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Ram Mallar
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Welingkar Institute of Management, Development & Research


PRIVATE & CONFIDENTIAL

HANDOUT
BUSINESS LAW

CONFIDENTIALITY NOTICE
This Hand-Out is intended solely for the management students of Professor Ram Mallar. Access to this document by anyone else is unauthorized. If you are not the student, any disclosure, copying, distribution or any action taken or omitted to be taken in reliance on it, is prohibited and may be unlawful. Any opinions or advice contained in this document are subject to the standard terms and conditions of confidentiality.

2008 Mallar Law Consulting 3, Silver Cascade, 110AA, Near Ruby Mills, Senapati Bapat Marg, Dadar West. Mumbai 400 028. Tel. No.: 2432 2713 (4 lines) Email: mallarlaw@vsnl.net - Website: www.mallarlaw.com

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COMPANIES ACT 1956


Distinctive Features of a company: The distinctive feature of a company as compared to partnership unincorporated bodies is that in law it has a status and existence separate from that of its members. It is not the more getting together of persons for the purpose of carrying on business as in the case of unincorporated associations. This characteristic offers to its members certain advantages. A company can carry on business as effectively as partnership. Yet unlike a partnership it is not disturbed by the death of its members. It continues to exist until it is dissolved in the manner provided by law. This is aptly described in company law here and elsewhere by the expression perpetual succession. From its characteristics as a corporate body as distinct form its shareholders, follows another consequences - the company as a legal entity, and not the shareholders are liable for its wrongs or misdeeds. The company assets are separate and distinct from those of its members and the creditors cannot proceed against the assets of the shareholder; the members liability is limited to their investment into the assets they have undertaken to their contribution, even on winding up. The classic case of this point is Salomon V. Salomon & Co. Ltd, 1987. A.C. p.22 where all the shares of the company were owned by one Salomon and his family members who also held secured debentures of the company. On a winding up of the company, it was claimed on behalf of the unsecured creditors that the company never had an independent existence. Negativing this House of Lords said when the Memorandum is duly signed and registered, the subscribers of the body corporate are capable of exercising all the functions of an incorporated individual and it is difficult to understand how a body corporate, thus created by statue, can lose its individuality by issuing the bulk, of its capital altogether to the subscribers of the memorandum. At the same time, inspite of its impersonal nature a company has qualities alike to those of an individual. A company may enter into a contract like any other natural person. It may form companies by subscribing to the memorandum of another and enter into partnerships. It can be liable for tort committed by its agents or servants in the course of their employment in the same manner as any other employers would be vicariously liable. Where a question of knowledge or intention arises, knowledge or intention must be found in the minds of its agents. Further, a company can sue for slander affecting its business reputation. Similarly, a company can be guilty of criminal act e.g. it can be charged with conspiracy to defraud or may be convicted for making use of false document with intent to deceive. In certain cases where the law wishes to hold the members personally liable for act of the company, the liability is specifically provided, for examples of the attachments are given in Sections 45 and 542 of the Company Act, 1956. Section 45 provides that where the

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number of members of a public company is reduced to less than seven or of a private company to less than two and the company carries on business for more than six months while the number is so reduced, every person who is member for the period beyond six months will be severally liable for the debts of the company contracted during that period and can be sued for such debts. Under Section 542 if in the course of winding up the Court comes to the conclusion that the business of the company has been carried on with a view to defrauding creditors or any other persons or for any fraudulent purpose, the liability for fraudulent conduct would attached on any persons that the Court finds were knowingly parties to the carrying on of the business in fraudulent manner and such person would be personally responsible without limitation of liability for all or any of the debts or other liability of the company. The words any person in this section would cover in addition to the directors of the company, its officers and shareholders if they were knowing parties to the fraud. Lifting the Corporate Veil Apart from the specific provisions indicted above the Courts have in some cases held that it is justifiable to lift the Veil of corporate entity and pay regard to the economic realities behind the legal facade. This can happen when the court is seeking to find out the person who are actually in control if a company to make them liable. The corporate veil may also be lifted where the question of trading with the enemy arises, or the nationality of a company is to be determined. In other cases the corporate veil may be lifted where the question of evasion of taxes is involved. One of the earliest case on this point was Deliminer Co. Ltd. Vs. Continental Type & Rubber Co. 1916 2 A.C. p.307 where the question to be decided was whether one company was an Alien enemy. In that case, Lord Falmer said the analogy is to be found in control. He held that a company registered in England may be an alien enemy if its agents or the persons if defacto control of its affairs are alien enemies and in determining whether alien enemies have such control, the number of alien enemy shareholders is material. An interesting case in India where the corporate veil was lifted was that of the Incom Tax Commissioner, Marcras Vs. Meenakshi Mills, Madurai, A.T.R. 1967 S.C. p.800. In this case these mills concerned were engaged in the manufacture in the Princely State. The Madurai Bank was formed, in which coincidentally the three mills and Mr. Chettar, another bulk shareholder in the Mills, once again held all the shares. The bank also established a branch at Pudukott into which the profits of the three mills were deposited. Against these deposits, the Bank granted loan facilities to the Mills at Madurai. The question arose whether this amounted to a transfer of moneys from the princely state into the taxable territories of British India. Lifting the corporate veil, the Supreme Court held that there was a basic arrangement between the Mills Companies and the Bank that the money outside taxable to territory and this arrangement was possible because the companies had the controlling voice in the running and management of the Bank, the Pudukkotai was neither a cotton producing area nor had it a market for cotton and there was nothing to recommend the carrying on of business there except that it was a non-taxable territory. Similarly, in Juggles and Kamapat Vs. Commissioner of Income Tax U. P. A.I.R. 1969 S.C. p.932, the Supreme Court held that the court is entitled to lift the mask of corporate

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entity if the concept is used for tax evasion or to circumvent tax obligation or to perpetrate fraud. In this case, a company, which was promoted by the assesses firm, prematurely terminated the Managing Agency Agreement with the firm and paid compensation for such premature determination. The Managing Agency was assigned to a new company in which the partners of the assessee firm held the controlling shares. The compensation was disallowed as a capital gains in the heads of the assessee. Companies Registrable under the Companies Act Companies registration under the Companies Act, 1956 may be divided into the following 3 categories on the basis of the liability of their members : a) b) c) Companies limited by shares. Companies limited by guarantee these may or may not have a share capital. Companies having unlimited liability these again may or may not have share capital.

Company Limited by Guarantee The Companies Act is mainly concerned with companies limited by shares. However, brief mention may be made of the other two types of companies. A company limited by guarantee in one where the liability of the members is limited by the Memorandum to a fixed amount in the event of the company being woundup (Sec. 12(2) (B)). Professional associations, trade associations and research associations favour this form or organisation. Such companies may, subject to the approval of the Central Government dispense with the word, Limited under section 25 of the Act. The Memorandum and Articles of Association of such companies are required to be in the form set out in Schedule I-Tables C and D. Unlimited Company An unlimited company is one which does not place any limit on the liability of its members (Section 12(2) (c)). Section 11 of the companies Act prohibits the formation of partnerships and unincorporated business association consisting of more than ten persons if formed for the purpose of banking, or more than twenty persons if formed for carrying on any other business. Persons normally form partnerships or unincorporated larger form of unlimited company, of their number is larger than ten or twenty as the case may be. The Memorandum and Articles of Association of unlimited companies required to be in the form of Schedule I-Table E. Company Limited by Shares A company limited by shares is one where the liability of the members is limited by the Memorandum to the amount, if any, unpaid on the shares held by them (Section 12(2) (a)). The Articles of Association of such a company are required to be in the form set out in Schedule I-Table A. A company limited by shares obtains its working funds by the issue of

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shares which may be subscribed by the signatories to the Memorandum of Association, or allotted to applicants for cash or for consideration other than cash e.g. for transfer of machinery or knowhow. In a company limited by shares, the shareholders may or may not pay the whole nominal amount to his share to the company when acquiring the shares. The practice is to pay some amount at the time of application, thereafter the Directors may call upon the shareholders at any time to pay up the unpaid portion of the nominal amount. It is important to remember that the unpaid portion may be made payable either during the existence of the company or on winding up. Private Company and Public Company Companies can also be classified on yet another basis. One category is closer to family groups. It does not invite the public to contribute to its capital or join its activities. It restricts its memberships to fifty persons and even in respect of this small number, the members are prohibited from freely transferring their shares. Such a company is called a private company. Loosely speaking a company which is the opposite of such company is a public company. Private Company Section 3(1) (iii) of the Companies Act defines a private company as a company which by its articles. a) b) Restricts the right to transfer its shares, if any. Limits the number of its members to fifty not including : i) ii) Persons who are in the employment of the company and Persons who are having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased and

c)

Prohibits any invitation to the public to subscribe for any shares or debentures of the company.

A public company has not been specifically defined but Section 3(1) (iv) states that a Public Company means a company which is not a private company. It is unfortunate that the definition of private company omits one important distinguishing features between a private company and a public company, viz. that the minimum number of members that a private company is required to have is two against seven members required for a public company. This is given in Section 12. Only shares and debentures of public companies can be dealt with on the Stock Exchange. However, the reverse is not true. The shares of all public companies are not quoted on the Stock Exchange. A company that wishes to have its shares and debentures to be listed has to obtain permission from the Stock Exchange to do so. This permission is granted on condition that the rules and regulations of the Stock Exchange will be complied with. These

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generally involve the giving of information to the Exchange regarding allotment of shares, closure of books, issue of certificates, bonus shares, dividend declaration, changes in the Board etc. A listing Agreement would also have to be executed by the company with the Stock Exchange for this purpose. Violation of any of the conditions of the agreement would result in the companys shares being delisted, the restriction imposed by the Stock Exchange are in addition to any statutory requirements that have to be complied with by a company. Advantages enjoyed by any Private Company (Including a private company which is a subsidiary of a public company.) Private companies enjoy certain advantages over Public Companies. The Act, however, treats private companies, which are subsidiaries of public companies, roughly on a par with public companies, and the privileges enjoyed by the other private companies, viz. those that ate not subsidiaries of public companies are denied to them. The following are the advantages enjoyed by all private companies whether they are subsidiaries of public companies or not : i) ii) The minimum number of persons required to form private company is two as against seven person required for a public company (Section 12 (1)). The prohibition regarding allotment of shares in certain cases unless statement in lieu of prospectus is delivered to the Registrar is not applicable to private companies (Section 10 (3)). The provisions relating to further issue of capital are not applicable to private companies (Section 81). A private company is not required to comply with the conditions set but in Section 149 relating to commencement of business. A private company is not required to hold a statutory meeting (Section 165). As against five members required for a public company, in the case of a private company, even one member present either in person or by proxy and having the right to vote on the resolution (if not more than seven such members are personally present) or two such members (if more that seven such members are personally present) is entitled to demand poll (Section 1/9 (1) (b)). The minimum number of directors required for a private company is two as against three required for a public company (Section 252).

iii) iv) v) vi)

vii)

Advantages enjoyed only by a private company which is not a subsidiary of a public company in this referred to as purely private company. Certain advantages are enjoyed only by a private company that is not a subsidiary of public company and are denied to a private company that is subsidiary of a public company. In

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other words, both a public company and a private company that is a subsidiary of a public company would be treated alike in respect of the following matters. i) Neither public company nor a private company that is a subsidiary of a public company can provide financial assistance to a part to enable such party to purchase share in the company (Sec 77(2)). Neither public company nor private company that is subsidiary of public company can have preference shares that carry voting rights (Sec.90 (2)). A person not admitted as a shareholder by a public company can appeal to the Central Govt. against such refusal. Not so to a shareholder of a purely private company. The conditions governing notice for calling general meeting as well as those governing the manner of conducting such meetings (which are contained in Section 171 to 186) apply only to a public company and a private company that is a subsidiary of a public company not a public company and a private company that is a subsidiary of a public company, not to a purely private company. The overall limit for managerial remuneration does not apply to purely private companies. Further, Govts approval is not necessary for amending any of the provision relating to whole-time directors. Nor is it necessary to obtain government approval for the payment of remuneration to the managing directors or managers of purely private companies. (Sections 198, 268, 269, 309 to 311). A purely private company is entitled to appoint a firm or body corporate to an office or place of profit for any period of time unlike the other two types of companies (Action 204). No person other than a member of a purely private company is entitled to inspect or obtain copies of the profit and loss account of the company. In respect of the other two types of companies the balance sheet and profit and loss account have to be filed with the Registrar and any person can inspect them (Section 220 (1) proviso). A person can be a director of more than twenty purely private companies (Section 273). The restriction on the powers of directors regarding sale, lease, disposition of property, investment, borrowing and contributions do not apply to a purely private company (Section 293). The registration on the grant of loans to directors applies only to a public company and a private company that is a subsidiary of a public company (Section 295). The provision prohibiting a director from participation in the Boards proceedings, when he is in credit, does not apply to a purely private company (Section 300 (2)).

ii) iii)

iv)

v)

vi)

vii)

viii) ix)

x) xi)

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xii)

A person cannot be a manager/managing director of more than two companies or to be appointed for more than five years at a time only in the case of a public company, or a private company which is a subsidiary of a public company (Sections 316, 317 (4) and 888 (A)). In a purely private company there are no restriction on the company giving loans or guarantees to other companies or securities for loans granted to other companies or investing in other companies (Section 370 and 372). The Central Govt. has no power to present a change in the composition of the Board of a purely private company as in the case of a public company or a private company that is a subsidiaries of public company.

xiii)

xiv)

Where a private company makes a default in complying with any of the provisions required to on included in its Articles under Section 3(1) (iii), it will cease to be entitled to the privilege and exemptions conferred on private companies by the Act unless the Central law Board is satisfied that the failure to comply with the conditions was accidental or due to inadvertence to some other sufficient cause of that it is just and equitable to grant relief (Section 43). Section 43 A Company : There is one type of company of which mention must be made before the topic relating to public and private companies is terminated and that is a section 43 A company. This company is peculiar to Indian law. Under Section 43 A, a private company is deemed to become a public company in the following circumstances : 1) 2) 3) 4) If not less than twenty five percent of the capital of the private company is held by one or more bodies corporate (Section 43 a(1)). If the average annual turnover of such a company for three consecutive financial years is not less than much amount as may be prescribed (Section 43 a(IA)). If such a company holds not less than twenty-five percent of the paid-up share capital of a public company (Section 43 A(1B)). If such a company accepts, after an invitation is made by an advertisement or renews deposits from the public, other than its members, directors or their relatives (Section 43 A (1C)).

