for the Directorship). But the holder of a Share Certificate is so qualified to be a Director of the company.
9. Winding up petition :- The petition for the winding up of the company can be presented by the holders of Share Certificates only. Holders of Shares Warrants cannot do so.
Ans. Application and Allotment of Shares - The term allotment has not been defined in the Companies Act. When a company issues a prospectus inviting the public to subscribe for the shares of the company, it is merely an invitation to an offer and not an offer. An application for shares is an offer by the prospective share-holders to take the shares of the company. Such offers are made on application forms supplied by the company. Where an application is accepted, it is called allotment of shares. Allotment is the acceptance by the company of the offer made by the applicant.
General principles regarding Allotment of Shares - The rules of the Law of Contracts regarding the acceptance of an offer apply to the allotment of shares by a company. The general principles relating to the allotment of shares are as follows :-
1. Allotment must be made by proper authority - Allotment of shares should be made by a resolution of the Board of Directors, or by a committee authorised to allot shares on behalf of the Board if permitted by the Articles.
2. Allotment must be made within a reasonable time - Allotment of shares must be made by the company within a reasonable period of time. What is a reasonable period of time depends upon the circumstances of each case. The applicant can refuse to take the shares if there is undue delay in allotment.
3. Allotment must be absolute and unconditional - Allotment must be absolute and unconditional. If there is any condition in the application for shares, then that condition has to be fulfilled in order to make the allotment effective. In case that condition is not fulfilled, the applicant is not bound to take the shares.
4. Allotment must be communicated - Allotment must be communicated to the applicant so as to make it legally complete. When communication of allotment is made by post, it is complete when the letter of allotment is properly posted, addressed and stamped. Even if the letter is delayed or lost in transit, it will not affect the validity of the allotment.
5. Revocation of the offer - An offer to take shares can be revoked at any time before the allotment is communicated. In the same way, the allotment can be withdrawn by the company before it is communicated to the applicant.
Statutory provisions relating to Application and Allotment of Shares - The Companies Act, 1956 imposes certain restrictions on the allotment of shares and debentures when issued by public companies. However, private companies are not bound by those restrictions. Restrictions on public companies may be discussed under the following two heads :
(i) When no public offer is made.
(ii) When public offer is made.
(i) When no public offer is made :- A public company having share capital, which does not issue a prospectus or has issued a prospectus but has proceeded to allot any of the shares offered to the public for subscription, shall not allot any of its shares or debentures unless a statement in lieu of prospectus has been delivered to the Registrar at least three days before the first allotment of shares or debentures. The statement must be signed by every person who is a director or proposed director of the company or by his agent authorised in writing. Where a company does not follow the above provision, the allotment shall be irregular and voidable at the option of the allottee. Further, the company, and every director of the company who willfully authorises or permits the contravention, shall be punishable with fine which may extend to Rs. 10,000. (ii) When public offer is made :- In the case of a public company which has offered shares or debentures to the public for subscription, the provisions relating to allotment may be studied under the following three heads :-(1) First Allotment of Shares
(2) Subsequent Allotment of Shares
(3) Allotment of Debentures.
(1) First Allotment of Shares - The Companies Act, 1956 imposes the following restrictions which must be complied with by a public company which offers shares to the public for the first time :- (i) Registration of Prospectus :- The company must deliver a copy of the prospectus to the Registrar for registration on or before the date of its publication. It must be signed by every director or proposed director of the company or by his agent authorised in writing. (ii) Minimum Subscription :- No allotment shall be made of any share capital of the company offered to the public for subscription unless the amount stated in the prospectus as the minimum amount has been subscribed. A company making any rights or public issue of shares, debentures etc. must receive a minimum of 90 percent subscription against the entire issue before making an allotment of shares or debentures to the public. If the amount of minimum subscription is not received within 120 days of the issue of the prospectus, all amounts received from the applicants shall be refunded to them immediately without interest. However, if the refund is not made within 130 days after the issue of the prospectus, the directors of the company shall be jointly and severally liable to repay the money with interest @ 6% p.a. for the delayed period. (iii) Application money :- Application money is the amount of money payable with an application for shares. The amount payable on application for each share shall not be less than 5% of the nominal amount of the share. SEBI guidelines prescribe that in the case of mega issues (exceeding Rs. 500 crore), the amount payable with the application or allotment or any one call should not exceed 25% of the value of shares. All moneys received from the applicants for shares shall be deposited and kept deposited in a scheduled bank. If the conditions aforesaid have not been complied with all moneys received from the applicants for shares shall be forthwith repaid to them without interest. If any such money is not so repaid within 130 days after the issue of the prospectus, the directors of the company shall be jointly and severally liable to repay that money with interest at the rate of 6% p.a. from the expiry of 130 days. (iv) Irregular Allotment :- An allotment is irregular if it is made without complying with the condition applicable to a regular allotment. The allotment will be considered as irregular in the following cases :-(a) Where a company has issued a prospectus and allotment is made before receiving the minimum subscription; or
(b) Where shares are allotted before receiving the application money subject to a minimum of 5% of the nominal value of shares; or
(c) Where the application money so received has not been kept deposited in a scheduled bank.
(d) Where the company has not issued a prospectus, and a statement in lieu of prospectus is not filed with the Registrar for registration at least three days before the allotment of shares or debentures.
Effects of an irregular Allotment - Following are the effects of an irregular allotment : (A) Allotment voidable at the option of the allottee - An irregular allotment made by a company to an applicant shall be voidable at the instance of the applicant. But the applicant must exercise such option :-(i) within two months after the holding of the statutory meeting of the company, and not later, or
(ii) in any case where the company is not required to hold statutory meeting or where the allotment is made after the holding of the statutory meeting, within two months after the date of the allotment and not later. Irregular allotment shall be voidable even if the company is in the course of being wound up.
(B) Claim for damages :- If any director of a company knowingly or willfully authorises or permits the irregular allotment, he shall be liable to compensate the company and the allottee respectively for any loss, damages or costs which the company or the allottee may have sustained or incurred thereby. However, if the directors of the company make an irregular allotment of shares beyond their powers, such allotment can be ratified subsequently by the share-holders at the general meeting of the company. (2). Subsequent Allotment of Shares :- When the shares are offered to the public for subscription by a public company in the subsequent years, all statutory provisions regarding the first allotment of shares shall apply. (3) Allotment of Debentures :- The statutory provisions applicable to the first allotment of shares also apply to the issue of debentures except relating to the followings :1. The amount payable on application.
2. Deposit of application money in a scheduled bank.
Ans. Transfer of Shares - According to Section 82, the shares of a company are movable property. The right of a member to transfer his shares is absolute and inherent in the ownership of shares. The Articles may, however, impose certain restrictions on the right to transfer but there can be no absolute prohibition on this right. Also, they cannot be transferred by mere delivery. The transfer of shares can be made only in the manner provided in the Companies Act and the Articles of the company, voluntarily.
1. Who can transfer the Shares :- Ordinarily, shares can be transferred by a person whose name appears in the register of members and who is the holder thereof. A legal representative of a deceased member, although not a member at the time of transfer, can also transfer shares.
2. Instrument of transfer :- Shares may be transferred by executing an instrument of transfer (called the "transfer deed"). The instrument of transfer must be in the prescribed form. Before it is signed by or on behalf of the transferor and before any entry is made therein, it shall be presented to the prescribed authority which shall stamp or otherwise endorse on it the date of presentation.
3. Execution of Transfer Deed :- The instrument of transfer shall be then executed by the transferor and the transferee and completed in all respects. Thereafter it shall be presented for registration within the following time limits :-
I. Where the shares of the company are listed/dealt in/quoted on a recognised stock exchange, the instrument of transfer must be presented for registration at any time before the register of members is closed for the first time after the date of presentation of the instrument to the prescribed authority or within 12 months thereof, whichever is later.
II. Where the shares of the company are not listed on recognised stock exchange, it shall be registered within 2 months of presentation of the instrument to the prescribed authority.
The Central Government may, on an application, extend the period by such further time as it may think fit to avoid any hardship. Blank transfer - Most of the transfers in practice are covered by this provision on the recognised stock exchanges in the country. When transfer is made by means of a blank instrument of transfer, it is called "Blank Transfer". It occurs when an instrument of transfer duly signed and completed by the transferor but leaving the name and signature of the transferee blank is delivered to the transferee along with the relevant share certificate. As a consequence, the shares can be further transferred merely by delivering the blank transfer form and the relevant share certificate. It saves the trouble of having a new transfer form for each transfer. Until such registration, the original transferor continues to be the owner. A blank transfer, however, can remain in circulation only for 12 months after its signing by the prescribed authority or up to the time of closure of the register of members by the company, whichever is later. Transmission of Shares - Transmission of shares means transfer of property or title or ownership in the shares by the operation of law. It implies succession of shares on the death or insolvency of an individual share-holder, or if the member is a limited company, on its going into liquidation. On the death or insolvency of a share-holder, his shares would vest in his legal representative or official receiver. Since this is an involuntary assignment of shares, the property in the shares passes by the operation of law without any instrument of transfer and without consideration. Procedure of Transmission - In the case of transmission, the person entitled to the shares can become a member by making an application to the company and attaching thereto the relevant share certificates and the succession certificate. There is no need to execute a formal "transfer deed" for this purpose. On being satisfied, company deletes the name of the deceased member and enters the name of the legal representative in the Register of Members. Distinction between transmission and transfer of shares 1. Mode :- Transmission of shares takes place by the operation of law i.e. on the death or insolvency or insanity of a member. Whereas the transfer of shares occurs by virtue of a voluntary act of the parties. 2. Consideration :- In transmission of shares the property in the shares passes to another person without any consideration being paid. Whereas in transfer of shares the transfer of property in the shares takes place for a consideration. 3. Transfer Deed :- In Transmission of shares, there is no need to execute a formal transfer deed. Only a letter of request is sufficient. Whereas in transfer of shares execution of a transfer deed in essential. 4. Liabilities :- In transmission of shares the shares continue to be subject to the original liabilities of the deceased. Whereas in transfer of shares the liability of the transferor ceases as soon as the transfer is complete.
Ans. Where a member fails to pay any call on shares on the stipulated date the company may bring an action against him to recover the amount of the call. A notice is sent to the members that if they will not make the payment within stipulated period of time stated in the notice, the company shall proceed to forfeit their shares. Thereafter, if Articles of the company allows, the company may forfeit the shares of the defaulting share-holder. Forfeiture of shares means that the share-holder is deprived of the shares as a penalty for non-payment of any sum due on allotment or calls on such shares. Whatever he has already paid for those shares shall be retained by the company.
