Prof.

Santanu Mitra

Company Law

Companies Act, 1956

Nature and kinds of companies ormu!ation

Memorandum Artic!es Prospectus Capita! " s#ares, de$entures %orrowin& powers Minimum su$scription Mana&ement of t#e Company Company Meetin&s Accounts ' Audit (indin& up of companies

Prof. Santanu Mitra

Company Law

C)MPAN* LA( Company -- meaning -- Company denotes an association of like minded persons formed for the purpose of carrying on business for acquisition of gain / profits - it may also include non-profit making concerns too e.g., club etc. Company may be incorporated or non-incorporated. Incorporated Co. is a a legal artificial persons distinct from the individuals consisting it. n !nincorporated Co. is a mere collection of individuals e.g. partnership "firm# etc. Company is called a body corporate because the persons composing it are made into one body by incorporating it according to the la$ and clothing it $ith legal personality and turn into a corporation e.g. %IC, &'C etc. formed through a special ct of (arliament, $hereas )*%C+, )I,C+, -%% etc. formed under the Companies ct, 1./0. +1* 2 3 1 C+3( 14 5 Company "body corporate# is the creation of la$. It is an artificial person. &istinct from the individuals "members# constituting it unlike a (artnership firm $hich has no separate e6istence apart from its partners. shareholder "member# of a company cannot be held liable for the acts and the debts of the company even though he holds virtually the entire share capital 2 from $hich the concept of +1* 2 3 1 C(3( 14 arose. )he historic 7udgment of the -ouse of %ords in ,alomon 's. ,alomon 8 Co. %td. established the principle of independent corporate personality of a company. 9acts 5 ,alomon, a shoe manufacturer, incorporated a company :,alomon 8 Co. %td. : $ith ; subscribers "members# consisting of himself, $ife, < sons and one daughter. )he Company $ent into liquidation due to general trade depression. )he various unsecured creditors contended that ,alomon could not be treated as a secured creditor since he $as the 3anaging &irector of +1*-3 1 C+3( 14 $hich $as not different from ,alomon and the cloak of the company $as a mere name and fraud. -- )he Court held that ,alomon 8 Co. %td. $as a mere agent for a ,alomon. -- )his decision $as reversed by the Court of ppeal, the -ouse of %ords. It $as held that a body corporate "incorporated under statute# is a legal person different from the subscribers to the memorandum 2 the company is not in la$ the agent of the subscribers or trustees for the them. )he members/subscribers are liable e6cept to the e6tent as provided by the ct i.e. upto the unpaid portion of face value of share. --)hus a shareholder ",alomon# can not be held liable for the acts of the company even though he holds virtually the entire share capital. C#aracteristics of a company + , or ad-anta&es of incorporation.

Prof. Santanu Mitra

Company Law

company is the creation of la$, it is not a human being, it is an artificial person> it is clothed $ith many rights, obligations, po$ers and duties prescribed by la$> it is called a person. )he most striking characteristics of a company are5 1# Corporate persona!ity 5 ?y incorporation under the Companies ct, 1./0, the company is vested $ith a corporate personality quite distinct from individuals $ho are its members. company is a separate entity and e6istence in la$, an independent collective personality. 2# Limited !ia$i!ity 5 )he privilege of limited liability for business debts is one of the principle advantages of doing business under the corporate form of organi@ation. )he company being a separate person, is the o$ner of its assets and bound by its liabilities. )he liability of a member as shareholder, e6tents to contribute to the assets of the company upto the nominal value of the shares held and not paid by him. =# Perpetua! Succession 5 n incorporated company never dies e6cept $hen it is $ound up as per la$. (erpetual succession means that the membership of a company may keep changing from time to time, but that does not affect its continuity. )he membership of an incorporated company may change either because one shareholder has transferred his shares to another or his share devolve on his legal representatives on his death. )hus $e can say, : 3embers may come and go, but the company can go on for ever.A <# Separate property 5 company being a legal person and entirely distinct from its members, is capable of o$ning, en7oying, and disposing of property in its o$n name. In other $ords, the property of the company is not the property of the individual members. shareholder has merely an interest in the company arising under the rticles of ssociation. )hus, incorporation helps the property of the company to be clearly distinguished from that of its members. /# /ransfera$i!ity of s#ares 5 )he capital of a company is divided into parts, called shares. )he shares are said to be movable property and sub7ect to certain conditions, freely transferable, so that no shareholder is permanently or necessarily $edded to a company. member may sell his shares in the open market and reali@e the money invested by him. )his provides liquidity to a member and ensures stability to the company. s soon as the shares are transferred, the transferee steps into the shoes of the transferor and acquires all the rights in respect of those shares. ,hare are freely transferable 2 ho$ever, a (rivate %td. Co. under the ct, requires to put certain restrictions on transferability of shares but any absolute restriction as right to transfer shares are prohibited. 0# Common Sea! 5 +n incorporation, a company acquires legal entity $ith perpetual succession and a common seal. ,ince the company has no physical e6istence, it must act through its agents and all such contracts entered into by its agents must be under the seal of the company. Common ,eal acts as the official signature of the company. )he name of the company must be engraved on its common seal. ;# Capacity to sue and $e sued +

