COMPANY LAW - Short Notes
In the commercial world today, company law is more relevant than any other law. This is an easily understandable topic for law students.
It opens up new perspectives and horizons for him; This enables him to appreciate the fundamentals of the subject from a legal and juridical point of view;
This places him in a critical position, when the opportunity presents itself for companies to offer their services, to be equipped with materials and resources that may be absent in others, without 'law qualification'. enter. The proliferation of companies (private and public) in the last four decades has led to the demand for skilled and qualified legal advisors to guide the executives running the companies. The omission or contravention of the provisions of the Companies Act attracts not only fines but also criminal prosecution.
According to our Constitution, the Parliament alone has the legislative "capacity" to make laws in the Companies Act and its affairs. Public companies are tied up with a number of grand formalities for non-compliance with attendant punitive consequences. The reason for this appears to be the 'public money' involved. Private companies are largely spared as there is no public funding involved; Otherwise the central government. Who else should bow down to this invisible hand to protect and secure public investment?
Major cases like Foss Vs. Horbottle, Cook Vs. Deek, Arlanger Vs. New Sombrero Phosphate Co. Ltd. Shantiprasad Jain Vs. Kalinga Tubes Ltd., R.V. Kylesant, Ashbury Railway Carriage Co. Vs. Rich, in addition to the frequently cited Solomon Vs. Solomon & Company, and Denny V. Peak, decided by the courts, has shown how difficult and complex the problems are.
The subject is evolving very rapidly to the extent of escaping the grasp of experts; Dozens are being amended and our Supreme Court has to add several judgments. However, the basic principles have remained the same. It is on the specialization of these principles that a sincere effort must first be made by the students. Keep company with company law, it will give you money and status:
Chapter 1: Introduction Definition of a Company
The word “company” has no strictly technical or legal meaning. (Stanley, Re,  1 Ch 131)
In general, “company” refers to a group of persons who have incorporated themselves into a distinct legal entity for purposes of achieving identified common targets.
The Act defines the term ‘company’ to mean a company formed and registered under the Act. (S.3(1))
Features of a Company
Upon incorporation, a company has an independent corporate existence. A company is a ‘legal person’ and is capable of having its own assets and liabilities. A company has the capacity to own property, to sue and be sued, borrow money, have a bank account and enter into contracts in its own name.
A company has perpetual succession; that is, even if the membership of a company changes from time to time, such changes will not affect the company’s continuity.
Illustration: X, a company, has three shareholders. Upon the death of one of the shareholders named A, the shares held by A were inherited by her son. The change in shareholding structure will not have any impact on the existence of company.
Lifting of the Corporate Veil
A company has a separate and distinct legal
identity from the members who compose it.
Illustration: S owned 99.9% shares of a company X, and the remaining shares of the company were owned by the family members of S. Upon liquidation, the creditors of the company claimed that S and X were the same entity. The court held that, upon incorporation, X would have a separate identity distinct from S, who was the owner of company X. Due to this, S would not be liable for debts incurred by X. (Salomon v. Salomon, 1897 AC 22)
In certain exceptional circumstances, however, the courts ignore the separate identity of the company and impose liability on the members or managers who are responsible for the actions of the company. This is known as the doctrine of “lifting of the corporate veil”. Certain instances where courts have applied the doctrine of lifting of the corporate veil are:
•If there is a danger to public interest.
Illustration: A company, X, was incorporated in England to sell tyres manufactured in Germany by a German company. The shares of X were held by the German company and all the directors of X were German nationals, resident in Germany. During the First World War, X instituted a suit for recovery of trade debts from an English customer. The court held that though X was incorporated in England, it was controlled by residents of an enemy nation. Allowing X to recover trade debts would amount to transferring money to an enemy nation which would be against the public policy. (Daimler Co. Ltd. v.Continental Tyre & Rubber Co. Ltd.,  2 AC 307)
•To avoid tax evasion or circumvention of tax obligation.
Illustration: D, a wealthy person, held her investments through various companies for purposes of avoiding tax liabilities. The companies had no business apart from holding investments on D’s behalf. The court disregarded the corporate identity of the companies and imposed a tax liability on D. (Dinshaw Maneckjee Petit, Re., AIR 1927 Bom 371).
•In case of fraud or improper conduct.
Illustration: L agreed to sell certain land to J. Subsequently L changed her mind. To avoid selling the land to J, L incorporated a company and transferred the land to the company. In a suit for specific performance, the court disregarded the corporate identity of the company and ordered the company to transfer the land to J. (Jones v. Lipman, (1962) All ER 342)
•If the statute itself contemplates the lifting of the corporate veil.
Illustration: Provisions of the Foreign Exchange Regulation Act, 1973 (“the FERA”) permitted non-resident Indians to hold up to 1% shares of Indian companies. S, a non- resident Indian, incorporated 13 companies and used the companies to purchase shares of an Indian company beyond the permissible limit of 1%. The court ignored the corporate identity of the companies and held the transactions to be in violation of the provisions of the FERA. (Life Insurance Corporation v. Escorts Ltd.,  1 SCC 264)
Chapter 2: Kinds Of Companies
Private Company and Public Company
S.3(1)(iii) of the Act defines a private company to mean a company which has a minimum paid-up capital of one lakh rupees or such higher amount as may be prescribed, and which, by its articles of association:
•Restricts the right of members to transfer its shares;
•Limits the number of its members to fifty. In determining this number of fifty, employee- members and ex-employee members are not considered;
•Prohibits an invitation to the public to subscribe to its shares or the debentures; and
•Prohibits any invitation or acceptance ofdeposits from any persons other than its members, directors, or their relatives.
A private company must have a minimum of two members.
The Act defines a public company to mean a company which is not a private company. (S.3 (1)(iv))
A public company must have a minimum of seven members. There is no limit to the maximum number of members that a public company may have. Moreover, a public company is required to have a minimum paid-up capital of five lakh rupees or such higher amount as may be prescribed; furthermore, the term ‘public company’ includes a private company which is a subsidiary of a company other than a private company.
Limited and Unlimited Company
A limited company may be of two kinds:
(a) company limited by shares; or
(b) company limited by guarantee.
In companies limited by shares, the liability of the members of the company is restricted to the amount of share capital unpaid by the members. Members have no liability when they hold fully paid-up shares. Note that most companies are incorporated as a company limited by shares.