Conditions for Forfeiture of Shares - The following conditions should be satisfied for the forfeiture of shares :-
1. Forfeiture should be according to the provisions of the Articles - Shares of a defaulting share-holder can be forfeited only if the Articles clearly provide the power to forfeit the shares. The power of forfeiture is given in regulations 25 to 35 of Table A. If the Articles of a company do not provide for the forfeiture of shares, they can be amended to include such power. Shares can be forfeited only for the non-payment of allotment money or a call. But a call for this purpose, must be properly made.
2. Notice prior to forfeiture must be given - Notice prior to forfeiture must be given to the defaulting share-holder requiring him to pay the call money together with any interests which may have accrued. The notice must give him at least 14 days from the date of the service of the notice to pay the amount due on the shares. It should also clearly state that in the event of non-payment before the time fixed in the notice the shares will be liable to be forfeited. The notice must also specify the amount payable by the share-holder.
3. Resolution of the Board - The notice of forfeiture alone is not enough. The Board of Directors must pass a formal resolution at a Board meeting to forfeit the shares of the defaulting share-holder.
Forfeiture is invalid without proper resolution of the Board. But if a notice states that in the event of default, the shares shall be deemed to have been forfeited, then further resolution is not necessary.
4. Good faith - The power to forfeit shares is in the nature of a trust and must be exercised for the benefit of the company, not for the purpose of assisting the share- holder in getting rid of his shares.
Consequences of forfeiture - A person whose shares have been forfeited shall cease to be a member in respect of the forfeited shares. But he remains liable to pay to the company all the moneys which, on the date of the forfeiture, were payable by him to the company in respect of the shares. The liability of such a person shall cease if and when the company receives the payment in full of all such moneys in respect of the shares.
The share-holder whose shares have been forfeited remains liable as a contributory as the past member of the company if it goes into liquidation within one year of the forfeiting of the shares.
Re-issue of forfeited shares - The forfeited shares become the property of the company and may be sold or otherwise disposed of on such terms and in such manner as the Board thinks fit. To this extent, forfeiture involves a reduction of the paid up capital till the shares are re-issued. The company may re-issue the forfeited shares at any price i.e. the shares may be issued at a discount. But the discount must not exceed the amount already paid by the original owner. It means that the amount already paid upon the shares together with the re-issue price must not be less than the nominal value of the shares. Re-issue of the forfeited shares is sale and not allotment. So no return of allotment is required to be filed with the Registrar in this respect.
In case the defaulting ex-share-holder makes a request for the cancellation of the forfeiture, the Board may cancel such a forfeiture before the sale or disposal of such shares. In that case, after receiving the amount due with interest, his name will be re-entered in the register of members.
Ans. Alteration of capital (Section 94)
If a company is authorised by its Articles, it may alter the Capital Clause of its Memorandum of Association in any of the following ways :-
1. Increase its share capital by issuing New Shares;
2. Consolidate any of its share capital into shares of a larger amount than the existing ones; For Example : 10 shares of Rs. 10 each is converted into one share of Rs. 100.
3. Sub divide its shares into shares of a smaller amount; For Example One share of Rs. 100 is converted into 10 shares of Rs. 10 each.
4. Convert all or any of its fully paid up shares into stock, and reconvert that stock into fully paid up shares of any denomination;
5. Cancel the shares which have not been taken up and diminish the amount of the share capital by the value of the shares so cancelled. However, such cancellation of shares as aforesaid will not be a reduction of capital under Section 100 as these shares have never been allotted to anyone.
Ordinary Resolution - Alteration in the capital clause can be done by an ordinary resolution in a general meeting and it does not require any confirmation by court. A notice must be given to the Registrar within 30 days of such alteration. He shall record the notice and make necessary alterations in the company's Memorandum and Articles of Association. In case of default, the company and every officer of the company who is in default shall be liable to a fine up to Rs. 500 for every day during which the default continues. Where the Articles of Association does not allow the company to alter its share capital clause, the Articles of Association must be amended by a special resolution before the power to alter the capital clause can be exercised by the company. Reduction of share capital - Reduction of share capital means reduction of the issued, subscribed and paid up capital of the company. Reduction of capital cannot be permitted unless :-I. It is under the provisions of the Act where no sanction of the court is required.
II. It is according to the procedure laid down under Sections 100 to 103 where the consent of the court is required.
I. Reduction of capital without the sanction of the court The reduction of share capital of a company without the sanction of the court can take place in any of the following manners:- 1. Forfeiture of shares - The company may, if authorised by its Articles, forfeit shares for non- payment of allotment money or calls. If the forfeited shares are not re- issued, it will result in the reduction of capital. 2. Surrender of shares - Surrender of partly paid up shares may be accepted by a company. This again will result in a reduction in its capital. 3. Cancellation of shares - The company may, if so authorised by its Articles, cancel shares which have not been subscribed or agreed to be subscribed by any person and diminish the amount of its share capital by the amount of the shares so cancelled. 4. Purchase of shares by the company - Shares of any member of the company may be purchased by the company with the permission of the Company Law Board. Such a step will have the effect of reducing the share capital of the company. 5. Redemption of redeemable preference shares - The company may redeem redeemable preference shares in accordance with the provisions of Sec. 80, and so reduce its capital. II. Reduction of capital with the consent of the court A company limited by shares or a company limited by guarantee and having share capital may reduce its share capital by a special resolution if so authorised by its Articles. Such reduction is subject to confirmation by the court. Reduction can be done in any of the following three ways : 1. Extinguishing the liability :- Extinguishing or reducing the liability of any of its shares in respect of the share capital not yet paid up. Examples :- Where the shares are of the face value of the Rs. 100 each with Rs. 75 as paid up value, the company may convert them into Rs. 75 fully paid up shares and thus relieve the share-holder of their liability on the uncalled capital of Rs. 25 per share. 2. Cancellation of Paid-up value :- Cancelling the paid up share capital which has been lost or is not represented by the available assets. This mode of reduction of capital is most common as it brings reality into the balance sheet position. Examples :- Where the company has shares of the paid up value of Rs. 10 may reduce the value of Rs. 10 each fully paid up shares to Rs. 5 per share. If the company extinguishes the liability on these shares, Rs. 10 shares will become shares of Rs. 5 each fully paid up. 3. Paying off the paid-up share capital :- Paying off any paid up share capital which is in excess of the wants of the company. Example :- A company has an equity capital consisting of Rs. 100 shares fully paid up. The capital is in excess of the requirements of the company. The company returns Rs. 25 per share to the share-holders. If the company extinguishes their liability on these shares, the Rs. 100 shares will become shares of Rs. 75 each fully paid up. Procedure for reduction of share capital [Sections 100 to 103] Procedure for the reduction of the share capital is explained below :- 1. Special resolution (Section 100) - The Companies Act provides that a company limited by shares or by guarantee and having a share capital may by a special resolution reduce its share capital. The power to reduce the share capital must be granted by the Articles of Association. If the articles do not grant such power, they must be altered by a special resolution giving such power. It will not be sufficient that the Memorandum of Association gives such power. 2. Application to the court (Section 101) - After passing the special resolution for the reduction of the capital, the company is required to apply to the court by way of a petition for the confirmation of the resolution. The main duty of the court is to look after the interests of the creditors and different classes of share-holders. If due to the reduction of capital, there is a decrease in the liability of the share-holders in respect of the uncalled capital or there is repayment to the share-holders of any paid up share capital, the interests of the creditors are likely to be affected. In such a case, the creditors can object to the reduction. Only such creditors are entitled to object to whom the company owes a debt which would have been payable on the winding up of the company. Of such creditors who are entitled to object, the court must settle a list. If all the creditors do not consent to the reduction, the court may dispense with the consent of the disintended creditors provided that their debts are paid or secured to the satisfaction of the court. If the court is satisfied, it may make an order confirming the reduction of capital subject to such terms and conditions as it thinks fit. In its order, the court may also direct that the company will add the words "and reduced" at the end of its name for a specified period and publish the reasons for the reduction. The fact of the court's order confirming the reduction has to be registered with the Registrar. 3. Interests of the share-holders - It is also the duty of the court to look after the interests of the share- holders. The scheme of reduction should be reasonable and fair among all the classes of share-holders in the company. When there is only one class of shares in the capital of the company and all the share-holders are to bear the reduction proportionately, the scheme of reduction is reasonable and fair and should be confirmed. The court's job is not easy when there are two classes of share-holders and the scheme, of reduction affects them differently. In such a case, it is the duty of the court to confirm that the scheme of reduction is fair and equitable between the equity and preference share-holders. 4. Registration of order and minutes of reduction with the Registrar - The order of the court confirming the reduction along with the minutes approved by the court shall be produced before the Registrar and a certified copy thereof shall be submitted for registration. The Registrar, on being satisfied, will issue a certificate of registration which will be a conclusive evidence that the requirements of the Act have been complied with and that the share capital is now as set out in the minutes. The Memorandum of Association will also be altered accordingly.
Ans. Further issue of capital (Rights shares) Section 94(1)(a)
A company limited by shares may, if so authorised by its Articles, increase its share capital by such amount as it thinks fit by issuing new shares. The directors may issue the new shares in a manner which would increase their own majority, to the prejudice of the interests of the existing share-holders.
Section 81 safeguards the interests of the existing share-holders by laying down that the new shares should be offered to the existing share-holders in proposition to their holdings, before they are offered to the outsiders. This right of the existing share-holders is known as the "share-holders' right of pre-emption".
Further shares can be issued in the following two manners :-
(I). By allotment of New Shares.
(II). By conversion of Debentures or Loans into Shares.
(I). By allotment of New Shares :- Provisions regarding issue of New Shares are as under :- 1. Shareholders pre-emptive right (Section 81) - If a Public Company limited by shares, wishes to issue further shares within the limit of the nominal capital, at any time, after the expiry of two years from the date of the company's incorporation or after one year from the date of the first allotment of shares, whichever is earlier, such shares shall be offered to the existing share-holders of the company in proportion to the paid up capital on those shares. So, it is clear that Section 81 is not effective when shares are issued within two years of the incorporation of a company or within one year after the date of the first allotment of shares whichever is earlier. Such an increase in the subscribed capital shall be offered to the existing equity share-holders in proportion, as nearly as the circumstances admit, to the capital paid up on those shares on that date. 1. To prevent discrimination among share-holders by ensuring equitable distribution of the new shares. 2. To ensure that the new shares should be offered to the existing share- holders before they are offered to the outsiders. 2. Notice of offer - The company must give notice to the existing equity share-holders giving them the option to buy the shares offered to them by the company. The notice must also state the number of shares which share-holders have the option to buy. At least 15 days must be given to each of the equity share-holders to decide whether he would exercise his option or not. If the share-holder does not accept the offer within the said time, he shall be deemed to have declined the offer. 3. Shareholder's right of renunciation - The notice shall also inform the share-holders that the offeree may renounce the whole or part of the offer in favour of any other person unless the Articles otherwise provide. 4. Refusal by the share-holder - After the expiry of the time specified in the notice or if the share-holder declines the offer by giving an earlier intimation, the directors can proceed to dispose of those shares in such manner as they may think most beneficial to the company. If the share-holder renounces his right to some other person and the person in whose favour the renunciation is made declines to buy the shares, the directors may proceed to dispose of all those shares in such manner as they may think fit. 5. Offer of new shares to outsiders - A company can issue shares to persons other than the existing share-holders in the following circumstances :-1. If the company in a general meeting passes a special resolution to this effect.