Within three months of a private company becoming a public company in any of the above ways, the company is required to inform the Registrar that it has become a public company and thereupon the Registrar will delete the word private from the name of the company. The Articles of Association of a 43A company may include provisions containing restriction on the transfer of shares and the number of its members may at any time be reduced to

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less than seven. The number of members necessary to form a quorum in such a company may have only two directors as against three required for a public company. For all other purposes, however, such company is treated as a public company and the restrictive conditions which Govern public companies such as obtaining Governments approval for appointment of whole-time directors, payment of remuneration to them, etc. apply to such company. The rationale behind the section is that the privileges and exemptions granted to purely companies which are more in the nature of family concerns and there the public is not interested should not be extended to companies in which public money is invested, or which throughout their investment in public companies influence such public companies. It has been stated in Ramaiyas Guide to the Companies Act (Eight Edition) at page 100 that after the enactment of this section there can exist no such company as private company which is subsidiary of a public company and that expression used in several section has no meaning. It is respectfully submitted that this view is incorrect. A company may be subsidiary of another company either by virtue of the later company holding the interest in the shares or by virtue of the later being able to control the composition of the Board of Directors. It is quite possible that a company may hold less than twenty-five percent of the capital of another company whose turnover may be less than rupees five crores and yet the first company may be able to control the composition of the Board of Directors of the second company. In such a case, the later company would be a subsidiary of the first company. It is, therefore still possible to have a private company which is a subsidiary of a public company in terms of the definition of subsidiary in Section 4 of the Act. While dealing with this topic it would be useful to keep in mind the distinction between a company and a body corporate. A body Corporate is defined by Section 2(7) and a company by Section 3. A body corporate is a much wider term than a company and includes not only a company which is only one class of body corporate i.e. the registration by the required number of persons under the Companies Act, but other bodies which are incorporated under a statute in India or abroad. Examples of bodies corporate in India are the Industrial Finance Corporation, the Industrial Development Bank of India, which are incorporated under their own Act. A body corporate also includes a company incorporated outside India whereas a Company under the Act means only an Indian company. Many of the restrictive provisions of the Act are so worded as to cover not only companies but bodies corporate also. The prohibition against lending in Section 372 extends to bodies corporate also. A contravention of the Act is likely if this aspect is not kept in mind all the time. Is the Company a Citizen ? This is an interesting question in the context of fundamental rights granted under the constitution. Under part III of the Constitution, certain fundamental rights are conferred on any person which others are conferred on citizens alone. For example, Article 14 provides that the State shall not deny to a person equality before the law or the equal protection of the law. Article 15 states that the State shall not discriminate against any citizens on

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ground of only religion, race, caste, sex etc. and Article 16 states that there shall be equality of opportunity for all citizens in matters relating to employment to any office under the State. Until the passing of the Citizenship Act, 1955, there were conflicting decisions of the different High Courts whether a company was a citizens. In Jupiter General Insurances Co. Vs. V. A. Rajagopalan, 1952, Pune, p.11, the court held that Articles 5 (a) and (b), 6, 8 and 19 (c) to (e) could not apply to corporations, that the expression citizen meant men and women and consequently a corporation was not a citizen. In a Bombay case, the state of Bombay Vs. R.M.D. Chamarbagwalla 1955 Bom. p. 630 C. J. Chagla struck a new line in holding that a company, the majority of whose shareholders were Indian citizens, was a citizen. In 1955 the Citizenship Act was passed. This prescribes the conditions under which a person can be a citizen, and it expressly provides that a person does not include a corporation. Incorporation of a Company The different kinds of companies that may be formed have been described earlier. Whatever the type of company proposed to be promoted, the mode of forming the company is the same, viz., it is formed, when even or more persons (in the case of a public company) by or two or more persons (in the case of private company) subscribe their names to the Memorandum of Association. The Memorandum is the constitution or the fundamental document or charter of the company. In sets cut, inter-alia the liability of the members depending on the type of company that is proposed to be formed, viz. whether it is limited by shares, limited by guarantee, or an unlimited company (Section 32). Who can be a Subscriber ? Anyone may be a subscriber. A bankrupt may be a subscriber so can a company, provided it has the necessary power. Several persons may jointly be subscribers. However, a firm is not person, and therefore cannot be a subscriber; if it wishes to subscribe, the individual partners would have to do so. A person resident outside India (whether a Citizen of India or not) or a person who is not citizen of India, but is resident in India cannot be a subscriber to the Memorandum without the permission of the Reserve Bank of India in terms of Section 29 (1) (b) of the Foreign Exchange Regulation Act, 1973. A subscriber may subscribe the Memorandum in his own hand or through an agent duly authorised by him. In addition to the name and the signature of the signatory, his address and occupation must also be mentioned. It is advisable to pay great attention to details when registering the Memorandum. If the handwriting is not clear or all the requisite details are not given, the registrar may return the document for rectification. Attestation The signature of cash subscriber to the Memorandum has to be attested by at least one witness. It would be in order for one person to witness the signature of all subscribers, in which case, the attestation clause would read as follows : Witness to the above signatures

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The address and occupation of the witness or witnesses must also be mentioned. Articles The Articles of Association contain the detailed regulations for the conduct of the business of the company. Section 28 states that the Articles of Association of company limited by shares may adopt all or any of the regulations contained in Schedule I Table A. Three courses are therefore open to a company (i) to adopt Table A wholly. In this case all that is necessary is for the Articles to state that Table A shall be the Articles of the company, (ii) to have a set of Articles which are complete by themselves and exclude Table A wholly. In this case it is capable forthwith or exercising the functions of an incorporated company and having perpetual succession and contribute to the assets of the company in the event of its being wound up as is mentioned in the Act, Section 33 (3) and 34. Section 35 states that a certificate of incorporation shall be conclusive evidence that all the requirements of the Act have been complied with in respect of registration and matters precedent and incidental thereto. This means that it is not open to a subscriber, after the certificate is obtained, to allege that he was induced to subscribe to a memorandum by mispresentation or fraud. Before the grant of the certificate, a subscriber would have usual remedies for his representation of the company. But after the certificate is obtained, would not be affected by any irregularity in connection with subscription such as that less than the prescribed number of persons have subscribed to the memorandum. Even if the company ceases to carry on business it continue exist as a corporate entity. In fact, in some cases, it is deliberately decided to retain the share of an otherwise defunct company rather the wind it up in the event of the company at some future time undertaking some business. This would obviate having to pay registration charges once again. It must be noted that Section II prohibits more than ten persons carrying on the business of banking unless the body of persons whether a company association or partnership is registered under the Act. The same section also prohibits more that twenty persons from carrying on any other business the object of which is the acquisition of gain by the company, association on partnership, unless such body is registered under the Act. This being so, and taking into account some of the disadvantages that attach to partnerships, the favoured vehicles of business in the future will in all probability be a company registered under the Company Act. MEMORANDUM OF ASSOCIATION As mentioned earlier, the Memorandum of Association is the charter of the company. The Memorandum, however, cannot or can the Articles (which in any case are subordinate in status to the Memorandum) override the provisions of the Act, an any provision void (Section 9). Salient features of Memorandum

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In view of its importance, it is worth describing the salient features of the Memorandum and Making mention of some important aspects relating to it. The Memorandum of Association should be in one of the forms set out in Schedule to the Companies Act depending on the kind of company that is being promoted viz. whether it is a company limited by shares or guarantees or an unlimited company (Section 14). Section 13 and 15 set put the essential features of a Memorandum. describes its format states that a) b) c) Section 15 which

The Memorandum must be printed : It should be divided into paragraphs numbered consecutively; It should be signed by the requisite number of persons whose signatures must be attested,.

Section 13, which deals with the essential components, provides that Memorandum must state : a) The name of the company. If the company is a public limited company, the name must have the word Limited as the last word of the name; if it is a private limited company, the name must be followed by the words Private Limited. The state in which the registered office of the company is situated; The objects to be pursued by the company. Where the company is formed after the commencement of the Company Act, 1956, the object have to be divided into (i) the main objects and objects incidental or ancillary to the attainment of the main objects and (ii) other objects; Where the objects extend to more that one state the Memorandum must mention the States to which the objects extend. This does not apply to trading corporations. Where the liability of the members if limited by guarantee the memorandum must state (1) that the liability of the members is limited and (2) the amount to which it is limited. In the case of a company having a share capital and limited liability, the memorandum must in addition to stating that the liability of the members is limited also state the amount of share capital with which the company is to be registered and the division of the capital into shares of a fixed amount. Further, each subscriber must be indicated against his name his share.

b) c)

d) e)

f)

Alteration of Memoranum While the Articles of Association can be altered by a mere Special resolution (except where the effect of the altering is to convert a public company into a private company with further approval of the Central Government is necessary), the Memorandum approval of the Central

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Government is necessary), the Memorandum of Association cannot be altered in its essentials excepts in accordance with prescribed procedure. Section 18 states that those conditions which are required by Section 18 or by any other specific provision in the Act to be set out in the Memorandum can only be altered in the mode and to the extent for which express provision is made in the Act. The other provisions can be altered in the same manner as the Articles of Association, viz. by special resolution. The procedure for alteration is set out in Sections 17 and 18. Briefly, the procedure is that a special resolution has to be passes, approving of the alternations and the further approval of the company Law Board must be obtained which approval the board will give only if it is satisfied that notice has been given by the company to the debenture holders and creditors of the company as well as to those person whose interests would be effected by the alteration and that such persons have no objection to the alteration. The Board on its part is also required to give notice to the Registrar to ensure that he has no objection to the company Law Board confirming the alteration, as well as the printed copy of the Memorandum as latered must be failed by the company with the Registrar. It is important to note that it is not enough that the procedure for amendment is followed. The alteration must be affected for any one of the reasons mentioned in Section 17 (1) viz. to enable the company to (a) carry on its business more economically or more efficiently or (b) to attain its main purpose by new or improvements or (c) to enlarge or some business which may conveniently be combined with the business of the company or (d) to restrict or abandon any of the objects specified in the memorandum or (e) to sell or dispose of the whole or any part of the undertaking of the company or (g) to amalgamate with any other company or body of persons. The above seven situations together encompass a wide field and a prime facie case could therefore generally be made out that the alteration of the Memorandum is for one of these reasons. However, the discretionary powers of the Company Law Board under this Section are very wide and the Board may refuse to confirm the alteration, or confirm it only in part or only subject to such terms and conditions as it thinks fit. Before confirming the alteration, the Board would have to be satisfied not only that the interest of the creditors and the member will not be affected but that the interest of the other category of persons mentioned above will not suffer. In exercising its discretion the Company Law Board would also have regard to considerations of business, morality, national interest, etc. Object Clause and its Construction The object Clause is obviously the most important clause of the Memorandum for it has a two fold purpose ( I ) It define the powers of the company and (ii) it limits the powers of the company to those that are specifically set out in the Memorandum. Further, linked with the object clause is the ultra vires doctrine. A company exits the only for the particular purpose of its incorporation as defined in its object clause. An Act which is ultra vires, neither the company nor the other contracting party can act on it. The main purpose of this doctrine in early times was to protect the investor against a misuse of funds of company, by preventing the company from frittering them on objects unrelated to the authorised objects. In the word of professor Gower, "Would not be dissipected in authorized enterprises.

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However this inaudible object can result in great disadvantages if the object clause is interpreted too strictly. A distinction must be made between acts which are ultra vires the company and acts which are ultra vires the directors. An act which is ultra vires the company is null and void, an act ultra vires the directors may be regularized. For example, Articles may place certain restrictions on the powers of directors and such powers are nevertheless exercised by the directors, it is open to the shareholders to ratify them not if the acts are ultra vires the company. ARTICLES OF ASSOCIATION Essential Features and Provision Governing Articles The essential features of the Articles of Association have been dealt with at several different places earlier whenever a reference to such features was necessary. It has been mentioned that the Articles of Association are the detailed regulation of the company relating to the internal management of the company and the conduct of its business. This document will therefore, define the respective powers of the shareholders and the directors as also the rights of the company in relation to its shares such as forefeiture, lien etc. For convenience, those essential features and the relevant provisions relating to the articles are recaptitulated and summarized below :1) 2) The Articles of Association cannot overide the provisions of the Act, (Section 9). It is not necessary for a company limited by shares to have a separate set of Articles of Association, where such a company does not have its own set of articles, the provisions of Table A would apply (Section 28). Where the company does have its own Articles of Association, they must be in the form mentioned in section 80 and be registered (Section 28). Even where a company has its own set of articles, it may adopt some of the provisions of Table A in Schedule I. In fact, if there is no specification that Table 'A' is excluded, then Table A will apply to the extent that provision is not made in the articles in respect to the matters dealt with in Table A (Section 28 (2) ). The Memorandum and the Articles, when registered bind the company and the members as if they had been signed by the company and by each member separately (Section 36). The Articles of Association of a private company must contain the restrictions set out in section 3 (1) (iii). This articles of Association may be altered by a special resolution where the alteration result in a public company becoming a private company in which case further approval of the Central Government is necessary (Section 81).