In companies limited by guarantee, the liability of the members of the company is limited to the fixed amount, as prescribed in the Memorandum of Association of the company, which the members of the company undertake to pay upon liquidation of the company. The liability of the members to pay the guaranteed amount as specified in the Memorandum of Association arises only when the company goes into liquidation.
In unlimited companies, the liability of its members in unlimited.
A government company is a company in which at least 51 percent of the total paid-up share capital is held by the Central Government, one or more State Government
(s) or jointly by the Central Government and one or more State Governments. (S.617)
Illustration: The following are some examples of ‘government companies’: Bharat Heavy Electricals Limited, Coal India Limited, Food Corporation of India, National Aviation Company of India Limited, Oil and Natural Gas Corporation, and Steel Authority of India.
In the recent past, several government companies have been in the news due to the efforts of the Central Government to reduce its shareholding in such companies (generally referred to as “disinvestment”).
The Act stipulates several special provisions for the governance of government companies. For instance, the auditor of a government company must be appointed by the Comptroller and Auditor General of India. (S. 619)
Holding Company and Subsidiary Company
A company is deemed to be subsidiary of another company (that is, the parent company) if:
(a) the composition of its board of directors is controlled by the parent company; or
(b) more than half, in face value, of its equity share capital is held by the parent company; or
(c) where it is the subsidiary of a company which is subsidiary of the parent company.
If Company A holds 51% of the share capital of Company B, then Company B is the subsidiary of Company A.
If Company A has the right to appoint more than half of the directors on the board of directors of Company B, then Company B is a subsidiary of Company A.
If Company B is a subsidiary of Company A, and Company C is a subsidiary of Company B, then Company C and Company B are both subsidiaries of Company A.
A listed company is a public company whose shares or other securities (like debentures) are listed on a stock exchange in India and can be freely traded through the stock exchange on which they are listed.
Illustration: The following are examples of listed companies: Reliance Industries Limited, whose shares are listed on the Bombay Stock Exchange Limited (“BSE”) and the National Stock Exchange Limited (“NSE”), and the State Bank of India Limited, whose shares are listed on the BSE and the NSE.
A company that intends to have its securities listed on a stock exchange must comply with the listing conditions prescribed by such stock exchange. The Listing Agreements of stock exchanges generally prescribe several disclosure obligations on the companies. For instance, the Listing Agreements of the BSE and the NSE require every listed company to make a public disclosure of the outcome of every meeting of the board of directors and shareholders of the company and any material information disclosed therein. The companies are also under an obligation to maintain a minimum level of public shareholding in the company, and to disclose quarterly and yearly audited financial information within certain prescribed periods.
A company incorporated outside India but which has a place of business in India is referred to as a “foreign company”. (S.591)
Foreign companies must furnish certain specified documents, such as, copies of charter documents, and details of directors, to the Registrar of Companies (“RoC”) within 30 days of establishing a place of business in India. (S.592)
Foreign companies must also submit copies of their account statements to the RoC within the stipulated time. (S.594)
Chapter 3: Incorporation and Constitutional Documents of a Company
Incorporation and Constitutional Documents of a Company
To obtain registration of a company, its founding members must file an application, along with the prescribed documents, with the relevant RoC. Upon satisfaction of all conditions, the RoC issues a Certificate of Incorporation to the Company. In the Certificate of Incorporation, the RoC certifies that the company is incorporated and, in case of a limited company, that the company is limited. (S.34(1))
The Certificate of Incorporation is conclusive evidence of the fact that all the requirements of the Act have been complied with in respect of the company’s registration. (S.35)
A private company can commence business from the date of its incorporation. (S.149(7))
A public company can commence business only upon receipt of a Certificate for Commencement of Business from the RoC. (S. 149(4))
Memorandum of Association (“MoA”):
The MoA of the company contains the fundamental conditions upon which the company is allowed to be incorporated. It sets forth the area of operation of the company.
The Act prescribes that the MoA of the Company must contain the following provisions:
Name: The first clause of the MoA must state the name of the company. The Act prescribes that the last word of the name of a limited company must be “Limited” and the last words of the name of a private company must be “Private Limited”.
Illustration: The name “XYZ Industries Limited” suggests that it is a limited company. Similarly, the name “ABC Private Limited” suggests that the company is a private company.
A company may change its name upon approval from its shareholders and the Central Government. (S.21)
Registered Office: The second clause of the MoA must specify the State in which the registered office of the company will be situated.
A company may change its registered office within a State upon approval from its shareholders. Shifting of the registered office from one State to another requires approval from the shareholders of the company and the Company Law Board. (S.17)
Objects: In the third clause, the MoA must state the objects for which the company is proposed to be established. The Objects clause must be divided into three sub- clauses, namely: the main objects, the other objects, and the States to which the objects extend.
A company can change its objects only in so far as the change is necessary to (S.17(1)):Carry on the business of the company in a more economically or efficient manner;
Illustration: A company sought to amend its MoA to enable it to pay remuneration to its managers. The court allowed such an amendment on the ground that it was necessary for efficient management of the company. (Scientific Poultry Breeders Association, Re, 1933 Ch 227)
•Attain the main purpose of the company by new or improved means;
•Enlarge or change the local area of operation of the company;
•Carry some business which, under the existing circumstances, may be combined with the company’s business; the new business must not be inconsistent with the existing business.
Illustration: A company was engaged in the business of providing protection to cyclists on public roads. The company sought to amend its objects for purposes of undertaking the business of providing protection to motorists. The court did not allow the amendment as the cyclists had to be protected against the motorists and both the businesses were contradictory. (Cyclists’ Touring Club, Re, (1907) 1 Ch 269)
•Restrict or abandon any of the objects specified in the memorandum;
•Sell or dispose of the whole or any part of the undertaking, or of any of the undertakings, of the company; or
•Amalgamate with any other company or body of persons.
Since there are restrictions on the purposes for which the objects clause of the MoA may be altered, most companies prefer to draft the objects clause in a broad manner such that it facilitates wide operations of the company.
Liability: The fourth clause must state the nature of liability that the members of the company will incur; for instance, whether or not the members of the company have limited liability, and whether the liability is limited by contribution towards share capital or guarantee. (S.13)
Capital: The last clause of the MoA must state the amount of nominal capital of the company and the number and value of the shares into which the capital is divided. (S. 13)
The capital clause of the MoA may be changed upon approval of the shareholders of the company.