2. If only an ordinary resolution is passed and the approval of the central government is obtained by the Board of Directors, the central government will give its approval only if it is satisfied that the proposal is most beneficial to the company.
3. If any existing share-holders to whom the shares are offered do not accept the shares or do not apply within the period specified in the notice.
4. If the new shares are issued within 2 years from the formation of the company or within 1 year of the allotment made for the first time.
Exemptions The restrictions contained in Section 81 of the Act regarding the issue of further shares do not apply to :1. A private company;
2. Increase in the subscribed capital of a public company caused by the exercise of an option attached to debentures or loans to convert them into shares of the company or to subscribe to the shares of the company.
6. SEBI guidelines regarding rights issue - Securities and Exchange Board of India has laid down the following guidelines regarding issue of rights shares :-1. A rights issue should not be kept open for more than 60 days.
2. The quantum of a rights issue shall not exceed the amount specified in the letter of offer. No retention or over subscription is permissible under any circumstances.
3. The gap between the closure of the rights issue and opening of the public issue should not exceed 30 days.
4. The minimum subscription clause is applicable to both the public issue and rights issue with a right of renunciation.
5. The letter of offer for the rights issue containing disclosures will be vetted by SEBI.
II. By conversion of Debentures or Loans into Shares :- Any Debentures or Loans obtained from the Government or Government owned financial institution may be converted into Shares even if there was no such agreement at the time of issue of such debentures or sanctioning of loans. This can be done by the Central Government in public interest. The order of the Central Government directing the company to convert the debentures or loan into shares shall be laid in draft before both Houses of Parliament for 30 days while it is in session, along with the terms and conditions. The company can also appeal to the court within 30 days of receipt of the order of the Central Government if the terms and conditions are not acceptable to it. The decision of the court shall be final.
Ans. Shareholders and Members - The terms "Shareholders" and "Members" are used interchangeably in the case of companies limited by shares and a company limited by guarantee having share capital. But a company limited by guarantee shall have only members but not the share-holders.
Shareholder without being Members and Member without being Shareholder :- Ordinarily a share-holder shall also be a member of the company and a member shall be a share-holder of the company. When a company makes allotment of shares to a person he becomes share-holder of the company and his name is entered in the Register of members and he also becomes the member of the company.
But it is not always true that a share-holder shall also be the member of the company and a member shall also be the share-holder of the company. Therefore, there can be a case that a person is the share-holder of the company but he is not the member of the company and similarly a person can be a member of the company but he is not the share-holder of the company.
When a person purchase the shares of a company, the moment he acquires the shares in his hand after making the payment, he becomes the share-holder of the company. Now the seller is no more share-holder of the company if he has sold all his shares. But the buyer shall not become the member of the company until he sends those shares to the company for transfer and the company transfers those shares in the name of the buyer. Till then the seller shall remain the member of the company and the buyer shall become the share-holder of the company. When the company transfers the shares, it shall remove the name of the seller from the Register of Members and it shall enter the name of the buyer in the Register of members. At this stage the buyer shall also become the member of the company.
Therefore when a person buys the shares of a company he becomes the share- holder of the company and he does not become member of the company till his name is entered in the Register of members. Similarly when a person sells his shares, he is no more share-holder of the company, but he remains the member of the company till his name is not removed from the Register of Members of the company. It is also not necessary for the buyer to get the shares transferred in his name. He may sell the shares to a third person and may not send them to the company for transfer in his name. In such a case he shall remain only share-holder of the company and he shall never become the member of the company.
In practice almost all the transactions for the sale and purchase of the shares are made with "Blank Transfer". It means that it is up to the buyer to hold the shares with him and to sell them in the open market before the Register of members is closed for transfer, or get them transferred in his name.
Distinction Between A Shareholder And A Member
A Shareholder may be distinguished from a member as follows:-
1. A registered share-holder is always a member of the company but a registered member may not be a share-holder of the company, because a company may not have a share capital.
2. A registered share-holder is always a member of the company but a registered member may not be share-holder of the company, because he may have sold his shares and the buyer has not got them transferred in his name.
3. A holder of a share warrant is a share-holder of the company but he is not a member of the company because his name is struck off from the Register of members as soon as share warrants are issued against full paid up shares of the company.
4. A legal heir of a deceased member becomes the share-holder of the company but he does not become the member of the company until his name is entered in the Registrar of members.
5. A member by estoppel, shall be deemed to be the member of the company but he shall not be the share-holder of the company.
Ans. How To Become A Member of a Company
A person may become the member of a company in any of the following manners :-
1. Membership by subscription.
2. Membership by acquiring qualification shares.
3. Membership by application and allotment of shares.
4. Membership by transfer of shares.
5. Membership by transmission of shares.
1. Membership by subscription :- Every such person who has signed the subscription clause of the Memorandum of Association of the company shall be deemed to be one of the first members of the company holding such number of shares as written against his name where he has signed. When a company is registered, their names are entered in the Register of members. Official Liquidator v. Suleman Bhai - Suleman had signed the Memorandum of Association of the company for 200 shares written against his name. But he took only 20 shares. On the winding up of the company Suleman was asked to contribute for 200 shares, but he refused. Company filed a suit to recover the amount on 200 shares. Held that Suleman is liable for 200 shares. 2. Membership by acquiring qualification shares :- A person shall not be eligible to be appointed as a Director of a Public Company unless he signs and files an undertaking with the Registrar in writing to take the qualification shares in the company as provided in the Articles of Association of that company. Where a person has signed and filed an undertaking to acquire and pay for the qualification shares, he shall be in the same position as if he has signed the Memorandum of Association of the company and therefore he shall also be deemed to be the member of the company in the same manner in which the subscribers has become the members of the company. But where a Director has not taken the qualification shares and consequently he had to vacate his office, he shall not be liable for those shares. 3. Membership by application and allotment of shares :- When a company comes out with a public issue of its shares, a person may become a member of that company by making an application for the shares, and if the shares are allotted to him, his name shall be entered in the Register of members and a Registered Folio Number shall be allotted to him. 4. Membership by transfer of shares :- When a person purchases the shares from the open market and sends those share to the company for transfer in his name, the name of the seller is struck off from the Register of members and the name of the buyer is entered in the Register of members, and therefore he shall become the member of the company. 5. Membership by transmission of shares :- When a person dies, the shares are taken over by his legal heir or representative, he becomes the share- holder immediately, but when his name is entered in the Register of members in place of the deceased member, he shall become the member of the company.
Ans. How A Member Ceases To Be A Member (Termination of Membership) ; A person may cease to be a member of the company :-
1. By an act of the parties, or
2. By operation of Law.
1. Cessation of membership by an act of the parties :- Under the following circumstances a person may cease to be a member of the company by an act done by the parties i.e., either some act done by the member or by the company :-(1) Transfer of shares :- Where a member sells or transfers his shares to another person, and the shares are transferred by the company in the name of the buyer.
(2) Forfeiture of Shares :- Where the shares of a member are forfeited by the company.
(3) Share Warrants :- Where share warrants are issued by the company in exchange of fully paid-up shares of the company and the names of those members shall be struck off from the Register of members who have opted for Share Warrants.
(4) Surrender of Shares :- Where the shares are surrendered by the share-holder in accordance with the provisions of Articles of Association of the company.
(5) Redemption of Shares :- When the Redeemable Preference Shares are redeemed by the company after stipulated period of time.
(6) Rescission of Shares :- When the member has exercised his right of rescission of the contract on the ground of omission or misrepresentation in the prospectus.
(7) Lien on Shares :- Where the company has sold the shares of a member under the provisions of lien on shares as per the Articles of Association.
2. Cessation of membership by operation of Law :- Under the following circumstances a person may cease to be a member of the company by operation of Law i.e., the Law terminates the membership :-(1) Insolvency :- When a member is declared as insolvent and the Official receiver or assignee transfers the share of the insolvent to another person, the insolvent member ceases to be a member on the registration of that transfer by the company. But an insolvent remains a member of the company till his name appears in the Register of members of the company and the dividend shall be received by the Official receiver.
(2) Death :- When a member dies, he no more remains the members of the company. However his estate shall remains liable for the calls until the shares are transferred in the name of his legal representative.
(3) Sale of Shares in execution of a decree of a court :- Where the shares of a member are sold in execution of a decree of a court and the buyer has got the shares transferred in his name, the name of the original members shall be struck off from the Register of members.
(4) Winding up of the company :- Where a company is wound up, the membership of all the members comes to an end.
Ans. Borrowing Powers of A Company - Every trading company needs money to finance its activities. A part of this requirement is met by the issue of shares by the company and the remaining requirements are met from borrowings from the public.
A Non-trading company can borrow only if its Memorandum or Articles of Association allows it to borrow.
Every Trading company has an implied power to borrow money for the purposes of its business unless prohibited by the Memorandum or Articles of Association of the company. It has also the power to give security for the loan by creating a charge on the property of the company in favour of the money lenders.
The only condition laid down in the Act is that a Public Company having a share capital cannot exercise the borrowing powers unless Certificate of Commencement of Business is obtained by it.
Who can exercise the borrowing powers ? The Directors of the company exercise the borrowing powers of the company. This power of the Directors is subject to the following two restrictions :-
1. Statutory Limit :- The Directors of a company cannot borrow money more than the aggregate of the Paid up Share Capital of the company and the Free Reserves.