3) 4)

5)

6) 7)

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

i)

Capital and shares : The amount of capital of the company method of increasing and reducing capital, rights of different classes of shareholders, rights of the company vis--vis shareholders, frequency of calls, lien on party paid shares, forfeiture of shares, conversion of shares into stock, procedure for transfer and transmissions. General meetings : Manner of convening general meetings, length and manner of giving notice, preocedure for conducting meetings, viz., appointment of the Chairman, manner of voting, i.e. form of proxy, etc. Directors : The number of directors, their qualification remuneration. Powers, method of appointment and removal, procedure to be followed at Board meetings, any special provision for appointment of nominees director, provisions relating to wholetime directors. Accounts : Provisions relating to dividends books of accounts where they are to be kept, right of inspection of such books, manner of signing accounts, capitalization of reserves stc. Common Seal : The manner of affixing the common seal. Audit : Provision relating to audit of accounts, appointment, qualifications, remuneration, rights and duties of auditors, etc. Miscellaneous provisions : Indemnity to officers of the company, authentication and service of documents, etc.

ii)

iii)

iv)

v) vi) vii)

Relating of the Articles to the Memorandum The articles of a company are subordinate to and controlled by the Memorandum of Association, which is the dominant instrument. The Memorandum contains the conditions upon which the company is granted incorporation, conditions which are fundamental, but some of which are alterable by the correct procedure. The articles are the internal regulations of the company, and over these the members have full control, and may alter them from time to time as they think fit, subject only to this, that they keep within the limits specified by the Memorandum of Association and the Act. PROCEDURE OF REGISTERATION OF COMPANY Commencement of Business While a private company can commence business, immediately after it is incorporated, a public company having a share cannot commence business company or exercise any

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borrowing powers unless it has obtained from the Registrar the "certificate to commence business". This certificate is granted after the company issues a prospectus or a statement in lieu of prospectus and has complied with the further conditions laid down in section 149 (section 149). Prospectus means "Any document described or issued as a prospectus and includes 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 or debentures. A Company issue a prospectus when it invites offers from the public for subscription or purchase of shares or debentures. However, where a company has made arrangements for its shares or debentures to be taken up by private parties or financial institution, so that it is not necessary to make an offer to the public, the company will not issue a prospectus but will file a statement in lieu of prospectus with the Registrar. The statement is required to be in the form set out in Schedule III of the Act. Section 67 of the Act describes what constitutes an offer of shares or debentures to the public. An offer to a section of the public can also be deemed to be an offer to the public. However, if the offer or invitation does not result in the shares or debentures being available for subcription or purchase by persons other than those receiving the offer, or can otherwise be treated purely as domestic concern of the persons making and receiving the offer, the offer is not deemed to be made to the public. This subject, as the circumstances under which it is necessary to file a prospectus, will be discussed in detail late which deals exclusively with prospectus. After the company has issued a prospectus or filed a statement in lieu of prospectus, the company has issued a prospectus or filed a statement in lieu of prospectus, the company can commence business only after the following conditions are fulfilled. (Section 149). A prospectus is issued, (a) after the minimum subscription laid down in the prospectus has been received and shares have been allotted. (b) every director of the company has paid to the company in respect of the shares taken or contracted to be taken by him for which he is liable to pay in cash, the amount payable on application and allotment. (c) permission has been obtained from the relevant stock exchange for dealing in the shares or debentures and (d) there has been filed with the Registrar a declaration by one of the directors or the secretary or where the company has not appointed a secretary, a secretary in whole time practice, that the above conditions have been complied with. Where a company has not issued a prospectus but filed a statement in lieu of prospectus only conditions (b) and (d) mentioned above have to be complied with. The declaration to the Registrar must be filed in Form 19 or Form 20 depending on whether a prospectus is issued or a statement in lieu of prospectus is filed. The minimum subscription is that the amount which in the opinion of the directors is necessary to provide the money for the following (unless part of the expenditure is proposed to be defrayed in any other manner).

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i) ii) iii) iv) v)

The Purchase price of any property. Preliminary expenses and commission payable for subscribing to the shares of the company. Re-payment of money borrowed for the above two. Working Capital. Any other expenditure of which the nature and purpose must be stated (section 69).

On complying with the conditions mentioned above, the registrar will certify that the company is entitled to commence business and such certificate will be conclusive evidence that the company is so entitled. (Section 149 (3)). Until the company received such a certificate, any contract made by the company is provisional only and not binding on the company. After the receipt of such a certificate, the contract is binding on the company. The following matter may be kept in mind in connection with the commencement of business by a company : i) Registered office : A company must have registered office from the day on which it begins to carry on business or from the thirteenth day after its incorporation, whichever is earlier and the notice of the situation of the registered office must be given to the Registrar (Section 146). The Memorandum of Association merely mentioned the State in which the Registered office will be situated. The decision regarding actual location of the office may therefore taken later on, but before the expiry of the period mentioned above. The registered office has some importance and status in as much as certain documents are required to be kept under the Act at the Registered Office only. Some of the documents which are required to be kept at the Registered Office are :a) b) c) d) e) Register of Members, Index of Members Register and Index of Debenture holders. Register of charges Copies of annual returns under section 159 and 160 (section 163). are the the are

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

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

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iv) Appointment of Baanners ; The Company would have to decide in which bank it will open its accounts. Further such bank will have to be intimated the names of officers who will be operating the accounts on behalf of these company. The company will also probably have overdraft facilities with certain banks and the Boards approval would be required for this purpose also. v) Common Seal : The design of the common seal would have to be approved by the Board and arrangements would have to be made for its safe custody. vi) Execution of agreement previously entered into by promoters ; It has been mentioned above that until the company obtained a certificate to commence business any agreement entered into by the company. It is customary to place such agreements before the Board and have them confirmed after the certificate to commence business has been obtained.

vii) Statutroy book : It may be descriable to obtain the Boards approval to the forms of the various registers and books that are required to be maintained under the Act. Such as the register of investment, register of charges, minutes book, register of contracts, register of directors etc. P R O S P E C T U S I have mentioned earlier that company which invites offers from the public for subscription or purchase of any shares is required to issue a prospectus. The provision relating to a prospectus, are some of the most confusing in the Companies Act, and present difficulty in their interpretation not only to the students but sometimes to the lawyers also. It may be some consolation to know that the provision of the English law on the subject are very similar. When Necessary to issue prospectus Prospectus is defined by section 2(30) as any document described or issued as a prospectus and includes any notice, circular advertisement or other documents, inviting deposits from the public or inviting offers from the public for subscription or purchased of any share in, or debentures of, a body corporate. The question that naturally arises for consideration is when is it necessary to issue a prospectus ? or When is and document deemed to be a prospectus ? The answer to that question is found in section 64, which sets out the circumstances under which this liability arises. Section 64 states Where a company allots or agrees to allot any of these shares or debentures being offered to be a prospectus of any company . Provision Covering Prospectus. The provisions governing prospectus are summarised below :-

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1.

A prospectus is required to be dated and the date on the prospectus will be assumed to be the date of publication of the prospectus. (Section 55). The date of publication of the prospectus must be construed as the date of issue of the prospectus. The date of issue is the date on which the prospectus first appears as in advertisement. A prospectus is required to state the matters specified in Part I of Schedule II and to set out the reports specified in Part II Schedule II and is further subject to the conditions in Part III of that Schedule (Section 56 (1)). Every form of application of shares or debentures must be accompanied by a memorandum containing such salient features of a prospectus as may be prescribed. However copy of prospectus will be required to be furnished on a request being made be any person before closing of the subscription list. The provision of this section does not apply where the application form is issued (a) in connection with an invitation to a person to enter into an underwriting agreement with respect to the shares or debentures or (b) in relation to share or debentures not offered to the public (Section 56 (3)). The application need not be accompanied by a prospectus and the prospectus need not comply with the requirement mentioned above, if issued to existing members or debenture-holders of the company or (b) the issue of the prospectus or application related to shares or debentures which will be in all respects uniform with the shares or debentures previously issued, and are dealt with an a stock exchange. (Section 56 (5)). Where the prospectus includes a statement purporting to be made by an expert, the expert must be a person who is not connected with or interested in the promotion or the management of the company. An expert includes an engineer, a valuer, or an accountant and any other person whose profession gives authority to statement made by him. (Section 57 and 59 (2)). A statement purporting to be made by an expert can be included in a prospectus only if the expert has approved the form of the statement and the context in which it is included and had given his written consent to the issue of the prospectus with the statement in such form, and further statement appears in the prospectus that the expert has given his consent and has not withdrawn it. (Section 53). If the company issue the prospectus knowing that the expert is connected with the formation of the management of the company or the statement is not in the form approved by him or he was withdrawn his consent to the issue of the prospectus, the company and every person who is a party to the issue is punishable with a fine which may extent the rupees five thousand (Section 59). A Prospectus cannot be issued unless before its publication there has been delivered to the Registrar, for registration a copy of the prospectus signed by every person who is named in the prospectus as a director or proposed director of the company or

2.

3.

4.

5.

6.

7.

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by the agent of such director and unless further the following documents are attached. a)The consent of the expert to the issue of the prospectus. This consent may be either attached to the prospectus or endorsed on it (Section 601 91) (a)). b) The consent of every person named in the prospectus as an advisor, legal advisor, attorney, solicitor, banker, or broker of the company(Section 60 (3)) c) A copy of every material contract entered into by the company in the last two years, not being a contract in the ordinary course of Business, and a copy of every contract appointing or fixing the remuneration of a managing director or manager (Section 60 (1) (b) (1)). d) Where any adjustments have been indicated by auditors or accountant in their report a written statement signed by such persons setting out the adjustments and indicating the reasons for such adjustments (Section 60 (1) (b) (ii)). 8. The prospectus must on the face of it state that a copy has been delivered to the Registrar and specify the documents which are attached to the copy (Section 60 (2)). Register the prospectus after being satisfied that all the requirements have been complied with (Section 60 (3)). A prospectus cannot be issued more than 90 days after the copy is delivered for registration to the Registrar. (It will be noted that the English Act contains no such time limits). The reason for imposing the limit is that if the issue of the prospectus is delayed too long, conditions may alter and what is stated in the prospectus may no longer be valid. (Section 60 (4)). The various reports and contracts referred to in the prospectus can be inspected by any member of the public, at the office of the Registrar for a period of 14 days beginning with the date of publication of the prospectus (Section 610). The term of any contract referred to in the prospectus cannot be varied by a company except with the concept of the shareholders in general meeting (Section 61). A prospectus shall be deemed to include an unture statement if (a) the statement is misleading in the form and context in which it is included or (b) there is an admission in the prospectus of any matter and such admission is calculated to mislead the public (Section 65).

9. 10.

11.

12.

13.

CIVIL AND CRIMINAL LIABILITY FOR MISSTATEMENT IN PROSPECTUS Section 62 states that if there is any untrue statement included in the prospectus, the following persons, are liable to pay compensation to every person who subscribed to any

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shares or debentures on the faith of the prospectus for any loss or damage he may have sustained by reason of any untrue statement : a) Every person who is a director of the company at the time of the issue of the prospectus or has authorised himself to be named as a director or as having agreed to become a director. b) Every promoter of the company. c) Every person who has authorised to issue of the prospectus. It is to be noted that liability for compensation is only towards those persons who subscripted for the shares or debentures on the faith of the prospectus and does not extend to any person who may have purchased shares in the market. Under Section 63 criminal liability attached for any untrue statement to every person who authorised the issue of the prospectus. These two sections also set out the grounds on which the person mentioned above may escape liability. ALLOTMENT OF SHARES The application for and allotment of shares is equivalent to an offer and acceptance in a contract and generally the same provision that apply to a contract would apply to the application for and allotment of shares. Under the English law an application for shares can be oral, However, the Indian Law in terms of section of 41 (2) a person must agree in writing to become a member of the company. As in the case of a contract, a person may withdraw his offer (Application) provided the withdrawal is made before the allotment of shares. Similarly, a person may apply through his agent and the allotment would be as effective as if the application were made personally. The application form issued by companies are so worded that the offer is that of a certain number of shares, or any smaller number of share by the company that applied for may amount to a refusal of the offer. In other words, the acceptance must be unconditional. PROVISIONS GOVERNING ALLOTMENT The following relating to allotment may be summarized as follows :1) No allotment of shares offered to the public can be made by a company unless the minimum amount intended to be raised by the issue has been subscribed and the sum payable on application for the amount so stated has been paid to and received by the company. (Section 69 (1)). 2) The amount payable on application must be not less than five percent of the nominal value (Section 89 (3)). 3) All the moneys received from the applicants must be kept in a schedule bank until (a) the certificate to commence business has been obtained or (b) if the certificate

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has already been obtained, until the minimum subscription has been received (Section 69 (4)). 4) If the company has not obtained the certificate to commence business or not received the amount payable on shares in respect of the minimum subscription within one hundred and twenty days after the issue of the prospectus, it must return the money without interest. If the money is not returned within one hundred and thirty days after the issue of the prospectus, interest at six percent would be payable on such moneys from the expiry of the one hundred and thirtieth day (Section 69 (5)). It should be noted that the above conditions apply only to shares and not to debentures. Further, these conditions (Except condition (2) do not apply to the allotment of shares subsequent to the first allotment offered to the public for subscription. 5) No allotment shall be made of shares or debentures until the beginning of the fifth day after the issue of the prospectus. If however, before such day, any person associated with the prospectus (director or promoter) gives a public notice limiting or excluding his responsibility, the five days will be counted from the day of such notice. The prospectus is deemed is to be issued on the day of such notice. The prospectus is deemed is to be issued on the day on which it first appears as a newspapers advertisement, and the fifth day after the issue of the prospectus or any later date specified in the prospectus is the day of opening of the subscription list. (Section 72). 6) An application for shares or debentures in pursuance of a prospectus can be revoked only on the expiry of 5 days after the opening of the subscription list. (Section 72 (5)). 7) A person who makes an application for acquiring shares in fictitious name or induces a company to allot or register a transfer of shares to him in a fictitious name would be punishable with imprisonment. (Section 68 A). 8) A company has to file a return to allotment within thirty days of the allotment of its shares, and where shares have been allotted as fully or partly paid up otherwise than in cash, it has to file with the Register copies of the contract in terms of which the allotment was made (Section 75 (1) (b)). 9) Allotment to non-residents and foreigners would be subject to the approval of the Reserve Bank Of India. 10) A company limited by shares and a company limited by guarantee and having a share capital cannot buy its own shares.