Articles of Association
The Articles of Association (“the Articles”) contain the rules, regulations, and the bye- laws of the company that govern the internal management and administration of the company.
Schedule I of the Act contains various model forms of Articles. A company may either frame its own Articles or adopt any of the model forms of the Articles contained in Schedule I.
The Articles contain various provisions governing various areas, such as: issue and transfer of shares, alteration of capital, borrowing powers, accounts, and powers of directors. Any provision that aims to regulate the relation between a company and its members and between the members inter se may be incorporated in the Articles.
In the event of a conflict between the provisions of the Articles and the Act, the provisions of the Act prevail. (S.9)
S.36 of the Act imparts contractual force to the Articles. It provides that the Articles, when registered, bind a company and its members, as if they had been signed by the company and each member. The Articles regulate only such rights of the members of the company which can be enforced through the company. (Khusiram v. Hanutmal,  53 CWN 505)
Illustration: A and B are members of a company named ABC Pvt. Ltd. A and B have disputes regarding (i) transfer of the shares of ABC Pvt. Ltd.; and (ii) transfer of a commercial land owned by A to a third party. The dispute regarding the transfer of shares will be governed by the provisions of the Articles. The dispute over transfer of land, however, will not be governed by the Articles since it does not concern the rights of A and B with respect to the company ABC Pvt. Ltd.
The Articles may be amended upon approval of the shareholders of the Company. (S.31)
Doctrine of Constructive Notice
The MoA and the Articles of a company are public documents available with the RoC. They are accessible to all. The doctrine of constructive notice provides that every outsider who deals with a company is deemed to have notice of the contents of the MoA and the Articles.
Illustration: The Articles of a company stipulated that all deeds of the company must be signed by the managing director, the secretary and a working director of the company. The plaintiff accepted a deed from the company that was signed only by the secretary and a working director and was not signed by the managing director. The court held that the deed was invalid and the plaintiff had no remedy, because had the plaintiff consulted the Articles of the company, the plaintiff would have detected the defect in the deed. (Kotla Venkataswamy v. Rammurthy, AIR 1934 Mad 597)
Doctrine of Indoor Management
The doctrine of indoor management is an exception to the doctrine of constructive notice. As per this doctrine, an outsider dealing with a company is entitled to presume that the internal working of the company is in conformity with the provisions of the public documents of the company. (Royal British Bank v. Turquand,  119 ER 886)
Illustration: The Articles of a company provided that its directors may borrow funds from time to time, subject to authorization by the shareholders of the company. The directors of the company borrowed funds from the plaintiff without obtaining proper sanction from the shareholders. The shareholders of the company challenged the borrowing transaction. The court held that since the Articles authorized the directors to borrow funds, the plaintiff had the right to infer that the directors were acting within their authority and had approval of the shareholders. The transaction was held to be binding on the company. (Royal British Bank v. Turquand, (1856) 119 ER 886)
This doctrine does not provide protection in certain cases, such as where the affected party had knowledge of irregularity, where the act of an officer of a company is clearly outside the powers of such an officer, or in case of forgery.
Illustration: The Articles of a company stipulated that the company could issue debentures only with the approval of the shareholders of the company by way of a shareholders’ resolution. The directors of the company issued debentures to themselves without obtaining the sanction of the shareholders. The court held that the directors could not claim remedy pursuant to the doctrine of indoor management because as directors of the company, they had the knowledge about restrictions on the borrowing powers of the company. (Howard v. Patent Manufacturing Co., (1888) 38 Ch D 156)
Chapter 4: Share Capital
A company’s Capital must be divided into shares of a fixed amount. The Act permits issuance of two kinds of shares, namely “equity shares” and “preference shares”.
Every person holding share(s) in a company is entitled to receive a Share Certificate from the company certifying the number of share(s) held by such person in the company. A Share Certificate is issued under the common seal of the company and is prima facie evidence of the title of the member to such shares. (S.84)
In accordance with the provisions of the [Indian] Depositories Act, 1996, as amended, companies have the option of issuing shares in “dematerialised form”. Dematerialisation refers to the process under which Share Certificates of the shareholders are converted into electronic form and credited to the shareholder’s account that is maintained with a depository participant. Thus, no Share Certificate is issued to the shareholder in case of dematerialised shares. Such shares exist in the form of entries in the books of the relevant depository.
Equity share capital is defined under the Act as meaning all share capital which is not preference share capital. (S.85(2))
Equity shares are also referred to as “ordinary shares”. Companies also have the right to issue different classes of equity shares with differential rights as to dividend or voting,
subject to certain specific prescriptions.
Preference shares are shares that fulfil the following conditions:
•They carry preferential rights to dividend; that is, the preferential dividend payable to shareholders holding preference shares must be paid before distribution of any dividend to the ordinary shareholders; and
•They carry a preferential right to be paid in
case of liquidation of the company; this means that in case of winding up, the amount paid-up on preference shares must be paid to the preference shareholders prior to distribution of any funds to the ordinary shareholders.
The dividend payable on preference shares may be “cumulative” or “non-cumulative”, depending on the terns of issue of the preference shares.
In case of cumulative preference shares, where no dividend is issued in a year, due to lack of profits, the arrears of dividends must be carried forward and paid out of the profits of subsequent years. In case of non-cumulative preference shares, the dividends lapse if no dividend is declared in any year.
Preference shares are presumed to be cumulative unless clearly specified otherwise in the terms of issue of the preference shares or the Articles of the company.
The Act prohibits issuance of irredeemable preference shares or shares that are redeemable after expiry of a period of 20 years from the date of their issue. (S.80-A)
The terms of issue of the preference shares may stipulate when the preference shares will be redeemable and whether they will be redeemable at the option of the shareholder or the company. Prior to redemption of the preference shares, the following conditions must be satisfied:
•The preference shares to be redeemed mustbe fully paid-up;
•The preference shares must be redeemed out of the profits of the company or by utilising the proceeds of a fresh issue of shares for redemption; and
•If redemption is made out of the profits of the company, then a sum equal to the redemption amount must be transferred to the Capital Redemption Reserve Account of the company.