Prof. Santanu Mitra

Company Law

<

company being a body corporate, can sue and be sued in its o$n name. ll legal proceedings against the company are to be instituted in its o$n name. ,imilarly, the company may bring an action against anyone in its o$n name. 0istinction $etween a Company ' a Partners#ip + 1# Company 2 is a distinct legal person> a (artnership is not distinct from the persons comprising it > 2# Creditors of a (artnership firm are the creditors of individual partner > Creditors of a Company can proceed against the Company and not against its members > =# (artners are the agents of the firm but members of a Company are not its agents. <# partner can not contract $ith his firm, $hereas a member of a Company can. /# partner can not transfer his share $hereas a CompanyBs share can be transferred by its members. 0# partnerBs liability is unlimited> $hereas the liability of a shareholder may be limited either by shares or a guarantee. ;# company has perpetual succession, death or insolvency of a shareholder does not effect the life of the Company $hereas the death or insolvency of a partner dissolves the firm. 0istinction $etween a Company ' 12 + 1# company consists of heterogeneous members but a -!9 consists of homogeneous members. 2# In -!9, the Carta " 3anager# is a sole authority for the purpose of business, but no such system e6ists in case of Company. =# 1o registration is compulsory by a -!9 even if the number e6ceeds 2D. Eegistration of Company is compulsory. " ,hyam %al Eai 's. 3adhusudhan Eoy#. 0isad-anta&es of incorporation + 1# 9ormalities and e6penses 2 9ormalities $ith E+C, C%?, ,tock *6change etc., e6penses for holding meeting, issue of capital, auditing etc. 2# Corporate disclosure 2 ma6imum disclosure of corporate information to comply $ith various guidelines e.g. ,*?I guidelines. =# ,eparation of control from o$nership 2 members do not have control over the $orking of the Company. )heir position is more passive in nature. <# Freater social responsibility 2 more accountable to the society e.g., establishment of 1ICC+ (ark. 3LL45AL ASS)C3A/3)N + !nder ,ec. 11 of the Companies ct, no company, association or partnership firm consisting of more than 2D persons " 1D for banking Cos. # can be formed for the purpose of the business, unless it is registered under Companies ct, 1./0. )his ,ec. &oes not applied to -!9. 1on-registration of an association " having more than 2D members # is illegal."Eef. +f case 5 ?adri (rasad 's. 1agar 3al # n illegal association 2 1# can not entered into a contract. 2# can not sue and be sued. )he members of illegal association are individually liable for acts made on behalf of the association. 6uestion + (#at is a Corporate -ei! 7 2nder w#at circumstances t#e Court may order to !ift t#e corporate -ei!7