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11) A public company and a private company which is a subsidiary of a public company cannot give financial assistance to any person for purchase of its own shares of its holding company (Section 77 (22)). 12) In computing the various time limits mentioned above, any day which is a holiday under the negotiable Instruments Act, 1881, should be excluded. (Section 7). Special Provision When Shares Or Debentures Are To Be Dealt In on a Stock Exchange (Section 73). 1. Every company intending to offer shares or debentures to the public for subscription by issue of prospectus is required to make an application to one or more recognized stock exchange for listing permission. 2. Where a prospectus states that an application has been made for permission for the shares or debentures to be dealt in on the stock exchange the prospectus must mention the name of the exchange or exchanges. 3. The permission so applied for listing in one or more recognized stock exchanges must be obtained within ten weeks from the closing of the subscription list. If these conditions are not complied with, any allotment made will be void. 4. Where an appeal against decision of any recognized Stock Exchange refusing permission for the shares or Debentures to be dealt in on that Stock Exchange has been preferred under section 22 of the Securities Contracts (Regulation) Act, such allotment shall not be void until the decision of the appeal. 5. Where company has not applied for listing permission to Stock Exchange/s has stated in (1) above or such permission having been applied for has not been granted (As stated in (3)) above the company must forthwith repay all the moneys received on application and if the company does not do so within eight days, the directors of the company will be jointly and severally liable to repay such moneys with interest ranging from 4% to 15% as may be prescribed having regard to the length of the period of delay in making payment. 6. All the moneys received on application must be deposited in a separate bank account maintained with a schedule bank. The moneys in this account are to be utilized only after allotment of shares or repayment of money where permission has not been applied for or where it has been applied for but refused. The provisions of section 73 requiring permission for compulsory listing of all public issues with recognized stock exchanges, the making of any allotment is void if such permission is not obtained. In union India V. Allies International Product Ltd., and other A.I.R. 1981 S.C.P. 251, the Court held that if the company makes applications to several exchanges and is unable to

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obtain permission for enlistment from any exchange, the allotment will be invalid. But if permission is secured from any exchange, the allotment will not be invalid just because another exchange has not granted the permission. The Act does not indicate anywhere when the subscription list should be closed. It is therefore left to the company concerned to set out in the prospectus the number of days for which the list will remain open. The general practice it to keep it open for atleast three days. Irregular Allotments It is important to remember that an irregular allotment does not automatically make an allotment void. It would be possible to distinguish three kinds of irregular allotments. a) An allotment made before the minimum amount is subscribed or the certificate to commence business has been received or the statement in lieu of prospectus is filed is voidable at the instance of the applicant. The allotment however must be avoided within the time-limit prescribed. i.e within two months of the holding of the statutory meeting or where the meeting is not required to be held or the allotment is made after such meeting, within two months after the date of the allotments. (Section 71). b) Where the allotment is made before the beginning of the fifth day after the issue of the prospectus. The validity of the allotment is not affected, although every officer of the company who is in default is liable to fine for violating the provisions. c) Where no application has been made to the exchange or the application is rejected, the allotment is void. Issue of Shares to Exiting Shareholders. What has been described above applies to the issue of shares to the public, Section 81 however, stipulates that where the subscribed capital of a company is increased by allotment of further shares at any time after the expiry of two years from the formation of the company for one year from the allotment of its shares made for the first time after its formation, whichever is earlier. The shares should be offered to the existing shareholders in proportion to their share holding unless the article/s provide otherwise. The offer would include a right to resource the share in favour of any other person. It is, however open to the shareholders to waive this right granted to them by law by passing a special resolution to this effect, or by passing an ordinary resolution and obtaining government confirmation that it would be in the interest of the company that the shares should be offered to one other than the existing shareholders. The shares are however, not required to be of credit to the existing shareholders. Preference shares are those of a private company where the increase in the capital results from the conversion of loans or debentures granted to the company into shares of one company. The conditions laid down in section 81 would have to be followed whether the issue is that of equity shares or preference shares.

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Issue of Shares and offer for Sale of Shares An issue of shares must be distinguished from an offer for sale of shares. An issue of shares is by the company itself. An offer for sale of shares envisages the case of bulk shareholders offering part of his shares to the public either with the intention of increasing public participation in the capital of the company to qualify it for listing on the stock exchange or in order to comply with guidelines laid down under the Foreign Exchange regulation Act. In this case, the offer in reality is made by the shareholder although in most cases for the sake of convenience, the company appoints the agent for carrying out the sale. SHARE CAPITAL AND DEBENTURES Reduction of Capital Reduction of capital may involve a reduction in the nominal capital, or issued capital, or paid up capital. The reduction must be authorized by the articles, and a special resolution is necessary to effect the reduction. Further the reduction is not effective until it has been confirmed by the court, the intent being that of the court will before giving its approval ensure that the interest of the creditors is safe guarded. Transfer and Transmission of shares The procedure for the transfer of shares in a company is set out in section 108 of the Act. Since the prevalent practice in both large and small companies is to have this work done by specialized agencies, the subject is not dealt with in detail. Briefly, the procedure is that the transfer must be executed in the Prescribed Form. The prescribed form is form 78 of the companies (Central Governments) General Rules & Forms, 1956, before the form is executed by the transferor and transferee, it has to be stamped by the prescribed authority (the Registrar of Companies) and after execution by both, delivered to the company long with the share certificates. In the case of share listed on the Exchange, the form must be presented to the company within twelve months of presentation to the prescribed authority or before the closing of the registrar of members for the first time after it is presented to the prescribed authority (whichever is after) and in the case of shares not listed, within two months from the date of presentation. The following other conditions are complied with which are set out in section 108 ( C) a) The qualification shares of a director who is a nominee of another company : b) Any shares deposited by any person with the State Bank, or any schedule Bank, or banking company or financial Institution approved by the Government or the Central or State Government or any corporation owned or controlled by such Government as security for the repayment of any loan or advance. c) Any share held in any company by the Central or State Government in the name of its nominee, except that the instrument of the transfer shall be in the prescribed form.

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The application for transfer may be made either by the transferor or the transferee and where the application is made by the transferor and relates to partly-paid shares, the transfer is not to be registered unless the company gives notice of the application to the transferee and he makes no objection to the transfer within two weeks from the receipt of the notice, (Section 11A). A transfer is incomplete until it is registered and the transferee becomes the legal owner only when his name is entered on the register. It should be noted however that Section 108 prescribes the conditions that have to be complied with before a company registered any transfer of shares. Non-compliance with these formalities does not nullify a sale which becomes complete as soon as the property in the shares is intended to be transferred and which intention has to be gathered from the facts of each particular case, See Unity company limited V. Diamond Sugar Mills and another, ATR 1971 Cal 18. The company is required to complete and have ready for delivery the certificate of shares or debentures within three months of allotment of the shares and debentures of within two months of the application for registration of transfer. However, Company Law Board has been empowered to extend the time limit for issue of debentures certificate, up to period of nine months on an application made by the company on this behalf (Section 113). This particular condition is today observed more in the breach. Any person who has purchased shares recently will vouch for the fact that he does received the certificate for the share purchased sometime for period as long as six months or one year. The broker puts the blame on the company concerned and the companies when contacted do not give satisfactory explanation. It is fit matter to be taken up by the shareholders as a body. Where shares pass by transmission by operation of law, these provisions relating to transfer do not apply although it would be necessary for the legal representative to establish proof of his title and follow the procedure laid down by the company for this purpose. A transfer of shares by a legal representative would be as valid as if made by a member (Section 108 (1) second provision and section 109). Boards Power to Refuse Transfer The question is often raised In what circumstances is the Board of Directors of a company is justified in refusing to register the transfer of share ? The power given to the directors under the Articles to refuse to register a transfer must be exercised reasonably and in good faith. In Bajaj Auto Limited V.N.A. Firodia reported in A.I. R. 1971 S.C. at page 321 their Lordships of the Supreme Court have laid down the following three broad tests for deciding this question a) Whether the directors acted in the interest of the company. b) Whether the directors acted on a wrong principles or with corrupt motive. c) Whether they acted with an oblige motive or for an collateral purpose.

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Where the directors bonafide decide, that in the interest of the company it would not be desirable to register a transfer , the decision would be justified. Publication of Authorised and Subscribed Capital Where any notice, advertisement or official publication mentions the authorized capital of a company, it must also mention its subscribed and paid-up capital. Seal of the Company Section 34 states that from the date of incorporation mentioned in the Certificate of Incorporation of a Company, the subscribers of the memorandum and other persons who are members shall be a body corporate by the name contained in the memorandum capable of exercising all the functions of an incorporated company and having perpetual succession and a common seal. The seal, therefore is an essential feature of a company. On this seal, as mentioned earlier, the name of the company must be engraven. A document may be executed on behalf of a company either under the common seal of the company or under the authority of any person authorized to exercise such document. Where a document is executed under the seal, it is necessary to check that the seal is affixed in the manner set our in ARTICLES. The Articles will describe in detail the manner in which the seal of the company is to be affixed e.g. that it should be affixed only under the authority of the Board in the presence of one or two Directors, with or without any other counter signature. Where it is executed by an officer acting on behalf of the company, it may be necessary to verify the authority of the person unless the status of the person carries with it an implied authority to execute the document e.g. the managing director may be assumed to have the power to execute documents. Under section 50, a company which carries on business outside India, also may if authorized by its articles, have an official seal for us outside India which is a facsimile of the common seal. An authority to affix the additional seal must be granted by the company. A document executed under the official seal is an authentic as a document executed under the common seal. GENERAL MEETING AND PROCEEDING The Provisions relating to meeting are covered by sections 165 to 197 or the Companies Act. It is important to remember, however, that apart from the Statutory provisions, the meetings of a company are governed by its articles of association. Thus, while the articles cannot contain provisions which would make an invalid meeting valid, they would contain provisions on matters that the law leaves a for passing resolutions on matters like borrowing investments, or the quorum necessary for constituting a meeting. It is possible that the Articles of Association may impose on the company conditions, stricter than these provided under the law, e.g. they may provide that a resolution should be

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Ram Mallar
Prof. of Law & Corporate Governance

passed by a special majority when the Act required it to be passed by an ordinary majority. Meeting of members may be classified into the following : 1. Statutory meetings. 2. Annual General meeting. 3. Extra ordinary General meeting. 4. Meetings of classes of shareholders. A D M I N I S T R A T I O N Under section 146, a company is required to have a registered office from the day it begins to carry on business or from the thirtieth day after its incorporation which ever is earlier. While the registered office may be moved within the limit of the city or down in which it is situated, it cannot be moved outside such city or town without the sanction of the shareholders obtained by a special resolution. Further intimation must be given to the Registrar of the initial situation of the registered office and thereafter of every change in the office. The notice is required to be given in form no. 18 of the companies (Central Governments) General Rule and Forms, 1956. The registered office has significance as all communication addressed to a company at such office. Further the following important registers are required to be maintained at this office. 1) The Registers of members and debentures of holders and the index of members and debentures holders as well as copies of annual returns together with the certificates and documents required to be attached to such annual returns (section 163). These may, however, approve of their maintenance elsewhere by an intention to remove them elsewhere is given to the registrar. 2) The Registers containing the contracts or arrangements in which Directors are interested (Section 301). 3) The Register of directors, managing directors, manager and secretary (section 303). 4) The Register of charges (section 143). 5) The books containing the minutes of the general meeting (Section 198) 6) Books of Accounts (Section 209). However, by a resolution of the Board, the Directors may decide to keep the books at some other place in India in which case the decision to keep the books elsewhere must be intimated to the Registrar within seven days. Where inspection of documents is permitted e.g. of Register of members, register of charges and minutes of meetings, the inspection must take place at the registered office.