2. Limitation as contained in the Memorandum or the Articles.
Ultra Vires Borrowings
Ultra Vires borrowings means, the borrowings which are beyond the powers of the company or the Directors of the company. Therefore, the borrowings by a company may be :-
1. Borrowings Ultra Vires the company, OR
2. Borrowings Intra Vires the company but Ultra Vires the Directors.
1. Borrowings Ultra Vires the company :- Where a company borrows money beyond its powers, the borrowing is said to be ultra vires the company. Any borrowing by a company which is ultra vires the company is void and therefore not binding on the company. In that case no debt is created against the company and Securities given by the company become inoperative and void. Ultra Vires Borrowings - Remedies available to a lender Where a company borrows money beyond its powers, the borrowings shall be treated as ultra vires the company and shall be void and therefore the lender of money has no remedy against the company in the Common Law. He cannot recover his loan from the company, because an ultra vires loan does not create the relationship of creditor and the debtor in the eyes of Law. However, in equity, he has the following rights :- 1. Injunction :- Where the company has taken a loan from the lender ultra vires, but has not yet spent the money, the lender may apply to a Law Court for passing an Injunction Order to restrain the company from spending it or parting with the money in any manner. The loan shall be considered as ultra vires and therefore company does not become the owner of that money in the eyes of Law and hence the ownership remains with the money lender. Therefore he can recover his money back. 2. Subrogation :- Where the company has used the ultra vires borrowed money in paying off its lawful debts, the money lender shall step in the shoes of creditor of the company whose debt was paid off and he shall have the same right to recover his debt against the company, which that creditor had against the company. This is known as Doctrine of Subrogation. But the right of subrogation does not entitle the lender the same priority as the original lender had over the other creditors of the company. The right of subrogation also does not give the subrogated creditor any right to the securities which were held by the original creditor against his original debt. 3. Identification, tracing and restitution :- Where the money of the lender is in the hands of the company in its original form and the money lender is able to trace his money, or where the company has bought any asset with that money and he can prove it, the lender may get tracing order and claim that money or asset as the case may be. 4. Recovery of damages - Suit for breach of Warranty of Authority :- Where the money lender has lent the ultra vires borrowing, he can file a suit against the Directors of the company for the breach of warranty of authority and recover the damages from the Directors of the company. But where it is clearly mentioned in the Memorandum or Articles of Association of the company that the Directors had no borrowing powers, the lender shall not be able to claim any damages from the Directors because of the application of Doctrine of constructive notice. 2. Borrowings Intra Vires the company but Ultra Vires the Directors :- Where a company borrows money within its borrowing powers but it was outside the powers of the Directors, it is called borrowings intra vires the company but ultra vires the Directors. In this case the company has the power to ratify the action of its Directors and make the borrowing valid. The legal position is quite simple in this case. The company had the power to borrow such amounts but the company had restricted the powers of its Directors to borrow up to a certain limit just for better control on the borrowings of the company. But the Directors had borrowed more than their vested power. Here the Directors are working as agents of the company and the basic principles of Agency shall be applicable. The company has the power to ratify the action of its Directors, (Agency by Ratification) which makes the company binding on such debt, as if it had been made with the authority of the company. Where a company refuses to ratify the action of the Directors, the normal principles of contract of Agency shall apply, i.e., the company (Principal) shall not be liable for such debt and the Directors (Agent) shall be liable for such acts done by him outside his authority. Rule in Royal British Bank v. Turquand :- Where a borrowing is ultra vires the Directors but intra vires the company and it is not ratified by the company, and the excess of the borrowings consists of non-compliance with some internal regulation of the company, the benefit of Turquand's rule (Doctrine of Indoor Management) shall also be available to the money lender. T.R. Pratt (Bombay) Ltd. v. D.D. Sassoon & Co. Ltd. - The Directors of the company had the power to borrow money up to the issued capital of the company. If more amount were required by the Director to be borrowed, sanction in the general meeting of the share-holders shall be taken. No such sanction was taken by the Directors before borrowing in excess of their authority. The money was used for the benefit of the company. But when the company refused to repay the debt being ultra vires the Directors, it was held that lender is entitled to the benefit of Doctrine of Indoor Management and the company is liable for the debt. Where the Directors of a company borrow money without having the authority from the company and that money is used only for the benefit of the company, the company cannot escape its liability to repay the debt. Here also the normal principle of Agency shall apply that where an Agent borrows money for his Principal without his authority, but the Principal derives the benefit of that money by using it, the Principal shall be liable for the repayment of the debt.Q. 42. What are the provisions for holding the statuory meetings of the share-holders of a company ?
Ans. Statutory Meeting (Section 165)
Statutory Meeting is the first meeting of the share-holders of a company. It is called Statutory because it is essential to call this meeting within a specified time and this meeting is held only once in the life time of the company. The following companies shall have to call their Statutory Meeting :-
(i) Public company limited by shares.
(ii) Public company limited by guarantee having share capital.
(iii) Private Company which becomes a Public Company by the application of Section 43.
The following companies are not required to hold a Statutory Meeting :-(i) Private companies.
(ii) Public Companies limited by guarantee not having share capital and
(iii) Unlimited companies.
Objectives of Holding the Statutory Meeting The main objectives of calling a Statutory Meeting of the company are :-1. To approve the preliminary contracts specified in the prospectus of the company with modification if any.
2. To discuss the success of floating the project of the company.
Provisions for holding Statutory Meeting - Following are the essential provisions for calling and holding Statutory Meeting of the company :- 1. Time :- Every company, shall, within a period of not less than ONE month and not more than SIX months from the date on which the company is entitled to commence business, hold a general meeting of its share-holders which is called Statutory Meeting. 2. Notice :- The company must give notice to its members at least 21 clear days before holding the statutory meeting stating time, date and place of meeting. However, if the member holding 95% of the paid up share capital having voting rights give their consent, meeting can be called at a shorter notice. 3. Statutory Report :- The Directors of the company are required to send a report called "Statutory Report" to every member of the company along with the notice of the meeting at least 21 days before the date on the meeting. A statutory report shall have the following contents :-(1) Allotment of Shares :- The total number of share allotted, distinguishing fully paid or partly paid-up and the extent to which they are so paid-up, shares issued otherwise than for cash.
(2) Cash Received :- Total amount of cash received by the company in respect of all the shares allotted.
(3) Abstract of Receipt and Payment Account :- An abstract of receipts of the company and that of payments made by the company up to date shall be given.
(4) Directors, Auditors and other Managerial personnel :- The names, addresses and occupations of its Directors, Auditors and all other Managerial personnel shall be given.
(5) Preliminary Contracts :- The particulars of any preliminary contracts and the proposed modifications which are to be submitted for approval.
(6) Underwriting Contracts :- The extent to which the under writing contracts has not been carried out and the reasons thereof.
(7) Calls in arrears from Directors and Managers :- The calls in arrears, if any, due from any Director and the Managers of the company.
(8) Commission and Brokerage :- Any commission or brokerage paid to any Director or Manager on the issue of shares or debentures of the company.
4. Certification of Statutory Report :- The Statutory Report shall be certified as correct by not less than two Directors of the company, one of whom shall be the Managing Director, if any. The Auditor of the company shall certify the particulars regarding shares allotted, cash received, and receipt and payment account. A certified copy of the statutory report shall be sent to the Registrar for registration immediately after it is sent to the members of the company. 5. Procedure at the meeting :- At the commencement of the meeting, the Board of Directors shall place a list showing the names, addresses and occupation of the members of the company and the number of shares held by them. The list shall remain open for inspection by the members during the meeting. The members shall be free to discuss any matter with respect to formation of the company or arising out of the statutory report of the company. 6. Penalty :- If default is made in complying with the provisions of Section 165, every Director and officer of the company shall be liable to a fine which may extend to Rs. 5,000. If a default is made in delivering the "Statutory Report" to the Registrar, or in holding the Statutory Meeting, the company may be wound up by the court. However, Court may give directions for the statutory report to be filed or a statutory meeting to be held, as the case may be and refuse to order the winding up of the company.
Ans. Annual General Meeting (Section 166)
Every company must hold a general meeting of its share-holders in each calender year in addition to any other meeting, as its annual general meeting. A calender year means from 1st January, to 31st December every year. It is called Annual General Meeting, because it is held every year.
Objectives of Holding the Annual General Meeting
1. Presentation of Annual Accounts :- The Profit & Loss Account and Balance Sheet of the company shall be presented by the Board of Directors for the approval of the share-holders.
2. Declaration of Dividend :- Directors may also declare Dividend for the Shareholders of the company; if they think so.
3. Appointment of Auditors :- Auditor of the company for the next financial year are also appointed, and their remuneration shall also be fixed in the annual general meeting.
4. Appointment of Directors in place of retiring by rotation :- In case of Public companies limited by shares 2/3rd number of Director shall retire by rotation and new Directors in their place shall be appointed in the Annual General Meeting of the share-holders. However retiring Directors can also present themselves for re-appointment as they are eligible to be appointed.
5. Special Business :- Any other business can also be conducted at the Annual General Meeting of the company which can be specified in this clause of special business.
Provisions for holding Annual General Meeting
1. First Annual General Meeting :- First Annual General Meeting of the company should be held within a maximum period of 18 Months from the date of its incorporation.
2. Subsequent Annual General Meetings :- Thereafter this meeting should be held every year and there should be one meeting per year and as many meetings as there are years. There cannot be a gap of more than 15 Months between the dates of two Annual General Meetings of the company. Registrar may extend the time for holding an Annual General Meeting by a period not exceeding 3 months for any special reason. But no extension is granted for holding the 1st Annual General Meeting.
3. Power to convene the Annual General Meeting :- Only Board of Directors of the company has the power to convene the Annual General Meeting of the company. No individual Director, Secretary or even Managing Director can convene this meeting.
4. Notice :- A Public Company must give 21 clear days notice to all its members to convene the Annual General Meeting of the company. However, if all the members having voting rights gives their consent, the meeting can be called at a shorter notice. Holding of Annual General Meeting is a statutory requirement. The fact that a company did not function in a year shall be no excuse for not holding the Annual General Meeting of the Company.
5. Date, Time and Place of holding Annual General Meeting :- Every Annual General meeting shall be called during the business hours, on a day which is not a public holiday, and shall be held either at the registered office of the company or at some other place within the city in which the registered office of the company is situated. Business hours means the normal working hours of the company. The meeting must start within the business hours and there is no restriction on the duration of the meting and therefore it may last beyond the business hours of the company.
6. Postponement :- Where an Annual General Meeting is convened for a particular date and notice is issued to the members, the Board of Directors may cancel or postpone an annual general meeting, provided that it is being done for bonafide reasons.
7. Adjournment :- An Annual General Meeting can be adjourned by the Chairman for bonafide reasons only. If a Chairman does so wrongfully, the members may appoint a new Chairman and accordingly proceed with the meeting. If the meeting is adjourned it shall not be counted as a separate meeting. Where the meeting is adjourned, the adjourned meeting shall be held on the same day next week at the same place at the same time.