Sweat Equity Shares
The Act enables companies to issue shares for consideration other than cash. Shares issued to the directors or employees of a company in lieu of services rendered, intellectual property provided or other value addition are known as “sweat equity shares”.
Voting Rights on Shares
Every equity share carries one voting right. An equity shareholder is entitled to vote on all matters of the company.
A preference shareholder is entitled to vote on only such matters which have a direct impact on the rights of the preference shareholders.
However, preference shareholders obtain general voting rights if dividend on the preference shares held by them remains unpaid beyond a defined time period (which varies depending on whether the preference shares are cumulative or non-cumulative).
Transfer of Shares
Shares of a company are movable property and are capable of being transferred in the manner provided by the Articles of the company. (S.82)
In a private company, the Articles may impose restrictions on the rights of the members of the company to transfer shares. A private agreement between the shareholders of a private company, that imposes restrictions on the members’ right to transfer shares, is binding on the company only if the provisions of the agreement are incorporated in the Articles. (V. B. Rangaraj v. V. B. Gopalakrishnan,(1992) 1 SCC 160)
Illustration: The Articles of a private limited company provided that the shares of the company could not be transferred to persons who were not members of the company. The shares of the company were transferred to non-members under a court auction. Upon being challenged, the court held that the transfer of shares was in violation of the provisions of the Articles. (S. A. Padanabha Rao v. Union Theatres Pvt. Ltd., (2002) 108 Comp Cases 108 (Kant))
There are diverse case laws on the issue of restriction on transfer rights of members of a public company. S.111 states that shares or debentures, and any interest therein of a public company shall be “freely transferable”. Some courts have held that in case of public companies, if the restriction on transfer is incorporated in the Articles, it would be binding on the members. However, the prevalent view is that shares of a public company are freely transferable, and any restriction on right to transfer such shares is not valid. (S.111A, Western Maharashtra Development Corporation Ltd. v. Bajaj Auto Limited, (2010) 154 Comp Cases 593 (Bom))
A transfer of share(s) of a company becomes effective only when it is recorded in the books of the company and the name of the new shareholder is recorded in the Register of Members of the company.
Shares, being movable property, may be mortgaged or pledged by the shareholders.
Forfeiture of Shares
A company has the right to “call” upon its members to make payment towards full value of the shares as held by them.
If any member, after being called upon to do so, defaults in making payment towards the full value of the share held by such member, the company has the right to take action against such member. In practice, the Articles of most companies entitle them to forfeit the shares of such defaulting members. The right
to forfeit shares can be exercised by a company only if (a) there is a clear provision in this regard in the Articles; (b) due advance notice of forfeiture has been given to the concerned member; and (c) the board of directors of the company have approved a resolution in this regard.
Chapter 5: Directors
A company, being an artificial person, does not have a mind or body of its own. Therefore, it is important that the company’s management must be entrusted to human agents. In practice, directors are the professional persons engaged by the company to manage the business of the company.
Directors are officers of the company and are sometimes described as agents or trustees.
The Act does not provide a definite definition for the term “directors” and merely states that “director includes any person occupying the position of a director, by whatever name called”. (S.2(13))
Only an individual can be appointed as a director of a company. Thus, a company or a firm or association cannot be appointed as a director. (S.253)
A person cannot be appointed as a director, if the person:
• Is of unsound mind;
• Is an undischarged insolvent
• Has applied to be adjudicated as an insolvent
• Has been sentenced to at least six months of imprisonment for an offence involving moral turpitude, and five years have not lapsed from the date of expiration of the sentence;
• Has not paid any “call” on her shares for six months;
• Has been disqualified under the Act for the purpose of preventing fraudulent persons from managing companies; or
• Is a director of a public company which has
(i) not filed its annual return and annual accounts for three continuous years; and
(ii) failed to repay its deposits or interest on
it on the date due, or redeem its debentures on the date due, or pay dividends, and such failure continues for more than one year.
A private company must have a minimum of two directors and a public company must have a minimum of three directors.
Term of Appointment
In private companies, the term of appointment of the directors may be fixed by the shareholders at the time of appointment or it may be specified in the Articles. Unless specified otherwise in the Articles, directors of private companies are not liable to retire by rotation. In public companies, only one-third of the total number of directors can be appointed on permanent basis. The remaining directors are liable to retire on rotational basis. (S.255)
The shareholders of a company have the right to remove a director from her office prior to expiration of her period of office. (S.284)
Kinds of Directors
• Whole-time Director: Whole-time directors are directors who are in whole-time employment of the company.
• Independent Directors: Independent directors
are directors who, apart from receiving director’s remuneration, do not have any material pecuniary relationship or transaction with the company, its management or its subsidiaries which may affect their independence of judgment.
The Listing Agreements of the stock exchanges in India mandate that every listed company in India must have a certain minimum number of independent directors on its board of directors. (Clause 49 of the Listing Agreement)
The Listing Agreement provides that if the chairman of the board is an executive director, then at least half of the directors on the board must be independent directors. If the chairman of the board is a non-executive
director, then at least one-third of the board of directors must comprise of independent directors.
The Listing Agreements specify the criterion that must be satisfied for a person to be deemed as an independent director.
• Managing Director: A managing director is a whole-time director who is entrusted with substantial powers of management of the company which would not otherwise be exercisable by her. (S.2(26))
A managing director can be appointed only if the Articles of the company provide for such appointment. The powers and duties of a managing director may be enumerated in the Articles of the company, the board resolution pursuant to which the managing director is appointed, or in the agreement executed by the company in relation to the appointment of the managing director.
Powers of Directors
The Act authorises the board of directors to exercise all such powers and to do all such acts and things as the company is authorised to exercise and do. (S.291)
The directors have wide powers over the operation and management of the company, subject only to such restrictions as are contained in the Act and the MoA or the Articles of the company.
The Act prescribes that the following powers can be exercised by the directors only by means of a board resolution, approved at a meeting of the board of directors:
• To make “calls” on shareholders in respect of money unpaid on their shares.
• To authorise buy-back of securities.
• To issue debentures.
• To borrow moneys otherwise than on debentures.
• To invest the funds of the company.
• To make loans.
The Act imposes certain restrictions on the powers of the board of directors of a public company.