Prof. Santanu Mitra

Company Law

+ne of the fundamental attributes of a company is that it is an artificial person created by la$. company has a legal entity distinct from and independent of its members. ,eparate personality of the company is a statutory privilege, it must be used for legitimate business purposes only. Ghere a fraudulent and a dishonest use is made of the legal entity, the individual concerned $ill not be allo$ed to take shelter behind the corporate personality. )he Court $ill breakthrough the corporate shell and apply the principle of $hat is kno$n as : lifting or piercing the corporate veil A. )he Court $ill look behind the corporate entity and take action as though no entity separate from the members e6isted and make the members or the controlling persons liable for debts and obligations of the company. )he corporate veil is lifted $hen in defence proceedings, such as for the evasion of ta6 an entity relies on its corporate personality as a shield to cover the $rong doings. )he circumstances and cases in $hich the corporate veil $ill be lifted may broadly be classified under the follo$ing t$o heads 5 a# !nder 7udicial pronouncements > and b# !nder e6press statutory provisions. a. 2nder 8udicia! pronouncements 5 )he corporate personality of a company is disregarded in very e6ceptional cases, they are follo$ing5 1.9or determining the character or status of a company 5 " *nemy Character# - $hen it is suspected that the company is o$ned or controlled by enemies of the country, the Courts may lift the corporate veil and e6amine the character of persons in the real control of the company. the Court may ignore the separate entity " &aimler Co. %td. 's. Continental )yre 8 Eubber Co. #. 2.9or the benefit of revenue 5 " to prevent ta6 evasion # 5 Ghere the veil has been used for evasion of ta6es and duties and the Court upheld the piercing of the veil to look at the real transaction " Commissioner of Income )a6 's. 3eenakshi 3ills +r Ee ,ir &insha$ 3aneck7ee (etit #. =.9or preventing fraud or improper conduct 5 - )he Court may also lift the corporate veil of a company $here it appears that the company $as formed only for some fraudulent purpose, to defraud creditors or to avoid legal obligations " Filford 3otor Co. 's. -orne> +r Hones 's. %ipman# <.Ghere company acting as agent or trustee of the shareholders 5 - s a general rule a company is not an agent of its shareholders but under certain circumstances a company may be regarded as an agent or trustee of its members " In Ee. E.F.9ilms %td. #. /.Ghere the doctrine conflict $ith public policy 5 -Courts lifted the corporate veil for protecting the public policy / interest "Connors ?ros. 's. Connors #. 0.Ghere company is used as a medium to avoid $elfare legislation 5 IGhere the provisions of $elfare legislations like (ayment of ?onus ct, Fratuity ct etc. are avoided " )he Gorkmen *mployed in ssociated Eubber Industries %td., ?havnagar 's. )he ssociated Eubber Industries %td., ?havnagar 8 another #. ;.9or determination of technical competence of a company 5 )he ,upreme Court in 1e$ -ori@ons %td. 's. !nion of India case held that the e6perience of the promoters could $ell be considered as the e6perience of the company in determining its technical competence. a. 2nder e9press statutory pro-isions 5 )he Corporate veil can be lifted as the Companies ct itself has provided for certain cases making the members or directors personally liable. )hese are 5-