8. Power of the Company Law Board to call Annual General Meeting :- Where a company fails to hold Annual General Meeting within the prescribed period of time, the Company Law Board on the application of any member, may either call or direct the company to call its annual general meeting. The Company Law Board may direct the one member of the company present in person or by proxy shall be deemed to constitute a meeting and that shall be regarded as annual general meeting of the company. (Section 167).
9. Penalty :- If default is made in complying with the provisions of Section 166 the company and its Directors or Officer of the company who is in default, shall be punishable with a fine which may extend to Rs. 50,000, and if the default continues, with a further fine of Rs. 2,500 per day for which the default continues.
10. Annual General Meeting when Annual Accounts are not ready :- Where the annual accounts are not ready to be presented before the annual general meeting of the company, there is a clear statutory duty on the Directors to call the meeting, whether or not the accounts are ready. The proper course to follow is to hold the meeting within prescrbed period, transact all business except the presentation of the accounts, and then to adjourn the meeting to some future date when the accounts will be ready to be placed before the share-holders of the company.
Ans. Extra-Ordinary General Meeting - Any general meeting other than an annual general meeting is called an Extra- ordinary General Meeting. A statutory meeting and annual general meeting of a company are called ordinary meetings.
Objectives of Holding the Extra-Ordinary General Meeting - An Extra-Ordinary General Meeting of a Company is called for transacting some urgent or special businenss of the company for which it is not advisable to wait till the next annual general meeting of the company. Therefore, this meeting is generally held for the purpose of dealing with any extra-ordinary matter which cannot be postponed till the next annual general meeting of the company. Hence, Extra- ordinary General Meeting is a meeting which is held between two consecutive annual general meetings.
Who can convene an Extra-ordinary General Meeting - An Extra-ordinary General Meeting can be convened :-
1. By the Board of Directors, OR
2. By the Requisitionists, OR
3. By the Company Law Board.
1. Extra-ordinary General Meeting convened by the Board of Directors :- The Board of Directors may call Extra-ordinary meeting of the company :-(1) On their own, OR
(2) On the requisition of Members.
(1) On their own :- Board of Directors may convene an Extra-ordinary General Meeting of the company as and when they think fit by passing a resolution at the Board meeting. (2) On the requisition of Members :- The Directors shall have to call an Extra-ordinary General Meeting of the company if a requisition is made and signed by :-(a) In the case of companies having share capital, the holder of at least 10% of the paid up share capital of the company carrying voting rights, OR
(b) In the case of companies not having any share capital, representing at least 10% of the total voting rights.
Provisions to hold this meeting :- (i) The Board of Directors must proceed to call its Extra-ordinary General Meeting within 21 days of the receipt of the valid requisition.(ii) The Board of Directors shall send out notices to all the members of the company giving not less than 21 clear days to hold meeting.
(iii) The meeting must be held within 45 days from the date of deposit of the requisition.
2. Extra-ordinary General Meeting convened by the Requisitionists :- Where a valid requisition signed by the required number of members was deposited with the company to call Extra-ordinary General Meeting of the company and the Board of Directors fails to call the meeting as required by the requisitionists, the meeting can be called by the Requisitionists themselves :-(i) In the case of companies having share capital, the holder of at least 10% of the paid up share capital of the company carrying voting rights, OR
(ii) In the case of companies not having any share capital, representing at least 10% of the total voting rights in case the company does not have share capital.
Rules regarding holding of meeting by the requisitionists :- (1) This meeting must be called by the Requisitionists within a period of 3 Months from the date of deposit of the valid requisition by the Requisitionists. The meeting called by the Requisitionists cannot be held after the expiry of 3 months from submitting a valid requisition with the company. However, a meeting commenced before the expiry of 3 months can be adjourned to some other day after the expiry of 3 months. (2) Ordinarily this meeting should also be held in the same manner as if it is called by the Board of Directors. The members must be served with a notice of 21 clear days and the meeting should be called at the registered office of the company. But where the company does not provide its registered office to be used by the requisitionists to hold the meting, this meeting can be held at some other place. (3) All expenses to hold this meeting by the requisitionists shall be born by the company and the requisitionists can recover the expenses from the company. (4) All the resolutions duly passed by the share-holders shall be binding on the company in the same manner as if the meeting had been called by the Board of Directors of the company. 3. Extra-ordinary General Meeting convened by the Company Law Board :- Where for any reason it is impracticable to call the Extra-ordinary general meeting of the company, the Company Law Board may order the company to call its meeting to be held and conducted in such a manner in which Company Law Board thinks fit. The Company Law Board may do so :-(i) On its own, OR
(ii) On the application of any Director of the Company, OR
(iii) On the application of any member of the company having voting right and entitled to vote at the meeting.
Ans. Directors - A company is an Artificial Person in the eyes of law. It has neither a body, nor a soul, even then it does exist. It is regarded as only a legal person in the eyes of law. Therefore, it can not act on its own like a Natural Person. This makes it necessary that the company's business should be entrusted to some Natural Persons. Hence, there is a need for human beings to act as the Directors of a company. Inspite of their having such a great importance, the term "Directors" has not been defined anywhere in the Companies Act. Directors are those natural persons who manage the affairs of the company. They are collectively known as the Board of Directors or Board. If we assume the company to be a body, the directors are its brain. The company can act only through its directors. The Directors are the elected representatives of the share-holders of the company.
According to Indian Companies Act, 1956
"Director includes any person occupying the position of a director, by whatever name called."
According to Webster's Dictionary :- "Director means a person who is chosen to control or govern the affairs of a company or corporation".
Qualification of Directors - Only individuals can be appointed directors and no body corporate, association or firm shall be appointed director of a company. The purpose of this section is to hold an individual responsible for any failure to carry out the trust, because the office of a director is considered as an office of trust.
A person is not eligible to be appointed as a director of a company Unless, he has signed and filed with the Registrar his consent in writing to act as director of the company.
It shall be the duty of every director to hold qualification shares as required by the Articles of the company within two months after his appointment as director. These qualification shares can be acquired by him either by the transfer of shares from the existing share-holders or by purchase from the company itself directly. The value of qualification shares shall not exceed 5000 rupees. However, where the value of one share exceeds 5000 rupees, one share will be considered as qualification share.
Holding of share warrants does not serve the purpose of the Act. If a director does not acquire his qualification shares within two months of his appointment, he shall be punishable with a fine which may extend to Rs. 500 for every day on which he acted as a director, and he shall have to vacate the office.
Appointment of Directors - The success of a company depends to a large extent on the calibre, honesty and integrity of its Directors. So, it is necessary to keep the management of a company in proper hands. At present, only an individual can be appointed as a director of a company. The directors of a company can be appointed in the following ways :
1. First Directors :- First directors of a company are appointed by promoters and they are named in the Articles of the company. If they are not named in the Articles, then the names and the number of the first directors are determined in writing by the subscribers to the Memorandum.
If the first directors are not appointed in the above manner, the subscribers to the Memorandum, who are individuals shall be deemed to be the first directors of the company. The directors so appointed shall hold office until the directors are duly appointed at the annual general meeting of the company.
2. Appointment of Directors by the Company :- The subsequent directors are appointed by the company in the general meeting. In case of a public company or a private company which is a subsidiary of a public company, at least two thirds of the total number of directors shall be liable to retire by rotation unless otherwise provided for in the Articles. It means that not more than 1/3 of the total number of directors can be appointed on a permanent basis. However, the Articles may provide that all the directors will retire every year.
At every subsequent annual general meeting held after the meeting at which the directors are appointed, 1/3 of the directors are liable to retire.
Example :- If there are NINE directors, in a company, THREE of them can be permanent directors, whereas SIX of them will be liable to retire by rotation of whom TWO will retire every year. Those who have been longest in office shall retire. Out of those who became directors on the same day, those liable to retire shall be determined by lots in the absence of an agreement among them.
At the annual general meeting at which a director retires as aforesaid, the company may fill up the vacancy by appointing the retiring director himself or some other person thereto. If the place of the retiring director is not so filled up and the meeting has not expressly resolved not to fill the vacancy, the meeting shall stand adjourned.
If in the adjourned meeting also, the place of the retiring director is not filled up and that meeting also has not expressly resolved not to fill the vacancy, the retiring director shall be deemed to have been re-appointed at the reconvened meeting unless :-
(i) At the meeting or at the previous meeting, a resolution for the re- appointment of such director has been put to vote and lost;
(ii) The retiring director has, by a notice in writing, expressed his unwillingness to be so re-appointed;
(iii) He is disqualified for appointment;
Where a new director (other than the retiring director) is to be appointed, a notice in writing shall be given to the company at least 14 days before the meeting. The notice shall be given by the person seeking appointment as director or by some member intending to propose him as director along with a deposit of Rs. 500. The deposit shall be refunded to the depositor if such person is elected a director. In case such person is not elected, the amount deposited shall stand forfeited by the company. 3. Appointment of Directors by the Directors :- Directors can be appointed by directors in the following circumstances : (1) As Additional Directors :- If the Articles of the company so provide, the Board of Directors can appoint additional directors. Such additional directors shall hold office only upto the date of the next annual general meeting of the company. However, the number of directors and additional directors together shall not exceed the maximum strength fixed for the board by the Articles. (2) In case of a Casual Vacancy :- If the office of any director appointed by the company in a general meeting is vacated before his term of office expires in the normal course, the resulting casual vacancy shall be filled by the board of directors at a meeting of the board. Any person so appointed shall hold office only upto the date upto which the director in whose place he is appointed would have held office. (3) As Alternate Director :- If authorised by the Articles or by a resolution passed by the company in a general meeting, the board of directors of a company may appoint an alternate director to act for a director during his absence for a period of not less than three months. An alternate director so appointed shall not hold office as such for a period longer than that permissible to the original director in whose place he has been appointed and shall vacate office if and when the original director returns to the state in which his meetings of the board are ordinarily held. 4. By Debenture Holders etc. - Under certain conditions the articles may empower the debenture holders, a banking company or a financial corporation to appoint their nominees to the Board of Directors. The number of the directors so appointed must not exceed one-third of the total strength of the Board of Directors. 5. By Central Govt. - The Central Govt. may appoint directors in the exercise of its powers under S. 408 in order to prevent oppression or mismanagement. The Central Govt. can make such appointment on its own motion or on the application of at least hundred members or members holding not less than one- tenth of the total voting power. The appointment of such directors may be made for a period not exceeding three years at a time.