The board of directors of a public company cannot exercise the following powers unless specifically authorised by the shareholders of the company in a general meeting:
• Sell, lease or otherwise dispose of the whole, or substantially the whole, of the undertaking of the company.
• Remit, or give time for the re-payment of,
any debt due by a director.
• Invest the amount of compensation received by the company in respect of compulsory acquisition in securities other than trust securities.
• Borrow moneys, where the moneys to be borrowed together with the moneys already borrowed by the company, will exceed the aggregate of the paid-up capital of the company and its free reserves. This excludes temporary loans obtained from the company's bankers in the ordinary course of business.
• Contribute, to charitable and other funds, not directly relating to the business of the company or the welfare of its employees, any amount exceeding Rupees Fifty Thousand Only in one financial year.
Duties and Liabilities of Directors
The Act prescribes various statutory obligations that must be performed by the directors of a company. Such statutory obligations include the duty to make statutory filings within the time prescribed by the Act, duty to attend board meetings (S.283(1)(g)), duty to convene shareholders meetings (Ss.165, 166 and 169), duty to approve the annual financial statement of the company (S.215), and the duty to appoint auditors of the company (S.233B). The Act imposes liability on the directors in case they fail to comply with their obligations stipulated under the Act.
Apart from the statutory obligations, the duties of directors include:
•Duty of Good Faith: A director of a company has a fiduciary obligation towards the company and is under a duty to act in the best interest of the company. Duty of good faith implies that all the actions of the directors must be for the benefit of the company and the shareholders of the company.
If a director takes an action which is not beneficial for the company or its members, the director can be held liable for breach of her fiduciary duty towards the company.
Illustration: X, a director of a company, was aware that the value of the assets of the company was 650,000 Pounds. She, however, allowed the assets of the company to be sold for a consideration of 350,000 Pounds. Thus, the assets of the company were sold at lesser value and the company incurred a loss. X was held liable for breach of fiduciary duty towards the company. (Aviling Barford Ltd. v. Perion Ltd., 1989 BCLC 626 Ch D)
•Duty of Care, Diligence and Skill: A director is under an obligation to perform her duties with reasonable care, skill and diligence. The courts have held that a director is not expected to exhibit extraordinary skill or diligence. The director, however, is expected to exhibit such “skill as may reasonably be expected from a person of his knowledge and experience”.
A director can be held liable for negligence if she fails to discharge her duties with reasonable diligence.
Illustration: The directors of a company released funds of the company to pay the company’s debts without ascertaining whether or not the company was under any obligation to pay any debts. The directors were held liable for negligence. (Selanjor United Rubber Estates Ltd. v. Cradock, (1968) 2 All ER 1073)
•Duty to disclose interest: A director is under an obligation to ensure that she does not place she in a situation where her personal
interests may conflict with her duties towards the company.
A director who is interested in any matter that is being discussed by the board of directors, must disclose her interest to the other directors on the board. The interested director must not take part in any discussion pertaining to such matters and must refrain from voting on the same. (Ss.299 and 300)
Illustration: X was a director in Company A. X was also the chairman of Company B. The board of directors of Company A considered and approved a resolution for purchasing office furniture for Company A. During the board meeting, X did not disclose that she was the chairman of Company B and thus, had substantial interest in the purchase contract being awarded to Company B. Upon being challenged, the court set aside the purchase contract and held that X had breached her duty to disclose her interest in the matter. (Aberdeen Railway Ltd. v. Blaikie, (1854) 1 Mcy 461)
S.201 of the Act provides that any provision in the Articles of a company that seeks to exclude the liability of the directors for negligence, default, misfeasance, breach of duty or breach of trust, is void.
At the same time, S.633 of the Act provides statutory protection to the directors against liability of actions taken in good faith.
Illustration: The managing director of a company failed to file the cost audit report of the company within the prescribed time. The delay of 24 days was, however, attributable to labour problems within the company. The managing director was not held liable for the delay in filing the report. (G. Ramesh v.
Registrar of Companies, (2007) 112 Comp Cases
The directors can be held personally liable for their actions that are ultra vires; that is, beyond the scope of the Act or the Articles and MoA of the company.
Illustration: The directors of Company X
entered into certain transactions on behalf of the company despite having the knowledge that such transactions were not authorised by the Articles of the Company. Upon being challenged by the shareholders, the court directed the directors to restore the funds of the company. (Jehangir R. Modi v. Shamji Ladha, [1866-67] 4 Bom HCR 185)
A director may also be held criminally liable for offences committed by the company, if it can be proved that the directors actively aided in commission of the offence.
Illustration: The directors of Company X issued cheques for payments to the customers of the company despite having the knowledge that the company did not have funds in its bank accounts. In a case for dishonour of cheques, the directors shall be liable and may be prosecuted under the relevant provisions of the Negotiable Instruments Act, 1881.
Chapter 6: Management of a Company
Chapter 6: Management of a Company
Meeting of the Board of Directors of the Company
A meeting of the board of directors of the company must be held at least once in every three months and at least four such meetings must be held in each year. The Articles govern the manner in which a board meeting must be called and conducted.
The Act authorises companies to hold board meetings at any location as the directors may deem fit, including outside India. The Act provides that the physical presence of at least two directors or one-third of the total strength of the board, whichever is higher, is compulsory to constitute a quorum for a Board meeting. (S.287)
The Act does not authorise conducting of board meeting by way of teleconferencing or video conferencing.
Unless the Articles specify otherwise, decisions at board meetings are taken by a majority vote.
The Act specifies that minutes of all meetings
of the board of directors must be duly recorded in the books of the company.
Shareholders’ meetings are also referred to as “general meetings”.
Every company is under an obligation to hold at least one meeting of its shareholders every year, in which meeting the annual financial statement of the company is placed before the shareholders. This meeting is known as the “annual general meeting” or “AGM”. The Act prescribes that the gap between two AGMs must not exceed fifteen months. The AGM must be held during business hours on a day which is not a public holiday, and at the registered office of the company or at a place within the city where the registered office of the company is located.
All shareholder meetings, other than an AGM, are known as “extra-ordinary general meetings” or “EGMs”. An EGM may be called at any time as the board of directors may deem fit.
Requisites of a Valid Shareholders’ Meeting
• A shareholders’ meeting must be called by proper authority.