Publication of the Company

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Ram Mallar
Prof. of Law & Corporate Governance

The name of the company and the address of the registered office is required to be painted or affixed outside every office or place where the business of the company is carried out in the locality. Further the name of the company is engraved in legible characters on the seal, as well as bills, hundies, promissory notes, cheques and orders for money of goods. Failure to observe these provisions make the company and every officer in default liable to fine (Section 147) Statutory Meetings Every public company limited by shares and every public company limited by guarantee is required to hold a meeting known as The Statutory Meetings, within a period of not less than one month, and not more than six months from the date on which it is entitled to commence business (section 165). As this requirements applied only to public companies and not to private companies, the articles of incorporating a company initially as a private company and converting it into a public company after six months is sometimes resorted to. The object of the statutory meetings is to put the shareholders is possession of all important facts relating to the new company at an early date. The notice calling the Statutory Meeting must refer to the meeting as a Statutory Meeting (section 165 (1)). A report known as the Statutory Report certified by atleast two of the Directors of the company is required to be sent to every member of the company, at least twenty one days before the meeting unless all the members agree to have it forwarded later (Section 165 (2)). The matters that are required to be contained in this report are set out in sub-section (3) of this section. The report is required to be forwarded to the Registrar immediately after it has been forwarded to the members (section 165 (5)). It may be noted that if the Statutory Re[ort is not delivered to the Registrar, the court may order a winding of the company. The Statutory Report has to be made out in Form 22 of the Appendix I of the companies (Court) Rules 1959. At the meeting, a list of members including their addresses and occupation and the shares held by them is to be kept available for the inspection of members. It is interesting to note that at Statutory Meeting, members are at liberty to discuss any matters relating to the formation of the company or arising out of the Statutory Report whether previous notice has been given or not although no resolution may be passed of which notice has not been given in accordance with the Act, (section 165 (7)). The Statutory Meeting may be adjourned from time to time. Further, at such adjourned meeting any resolution may be passed even if such resolution was not intended to be passed at the first proposed Statutory Meeting provided requisite notice of such resolution had been given during the period between on adjourned meeting and the next (section 165 (8)). The notice required for such a meeting is also twenty one days as in the case of any other general meeting. Annual General Meeting

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Ram Mallar
Prof. of Law & Corporate Governance

Section 166 of the companies Act provided that in addition to any other meeting that may be held, a company shall held each year a general meeting as its Annual General Meeting. These are two cumulative conditions to be satisfied in this connection. 1) One meeting at least must be held in a calendar year, and (section 166 (1)). 2) There must not be a gap of more than fifteen months between one meeting and another (section 166 (1)). Therefore, it would be a contravention of the section if the meeting is held in consecutive calendar years, but there is a gap of more than fifteen months between one meeting and another; equally there would be a contravention if the Meeting is not held in each calendar year e.g. if one meeting is held in October 1977, and the next is held in January, 1979. There are two exception of the above, viz. a) the first Annual General Meeting of Company may be held within a period of not more than eighteen months from the date of its incorporation. In that case it would not be necessary for the company to be held any Annual General Meeting in the year of its incorporation or in the following year e.g. a company incorporated in the month of August of any year need not held meeting in that year or in the subsequent year; (this provision enables a company to draw up its accounts for a period of more than one year and present them to the first Annual General Meeting and (b) the Registrar may extend the period of fifteen moths by a further period of three months. This section must be read together with section 210 (3) in terms of which are the period for which the accounts are submitted to a meeting should not precede the day of the meeting by more than six months or six months plus the extension of time granted by the Registrar. It may, therefore, happen that an Annual Meeting may have to be held before the expiry of the period of fifteen months from the previous meeting in order to comply with the provisions of section 210. Equally it may be possible that the accounts may not be ready to be held to comply with the condition that one meeting must be held per year. In such a case the meeting should nevertheless be held within one statutory time limit, but adjourned to a date when the accounts will be ready. If default is made in calling the meeting in accordance with section 166, the Central Government may on the application of member call the meeting or direct that the meeting be called. Default under section 166 is punishable with a fine upto five thousand rupees which can be imposed separately on the company and the office in default. (section 167 & 168). The question is sometimes raised in this connection what is the consequence of holding a meeting after the expiry of the time limit prescribed by the law? Would the resolutions passed at such a meeting be valid and the appointment of directors be effective? The legal position would be that while penalty would undoubtedly be levied in view of the violation of the law, the resolution passed would be valid.

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Ram Mallar
Prof. of Law & Corporate Governance

The point that would arise for consideration, however when a meeting is held in the year following the year of default would be, whether the meeting is the meeting of the year of default, or that of the year in which it is actually held. Palmers view is that the proper course would be for the shareholders to resolve at the meeting that the meeting will be treated as the annual general meeting for both years and unless this is done the meeting will be treated as the annual meeting of the year of the default and a second meeting have to be held for the year in which it is actually held. Annual General Meeting must be called for a time during business hours, on a day that is not a public holiday, and must be held either at the registered office of the company or at some place within the city, town or village in which the registered office is situated. The Central Government, however has the power to exempt any class or companies from these provisions. Provisions (a) and (b) of the sub-section (2) of section 166 cast some doubt on the point on the point whether the articles of a company of the resolution passed by the shareholders at the Annual General Meeting can fix a time which falls outside business hours. The correct view would be that this cannot be done. The condition requiring the meeting to he held during business hours is intended to make it convenient for the majority of shareholders to attend a meeting which would not be possible if the meeting were held outside business hours and this condition must still be complied with. It must also be noted that while a private company which is not the subsidiary of a public company can fix both the time and place of the meeting, a public company and a private company which is subsidiary of a public company can fix only the time. The definition of public holiday given in section 2 (38) should be noted. The company is not in default if a public holiday is declared after the issue of the notice. Extraordinary General Meeting An extra-ordinary General Meeting is any general meeting (i.e. of the general body of shareholders as opposed to a particular class of shareholders), other than the annual general meeting and the statutory meeting. Such meeting may be called for the management to transact any business of special character or may be called following requisition by shareholders under section 169 convened by the management on its own, and advance notice of twenty one days the Annual General Meeting is given. It should be noted that the conditions that attach to an annual general meeting viz. be held during business hours, etc. do not attach to an extraordinary meeting Section 173, states that all items transacted at an extraordinary general meeting shall be deemed to be special. The notice relating to an extraordinary meeting must, therefore, be accompanied by a statement setting out all the material facts relating to the business to be transacted including in particular the nature of the interest in that business of every director and manager. If the business to be transacted concerns

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Ram Mallar
Prof. of Law & Corporate Governance

another company the extent of shareholdings of every director and manager in the company must be stated provided the shareholding exceeds twenty per cent. An extraordinary general meeting may be called if a requisition is made from any of the following. i) In the case of a company having a share capital such number of members as hold not less than one-tenth of cash of the paid up capital of the company as at that date carries the right of voting in regard to the matter. ii) In the case of a company having a share capital such number of members as have not less than one-tenth of total voting power of the members entitled to vote on that matter (section 169). Section 169 contains an important right granted to minority shareholders viz. the right to compel directors to call meeting on the requisition of holders of only onetenth of the paid up capital of a company. Meeting of classes of Shareholders The shares of a company are divided into various classes. Class meetings to be held when the Act or the Articles of Association or the terms of issue of the shares provide that they should be called. Who may convene General Meeting A general meeting must be convened by our under the authority of the Board. It is customary to pass the resolution at a meeting of the Board and not by circular, but there would be nothing improper in convening a meeting by means of a circular resolution also. A meeting convened by the Manager Director or the secretary is invalid if not authorized by the Board. However, if, before the meeting is actually held, the Board ratifies it, the meeting would be valid. The circumstances under which meetings may be requisitioned by shareholders have already been set out above. In this connection, the provisions of section 186 which empowers the Company Law Board to call a meeting (other than an annual general meeting) either on its own motion, or on the application of a director or member are relevant. Such a meeting can be called by the Board (i) if, for any reason, it is impracticable to call a meeting or (ii) if the meeting cannot be held or conducted in the manner prescribed by the Act or the articles of the company. Notice of Meeting Contents and Manner of Service A meeting is not valid if the notice of the meeting has not been given in accordance with the Act. It should also meet the requiring of the Articles. The following are the important provisions relating to a valid notice for a general meeting.

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Ram Mallar
Prof. of Law & Corporate Governance

i) At least twenty-one days notice must be given of the meeting. The meeting may be held at shorter notice (a) in the case of an Annual General Meeting, if all the members agree to such shorter notice and (b) in the case of any other meeting, if members holding 95% of the share capital or 95% of the total voting power consent to such shorter notice. (Section 171). ii) The notice should specify (a) the place (b) the date and the hour of meeting and (c) the business to be transacted at the meeting (Section 172). iii) Notice of the meeting must be given to (a) every member (b) the person entitled to a share in consequence of the death of insolvency of member and (c) to the auditors of the company (Section 172 (2)). The question is often raised whether notice of the meeting should be given to preference shareholders who are in terms of the Act entitled to vote only on these resolution which affect their own rights, strictly unless the articles specify otherwise, only these persons who are entitled to attend and vote. Notice is given to all shareholders whether ordinary or preference. Where a company has taken long-term loans from financial institutions, notice is required to be given to them in terms of the agreement with them. iv) Notice must be given in the manner indicated in section 53 viz. a) by serving it personally, or b) by sending it by post to their address registered with the company. (if the document is sent by post, it must be ensured that the normal formalities of posting are complied with viz. the letter is properly addressed and the necessary stamp affixed. The letter is not required to be sent under a certificate of posting or by registered post, unless specific instructions to that effect have been given. c) in the case of shareholders who do not have registered address in India, notice is served by advertising the Notice in a newspaper. The words or if he has no registered address in India section 53 creates some doubt whether a notice would have to be given by a company to a foreign shareholders who has not address in India and this view is supported by the fact that under English Law no notice is bound to be given to a foreign shareholders, although in practice a company may do so, and further that many articles of association of English companies specially provide that notice to such shareholders should not be given. Section 53 (3) which states that a documents advertised in a newspaper will be deemed to be served on members who have no registered address in India also strengthens this view. iv) v) A notice given by post is deemed to be effected in the case of the notice of meeting, on the expiration of forty-eight hours after the letter is posted. The accidental omission to give notice to any member entitled to the notice, or the non-receipt of notice by any person does not invalid to the proceedings of the meeting.

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Ram Mallar
Prof. of Law & Corporate Governance

Ordinary and Special Business Section 173 of the Act indicates which business is deemed to be ordinary and which is deemed to be special. At an annual general meeting all business shall be deemed to be special with the exception of i) consideration of the accounts, balance sheet and the report of the Directors and Auditors, ii) declaration of dividend, iii) the appointment of Directors in the place of those retiring, and iv) the appointment of and the fixing of the remuneration of the auditors. At any other meeting, viz. Extra-ordinary General Meeting, Statutory meeting and Class Meeting, all business is deemed to be special. From the above classification of business into ordinary and special follows another distinction. In respect of ordinary business, the notice is merely required to refer to the time of business. In respect of special business, there has to be annexed to the notice of the meeting, as statement setting out all the material facts relating to that item of business including the concern or interest in such business of every Directors and the manager of the company and if any item of special business involves a transaction with another company the extent of shareholding interest in the other company of every director and the manager has to be mentioned if the total shareholding of such persons in the other company is not less than twenty percent. Special business relates to according approval to any document (e.g. adoption of fresh articles) the statement must specify the time and place where the document can be inspected. If all the relevant facts relating to a special business have not been given in the statement, or if the notice is misleading, the transaction of that item of business is invalid. However, other business transaction at the same meeting is not necessarily invalidated if in respect of that business the provision of law have been complied with. Resolution requiring Special Notice Under Section 190 of the Act, certain ordinary resolutions required special notice to be given. This means that the intention to move certain kinds of resolution must be intimated by a member to the company at least fourteen days before the meeting which it is to be moved (excluding the days on which notice is served and the day of the meeting). The company in its turn is required to give notice to the members. Notice by the company has to be given in the same manner as the notice of a meeting or if that is not possible, it should be given by an advertisement in a newspaper. Instances of resolutions where a special notice is required are i) under section 225 when an auditor other than a retiring auditor is being appointed and ii) under section 284 for removal of a director before the expiry of his period of office. PROCEEDING AT GENERAL MEETING What is a Meeting The word meeting prime facie means coming together of more than one person. The only exception would be where the statute specially provides is under section 107 that one member may constitute a meeting.

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Ram Mallar
Prof. of Law & Corporate Governance

QUORUM AT GENERAL MEETING In order to constitute a valid meeting, the quorum provided under the Act must be present. Section 174 states that five members personally present in the case of public company (other that 43A company) and two members personally present in the case of any other company shall be the quorum for the meeting of the company. It may be noted that under English Law while the necessary quorum for a private company is the same as under the Indian Law, viz. the quorum for a public company is not five but three. It is important to remember that the persons who must be present must be the actual members and not persons who are representing the members by proxy. The obvious exceptions being a person who is representing a corporation under section 187 or a Governor or the President under section 187 (A), since it is not possible in these cases for the members to be personally present. It is important to note that while articles may provide for a large number than that stipulated in law for constituting a quorum they cannot provide for a smaller number. It is also submitted that the articles cannot provide that a quorum shall be five persons present in person or by proxy as the Act required the members to be personally present. The quorum required under the Act must be present at the beginning of the meeting and the business will be deemed validly transacted if thereafter the number falls below the statutory minimum. To make this position abundantly clear articles relating to quorum state that the necessary quorum present at the commencement of the business. The Act stipulates what should be the quorum in the first instance, it leaves the company free to provide in its articles what course should be followed if the quorum is not present at the meeting. If no provision is made in the articles the following will be the procedure:If the quorum is not present within half an hour of the time fixed for the meeting: a) The meeting will stand dissolved if it has been called upon the requisition of members; b) At any other case, it will be adjourned to the same day in the next week at the same time and place or to such other day and at such other time and place as the Board determine; c) IF there is no quorum at the adjourned meeting also, the members present shall be the quorum. In this eventuality even one member can constitute a quorum whether present in person or by proxy.

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Ram Mallar
Prof. of Law & Corporate Governance

Chairman of Meeting The articles generally make provision as who should be the Chairman of the Board of Directors as well as Chairman at general Meetings. The common practice is for the articles to lay down the procedure for the election of the Chairman of the Board of Directors and to provide that such Chairman shall preside at general meeting and in the absence of such Chairman, the Deputy Chairman or Vice-Chairman will preside. Section 175 states that in the absence of any provision in the articles to the contrary, the members personally present at the meeting shall elect one of themselves to be the Chairman on a show of hands. The same section provides that if there is a demand for poll on the matter of election of a Chairman the poll must be taken at once, the Chairman for conducting a poll to be first elected on a show of hands. The duty of the Chairman is to keep order and see that the business of the meeting is properly conducted and to ascertain the same of the meeting in referred of the items of business. Where no poll has been demanded, a declaration by the Chairman that on a show of hands a resolution is or has not been carried or has been carried either unanimously or by a particular majority and an entry to this effect in the minutes book is conclusive evidence. (Section 178). Usually the articles contain a provision that in the event of an equality of votes, the Chairman shall have a casting vote. However, in the absence of such a provision the Chairman cannot claim such a privilege. Most articles also provide that no business shall be transacted at a meeting if there is no Chairman present unless the Chairman has first been elected. P R O X I E S A member of a company who is entitled to attend and vote at a meeting is entitled to appoint another person whether a member or not to attend and vote instead of himself. The provision relating to proxies may be summarized below:a) Every member of a public company or private company which is a subsidiary of a public company and having a share capital has the right to appoint one or more persons to vote in respect to his shares. This right would be available to the member of a Company not having a share capital and a private company only if the articles of such a company specifically provided for this. (Section 176 (1) and proviso). b) A proxy is not entitled to speak at a meeting or normally to vote on a show of hands, he can however join in demanding a poll and vote by way of poll. The Articles of Association however may grant to the proxy the right to vote on a show of hands in addition to being entitled to vote on a poll (Section 176 (1)).