Ans. Vacation of Director's Office (Section 283)
Director shall have to Vacate office under the following circumstances :-
(i) He fails to obtain qualification shares, required by the Articles of the company within two months after his appointment, OR
He ceases to hold qualification shares, required by the Articles of the company at any time thereafter.
(ii) He is declared to be of an unsound mind.
(iii) He applies to be adjudicated an insolvent.
(iv) He is adjudged an insolvent.
(v) He is convicted by a court, of any offence for moral turpitude and sentenced to imprisonment for not less than 6 months.
(vi) He fails to pay any calls for a period of six months from the due date, unless exempted by the government.
(vii) He absents himself from three consecutive meetings of the board or from all meetings for a continuous period of three months, whichever is longer, without obtaining leave of absence from the board.
(viii) He fails to disclose his interest in a contract.
(ix) He becomes disqualified by an order of the court for a fraudulent conduct.
(x) He is removed by means of an ordinary resolution before the expiry of his term.
(xi) Where a person was appointed as director by virtue of his being an employee of the company, and he ceases to hold such employment in the company.
When a person functions as a director even when he knows that the office of a Director held by him has become vacant on account of any of the above mentioned disqualifications, he shall be punishable with fine which may extend to Rs. 5,000 for every day on which he had functioned as a Director of the company. Removal of DirectorsRemoval by the share-holders (Section 284)
Removal by the Central Government (Secs. 388 B to 388 B)
Removal by the Company Law Board (Section 402)
1. Removal by the share-holders (Section 284) A company through its shareholders may remove a director before the expiry of his period in office by an ordinary resolution. For such removal, a special notice shall be required to be served. However, a director appointed by central government or a director holding office for life cannot be so removed. Those members who are intending to remove a director must serve a special notice to the company at least 14 days before the meeting that the company may notify the same to the concerned director as well as the members. The director sought to be removed has a right to make a representation at the meeting. The vacancy so created may be filled up at the same meeting when a special notice of the proposed appointment has been given. The appointee shall hold office upto the date of expiry of the removed director's term of office. The removed director cannot be reappointed but he can claim compensation for the termination of his appointment. 2. Removal by the central government (Sec. 388 B to 388 E) Central Government can remove the directors on the recommendation of Company Law Board. The person so removed shall not hold the office of director or any other office connected with the conduct and management of the affairs of the company for a period of five years. However, compensation shall be payable to him for the termination of his office. Central government may remove a Director if, in its opinion, there are circumstances suggesting :-(i) That any person concerned with the conduct and management of affairs of a company is guilty of fraud, misfeasance, negligence or default in carrying out his obligations functions under the law, or breach of trust; or
(ii) That the business of a company is not or has not been conducted and managed by such person in accordance with sound business principles or prudent commercial practice; or
(iii) That a company is or has been conducted and managed by person in a manner which is likely to cause, or has caused serious injury or damage to the interests of the trade, industries or business to which such company pertains; or
(iv) That the business of a company is or has been conducted and managed by such person with the intent to defraud its credit members or any other persons or otherwise for a fraudulent unlawful purpose or in a manner prejudicial to public interest.
3. Removal by the Company Law Board (Section 402) If satisfied on an application made to the Company Law Board for prevention of oppression or mismanagement, it may terminate agreement of the company with the director, after due notice to parties concerned. The person so removed is disqualified from holding managerial office for a period of five years in any company. He can not claim any compensation for the loss of office.
Ans. Legal Position of Directors of a Company :- It is very difficult to explain the legal position occupied by the directors in a company. They are the persons appointed by the company share-holders to direct and regulate affairs of the company. But they are not the servants of the company. They are only directors who control the affairs of the company. They may, however, work as employees in a different capacity. Directors have been described by various names, sometimes as Trustees, sometimes as Agents and sometimes as Managing Partners of the company.
Different aspects :- The various aspects relating to the position of directors are discussed below :-
1. Directors as Trustees
2. Directors as Agents
3. Directors as Employees
Directors as Trustees - The trustee is a person who holds and manages a property for the benefit of others. In the words of Lord Lindley, "Although directors are not, properly speaking, trustees, yet they have always been considered and created as trustees of money which comes to their hands or which is actually under their control; and ever since the joint stock companies were invented, the directors have been held liable to make good moneys which they have misapplied upon the same footing as if they were trustees". The directors are persons selected to manage the affairs of the company for the benefit of the share-holders. It is an office of trust, which if they undertake, it is their duty to perform fully and entirely. However, they are not trustees in the real sense of the ownership of the company's property. In a nutshell, they are not trustees in the truest legal sense, but they are trustees in the sense that they must act in the interests of the company and not in their own interests. But, as already stated, a trustee is the owner of the property and deals with it as principal, owner and master subject only to an equitable obligation to account for his acts. The office of a director is that of a paid servant. A director never enters into a contract for himself but for the company, of which he is a director and for whom he is acting. He cannot sue on such contracts nor be sued on them. 2. Directors as Agents - A company is an artificial person existing only in the eyes of law. It can not act on its own. It has to act through some human agency. That human agency is its directors who control and manage its affairs. The general laws of agency govern their relationship with the company. Where the directors contract in the name and on behalf of the company, it is the company which is liable on it and not the directors. Similarly, as in the case of agency, a notice to an agent in the course of business amounts to a notice to the principal, so as it is true of directors in relation to the company but notice to a director will amount to a notice to the company only if the director is, like an agent, bound in the course of his duty to receive the notice and to communicate it to the company. Where the directors of a company act on its behalf, they are not personally liable for the contracts which they make for the company provided they act within the scope of their authority and do not make the contracts in their personal name. The director are, however, personally liable where the contract is in their own names, or where they use the company's name incorrectly e.g. by omitting the word or the words "Limited" or `Private limited', or where the contract is signed in such a way that it is not clear whether it is the principal (the company) or the agent who has signed or where they exceed the powers given to them by the Memorandum or the Articles. However, it is important to note that they are not agents of individual share-holders. they enjoy independent powers in certain matters and they need not consult individual share-holders. As a conclusion it can be said that directors are not the agents in the strict sense of the term because they have the power to carry on the business of the company independently on their own, whereas an agent in true sense cannot do so on his own. 3. Directors as Employees - Directors are not the employees of the company when they act as directors. They are not entitled to the privileges and benefits which are granted to the employees under the Companies Act. They are acting as Managing Partners in a company. Conclusion :- We can conclude that in the truest legal sense the Directors cannot be regarded as Trustees of the company, they also cannot be treated as Agents of the company and finally they are not the Employees of the company. In real sense, he stands in a Fiduciary position towards the company. Meetings of Directors - Directors are the central point of the company. They exercise most of their powers in the board meetings. Sections 285 to 289 of the Companies Act contain provisions regarding the meetings of the directors which are discussed below : 1. Number of Meetings :- According to section 285, in the case of every company, a meeting of its board of directors shall be held at least once in every three months and at least four such meetings shall be held in every year. However, the central government may, by notification in the official gazette, direct that the provisions of this section shall not apply in relation to any class of companies or shall apply in relation thereof subject to such exceptions, modifications or conditions as may be specified in the notification. 2. Notice of meetings :- According to section 286, notice of every meeting of the board of directors of a company shall be given in writing to every director for the time being in India, and at his usual address in India to every other director. Every officer of the company whose duty it is to give notice as aforesaid and who fails to do so shall be punishable with fine which may extend to Rs. 1,000. 3. Quorum for the meetings :- According to section 287, the quorum for a meeting of the board of directors of a company shall be 1/3 of its total strength or two directors, whichever is higher. Total strength means the total strength of the board of directors of a company as determined in pursuance of this Act, after deducting therefrom the number of the directors, if any, whose places may be vacant at the time. 4. Adjournment of meeting :- According to section 288, if a meeting of the board could not be held for want of quorum, then, unless the Articles otherwise provide, the meeting shall automatically stand adjourned till the same day in the next week, at the same time and place, or if that day is a public holiday, till the next succeeding day which is not a public holiday, at the same time and place. The provisions of section 285 shall not be deemed to have been contravened merely by reason of the fact that a meeting of the board which had been called in compliance with the terms of that section could not be held for want of a quorum.
Ans. Powers of Directors - Directors are the sailors of the boat called company. They are the symbols of the management of the company. All the powers regarding the management of the company vest in them. Therefore, the Board of Directors is known as the active part of the company. They are the real sanctionaries of the company. They can exercise the following powers:-
1. General powers of the board.
2. Powers to be exercised at the board meeting.
3. Powers to be exercised with the consent of the company.
4. Power to make political contributions.
5. Power to make contributions to the national defence fund etc.
General Powers of the Board (Section 291) Board of Directors of a company shall be entitled to exercise all such powers and to do all such acts and things as the company is authorised to exercise and do. If powers of management are vested in the directors, they and only they can exercise these powers. Normally the following powers are exercised by the Directors as General Powers :-(i) Issue and allotment of shares.
(ii) Making calls on shares.
(iii) Forfeiture of shares.
(iv) Making contracts.
(v) Borrowing on behalf of the company.
(vi) Investing in the shares of the other companies.
(vii) Declaring the dividend.
(viii) Sue on behalf of the company.
(ix) Inspecting the account books.
(x) Appointing Casual, Alternate and Additional Directors.
Powers to be exercised at the Board Meeting ( (Section 292) Board of directors of a company shall exercise the following powers on behalf of the company and the Directors shall do so only by means of resolutions passed at the board meetings :-(i) The powers to make calls on the shares;
(ii) The power to issue debentures;
(iii) The power to borrow money otherwise than on debentures;
(iv) The power to invest the funds of the company; and
(v) The power to make loans.
3. Powers to be exercised with the consent of the company (Section 293) The following powers can be exercised by the board only with the consent of the company in a general meeting of the share-holders :-(i) Sale or lease of the company's undertakings.
(ii) Extension of the time for the payment of a debt due by a director.
(iii) Investment of compensation received on compulsory acquisition in securities other than the trust securities.
(iv) Borrowing of money beyond the statutory limit of the company. This, however, does not include temporary loans obtained from the company's bankers in the ordinary course of business.
(v) Contribution to any charitable or other funds beyond fifty thousand rupees in one financial year or 5 percent of the average net profits during the preceding three financial years, whichever is greater.