Illustration: The Articles of Company A provide that every shareholders’ meeting must be called by way of a board resolution. If valid quorum was not present at the board meeting at which the resolution to call the shareholders meeting was approved, then the shareholders meeting would be deemed to be improperly convened.
• Due notice of the proposed shareholders’ meeting must be given to all the members of the company. The Act stipulates that the notice must be in writing and, unless specifically waived by the shareholders by way of a resolution or a provision in the Articles, must be given at least 21 day’s prior to the date of meeting.
• The notice must clearly specify the
following: the time and place where the
meeting will be held, the businesses that are proposed to be transacted at the meeting and a statement setting forth all material facts regarding, and the rationale for, each of the businesses proposed to be transacted at the meeting.
• The Act specifies that in case of a public
company, at least five members, and in the case of a private company, at least two members of the company, must be physically present to constitute a valid quorum.
Illustration: In a shareholders’ meeting, only one member was physically present. The member, however, held valid proxies for other members of the company. The court held that a valid quorum was not present for the shareholders’ meeting. (Sharp v. Dawes, 36 LT 188)
Voting at a Shareholders’ Meeting
Shareholders are entitled to discuss each proposed resolution and suggest amendments to it, prior to it being put to vote.
Every equity shareholder is entitled to vote on all shareholder resolutions. To begin with, voting on resolutions takes place by show of hands. Upon show of hands, each member has one vote.
If the shareholders are not satisfied by the results of the voting by show of hands, then a requisite number of shareholders may demand a “poll”; the number of votes cast for and against a resolution must be recorded. In case of a poll, the voting right of shareholders is proportionate to the respective paid-up shares held by them.
A member may vote either in person or through a proxy. (S.176)
Ordinary and Special Resolutions
A resolution is said to be an ordinary resolution when the total number of votes cast in favour of the resolution, is more than the number of votes cast against the resolution.
Illustration: Company A comprises of 100 members holding one share each. At a shareholders meeting of the company, 80 shareholders are present and voting. If 45 shareholders vote in favour of an issue and 35 shareholders vote against it, then the said resolution shall be deemed to be approved by way of an ordinary resolution. Note that members who are not present and voting are not relevant for calculation of votes.
A special resolution is a resolution that requires the approval of at least three-fourth majority of the shareholders present and voting at a shareholders’ meeting.
Illustration: Company A comprises of 100 members holding one share each. At a shareholders’ meeting, 80 shareholders are present and voting. For a resolution to be approved by way of a special resolution, at least 60 members (¾ of 80,) must vote in favour of the resolution. Note that members who are not present and voting are not relevant for calculation of votes.
Matters that must be approved by way of a special resolution include amendment to the Articles or MoA of the company, change in name of the company, and to shift the registered office of the company from one State to another.
The Act specifies that minutes of all meetings of the board of directors must be duly recorded in the books of the company.
Chapter 7: Compromise, Arrangement and Reconstruction
Chapter 7: Compromise, Arrangement and Reconstruction
The Act authorizes companies to enter into a “compromise” or “arrangement” with their creditors or members (Ss.391-393), or to undergo reconstruction or amalgamation with other companies. (S.394)
Note that the Act does not define ‘mergers’ or ‘amalgamations’ anywhere, even though the term ‘amalgamation’ is used in the Act in certain provisions (See Ss.394, 396, and 396A of the Act). These terms, however, are prevalent in common usage; the terms ‘merger’ and
‘amalgamation’ are also usually used interchangeably.
The term “compromise” is not defined in the Act, but is understood to refer to the process where an existing dispute between the company and its members or creditors is resolved by drawing up a scheme of compromise.
“Arrangement” has a wider connotation, and includes reorganisation of the share capital of a company by the consolidation of shares of different classes, or by the division of shares into share of different classes or by both these methods. (S.390(b))
S.390 of the Act lays the ground for the law relating to mergers and amalgamations in India. The Section recognises that a variety of different agreements may be arrived at between a company, its creditors, and its shareholders, and tries to emphasise that the rights and interests of each class of creditors and shareholders must be kept in mind when entering into such agreements. Note that the emphasis is on ‘classes’ of creditors and shareholders, rather than individual creditors or shareholders. This illustrates the commonly accepted view that the law relating to mergers in India goes by the maxim ‘rule of the majority’, so that one or two creditors or shareholders cannot prevent the progress of the company in a merger process.
An application for a compromise or arrangement may be filed before the relevant court by the company, its creditors, members or the liquidator (in case the company is being wound up).
For a scheme of compromise or arrangement to be effective, it must first be proposed before the court under S.391 of the Act. The court may, on the application of the company, or, in the case of a company that is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be to be called, held and conducted in such manner as the court may direct. (S.391(1))
The scheme must then be approved by a majority representing three-fourths in value of the creditors or members, as the case may be, of the company and, thereupon, sanctioned by the court. (S.391(2)) Such an order of the court sanctioning the scheme is binding on all the creditors or class of creditors, all the members or class or members, as the case may be, and also on the company, or, in the case of a company which is being wound up, on the liquidator and contributories of the company. (S.391(2))
A scheme sanctioned by the court does not operate as a mere agreement between the parties; it becomes binding on the company, the creditors and the shareholders, and has statutory force. It cannot be altered except with the sanction of the court, even if the shareholders and creditors acquiesce in such alteration. (J. K. (Bombay) Pvt. Ltd. v. New Kaiser-I-Hind Spinning and Weaving Co. Ltd., 1970 (40) Comp. Cas 689)
The Act gives wide discretionary powers to the court in sanctioning of a scheme of compromise or arrangement, including the power to convene meetings of members or creditors, to examine the reasonableness of the scheme, to request for further information or documents, and to enforce the scheme.
As a summary, S.391 provides the method which has to be followed to put a scheme between a company and its creditors or any class of creditors, or its members or any class of members, or, in the case of a company being wound up, its liquidator, into effect. The courts have wide discretion in deciding whether or not to allow a scheme under S.391, since this is necessary to protect the minority’s interests and to ensure that the scheme is otherwise fair and legal, and that it is not motivated by some illegitimate or unfair reasons. Once the court sanctions the scheme, and the order of the court is filed with the Registrar of Companies, the scheme is given effect from the date it was arrived at.