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Ram Mallar
Prof. of Law & Corporate Governance

Although the articles of association of most public companies provide that a proxy shall not be entitled to speak and will vote only on a poll, in actual practice this provision is not enforced for practical reasons. viz. that no separate sitting arrangement are made for proxy-holders and in all probability these persons take an active part in the proceeding as the members themselves. c) Every notice of a general meeting of a public company with share capital must state that the member has this right (Section 176 (3)). d) The instruments of proxy must be deposited with the company forty-eight hours (or less than forty-eight hours but not more) before the meeting and the articles of association cannot require a member to deposit it earlier than forty-eight hours. (Section 176 (3)). e) The company is forbidden from sending out invitations to member at its own expense requesting them to grant proxies in favour of a person nominated by the company. This offence is punishable with fine exceeding upto rupees one thousand. The Company is not however forbidden from supplying to members at their request proxy forms or a list of persons willing to act as proxies. (Section176 (4)). It should be noted that under the English Law this is not an offence. On the contrary, the law provides that if directors send our proxy forms at the expenses of the company they should send them to all members. f) An instrument of proxy must be in writing and signed by the member or his duly authorized attorney. The proxy by a body corporate must be under its seal and signed by an authorized attorney, even if the articles provides for a form of proxy. A member is free to follow any of the forms set out is schedule IX (Section 276 (5) and (6)). Representation of Corporations : While on the subject of proxies, it would be convenient to deal with the subject of representation of corporations at meeting of shareholders. Section 187 provides that a body corporate (which is a term wider than company) may authorize its representative to attend the meeting of companies in which it is a shareholder such a representative must be appointed by resolution of the Board of Directors or other governing body. It is open to a company to appoint a proxy instead of a representative on its behalf in which case the proxy would have the limited rights mentioned above. It is important to note however that the representative of a company has several advantages over a proxy. Viz. a) a representative, unlike a proxy, is entitled to speak at the meeting, b) a representative would be treated as a member personally present unlike a proxy and c) a representative has all the rights of a member and would therefore himself be entitled to appoint a proxy. The resolution of the Board of Directors appointing a representative may authorize a person to attend all general meetings of a company of which it is a shareholder and such

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Ram Mallar
Prof. of Law & Corporate Governance

a resolution would be valid one until it is substituted by a resolution in favour of another person. RESOULTION The Proposal put before a company in general meetings are usually expressed in the form of resolutions. According to the normal practice the resolution is put to the meeting by the Chairman, where upon it is discussed. After the discussion is over, the Chairman puts resolution formally to vote viz. he states that it has been proposed by Mr. X and seconded by Mr. Y and then requests the meeting to indicate the sense of the house by a show of hands, unless a poll is demanded, those in favour of resolution are asked to put up their hands, and these are counted again. The Chairman then declares the results viz. whether the resolution is carried by the requisite majority or lost. While on this subject, it would be convenient to deal with the subject of ordinary and special resolutions. Section 189 defines the two kinds of resolutions. An ordinary resolution is one where the votes cast in favour of the resolution by the persons who are members or where proxies are allowed to vote, by proxy (either on a show of hands or on a poll) exceed the votes cast against the resolution. A special resolution is one where the votes cast in favour of special resolution i.e. the resolution requires a three-fourth majority. It should be noted that in addition to such majority, the notice must specifically mention that the resolution will be proposed as a special resolution and the notice must be validly given. Voting by show of Hands Section 177 states that unless a poll is demanded under section 179, the voting in the first instance will be by a show of hands. It should be noted that unless the articles specifically give to a proxy this right, he is not entitled to vote on a show of hands. However, as mentioned above, in actual practice, unless the company makes special arrangements for seating proxy holders separately, proxies probably generally take part in a voting on a show of hands. In a voting on a show of hands, each hand is counted as one vote regardless of the number of votes the person actually possesses. Section 178 states that the Chairmans declaration of the voting results on a show of hands, and an entry to that effect in the minute book shall be conclusive evidence, without further proof. A relevant question in this connection whether directors in these cases where they are not shareholders of the company are entitled to propose and second a resolution or vote. There is no provisions in the Act covering this question and the matter would be governed by the law relating to meetings. The accepted positions seems to be that as the meeting is the shareholders meeting, only shareholders have a right to propose and second resolutions or vote and it would be irregular for any director who is not a shareholder to do so.

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Ram Mallar
Prof. of Law & Corporate Governance

POLL : (Section 179) A demand for a poll may be made either before or after a voting on a show of hands. The poll may also e taken by the Chairman on his own motion. If a demand is made by any of the following, the Chairman is duty bound to order the poll: a) In the case of a public company, by any member or members present in person or by proxy holding shares worth 1/10th of the total voting power or with a paid up value of Rs. 50,000/b) In the case of a private company, by one member having the right to vote on the resolution and present in person or by proxy if not more than seven members present in person or by proxy and by two such members or more than seven such members are personally present. c) In the case of any other company by any members or members present in person or by proxy who have not less than one tenth of the total voting power. The word and shall be ordered to be taken by him in section 179 lead to the inference that it is obligatory on the Chairman to take a poll if a demand is made by the proportion of shareholders mentioned above. It would also follow that the Articles of Association of a company cannot contain provisions providing for a minimum for demanding a poll or if they do, such articles would be ineffective. A poll demanded on the election of the Chairman and on a question of adjourned must be taken forthwith (section 175 and 180). A poll demand on any other question must be taken at such time as may be directed by the Chairman, but not later than forty-eight hours, from the time of demand. Voting Rights of Shareholders The voting rights of shareholders are governed by section 87 of the companies Act. There are briefly summarized as follows:a) Every member shall have a right to vote on every resolution placed before the company. b) His voting right on a poll will be in proportion to his share of the paid-up equity capital of the company. c) After the coming into force of the companies (Amendment) Act, 197, preference shares whether issued prior to or after 1956, carry the right to vote only on resolutions which directly affect the rights attached to their shares. Section 181 and 182 of the Act contain the restrictions that are permitted to be imposed by a company on voting rights of shareholders. While a private company which is not a subsidiary of a public company may impose any kind of restrictions on its Shareholders regarding voting, the only restrictions that a public company may provide are in the

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Ram Mallar
Prof. of Law & Corporate Governance

following situations. a) where a member has not paid the calls on his shares and b) where the company has any right of lien, and has exercised such rights:

Manner of Taking Poll Section 181 and 182 of the Act contain the restrictions that are permitted to be imposed by a company on voting rights of shareholders. While a private company which is not a subsidiary of a public company may impose any kind of restrictions on its Shareholders regarding voting, the only restrictions that a public or a private company may which is a subsidiary of a public company may provide are in the following situations. a) where a member has not paid the calls on his shares and b) where the company has any right on lien. Manner of Taking Poll Section 184 & 185 of the Act indicate the manner in which a poll must be taken. The Chairman of the meeting is entrusted with full powers to regulate the manner in which the poll is to be taken, subject of course to the provisions of the Act, Sec 184 provide that the Chairman shall appoint two scrutinies to scrutinize the vote during the poll, one of the scrutinies at least must be a member present at the meeting. The Chairman has the power at any time during the poll to remove the scrutineer from office. The result of the poll is deemed to be the decision of the meeting. Section 183 provides that on a poll, a member entitled to more than one vote or the proxy or attorney of such a member may use his votes differently. The following further points may be noted in connection with a poll:A member may be present at a poll although he is not present when the poll is demanded. At a poll, the right to vote, and the number of shares is to be determined by a reference to the register of members. If a poll is not completed on the day on which it is commenced, it must be completed subsequent day to exclude any voter to invalidate a poll. Where a subsequent day has been fixed for taking a poll it does not amount to an adjournment of the meeting. It would be in order to adjourn to ascertain the results of a poll, and the poll is deemed to continue until the result is obtained. Adjourned and Postponement of Meetings

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Ram Mallar
Prof. of Law & Corporate Governance

The articles generally give the Chairman power to adjourn a meeting. Regarding postponement, according to a decision of the Allahabad High Court, in Rajpal Singh v. Singh of U.P. 1968 in com. L.J. P. 22 the Board has this power and it can be exercised for Bonafied and proper reasons. In Seth Sobhag Mal Lodha v. Edward Mills Co. Ltd., Beawer 1972 42 comp. Pas. P. 357, the Supreme Court held that It is settled law that when a meeting is called, no Chairman can arbitrarily adjourn it, or disperse it as his own choice if required the Chairman should vacate the chair or adjourn the meeting regardless of the views of the majority those remaining, even if a minority can appoint a Chairman and conduct the business. The court also held that as the notice suggest that the meeting was called for the appointment of the Chairman, Managing Director, etc. the Directors could not bind the company to appoint only the person nominated by the directors and fetter its discretion. An adjourned meeting is a continuation of the original meeting and no new notice need to be given to the meeting unless the Articles so provide. When no notice is given, the adjourned meeting will transact only such business as is left in complete at the original meeting. If however, notice must be passed. Section 191 provides that where a resolution is passed at an adjourned meeting it shall, for all purposes, be treated as having been passed on the date on which it was in fact supposed to be passed, and not on an earlier date. Regarding proxies those which are invalid because they have not deposited before the original meeting cannot be made valid depositing them before the adjourned meeting. Registration of Certain Resolution While dealing with the topic of general meetings it would be relevant to deal with this subject. Section 192 requires certain resolutions and agreements to be registered with the Registrar of Companies within thirty days of passing of the resolution, or making of the agreements. The resolutions and agreements which are required to be filed with the Registrar are:a) Special Resolutions. b) Resolutions which have been agreed to by all the members, but which if not so agreed to, would have to be passed as special resolutions to be effective. For example where the management has resorted to the method of passing a circular resolution, with all the shareholders agreeing, instead of passing a special resolution at a shareholders meeting, the circular resolution would have to be filed with the Registrar.

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Ram Mallar
Prof. of Law & Corporate Governance

c) Resolution of the Board or agreements executed by a company relating to the appointment, re-appointment of renewal appointment, or variation of terms of appointment of a Managing Director, (as the section refers only to a Managing Director the resolution or agreement relating to other whole time Directors need not be filed). d) Resolution or agreement agreed to by all the members of any class of shareholders, which if not so agreed to, would have to be passed by a particular majority or in a particular manner to be affective and all agreements which bound all the members of a class though not agreed to by all these members. Instances to such resolutions would be those covered by section 106. e) Resolution of shareholders authorizing the Board to exercise powers under the clauses (a), (d) and (e) of sub-section (1) of section 293. f) Resolution approving the appointment of sole selling agents and copies of the terms and conditions of appointment of sole selling agents, and g) Resolution of shareholders agreeing to the voluntary winding up of a company under sec. 434. Minutes of Meetings Section 193 requires the minutes of proceedings of general meeting to be entered in a special book maintained for that purpose within thirty days of the conclusion of the meeting. The pages of the books must be consecutively numbered and each page must be initialed or signed and the last page must be dated and signed in the case of Board meeting by the Chairman of that meeting, or the Chairman of the next meeting and in the case of a general meetings by the Chairman of that meeting or by a director authorized by the Board for this purpose. The minutes must contain a fair and correct summary of the proceedings and must include all appointments of officers made at the meeting. The decision of the Chairman as to whether any material is defamatory, irrelevant or detrimental to the interest of the company are also to be mentioned. The minutes are deemed to be evidence of the proceedings recorded in them (section 94) and where the minutes have been kept in accordance with the Act, it shall be presumed that Meeting has been duly called and held (section 195) Section 196 states that the minute books must be kept at the registered office of the company and be open for inspection of members during business hours (subject to restriction imposed by the articles) but at least two hours in any day are available for inspection. Further a member is entitled to be furnished a copy of any minute on payment of thirty-seven paise for every hundred words. Default in maintaining the minutes or furnishing copies on request is punishable with fine. Annual Returns and Filling of Balance Sheet

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The subject of annual meeting and the formalities to be complied with, would be incomplete if mention was not made to the documents which are to be filed with the Registrar after the annual general meeting. Section 159 specified the information has to be set out in returns to be submitted by a company having a share capital and section 160 specified the information to be filed by a company not having a share capital. The annual return has to be filed within sixty days of the date of the Annual General Meeting and if the meeting has not been held, within sixty days of the last date on which it should have been held. Alongwith the annual return, the certificate mentioned in section 161 certifying the facts set out is section 161 (2) should also be filed. For all listed companies, it is not compulsory to get the Annual Return certified by a practicing company secretary. Section 220 requires that the Balance Sheet and profit and loss account of a public company shall also be filed with the Registrar along with the annual return within the period of thirty days from AGM. In the case of a private company, the profit and loss account and the balance sheet must be separately filed with the Registrar. Under Section 610, any person is entitled to take inspection of the balance sheet and profit and loss account of a public company and is also entitled to have copies of these documents on payment of the stipulate fee. However, the balance sheet and profit and loss account of a private company may only be inspected by a member of the company who would also be entitled to obtain copies of the documents. Offence under this section is punishable with fine. MANAGEMENT REMUNERATION The Act does not specifically state in respect of which category of personnel the remuneration is sought to be controlled. However, a study of the relevant provisions reveal that the overall as well as the individual limits govern the remuneration of Managing and whole time Directors and Managers only. The Companies Amendment Act 1988 has introduced substantial changes regulating overall scheme of managerial. iv) Unless the Central Governments approval has been obtained to such higher payment, the total amount that may be paid to a whole time director or managing director by way of monthly payment and commission must not exceed five per cent of the net profits of the company or if there is more than one such director the per cent of the profits for all of them together (section 309) The remuneration payable to all the directors must be determined (within the limits laid down by the Act) by the Articles or by a resolution of the shareholders, either ordinary or special. The intention is, that the director, themselves cannot determine their own remuneration. Further within the limits laid down by the Act, the Articles and the resolutions, must include all remuneration payable to the director including remuneration for services

v)