4. Power to make Political Contributions (Section 293A) No Government Company and no other company which has been in existence for less than three financial years shall contribute any amount or amounts directly or indirectly to any political party or for any political purpose to any person. However, any other company than the above mentioned, may contribute any amount or amounts. However, the amount so contributed in any one financial year shall not exceed 5 per cent of its average net profits during the three immediately preceding financial years. Every company shall disclose in its profit and loss account any amounts contributed by it to any political party during the financial year to which that account relates, giving particulars of the total amount contributed and the name of the party or person to which or to whom such amount has been contributed. If a company makes any contributions in contravention of the provisions of this section, the company shall be punishable with fine which may extend to Three Times the amount so contributed and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to Three Years and shall also be liable to fine. 5. Power to make contributions to the national defence fund etc. The Board of directors of any company or any other person or authority exercising the powers of the Board of Directors of a company, or of the company in a general meeting, may contribute such amount as it thinks fit to the national defenee fund or any other fund approved by the central government for the purpose of national defenee. Every company shall disclose in its profit and loss account the total amount or amounts contributed by it to the fund referred to in this section during the financial year to which the amount relates. Duties and Liabilities of Directors - Directors possess immense power and they occupy a place of importance in the regulation and management of the affairs of the company. They are supposed to use their power for the profits of share-holders whose investments are involved in the company. The law has established certain duties of the directors for the purpose of public welfare and the protection of the interest of public at large. Directors are not personally liable until they perform their duties with great care and diligence. But if they perform their duties with the negligence or make any default in the performance of their duties, they shall be held personally liable. The duties and the resultant liabilities for their failures are as under :- 1. Fiduciary duties and liabilities - Directors are the trustees of the company. The first and foremost obligation of the directors is to act with honesty and work only for the benefit of the company. All their efforts should be in promoting the interests of the company. They should not incorporate opportunities for their own use. Fiduciary directors can be discussed under the following two headings. (i) Disclosure of profits - The directors should not make any secret profit while working with the company. If any director makes secret dealings while working with the company and without the knowledge and consent of the company, he is liable to return the amount of profit to the company. Secret profit can be earned in the following ways :1. If any director gets any commission on the Sale by a person to the company or by company to anybody.
2. A director can not use, for his own profit any information which he gets by virtue of being a director and if he by use of such information derives any benefit from such information he be held liable to the company.
3. If any director gets any gift or bribe he shall be liable to the company for the bribe or gift received by him.
4. Where a director is instructed to purchase something for the company, and he purchases the same for himself and then sells ti to at a profit, he will be held accountable for the profit so made by him.
(ii) Disclosure of interest (Section 299) Every director of a company who is directly or indirectly, interested in a contract or proposed contract, entered into such agreement or contract on behalf of the company, he shall disclose the nature of his interest at a meeting of the board of directors. A general notice given to the board by a director, to the effect that he is a director or a member of a specified firm and is to be regarded as interested in any contract, shall be deemed to be a sufficient disclosure of his interest in relation to any contract. Every director who fails to comply shall vacate his office and can be punishable with fine which may extend to Five Thousand Rupees. 2. Duty to take care and diligence and liability for negligence - For the directors of a company, fidelity alone is not enough. Directors should carry out their duties with reasonable care and exercise such degree of skill and diligence as is reasonably expected of persons of their knowledge and status. Directors, however, are not liable for mere errors of judgment. 3. Duty to attend board meetings and liability for failure - The powers of the directors are such that these can be exercised properly only at the board meetings. Such duties of directors are of intermittent nature to be performed at periodical board meetings. They are not bound to pay continuous attention to the affairs of the company. They are also not bound to attend all the meetings of the board. But their habitual absence becomes evidence of negligence on their part. According to section 283, the office of a director shall became vacant if he absents himself from three consecutive meetings of the board of directors, or from all meetings of the board for a continuous period of three months, whichever is longer, without obtaining leave of absence from the board. 4. Ultra vires acts and their liability - It is the duty of the directors to ensure that the funds of the company are utilized for the proper purpose. If the funds of the company are used for the acts beyond the scope of the Memorandum of Association, the directors shall be personally liable for such acts. Similarly, if a director makes an ultra vires payment, he must make good the loss. 5. Duty to give correct information in the prospectus and liability for mis- statement - It is the duty of the directors to give correct and authentic information in the prospectus. If they give any untrue statement or mis- statement in the prospectus, every person who subscribes to any shares or debentures on the faith of the prospectus, can hold the directors personally liable for any loss or damage which he may have sustained by reason of that mis-statement and can claim compensation from the directors. But Directors can escape their liabilities on the following grounds :-(i) Where the Director has withdrawn his consent before the issue of the prospectus.
(ii) Where the Director proves that the prospectus was issued without his knowledge.
(iii) Where the Director has given a public notice after the prospectus was issued but before the allotment that he has withdrawn his consent on becoming aware of untrue statement in the prospectus.
(iv) Where the Director has reasonable ground to prove that the statement was true and in fact he believed it to be true.
(v) The statement was an extract or copy of the statement made by an expert who has given his consent and has not withdrawn it.
6. Statutory Duties & Liability of Directors :- Directors have certain other statutory duties established by the Companies Act. Important among them are as under :1. Not to allot the Shares until Minimum Subscription is received.
2. To keep the Register of Members properly maintained.
3. To convene the General Meetings of the Shareholders.
4. To acquire Qualification Shares of the company within two months.
5. To send the copy of the Statutory Report to every member.
6. To send the Allotment Return to the Registrar.
Ans. Charge - A charge is the security given by a company for securing debentures by a mortgage on the assets of the company. A company can also give a security to the debenture holder to borrow money and in that case the debentures are called secured debentures. When existing as well as future property of the company is agreed to be made available as a security for the repayment of the debt, this is called a charge on the property of the company.
The power to create a charge on the assets of the company is also included in the Borrowing Power of a company. The creditor only gets the right to have the security made available by an order of the court. A charge includes a mortgage. The charges that may be created on its assets by a company are of two types:-
1. Fixed Charge, and
2. Floating Charge.
1. Fixed Charge :- A fixed charge which is also known as specific charge is always created on some definite and ascertained property of the company. The best examples of fixed charge may be a charge on the land & Building of the company, Plant & Machinery of the company. Though the property remains in the possession of the company but it prevents the company from dealing in that property without the consent of the holder of the charge. 2. Floating Charge :- A floating charge is a charge which is not specific charge. A floating charge is an equitable charge which is created on some asset which is constantly changing. It is not attached to any specific property of the company but it covers any fluctuating asset of the company. The best examples of a floating charge could be a charge on the Stock in trade and Book Debts of the company. Contrary to the fixed charges, the company can deal in such assets in its normal course of business until the charge becomes fixed on the happening of certain event. Characteristics of a Floating Charge :- Following are the main characteristics or features of a floating charge :-1. It is a charge on a class of assets of the company, which are both present and future assets.
2. The class of assets charged is one which in the ordinary course of business of the company would be changing from time to time.
3. The company can carry on its normal course of business until the charge becomes fixed on the happening of certain event.
Distinction between a Fixed Charge and a Floating Charge - Following are the main points of difference between a Fixed Charge and a Floating Charge :-1. Fixed charge is a charge on the fixed assets of the company. Whereas the Floating Charge is a charge on the variable assets of the company.
2. In Fixed charge it prevents the company from dealing in that property without the consent of the holder of the charge. Whereas in case of a Floating charge, the company can deal in such assets in its normal course of business until the charge becomes fixed on the happening of certain event.
3. A Floating charge can be crystallised i.e., a Floating charge can become a Fixed charge. Whereas a Fixed charge cannot be converted into a Floating Charge.
When a Floating charge becomes a Fixed charge (Crystallisation of a Floating Charge) :- When ever a lender want to use his authority to recover his debt from the security, he shall have to convert a Floating charge into a Fixed charge. A Floating charge would be useless if the lender could not convert a Floating charge into a Fixed charge. In certain circumstances the lender can do it, and when he does it, this process is called "Crystallisation" of a Floating charge. A Floating charge may be Crystallised or becomes a Fixed charge in the following circumstances :-1. When a company ceases to carry on its business ; OR
2. When the company goes into liquidation; OR
3. When a receiver is appointed; OR
4. When a default is made in paying the principal or interest and the holder of the charge brings an action to enforce his security.
Registration of charges - The following charges created by a company on its assets are void against the Liquidator or Creditors unless they are registered with the Registrar :-1. A charge for the purpose of securing any issue of Debentures.
2. A charge on the uncalled share capital of the company.
3. A charge on any immovable property where ever situated.
4. A charge not being a pledge, on any movable property.
5. A charge on any book debts of the company.
6. A Floating charge on any property of the company.
7. A charge on calls made but not paid.
8. A charge on any ship or any share in a ship.
9. A charge of Goodwill, Patents, License, Trade mark or Copy right.
Consequences or Effects of Non-registration of a charge :- Where a charge is required to be registered with the Registrar is not registered, the following consequences may arise :- 1. The Charge becomes Void :- The charge becomes void as against the Liquidator (Where the company goes into liquidation) and against the creditors. 2. The money secured by the charge becomes immediately payable :- When a charge becomes void against the Liquidator or the Creditor, the money secured thereby shall becomes immediately payable. 3. No Lien on the title deeds :- The holder of the charge whose charge has become void for non-registration, shall have no lien on the title deeds or documents deposited with him. 4. To be treated as Unsecured Creditors :- At the time of Liquidation of the company, the creditor having an unregistered charge shall become an unsecured creditor of the company as the charge has become void against the Liquidator and the Creditor. 5. Penalty :- If default is made in filing with the Registrar for registration the particulars of any charge created by the company, which should have been registered, the company and every officer of the company shall be punishable with fine which may be extended to Rs. 10,000 and further a fine of Rs. 5,000 for every day during which the default continues.
Ans. A Company Secretary is usually appointed by the Board of Directors, however if any specific mode for the appointment of the secretary has been provided in the articles of the company, the appointment will be made in accordance with the mode as provided. The Board of Directors may also remove the secretary. Usually the contract of service contains the terms of termination. As an employee he is entitled to a reasonable notice of dismissal or compensation in lieu thereof. However, he may be dismissed summarily and without notice for acts which go against the root of the contract such as misconduct, incompetence or permanent disability, wilful disobedience, etc. On winding up of the company, the service of the secretary terminates. Likewise, the appointment of manager or receiver may also terminate his service.
Status - A Company Secretary is an agent of the company. He is not a mere clerk, but an officer of the company with executive duties and responsibilities. He is now considered as a chief administrative officer of the company. He is an employee and entitled to the benefits conferred by statutes to the employees. It is to be noted that he holds the office of a fiduciary nature and therefore he cannot make secret profit in connection with the affairs of the company and if he earns such profit, he will be held accountable to the company.