Illustration: Two companies took deposits from the public at an interest rate of 12%. When the deposits began to mature the companies
informed the depositors that the companies were running at a loss. A scheme of arrangement was drawn up which envisaged payment to depositors at lesser interest. The depositors approved the scheme. The court, however, held that the approval of the depositors was obtained by giving inadequate information. The court further held that the scheme was unreasonable, and was intended to defraud the depositors. Consequently, the court did not sanction the scheme. (Premier Motors (P.) Ltd. v. Ashok Tandon, (1971) 41 Comp Cases 656 All)
Reconstruction refers to a process where a company’s business and undertaking are transferred to another company, formed for that purpose, such that the new company carries substantially the same business as the old company, and the same persons are interested in it as in the case of the old company.
A company may decide to undergo reconstruction for various reasons, such as, to extend its operations, reorganise the rights of its members or creditors, amalgamation with one or more companies.
Amalgamation refers to the process where two or more companies are joined to form a third entity, or one is absorbed into or blended with another company. (Somayajula v. Hope Prudhomme & Co. Ltd.,  2 Comp LJ 61)
Upon completion of the amalgamation, the assets and liabilities of the amalgamating company are transferred to and vested in the amalgamated company in accordance with the terms of the scheme.
Illustration: Company A owed Company X Rupees Ten lakhs. Company X amalgamated into Company Y. Upon amalgamation, Company X ceased to exist, and all the rights and liabilities of Company X were transferred to Company Y. Pursuant to the amalgamation, Company Y will have the right to recover Rupees Ten lakhs from Company A.
Wide powers are given to the courts under S. 394 to facilitate the reconstruction and
amalgamation of companies. This Section acts as the ‘Single-Window Clearance’ for merger and amalgamation activities, rather than have parties making a number of different applications before the courts for the purposes of each different activity. S.394 relieves the burden upon the parties to a scheme of having to make a number of different applications before the court. The court may, however, enquire into the various circumstances surrounding the scheme, to ensure that nothing that is being done through the scheme is against public interest.
Chapter 8: Dividends, Accounts and Audit
Chapter 8: Dividends, Accounts and Audit
Dividend refers to that portion of the corporate profit that is set aside by the company, and declared as liable to be distributed amongst the shareholders of the company. (Bacha F. Guzdar v. Commissioner of Income Taxes, AIR 1955 SC 74)
Dividends can be paid only out of the profits of the company. The Act provides that dividends may be paid out of the following sources:
•Profits of the company, for the year for which dividends are to be paid;
•Undistributed profits of the company, of the previous financial years; and
•Money provided by the Central or State Government for payment of dividends, pursuant to a guarantee.
Prior to declaration or payment of any dividend, a certain percentage of the profits of the company, as prescribed by the Act but not exceeding 10%, must be transferred to the reserves of the company. (S.205(2-A))
Once declared, a dividend becomes a statutory debt of the company to its shareholders, and must be paid within thirty days. (S.205(2-A))
If the dividend is not paid, or if the dividend is not claimed within thirty days, the company must transfer the unpaid dividend to the
“Unpaid Dividend Account” of the company.
If the dividend amount remains unclaimed for seven years, it is transferred to the Investor Education and Protection Fund established by the Central Government. Amounts accrued in this Fund are utilised by the Government to promote investor awareness, and to protect the interests of investors.
Illustration: Funds from the Investor Education and Protection Fund are being utilised to support a case filed on behalf of the public shareholders of Satyam Computer Services Ltd., who are seeking damages for loss incurred, due to the financial fraud committed by the promoters of Satyam Computer Services Ltd.
Accounts and Audit
Every company is under an obligation to keep proper books of account at its registered office. (S.209)
The books of account of the company must explain the transactions and the financial position of the company, in a true and fair manner.
The auditors of a company have an obligation to examine the books and accounts of the company and issue a report stating whether or not the accounts have been kept in accordance with the provisions of the Act and whether or not they give a true picture of the affairs of the company.
A company’s auditors are appointed by the shareholders at the AGM of the company, and hold office until the conclusion of the next AGM of the company. Removal of auditors prior to expiration of their term requires prior approval of the Central Government.
Chapter 9: Rights of Minority Shareholders
Chapter 9: Rights of Minority Shareholders
The management of companies is based on majority rule. The general rule regarding administration of companies is that “courts will not, in general, interfere with the management of a company by its directors so
long as they are acting within the powers conferred on them under the Articles”. (Foss v. Harbottle, (1843) 67 ER 189)
Illustration: Company A made a profit in a year. The directors of the company, however, decided to invest the profits for the benefit of the company, instead of paying dividends to the shareholders. The minority shareholders challenged this action. The court refused to intervene in the matter. (Burland v. Earle, (1902) AC 83)
There are the certain exceptions to the rule of majority supremacy, and shareholders can bring a suit against the company and its officers in the following circumstances:
•When the acts of the officers are ultra vires the Act, the Articles, or the MoA.
Illustration: The directors of Company A invested the funds of the company in a manner that was contrary to the provisions of the MoA. A, a shareholder, brought a suit against the directors, challenging their actions. The suit was decreed in the favour of the plaintiff. (Bharat Insurance Co. Ltd. v.
Kanhaiya Lal, AIR 1935 Lah 792)
•When the majority shareholders act in a fraudulent manner.
Illustration: The majority of the members of Company A were substantial shareholders in Company B. In a general meeting of Company A, the majority shareholders approved a resolution authorising compromise of an action against Company
B. The resolution approved by the majority shareholders was prejudicial to Company A, and favourable to Company B. Upon being challenged by the minority shareholders of Company A, the court set aside the actions of majority shareholders. (Menier v. Hooper’s Telegraph Works Ltd., (1874) 9 Ch App 350)
•When an act that requires a special resolution as per the Articles is done on the basis of a mere ordinary resolution.
•When the rights of a shareholder, such as the right to vote, or the right to have access to the company’s statutory records, is infringed.
The Act provides for special provisions to safeguard the interests of minority shareholders and prevent mismanagement of a company.
Prevention of Oppression
If the affairs of the company are being conducted in a manner prejudicial to the public interest or in a manner oppressive to any member(s), then the minority shareholders may seek appropriate remedy from the court. (S.397)
Illustration: The life insurance business of Company A was acquired by Company B on payment of compensation. The majority shareholders of Company A refused to distribute the compensation to all the shareholders and passed a new shareholders resolution approving investment of the compensation funds into new business of Company A. Upon being challenged, the court held the actions of the majority shareholders of Company A to be “oppression”. (Mohan Lal Chandumall v. Punjab Co. Ltd., AIR 1961 Punj 485)
Minor acts of mismanagement are not regarded as “oppression”.