Prof. Santanu Mitra

Company Law

1. Eeduction in membership " ,ec. </ # 5 If a company carries on business for more than 0 months after the number of its members has been reduced belo$ ; in case of a (ublic Company or 2 in case of a (rivate Company, every person $ho $as a member of the Company during the time $hen it carried on business after those 0 months and $ho $as a$are of this fact, shall be severally liable for all debts contracted after 0 months. In such a case though the Company has a separate entity, but the members become personally to the creditors and they can be sued for the debts. 2. 3isdescription of the Company " ,ec. 1<; # 5 )he name of the Company should fully and properly on documents instruments etc. If an officer of a company or any other person acts on its behalf and enters into a contract or signs a negotiable instrument $ithout fully $riting the name of the company, then such officer or person shall be personally liable. =. 9raudulent trading " ,ec. /<2# 5 Ghere in the course of $inding up of a company it appears that the business of the company has been carried on $ith intent to defraud creditors of the company or any other person or for any fraudulent purpose, all those $ho $ere a$are of such fraud shall be personally liable $ithout any limitation of liability. <. -olding 8 ,ubsidiary Company " ,ec.212 to 21< # 5 In the eyes of la$, the holding company and its subsidiary company have separate legal entities. It has been held that even a 1DDDJ subsidiary is a separate legal entity and its holding company is not liable for its acts. !/s 212"1# a holding company is required to attach $ith its final accounts a copy of the balance sheet, (/% /c, &irectorBs reports of each subsidiary. ,ometimes the Court may refuse to treat the subsidiary company as a separate entity and may treat as only a branch of the holding company. /. 9ailure to refund application money " ,ec.0.# 5 If the application money of those applicants to $hom no shares have been allotted is not repaid $ithin 1=D days of the date of the issue of the prospectus, then the directors shall be 7ointly and severally liable to repay that money $ith interest K 0J p.a. 0.!ltra vires acts 5 &irectors of a company shall be personally liable for all such acts $hich they have done on behalf of the Company, if they are !ltra vires the Company or !ltra vires the directors and the company does not ratify their acts. In all the above cases, the corporate veil pierced and the members can not take shelter behind the corporate veil. 6uestion + 0efine a Pri-ate Company and state t#e specia! pri-i!e&es w#ic# it en8oys under t#e Companies Act, 1956. (rivate Company can be formed by merely t$o persons by subscribing their names to the 3emorandum of ssociation. ?y virtue of section ="1#"iii# a (rivate Company means a Company $hich has a minimum paid-up capital of Es.1 lakh or such higher paid-up capital as may be prescribed by its rticles. ,ec.="1#"iii# of the Companies ct,1./0 provides that a private limited company by its rticles 2 a# restricts the rights of its members to transfer shares > b# limits the number of its members to fifty> c# prohibits 2 "i# invitation to the public to subscribe shares in or debenture of the company > "ii# 8 also prohibits any acceptance of deposits from public. Pri-i!e&es of Pri-ate Limited Company +

Prof. Santanu Mitra

Company Law

private company en7oys certain special privileges $hich are not available to a (ublic Company. )he (rivate %imited Companies are restrained from inviting capital and deposits from the public, not public interest is involved in their affairs. )he Companies ct, 1./0 confers certain privileges on (rivate %imited Company, they are5 "i# In a (rivate Company, business can be commenced immediately after its incorporation> "ii# (rivate Company is not required to hold a statutory meeting > "iii# (rivate Company is not required to issue prospectus or deliver a statement in lieu of prospectus to the Eegistrar> "iv# )he amount of managerial remuneration is not restricted to any particular proportion of the net profits> "v# (vt. Co. need not have more than t$o directors> ):MA/3)N ) A C)MPAN* Luestion5 *6plain the steps required to be taken for the formation of a (rivate %imited Co./ (ublic %imited Co. and the documents required to be filed $ith the Eegistrar of Companies. ?efore the promoter proceeds to incorporate a Company, he has to decide the )ype of Company to be formed 5 !nder the Companies ct, 1./0 only t$o types of companies limited by shares can be registered, vi@. a# (rivate %td. Co. 8 b# (ublic %td. Co. (rocedural steps for formation of a Company5 1. pplication for availability of name of the Company 5 n application in 9orm 1o. 1 of the Companies " Central FovernmentBs # Feneral Eules 8 9orms 1./0 is to be made on E+C $ith Es./DD/- as filling fee. )he 9orm should contain = suitable names in the order of preference. 2. (reparation of 3*3+E 1&!3 8 E)IC%*, +9 ,,+)I )I+1 5 " 3+ 8 + # - 3+ is the constitution of a Co. - It defines the area $ithin $hich the Co. can act. - It contains the name, the situation, the ob7ect, the liability, the capital etc. of a company. - 3+ contains the relationship bet$een the Co. and the outsiders vi@. Fovt., E+C,E?I,,*,,*?I etc. - + mainly contains the rules and regulations relating to internal management of a company. =. 'etting of 3+3 and + , (rinting, ,tamping and ,igning of the same - 'etting of 3+3 and + basically involves an approach to E+C for his opinion for any change > - 3+ 8 + after printing in a prescribed manner, have to be stamped and the value of stamp differs from state to state as per state stamp la$s > - ,ec. 1/ of Companies ct, 1./0 stipulates that every 3+ should be signed by each subscriber $ho should add his name, address, description and occupation in the presence of at least one $itness $ho shall attach the signature> - 9or + , similarly it should be signed by each subscribers and attested by $itness. <. (o$er of ttorney " (+ # 5 In order to fulfill various formalities that are required for incorporation of a Company, the promoters may appoint an attorney empo$ering him to carry out the instructions of E+C. )he (+ is to be e6ecuted on 1on7udicial ,tamp (aper of a value prescribed under the ,tate ,tamp %a$. /. dditional documents requires 5 "i# e-9orm 1o. 2. - Consent to act as a director of the Company only for (ublic %td.Co