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Prof. of Law & Corporate Governance

rendered in any other capacity e.g. services rendered by a director for legal, finance or technical advice. However, the remuneration for such professional services will not be included if the services are of a professional nature, and in the opinion of the Government, the director posses the requisite qualifications for the practice of his profession (section 309 (1)). vi) A whole time director or a managing director or a manager may be paid remuneration either by way of monthly payment or a percentage of the net profits or in both ways the monthly payment and commission not to exceed five percent or ten per cent as the case may be mentioned in (iii) and (iv) above, (Section 309 (3)) and 387). vii) A director who is neither in the whole time employment of the company nor a managing director cannot be paid monthly, quarterly or annual payment except with the approval of the Central Government. Neither can such director be paid a commission based on net profits, without the sanction of a special resolution. (The sanction of the Central Government is not necessary for the payment of commission). The special resolution cannot operate for more than five years, but the period may be extended by resolutions from time to time, and no renewal can be effected earlier than one year from the date. Even with such sanction the commission to such non-whole time director or Managing Director or Manager, or three percent on any other case. If however, the company wishes to pay more that one percent or three percent as the case may be than it has to take the approval of both the shareholders and the Government to make such payment (Section 309 (3) and (4)). The application to the Government to make payment in excess of percentage must be in form 253. viii) A whole time managing director or any director who revise a commission from the company cannot receive any commission or remuneration from any subsidiary of the company (section 309 (6)). ix) Any provision relating to the remuneration of director including managing or whole time directors or a manager, or any amendment of such provision which increases or has the effect of increasing the remuneration, whether the provision be contained in the Companys Memorandum of Articles, or in any agreement, or in any resolution, or the shareholders, or the Board, shall not have any effect. (i) In case where Sch. XIII is applicable unless such increase is in accordance with the conditions specified in that schedule and (ii) Unless approved by the Government in any other case. The approval is not necessary for any increase in fee paid to the directors for attending meetings of the Board or a Committee of the Board, if it does not exceed sum as may be prescribed (now linked with paid-up capital and reserves). x) The net profits wherever referred to in any of the above named

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sanctioned, must be calculated in accordance with sections 349 and 350 and commission would be paid on the net profits so calculated. All the above restrictions and regulations on remuneration apply only to a public company or a private company that is a subsidiary of a public company and not to any other private company. Governments Power to Fix remuneration Lower than Ceiling. The Companies (Amendments) Act, 1974 introduced a new section 637 empowering the Central Government while according approval to the appointment or remuneration of a managing or whole-time director or manager, to fix the remuneration at any level within the statutory ceilings. The note on the clause reads The clause is intended to make it clear beyond doubt that the Central Government has power to adopt an administration ceiling within the Statutory ceiling fixed by section 198 and 309 of the Companies Act. Section 637 AA reads as follows:637 AA. Notwithstanding anything contained in section 198, section 309 or section 637 AA the Central Government may, according its approval under section 269, to any appointment or to any remuneration under section 309, section 310, section 311 or section 387, fix the remuneration of the persons so appointed or the remuneration, as the case may be, within the limits specified in this Act. At such amount or percentage of profits of the company, as it may deem fit and while fixing the remuneration, the Central Government shall have regard to:a) The financial position of the Company. b) The remuneration or commission drawn by the individual concerned in any other capacity as a sole selling agent. c) The remuneration or commission drawn by him from any other company. d) Professional qualifications and experience of the individual concerned, e) Public policy relating to the removal of disparities income. Revised Provisions on Material Remuneration Salient features of the provisions of the Act, as amended by companies (Amendment) Act 1988 relating to appointment and remuneration of managerial personnel are as under : 1) Appointment of a managing or whole time director or a manager is made mandatory in the case of every public company or a private company which is a subsidiary of public company, having paid up capital of Rs. 1 Crore. 2) Section 269: Approval of the Central Govt. is not required for the appointment of managerial personnel, if the requirements specified is Schedule XIII are fulfilled. A

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Prof. of Law & Corporate Governance

return in the prescribed Form 256 is to be filed with the Registrar within 90 days from the date of such appointment. A copy of the resolution passed by the Board of Director and/or shareholders in the general meeting is required to be enclosed. 3) Section 198 (4): In the event of loss or inadequacy of profits, approval of the Central Government is not required for payment of remuneration if:a) The appointment has been made in accordance with the terms and conditions specified in Schedule XIII. b) The resolution passed in the general meeting provides for a cut of 10% of the salary proposed to be paid in terms para 2 of part III of Schedule XIII 4) No approval of Central Govt. under Sec 268 is required for appointment or reappointment of managerial personnel, if made in terms of section 269. 5) The conditions specified in Schedule XIII part I are required to be satisfied only at the time of appointment in case of the appointee, after appointment, does not satisfy any of the said conditions, it will not debar the person concerned from continuing in office for the full tenure of his appointment.

6)

The remuneration payable to managerial personnel is not linked with the effective capital employed in the company depending on the effective capital employed, the salary ranges from minimum Rs. 6,000/- on effective capital of less than Rs. 20 lakhs to a maximum of Rs. 15,000/- on effective capital of Rs. 5 crores or more.

7) For a company having effective capital of more than Rs. 5 crores, maximum remuneration payable under the Schedule XIII shall be as under:Salary (Rs. 15,000 x 12 Commission @ 19% of net profit Subject to maximum 50% of salary Perquisites overall limit under Part A, B & C of Schedule XIII Rs. 1,80,000 Rs. 90,000

Rs. 1,35,000

Duties to the company, the duty to locality and the duty to care. Breach of the duties amounts to breach of trust and misfeasance. A director would not be liable for more errors of judgement or imprudent action. A director would not be liable for the misconduct in the preparation of a wrong or has omitted to bring the notice a wrong due to his negligence. The test of negligence is not the post-event detached mind but the mind of the reasonable business in the heat of the moment. Similarly in Official Liquidator V.P.A. Tendolkar 1973, Comp. Cas p. 335 the Supreme Court stated He (the director) cannot shut his eyes to what must be obvious to everyone who examine the affairs of the company even superficially. If he dare so, he could be held liable for dereliction of duties undertaken by him, and compelled to make good the loss incurred by the company due to his neglect even if he is not shown to be guilty of participating in the commission of fraud. It is enough if his negligence is of

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Ram Mallar
Prof. of Law & Corporate Governance

such a character as to enable frauds to be committed and losses thereby incurred by the company. These decisions are also relevant in indicating when directors would be held liable for neglect or fraud and indicate also the degree of care that would be required of them, when acting as directors. Who is the Company? The question that will necessarily be raised as a reaction to the proposition that directors are agents and trustees of the company is who is the company? The term company is used in different senses, depending on the context in which it is used as measuring the management, the shareholders, or the employees. The question was answered in the Second Hotel Investigation case in England in 1964. In that case the directors of the Savoy Hotel Ltd. Realized that person unconnected with the management had begun to acquire stock in the open market obviously with a view to acquiring control over the company. The object of the takeover bid was to acquire two of the most valued properties owned by the subsidiaries of the Savoy Company. To field this attempt, the directors of the Savoy company formed a new company to which were sold these properties. These were again leased to the subsidiary companies by the new company. The scheme caused considerable comment and the Board of Trade caused an inquiry to be made whether in promoting the scheme the directors had committed a breach of duty. In defense, the directors produced the legal advice they had obtained from a council of high standing. In the words of the inspector, the council advised that in the phrase the best interests of the company the expression the company did not mean the sectional interest of some (it may be majority) of the present members, but of the present and future members of the company. He advised that the Board of Directors should conduct the companys business upon the footing that it would be continued as a going concern and accordingly should balance a long-term view against short-term interests of present members. It is to be noted that the directors actually used their powers to deprive them majority shareholders the persons attempting the take-over bid of the power to dispose of the companys properties. The matter was never tested in a court of Law as the parties settled their differences by agreement but there in no doubt that the view of the council would have been upheld. Agents of Shareholders In certain situations, directors may act as agent for shareholders e.g. where there is an offer for sale of share by a large shareholder, such holder may constitute one or more of the directors of the company as the agent to carry out the transaction of sale. Directors are not servants of the company Directors are not as such employees of the company. They are therefore, not automatically, entitled to the benefits that go to the staff. The position of whole-time

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directors, however, is a little different and they must be entitled to all the benefits that accrue to officers of the company under the companys rules. Power of Directors As agents of the company the directors cannot exercise powers which the company itself cannot exercise. Accordingly if they act ultra virus the company, the acts are invalid and void and no amount of ratification can validate them. It is possible however, in some cases their acts may be ultra virus their own powers, but intra virus the company. In such case the acts may be ratified by the company in general meeting. The powers of the directors are set out in the articles. The articles generally grant to the power of general management. If this is done, it is necessary to set out in the articles any specific powers. Further, where such general powers have been granted by the articles the shareholders cannot take away these powers, or reduce them, they must alter the articles. The powers of directors are limited both by the Articles and the Law. Examples of restrictions on their companies under the law are a) the granting of loans to companies under the same management (Section 370), b) investment in shares of other companies beyond certain limits (section 372), c) the borrowing of moneys beyond certain limited (section 293), the disposal of the undertaking of the company (section 393 (1)). Apart from the above restrictions the effect of which is that directors can exercise the above powers only after obtaining authority from the shareholders, the law provides that certain powers must be exercised at Board meetings only, and not by means of circular resolutions. This topic is dealt with in the chapter of Proceedings of Directors. Doctrine of Indoor Management. In considering the directors position vis--vis outsiders the doctrine of Indoor management must be referred to. According to this rule persons dealing with a company are assumed to have read the public documents of the company to have ascertained the facts. In this connection, the provisions of section 292 are worth noting. This section prohibits the delegation of certain powers completely e.g. the power to make calls on shareholders and the power to issue debentures. Other powers if delegation must be subjected to the controls mentioned in that section e.g. the resolution delegating the power to borrow must specify the limits up to which the money may be borrowed by the delegate and the resolution delegating the power to invest specify the limits up to which the funds may be invested as well as the nature of the investments. The same is the case with the power to make loans. While on this subject, mention may be made of the seeming conflict between section 292 (d) and section 372. Section 292 permits the delegation of powers relating to investment to a committee of individual, whereas section 373 states that no investment in shares shall be made by a Board of Directors (even within the limit of ten percent)

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Prof. of Law & Corporate Governance

unless the investment is passed by a meeting of the Board, with the consent of all the directors present in the meeting. The correct interpretation which would reconcile the provision of the two sections would be, that section 292 refers to investments e.g. machinery, property etc. While section 372 covers investments in shares only. The rational behind the distinction probably is, that investment in shares involves judgment which should be machinery may be within the established parameters of the business of the company. Disqualification of Directors A director would be disqualified if he is suffering from any of the disabilities mentioned in section 274. In addition he cannot held the office of director in more than twenty companies (section 278). Further if after his appointment, any of the events mentioned in section 283 take place he would have to vacate his office. A managing or whole-time director is subject greater disabilities. While an ordinary director cannot act as such if he is at the relevant time an undischarged insolvent, a managing or wholetime director is disqualified, at any time suspended payment at the creditors or make a composition with them. Further an ordinary director is disqualified only if he has been sentenced to imprisonment for not less than six months for an offense involving moral turpitude. Further, a managing director cannot act as such if he is the managing director or manager or more than one other company. (Section 267 and 316). Proceeding of Directors The proceedings of directors are governed in addition to the provisions of the Act of the Articles and the rules made by the directors by virtue of the power granted to them by the Articles. Articles usually provided that the directors may conduct their proceedings as they think fit. In the alternative, they may stipulate in detail some of the conditions necessary for the conduct of a valid meeting, such as quorum, frequency of meetings, election of a chairman, the requisite majority for passing resolutions etc. Transaction is not inconsistent with such documents, but they are not required to do more. They are not required to inquire into the regularity of the internal proceedings of the indoor management and may assume that all being done regularly. This rule is based on a presumption of law which is dominantly practical, for business could not be carried on if a person dealing with agents of a company was compelled to call for evidence that all internal regulations had been observed. Therefore, if a mortgage takes form the company mortgage which is executed in the manner provided by the articles and if it ultimately transpires that no quorum was present at the meeting he would be protected an the mortgage would be good as the party has no means of checking on such internal matter. Validity of Acts if Appointment Defective

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The acts of a director are valid even if it is afterwards discovered that his appointment was invalid due to any defect or disqualification or had terminated by virtue of any provision in the Act of the Articles (Section 290). Section 255 of the Act permits one-third of the total number of directors of a public company and all the directors of a private company to be appointed otherwise than by the company at a general meeting, if the articles make provision in this regard. The Act, therefore, expressly permits directors to be appointed otherwise than by the company. If follows that within the limit as to the number prescribed by the section a power of appointment of directors can be legitimately conferred by the articles on any person including one who holds the office of a director. Delegation of Duties The Articles of Association generally provide that directors may delegate to one or more of themselves any of set-up powers. Accordingly depending on the organizational set-up powers are delegated to managing or whole-time directors and or committee of Directors. In addition, all companies grant powers of attorney from the Board to officers of the company for carrying on the day to day business of the company such as assigning of letters, cheques, shares certificates, etc. Even if no express power is given in the Articles the directors would be entitled to appoint attorneys for the purpose of carrying on the companys business. However, an express power is desirable in view of the maximum delegates non protest delegate. The directors cannot delegate to others duties which involve the exercise of judgement. A view is also held that they cannot delegate powers which must be specifically given exercise without such specific authority e.g. the power to borrow moneys in excess of the companys capital and free reserves. It is submitted that this is not a correct view. Once the shareholders have granted authority to the directors to do certain acts to exercise certain powers, those powers lose their identity and would be equivalent to any other power which the directors would exercise without reference to shareholders, and as such the directors would have a right to delegate them. Board Meetings It had been mentioned earlier that certain powers of the Board are required to be transacted at Board meetings only, and cannot be delegated to a committee or individuals nor can they be exercised by resolutions passed by circular. Apart from what is prohibited by law, each company has its convention about what is to be placed for approval at meetings. Capital expenditures programmes, revenues and sales budgets are generally placed before the Board for approval although this is not required under the Act. Powers of attorney to officers if the powers are granted by the Board, would naturally have to be placed before the Board. Any decision of consequence such as purchase of property of a high value, award of term-key contracts, etc. would also be taken by directors at meetings. Frequency of Meetings