Illustration: The minority shareholders of Company A filed a case against the directors and majority shareholders of the company on the ground that petrol consumption was not being checked properly. The court held that this could not be a ground for “oppression”. (Lalita Rajya Lakshmi v. Indian Motors Co., AIR 1962 Cal 127)
Prevention of Mismanagement
S.398 of the Act provides relief in cases of “mismanagement” of the company. In an action for “mismanagement”, the petitioner must establish that the affairs of the company are being conducted in a manner prejudicial to the interests of the company, or to public interest.
Illustration: The shareholders of a company filed a petition against the directors of a company, alleging mismanagement. Upon investigation, the court found that the Vice- Chairman of the company had grossly mismanaged the affairs of the company and had drawn substantial funds of the company for her personal use. The court held this to be sufficient evidence of “mismanagement”. (Rajahmundry Electric Supply Corporation v. A. Nageshwara Rao, AIT 1956 SC 213)
Unlike in cases of “oppression”, relief in cases of “mismanagement” is in favour of the company and any member of the company.
The courts have wide powers to grant appropriate relief in cases of “mismanagement”, including the power to order for conduct of the company’s affairs in a manner that the court may direct.
Chapter 10: Winding Up
Chapter 10: Winding Up
A company, being an artificial person, cannot die. A company can, however, be dissolved and struck off the Register of Companies. The proceeding by which a company is dissolved is known as “winding up”.
A company may be wound up in any of the following manners:
1:- Compulsory Winding Up by the Court
A process where a company is wound up, upon an order of the court, is known as ‘compulsory winding up’. An application for compulsory winding up of a company may be brought by the company, its creditors, its members, the RoC, Central Government or the State Government on any of the following grounds (S.433 of the Act):
•If the company, by way of a special resolution, has resolved to be wound up by the court.
•In case of a public company, if such
company has failed to deliver its statutory report to the RoC, or has failed to hold the statutory meeting of its members.
•If the company fails to commence business
within one year of its incorporation, or if the company suspends its business for one year. This ground is not available if there are reasonable prospects of the company starting its business within a reasonable time or if there are good reasons for the company to suspend its business.
•If in case of a public company, the number
of its members is reduced below seven or in case of a private company, the number of its members is reduced below two.
•If the company is unable to pay its debts.
To invoke this provision, it must be established that there is a debt, there is no bona fide dispute regarding the debt and the company has failed to pay the debt, despite a notice to pay.
•On just and equitable grounds. This ground gives wide powers to the court.In the past, courts have ordered winding-up of companies on just and equitable grounds when:
•There is a deadlock amidst the members of the management of the company.
Illustration: A company had two directors and shareholders with equal management and voting rights. The two directors became hostile to each other and disagreed on all the decisions pertaining to the company. The court held that there was a complete deadlock in the management and the company must be wound-up. (Yenidje Tobacco Co. Ltd., Re, (1916) 2 Ch 426)
•When the object for which a company was incorporated, has failed.
Illustration: A company was incorporated for purposes of manufacturing coffee from dates, under a patent to be issued by the Government. The patent was never granted. The court held, that since it was impossible to carry out the objects for which the company was incorporated, it was just and equitable to wind-up the company. (German Date Coffee Co., Re, (1882) 20 Ch D 169)
•When it has been proved that carrying on the business of the company will lead to further losses.
•When the company was formed to carry a fraudulent activity.
Illustration: Company X was engaged in the business of purchasing and developing land and selling the same as plots. Upon investigation, it was discovered that the company was involved in fraudulent transactions and was selling plots over which it did not have valid title. The court ordered winding up of Company X on the ground that since it was involved in large- scale public deception, it had no right to exist.
•When “oppression” or “mismanagement” has been established.
•When it is important to do so, in public interest.
Illustration: Company X was engaged in the business of purchasing and developing land, and selling the purchased land as plots.
Upon investigation, it was discovered that the company was involved in fraudulent transactions, and was selling plots of land over which it did not have valid title. The court ordered winding up of Company X on the ground that since it was involved in large-scale public deception, it had no right to exist.
In case of compulsory winding up, the court appoints an official liquidator for carrying the winding up proceedings. The official liquidator is an officer of the court and is entrusted with the responsibility of realising money from the properties of the company and discharging the liability of the company towards such stakeholders as workmen, creditors, and the Government.
2:-Voluntary Winding Up
A company may be wound up voluntarily by approving a shareholders resolution to the effect that the company be wound up voluntarily.
If the Articles of a company prescribe a duration for operation of the company, or if the Articles provide that the company shall be dissolved upon occurrence of an event, then upon satisfaction of such a condition, only an ordinary shareholders’ resolution will be required for commencing the winding up proceedings. In all other cases a special resolution of the shareholders is required to commence voluntary winding up.
The primary difference between voluntary and compulsory winding up is that almost the entire process in the case of voluntary winding up does not require court supervision. Only the relevant documents are required to be filed with the court to obtain an order of dissolution when the winding up is complete.
Illustration: The Articles of Company A provide that the company shall be dissolved upon termination of the shareholders’ agreement between the shareholders of the company. Upon termination of the shareholders’ agreement, voluntary winding up proceedings may be initiated by the shareholders following an ordinary resolution in this regard.
3:-Voluntary winding up is of two kinds: members’ winding up, and creditors’ winding up.
If, at the time of commencing winding up proceedings, the board of directors of the company gives a declaration certifying that the company shall be able to pay its debts within a specified time, then such a winding up proceeding is known as ‘members’ winding up’. If the board of directors is unable to give such a declaration, then the proceedings are known as ‘creditors’ winding up’.
In case of voluntary winding up, the members or the creditors (as the case may be), appoint a liquidator to carry out the winding up proceedings.
4:-Payment of Liabilities
Upon liquidation, after retaining funds to meet the costs and expenses of winding up, all revenues, taxes, cesses and rates due to the Central or State Government, or any other local authority and all wages and amounts due to the employees of the company, must be made in priority to all other debts and liabilities. (S.530)