Prof. Santanu Mitra

Company Law

"ii# e-9orm 1o. 1M -- 1otice of Eegistered office to be filed $ith E+C $ithin =D days of the date of incorporation> "iii# e-9orm 1o. =2 -- (articulars of directors to be filed $ith E+C $ithin =D days of appointment as directors> 0. ,tatutory &eclaration 5 In 9orm 1o. 1 !/s ==, a declaration to be filed $ith E+C, by an dvocate of -igh Court or a (racticing Company ,ecretary or a (racticing Chartered ccountant or any of the directors or the ,ecretary of the proposed company, stating that all the requirements of the Companies ct, 1./0 and the Eules made there under have been compDlied $ith in respect of registration of a company. ,uch declaration is to be e6ecuted in a 1on-7udicial ,tamp (aper. ;. (ayment of Eegistration 9ee 5 registration fee to be paid to E+C as prescribed in ,chedule N to Companies ct, 1./0 $hich depend on the 1ominal Capital of the Company to be incorporated. M. Certificate of Incorporation 5 If all the above documents are complete and the E+C is satisfied that all the requirements have been complied $ith, he shall register the company and issue a Certificate of Incorporation under his hands and official seal. )he Certificate of Incorporation shall be the conclusive evidence that the company is properly registered. ",ec.=/ of the Companies ct, 1./0#. 9or the purpose of forming a (ublic %imited Company, it has to obtain the Certificate of Commencement of ?usiness from the E+C concerned !/s 1<. of the ct.

P:)M)/4:S In order to set up a company, there have to be promoters. )he promoters $ill purchase property from $hich the company is going to operate and undertake the preliminary steps to set the company up. )hey $ill thus be acting before the company has been formed. In 'ictorian ?ritain, there e6isted professional company promoters. )heses promoters $ere often dishonest and acted fraudulently. code of rules thus developed to ensure that promoters acted $ith integrity in setting up the company. In the absence of any precise definition in the statutes resort must be had to 7udicial statements relating to promotion. In )$ycross ' Frant, it $as stated that : the promoter is one $ho undertakes to form a company $ith reference to given pro7ect and to set it going and $ho takes the necessary steps to accomplish that purposeA. ?o$en H. said in Ghaley ?ridge Calico (rinting Co. ' Freen 5 : )he term promoter is a term not of la$, but of business, usually summing up in a single $ord a number of business operations familiar to the commercial $orld by $hich a company is generally brought into e6istenceA. )he term promoter has not been defined in the Companies ct, 1./0. ?ut several times, he is named, vi@. ,ections 02, 0. and <;M of this ct impose liability upon promoters. 9or the misstatement in the (rospectus, a promoter can be punished by Civil 8 Criminal proceedings. ,upreme Court of India several times reiterated that : (romoter is not a trustee or agent for the Company but he stands in fiduciary position to$ards it. 9unctions, (o$ers 8 (osition of (romoter