Powers and Functions - A Company Secretary is required to perform ministerial and administrative functions and thus the nature of his work is not managerial. It has been said that a company secretary is the officer of the company who is charged with the duty of ensuring that the affairs of the company are conducted in accordance with the provisions of the Companies Act and articles of the company are generally in accordance with the law. A company secretary is entitled to exercise all those powers which fall within the scope of his administrative functions or which are delegated to him, but he is not entitled to exercise managerial functions. Thus a company secretary, without express authority, cannot call a general meeting, though such action can be ratified by the Board of Directors before the meeting. Company Secretary cannot register transfer before it has been passed by the Board. He cannot strike a name off register and he cannot make representation on behalf of the company unless he be expressly authorised to do so or and cannot induce people to take shares in company. A secretary is a servant of the company and therefore an act done by him within the scope of his authority will be binding on the company even if the act has been done fraudulently for his personal benefit and not for the benefit of the company.
Duties and Liabilities - A Company Secretary has to perform several duties. His statutory duties include signing the annual return, verifying the statement made out of affairs of the company to the Official Liquidator in the event of winding up by Court, etc.
In addition to above it is his statutory duty to deliver a return of allotment to the Registrar, to issue certificates of shares and debentures, to file with the Registrar particulars and mortgages for registration, to allow inspection and furnish copies of the register of members, register of debenture-holders, register of directors etc. In the case of breach of these duties, he will be held liable as an officer of the company.
Besides, a Company Secretary is required to maintain proper accounts and he may be penalised if he is found guilty of not keeping proper accounts. He may also be penalised for fraud. If he is found to have destroyed or falsified any books, papers, etc., he will be punished with imprisonment.
In addition to his statutory duties he is to perform several general duties. It is his duty to attend meetings of the company and of directors, to prepare agenda of meetings, to issue notices to members under the direction of the Board of Directors, to maintain register of debentures, etc. and to look after the internal management of the company. His duties are usually specified in the articles of the company or under a contract of service.
Ans. The share of profit which falls to each individual member of the company is known as dividend. A company may, if so authorised by its articles, pay dividends in proportion to the amount paid up on each share where a larger amount is paid up on some shares than on others, Section 93. Dividends are paid only out of profits and they can never be paid out of the company's capital,
Section 205 - If the company has not provided for depreciation for any previous financial year, that should be deducted from the profits. If the company has incurred any loss in any previous year, the amount of loss should be deducted from the profits. The Central Govt. has been empowered to allow company to declare or pay dividend without providing for depreciation if it thinks necessary so to do in public interest.
Sub-section (5A) of Section 80 inserted by the Companies (Amendment) Act, 1988 has abolished the irredeemable preference shares. It provides that no company limited by shares shall, after the commencement of the Companies (Amendment) Act, 1988 issue any preference share which is irredeemable or is redeemable after the expiry of a period of 10 years from the date of its issue. Section 80A inserted by the Companies (Amendment) Act, 1988 makes provisions with respect to the redemption of existing irredeemable preference shares.
No dividend shall be payable except in cash. However, it does not prohibit the capitalization of profits or reserves of a company for the purpose of issuing fully paid up bonus shares or paying up any amount for the time being unpaid on any shares held by the members of the company, (Sections 6), 205(3). It is to be noted that any dividend payable in cash may be paid by cheque or warrant sent through the post directed to the registered address of the share-holder entitled to the payment of the dividend or in the case of joint share-holders, to the registered address of that one of the joint share- holders which is first named on the register of members, or to such person and to such address as the share-holder or the joint share-holders may in writing direct.
Time within which Dividends to be distributed. - The dividend is required to be distributed within 42 days of its declaration. Where the dividend is paid by cheque or warrant, the cheque or warrant must be posted within that period. If it is not paid within that period every director who is knowingly a party to the default is liable to simple imprisonment for a term which may extend to 7 days and also fine.
Whom dividend should be paid. - Dividend in respect of any share should be paid to the registered holder of such share or to his order or to his bankers. Where share warrant has been issued in respect of the share the dividend should be paid to the bearer of the warrant or to his bankers.
Who can declare dividend. - The Board of Directors recommends declaration of dividend at a particular rate. It is for the annual general meeting of the company to declare dividend at the rate recommended by the Board of Directors or at a rate lower than the rate recommended by the Board of Directors. The general meeting may reject the declaration of dividend, but it cannot declare dividend at a rate higher than the rate recommended by the Board of Directors. It is to be noted that the general meeting of the company cannot declare dividend, unless the Board of Directors has recommended for the declaration of dividend. The company in its general meeting may declare dividend, but no dividend shall exceed the amount recommended by the Board. In short, the dividend is declared by the company in its general meeting on the recommendation of the Board.
Ans. Meaning of Winding up. - Winding up is the process whereby the life of the company is ended and its property administered for the benefit of its creditors and members. Liquidator is appointed and he takes control of the company, collects its assets, pays debts and finally distributes the surplus (if any) among the members in accordance with their rights under the articles of the company, Section 439. This being done the company is dissolved in compliance with the requisite formalities prescribed by the Companies Act and thereafter its existence is terminated. Thus, the company is not dissolved immediately at the commencement of winding up.
Modes of Winding up. - A company may be wound up in any of the following ways :-
1. Winding up by the Court (Compulsory winding up).
2. Voluntary winding up.
3. Voluntary winding up under the supervision of the Court.
Ans. The petition for winding up may be brought by any one of the following :
1. Petition by the Company, Section 439(1)(a). - The company can itself apply to the Court for an order passing a special resolution to wind up the affairs of the company. Thus the company can present a petition for this purpose only if a special resolution has been passed by the members at the general meeting of the company to enable it to take such step. However, it has been held that where the company is found by the directors to be insolvent due to circumstances which ought to be investigated by the Court, the directors may apply to the Court for an order of winding up of the company even without obtaining the sanction of the general meeting of the company, State of Madras v. Madras Electric Tramways Ltd., A.I.R. 1956 Mad. 131.
2. Creditor's petition, Section 439(1)(b). - A creditor may also apply to the Court for an order of winding up of the company if principal sum or interest is due and payable by the company but the company has failed to pay it. Here the word `creditor' includes a secured creditor, debenture-holder, debenture- stock-holder and trustees of the debenture-holders. A secured creditor is as much entitled to present a petition for winding up as an unsecured creditor. Thus a secured creditor may present a petition for the order of winding up without being required to give up his security. A petition brought by contingent or prospective creditor will not be admitted unless the leave of the Court is obtained there is a prima facie case for winding up of the company and the petitioner gives security for costs, Section 439(8).
3. Petition by contributory, Section 439(1)(c). - When the winding up of a company is commenced its share-holders are called contributories. A contributory can also present a winding up petition. The term `contributory' includes the share-holder of any shares which are fully paid up. A contributory may present a petition for winding up in the following conditions :
(i) Where the number of the members in the case of a public company is reduced below 7 and in the case of a private company, below 2 any contributory may apply for winding up of the company.
(ii) Where the winding up petition is presented on any other ground, it is necessary that the shares in respect of which the petitioner is a contributory either were originally allotted to him or have been held by him and registered in his name for at least 6 months during the 18 months immediately before the commencement of the winding up or the share have devolved on him through the death of a former holder. The contributory on whom shares have been developed can present a petition for winding up only if shares so devolved are registered in his name. However in Shakuntala Rajpal v. Mckenzie Phillips Ltd., 1986 Tax L.R. 1774 (Delhi), it was held that the legal representative of a deceased member can present a winding up petition, even where his name has not been entered into the register of members of the company.
4. Petition by the Registrar, Section 439(1)(e). - The Registrar is also entitled to present a petition for winding up of a company if he is specifically authorised by the Central Govt. in a case falling under Section 243 or on any of the ground mentioned in Section 433 except on the ground that the company has passed a special resolution for its winding up. However, it is to be noted that on whatever ground the Registrar makes a petition for winding up he is required to obtain previous sanction of the Central Govt. to present such a petition and the Central Govt. will not give sanction to the Registrar without first giving the company an opportunity of making representations. 5. Petition by the Central Govt., Section 439(1)(f). - The Central Govt. may authorise any person to present a petition for winding up a company in a case falling within Section 243. It provides that if from the report of the inspectors who have investigated the affairs of the company it appears to the Central Govt. that :(i) the company's members have not been given all the information with respect to its affairs which they might reasonably expect, it may, unless the company is already being wound up by the Court, authorise any person to present to the Court a petition for winding up of the company,
(ii) the company was formed for any fraudulent or unlawful purpose,
(iii) the business of the company is being conducted with intent to defraud its creditors, members or any other person or otherwise for a fraudulent or unlawful purpose or in a manner oppressive of any of its members, or
(iv) the person concerned in the formation of the company or the management of its affairs have been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members.
Ans. On petition, the Court has discretion to order winding up of the company or not. A petition for winding up may be presented to the Court on any of the grounds stated below, Section 433 :-
1. Special resolution. - A company may be wound up by the Court if it has, by a special resolution, resolved that it be wound up by the Court. But it is to be noted that the Court is not bound to order winding up merely because the company by a special resolution has so resolved. Even in such a case it is the discretion of the Court to order winding up or not.
2. Default in filing statutory report or holding statutory meeting. - If a company has made a default in delivering the statutory report to the Registrar or in holding the statutory meeting, a petition for winding up of the company may be presented to the Court. A petition on this ground may be presented to the Court by a member or Registrar (with the previous sanction of the Central Govt.) or a creditor. The power of the Court is discretionary.
3. Failure to commence business within one year or suspension of business for a whole year. - Where a company does not commence its business within one year from its incorporation or suspends its business for a whole year, a winding up petition may be presented to the Court. Even if the business is suspended for a whole year, this by itself, does not entitle the petitioner to get the company wound up. Such a circumstance is entirely in the discretion of the Court depending upon the facts and circumstances of each case, Paramjit Lal Bodhwar v. Prem Spinning & Weaving Mills Co. Ltd., 1983 Tax.L.R. 2506 (All.).
A company is not wound up merely because it has ceased to carry on one of its several businesses unless that business is the main business of the company.
4. Reduction of membership below the minimum. - When the number of members is reduced, in the case of a public company, below 7 and in the case of a private company, below 2, a petition for winding up of the company may be presented to the Court.
5. Company's inability to pay its debts. - A winding up petition may be presented if the company is unable to pay its debt. `Debt' means definite sum of money payable immediately or at future date, Abhilash Vinod Kumar Jain v. Cox & Kings (India) Ltd., A.I.R. 1995 S.C. 1592. A company will be deemed to be unable to pay its loan in the following conditions, Section 434:
(a) If a creditor to whom the company is indebted in a sum exceeding 500 rupees, has served on the company a demand for payment and the company has for 3 weeks thereafter neglected to pay it or to secure or compound for it to the reasonable satisfaction of the creditors.