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Ram Mallar
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Section 235 provided that the board must meet at least once in every three months and at least four meetings must be held every year. It may be noted that this section applied to a private company also. So that it would be necessary for even a private company to hold meetings at such intervals. However, Governments has been empowered to exempt any class of companies from the provisions of this section. The Act does not specify where one Board meetings should be held. However, it is a convention to hold directors meetings at the registered office and most companies held their meetings there. The question is often raised as to the time interval that can be allowed to elapse between one Board meeting and another. The title to section 285 refers to calendar months, one would, therefore be entitled to assume that the three months referred to calendar months, this being so, it would be in order if a Board meeting is held in January in the three months period of April to June. This interpretation is strengthened by the fact that there is no condition in the section that not more than three months should elapse between one meeting and another. If it has not been possible to hold a meeting for want of quorum it cannot be said that the provisions of section 235 have been contravened. There is no provision in law which requires a director to attend a specified minimum number of meetings. However, section 233 (1) (g) states that his office will become vacant if he absent himself from three consecutive meetings of the Board of for a continuous period of three months whichever is longer without obtaining leave of absence from the Board. A Director who is deliberately excluded from meetings of the Board can obtain relief by way of a suit for declaration an injunction. However, the Court will not grant his relief if it is wish of the shareholders that he should no longer continue to act as director. The attendance of directors at a meeting is generally recorded by their signing the attendance book. In some large companies the Registrar of Contracts is kept open at the entrance to the room and the signature of the directors in such register served the double purpose of recording their attendance at the meeting as well as signifying approval of the particulars of the contracts entered. Notice of Meetings Section 286 provides that notice must be given in writing to every director for the time being in India, and at this usual address in India to every other director. The Act does not specify the form of the Notice. If notice has been giving of the meeting, the business transacted at the meeting is invalid. In such a case, the solution is to ratify the transactions at a subsequent meeting. This principle was reaffirmed by the Supreme Court in Parmeshwari Prasad Gupta v. The Union of India A.I.R. 1973 S.C.P. 2389. The court also received that the confirmation of the

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minutes of the meeting at a subsequent Board meeting did not show that the directors had adopted the resolutions passed at the earlier meetings. It only showed that the Board passed the minutes of the proceedings of the earlier meetings. The Act does not specify the period of the Notice. However, it is accepted that it must be given a reasonable time before the meeting, otherwise the meeting may be declared invalid. Even if a Board meeting id held to be invalid as a rule, outsiders will not be prejudiced by such irregularity for outsiders are not invested with the knowledge of the indoor management of the company. QUORUM Under English Law, in the absence of a specific provisions in the Articles, the directors are free to affix to quorum for meetings. In India, the quorum of the minimum number of director necessary to transact business is specified in section 287. The quorum specified under the section is one-third of the total strength or two directors which-ever is higher. Total strength is defined as the total strength of the Board after deducting the number of directors whose places may be vacant. An interested director cannot form the quorum for the item of business is which he is interested and must be excluded from the one-third. The following example explaining the position. Suppose the Board ordinarily consists of twelve directors, but there is a vacancy on the Board caused by the resignation of death of a director then the total strength for the purpose of quorum is eleven. The quorum for such Board is one-third of eleven i.e. four (the fraction is rounded off, and the one-third being larger than two is taken as the quorum). If however, there is such an item of business that two third or more of the directors would be interested. Then the quorum for that item would be the no of interested directors or two whichever is larger. If a meeting cannot be held for want of a quorum than under the provisions of section 238 the meeting must be postponed to the same day in the next week and if that day is holiday unless the Articles provide otherwise. Circular Resolutions As mentioned earlier, apart from powers which either by the Act or the Articles, can only exercised by shareholders or powers which are entirely prohibited e.g. the making donations to political parties, the remaining powers can be exercised by the Board Directors by circular. The Act prescribed those powers which cannot be exercised Directors by means of a circular resolution. Instances, of such powers are: be of of by

a) The power to make calls on shareholders in respect of moneys unpaid on their shares. b) The power to issue debentures. c) The power to borrow moneys otherwise than on debentures. d) The power to invest funds to the company.

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Ram Mallar
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e) The power to make loans. The appointment of a managing director or manager who is already a managing director or a manager of another company would also require to be approved by the Board at their meetings (section 316 and 186). Similarly, approval to contracts in which a director is interested would also require to be given by the Board at its meeting. Section 289 sets out the procedures to be followed if a resolution is to be passed by circular. The section states that the resolution shall not be deemed to be passed unless (a) the resolution has been circulated in draft together with the necessary papers to all the directors resident in India the number of such directors shall not be less than the necessary quorum for the meeting (b) the paper have also been sent to those directors not in India, at their usual address in India and (c) the resolutions been approved by a majority of the directors in India & entitled to vote on the resolution. Disclosure of Interest by Directors Under section 299 a Director who is interested in a contract or arrangement or proposal that is placed before the Board cannot vote on that resolution. The quorum for an item in which a director is interested must therefore be determined excluding the interested director. The question arises who is a director deemed to be in interested? A director is deemed to be interested if a) he is director of a company with which the contract is being entered into b) he is a member of a firm with which the contract is being negotiated c) where the arrangement is between two companies, if the directors either by himself or with another director, or other directors of the company hold not less than two (2%) of the paid up capital of the other companies. The difficulties that arise in the last case are obvious while a director may not whether he holds more or less than two percent in another companies, he surely cannot know whether the shareholding of any of his colleagues is such that their company. In the circumstances, notice from directors to company nearly stated that they do not hold more than two percent of the capital of another company. Section 299 stated that the disclosure is adequate if the director gives to the company a notice indicating that he is a director or member of a body corporate or firm and is deemed to be concerned or interpreted in any contract with such company or firm and such notice is placed before the Board at the first meeting held after it is given. Such a notice given in the last month of the financial year in which it would otherwise expired. If any chance takes place in his directorships indicated in the notice, the director is required to indicate such change to the Board. Minutes Books Section 198 of the Act, requires the proceedings of the general meeting as well as Boards meeting to be entered within 30 days in the book kept for that purpose with the page numbered consecutively. The section states that the proceedings should not be attached to the book by posting or otherwise. It must be noted that there is no prohibition in the section against having the minutes typed and most companies follows

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Ram Mallar
Prof. of Law & Corporate Governance

the practice write them down. Many companies have now started the practice of using special files, which are numbered and can be removed and reinserted after typing and the file can be booked. Regarding circular resolution this can be posted in the minute book after they are passed to kept in a separate file and bound into books from time to time. Appointment and Retirement of Directors First Directors The first directors of a company are usually named in the Articles of Association. If there in none, the subscribers to the Memorandum, who are individuals, will be deemed to be the first directors under section 254 of the Act. If the directors are being appointed by the Articles, however, they cannot act unless they have a acquired their qualification shares when the Articles provide for qualification shares for directors. Companies of the Board Section 255 of the Act states that unless the Articles provides for retirement of all the directors at every annual general meeting not less than two third of the total number of directors of a public company or a private company which is a subsidiary of a public company shall be liable to retire by rotation. It is important to understand the meaning of the words to all number of directors in this section. The position is fairly simple if there is no vacancy in the Board. For example, if there are twelve directors on a Board, then not less than eight directors must be liable to retire by rotation. The other four may be nominated or appointed in any other manner. Appointment of Directors retiring by Rotation and Filling of Vacancies Section 256 states that out of the directors liable to retire by rotation one third (or the number nearest to one third) shall retire from the office every year. It is important to note that under section 255 not less than two third of the total number of directors must be liable to retire by rotation, whereas, under section 256 the number of directors to retire must be the number nearest to the fraction even if it is lower. The directors who are to retire must be those who have been longest in office, since their last appointment. If directors have been appointed on the same day, the persons to retire shall agree among themselves who shall retire; in the alternate, such director shall be ascertained by drawing lot. At the meeting, the place of the retiring director may be filled either by re-electing the retiring director or by appointing some one else. If it is intended to appoint some one else than the directors himself or any member proposing his candidature must give to the company notice in writing signifying such intention fourteen days before the meeting and the company in turn must inform the members of the candidature of such person seven days before the meeting. As the

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Ram Mallar
Prof. of Law & Corporate Governance

notice of the Annual General Meeting has to be sent out twenty one days before the meeting, it is obvious that if the notice of the candidature of a director is received fourteen days before such meeting, it would not be possible to give notice of the candidatures to the shareholders by way of an item in the notice. However, in a majority of cases, no such difficulty arises, as the candidates for directorship are approved by the Board and agree upon. In such cases the management ensure that it has no record notices from some shareholders recommending the candidature of the person concerned before the notice is issued to the members. In case where such notices are received after the notice of the meeting is issued the company would have to comply with the formality. If the vacancy is not filled and the shareholders have not decided not to fill the vacancy than the meeting will be adjourned to the same day in the next week and if at the adjourned meeting also the vacancy is not filled, then the retiring director shall be deemed to have been elected, unless it is necessary under any provision of his appointment. Casual Vacancies A caused vacancy is caused when the office of a director falls vacant before the term would expire in the normal course e.g. any death, or resignation. Such a vacancy may unless the articles provide otherwise be filled by the Board (section 262). If the Articles are silent, the vacancy may be filled by the Board or by the shareholders. Alternate Directors Section 313 states that the directors, may if authorised, by the Articles or by a resolution passed by the company in general meeting, appoint an alternate director to act for a director during his absence for a period of not less than three months from the state in which meetings of the Board are ordinarily held. The Board can, therefore exercise, this power only if (i) the articles so authorised and (ii) the directors on whose place the alternate is appointed is likely to be out of the state for more than three months. If the original director returns to the state, the alternate director automatically vacate his office. In any case, he vacates his office when the original regarding the automatic re-appointment of retiring director will apply to the original director and not the alternate director. Under English Law it is the director who ahs the right to appoint an alternate in India it is one Board. While the original director is out of the state when meetings are held, the alternate director has the right to receive notices of meeting and any other communications and to attend such meetings and vote. Additional Director

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Mallar Law Consulting www.mallarlaw.com

Ram Mallar
Prof. of Law & Corporate Governance

Section 260 provides that where the Articles permit, directors may appoint additional directors. An additional director holds office only up to the next annual general meeting, when he must be elected by the shareholders. While the additional director must be included in the total number of directors for purposes of calculating the maximum directors but not to be taken in to account when calculating the proportion liable to retire by rotation or the number that must actually retire every year. The following example illustrates this point. Suppose there are twelve directors of whom two are additional directors and seven are directors liable to retire by rotation. It cannot be said that the Board is not validly constituted because the number liable to retire by rotation is less than two third of the total number viz. nine. The proper way to calculate would be to deduct the additional director from the total number (12-2 = 10) and Board is therefore validly constituted. Similarly the number of directors that should be one-third of seven and not one-third of nine. At the same time, if the maximum number fixed by the Articles is twelve, and there are already twelve directors, the Board cannot appoint two more additional directors. The power to appoint additional directors gives the director freedom to bring on the Board men whose knowledge and experience would benefit the company without their having to be elected immediately by the shareholders. Consent of directors Apart from ensuring that the conditions mentioned above are satisfied, if the Board of Directors to be validly constituted and the appointments are to validly made, the Act lays down certain conditions regarding consent of directors. In the following cases, the directors must file their consent with the company or the registrar before the event referred to:a) A candidate proposed as director for the first time must file his consent with the company to act as director if he is appointed, before his appointment (section 264 (1)). b) A director named as director in the Articles or in prospectus or statement in lieu of prospectus must file his consent with the Registrar before the registration of the Articles or the filling of the prospectus or statement in lieu of prospectus (section 266). A person other than a director re-appointed director after retirement by rotation of after acting as additional or alternate director of filling a casual vacancy must file his consent to act as director with the Registrar within thirty days of his appointment i.e. he can act as director provided the consent is filed within thirty days. The director envisaged by this provisions would be a director who is meeting for the first time. The above restrictions do not apply to a private company unless it is a subsidiary of a public company. Resignation

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Mallar Law Consulting www.mallarlaw.com

Ram Mallar
Prof. of Law & Corporate Governance

There is no provision in the Act permitting a director to resign from his office. However, under the rule as master and agent, he would be entitled to resign after giving notice in writing to the company. Removal of Directors Section 284 provided that a company may by ordinary resolution remove a director before the expiration of his period of office. However, a director of a private company who holds office for life on the 1st April, 1952, cannot be so removed and a company that has adopted the procedure of proportional representation cannot also avail of this provision. The power has been given to the shareholders because although in theory they have the right to choose their directors and manage the affairs of the company. Under this section in an extreme situation they can at least remove a director, where it is intended to remove a director, the shareholders must give special notice of their intention to do so to the company, in turn must inform the director concerned. The director has the right to make a representation to the company against the proposal of his removal and if he requested the company to do so, the company is bound to circulate to the members his representation (provided it is of a reasonable length). Where a director is removed in this manner, the vacancy may be filled either at the general meeting at which the director is removed (providing notice of the intention to appoint the director has been given) or as a casual vacancy by the Board and as in the case of a casual vacancy the director who is appointed will retire when the original director would have retired. A director removed from office before his normal period of office is over would be entitled to compensation for premature termination of an office. This section applied both to a public company and a private company.

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