Prof. Santanu Mitra

unctions+

Company Law

)he (romoter brings a Company into e6istence. 1. -e puts it into motion. 2. -e is the first person to anticipate the future of the Company. =. -e decides the name, registered office, ob7ects, capital etc. of the Company. <. -e frames 3emorandum 8 rticles of ssociation. /. -e files all necessary 9orms before the Eegistrar of Companies "E+C#. 0. -e does all things necessary for the ne$ born company. ;. -e incurs e6penditure for all these matters. M. -e efforts to bring (rospectus, $here a (ublic Issue is necessary. .. -e dreams about company. 1D. -e struggles for its e6istence. 11. )he services of a promoter are very peculiar. 12. (romoter may be a single person or a group of persons. ,ometimes a registered company itself can become a promoter. *6ample 5 Eeliance Company %td. promoted Eeliance (etrochemicals %td. Position+ - %egal status of promoter in creation of a company is not yet finali@ed. (ractically a person himself or $ith the help of some other persons creates a company according to his ideas, imagine and dreams. fter incorporation of the company he or they become the directors. - %indley, %.H. describes his position as 5 : lthough he is not the agent for the company, nor a trustee for it before incorporation, the old familiar principles of the la$ of agency and of trusteeship have been e6tended and very properly e6tended to meet such cases.A - )he Companies ct, 1./0 " ct # does not provide any specific position to promoter, like that of directors, managing director etc. -ere and there it mentions about him. ?ut it imposes certain civil 8 criminal liabilities. - )herefore, it can be concluded that the promoter is not an agent of the company. -e is not a trustee of the company because there trust is e6isted. -e is not an employee of it. ?ut he stands in certain fiduciary position to$ards it. - )he ,upreme Court, $hile disposing case : 'ali (. Eao 's. ,ri Eamanu7a Finning 8 Eice 9actory (vt. %td.A, opened that : the promoter occupies the peculiar position of a quasi-trustee.A 0uties of Promoter+ )he (romoter occupies a position of total confidence and trust in relation to the company promoted by him. )he promoter in this fiduciary capacity has the follo$ing important duties51ot to make any secret profit 5 promoter can not make any direct or indirect profits out of the promotion of the company. ,ince he occupies a position of trust, it is his duty to be honest and upheld the trust of his position. )o make full disclosure to the Company of all relevant facts 5 In keeping $ith his fiduciary capacity, a promoter is bound to disclose to the company all relevant facts including any profit made from the sale of his o$n property to the company and his personal interest in a transaction $ith the company. )o give the benefit of negotiations to the company 5 )he promoter must pass on to the company, the benefit of any negotiation or agreement that he has carried on in his capacity of a promoter. 0uty of promoters towards future a!!ottees 5 )he promoters stand in a fiduciary position to$ards the company. It does not mean that they stand in such relation only to the company but they also stand in this

Prof. Santanu Mitra

Company Law

1D

position to the future allottees of shares. )he promoters ensure that the prospectus issued at his instance contains all materials facts and particulars and does not contain any mis-statements. ,olicitor, 'aluer or ccountant5 )hey are not the promoters. )hey are the professionals in their field. +f course, they may become promoters, if they sho$ special care and interest in creating the company and act as O(romotersB. Lia$i!ities of Promoters )he liabilities of the promoter, under the Companies ct are5 1.Section 56 explains the matters that should be stated and the reports that should be set out in the prospectus: If this provision is not complied $ith, the promoter may be held liable by the shareholders. 2.Section 62 discusses the civil liabilities for any misstatements made in the prospectus 5 !nder this section the promoter can be held liable for any false statements in the prospectus, by a person $ho has subscribed for the shares and debentures of the company acting on the faith of the prospectus. )he promoter may be held liable to pay compensation to every person $ho subscribes for shares or debentures for any loss or damage sustained by him on account of the untrue statements made in the prospectus. 3.Section 63 discusses the criminal liabilities for issuing a prospectus which contains untrue statements: !nder this section the promoter can also be held criminally liable for any false statements in the prospectus. 4.Section 478 states the power of the Court to order public examination of all the promoters held guilty of fraud in promotion or formation of the company: If in the event of $inding up of the company the liquidators report alleges a fraud in the formation of the company, the promoter can also be held liable for public e6amination by the Court, like any other director or officer of the company. 5.Section 543 provides for the liability for misfeasance or breach of trust by misapplication of funds during the formation of the company. 6.Section 203 provides that the Court may suspend a promoter from taking part in the management of the company for a period of / years if he is convicted of any offence in connection $ith the promotion, formation or management of a company. 7.The promoters are personally liable for pre-incorporation contracts.

Pre"incorporation contracts Ghere a person enters into a contract on behalf of an unformed company, a conceptual problem arises. It is clear in such instances that the company itself cannot be bound since the company does not e6ist. ?ut if such contracts are $arranted at the time of incorporation of the company and the same is informed to the contracting parties and also adopted by the ?oard of directors of the company after its incorporation. In Celner ' ?a6ter, the plaintiff had delivered goods to the defendants. )he goods had been ordered on behalf of the proposed Fravesend Eoyal le6andra -otel Co. %td. )he question arose $hether the company $as liable upon this contract. )he Court of Common (leas held that the company could not be liable since it did not e6ist at the time of the contract. In fact, the defendant, $ho had acted on behalf of the unformed company, $as liable on this contract. Pro-isiona! Contracts+ Contracts entered into by a company after obtaining the Certificate of incorporation but before obtaining the Certificate of Commencement of business "CC?# are called (rovisional Contracts. )hus such certificate is

Prof. Santanu Mitra

Company Law

11

necessary for (ublic limited company and not for (rivate limited company. (rovisional contracts are automatically valid once it receives the CC?. S#are Capita! Capital in relation to a Company means the ,hare Capital, i.e. Capital in terms of rupees divided into specified number of shares of fi6ed amount each. 9or e6ample - 1DD *quity shares of Es.1D/- each. Cinds of ,hare Capital5 ccording to Companies " mendment ct#, 2DDD, " by substituting ,ec. M0 #, a Company limited by shares can have t$o types of ,hares, vi@. *quity ,hare Capital "i# $ith voting rights> or "ii# $ith differential rights as to dividend or voting or other$ise b# (reference ,hare Capital *quity ,hare Capital i.e. +rdinary ,hare Capital is defined in the (reference ,hare Capital. Cinds of *quity ,hare Capital 5 1. uthori@ed / Eegistered / 1ominal Capital 5 )he sum stated in the 3+ of the Co. limited by shares as the Capital of the Company $hich is registered $ith the E+C of the concerned ,tate 8 for $hich fees has been paid as prescribed in ,chedule N appended to the Companies ct, 1./0. 2. Issued Capital 5 (art of uthori@ed Capital $hich the Co. issues for public subscription 8 allotment. =. ,ubscribed Capital5 (ortion of issued capital at face $hich has been subscribed. <. Called2up2Capital5 (ortion of subscribed capital $hich has been called- up. *.g. Ghere Es.//- has been called-up on each of <D,DDD shares of a nominal value of Es.1D/-, the called-up is Es.2 lacs. /. !ncalled2Capital5 It is the total amount of subscribed capital not yet called up. *.g. in the above case the uncalled capital is Es.2 lacs. 0. (aid - up capital5 (art of total called up amount $hich is actually paid-up by the shareholders. *.g. in < above, if only Es.1,.D,DDD/- is actually paid by the shareholders, the paid-up capital is Es.1,.D,DDD/-. ;. !npaid Capital5 )he part of the called2up capital remaining, i.e. Es.1D,DDD/- -- the difference bet$een called-up and paid-up capital. M. Eeserve Capital5 )his the part of uncalled capital $hich the Co. has decided by special resolution !/s .. of the Companies ct, 1./0 not to call e6cept in the event of Co. being $ound up and such amount shall not be called up until such events occurs. *.g. of Es./ per share uncalled capital Es.2 per share may be resolved to be kept as reserve capital. Eeserve capital should not be confused $ith the capital reserve $hich is created out of profits of the Co. *.g. revaluation of the fi6ed assets. Preference S#are Capita!;Sec.<5= + 3eans that part of ,hare Capital of the Company $hich fulfils both the follo$ing requirements 51. (reference in payment of 9i6ed rate of &ividend > and (reference in repayment of (aid-up capital in case of $inding up of the Company. ct as all ,hare Capital $hich is not

Prof. Santanu Mitra

Company Law

12

1. Cumulative 8 1on-cumulative (reference ,hares 5 (reference ,hares may be either Cumulative or 1on-cumulative. If there are no profits in one year and the arrear of dividends are to be carried for$ard and paid out of profits of subsequent years, the (reference ,hares are said to be Cumulative. ?ut if unpaid dividend lapses, the ,hares are said to be 1on-cumulative. 2. (articipating (reference ,hares 5 If after paying a fi6ed amount of preference dividend to preference share holders and some amount of dividend to +rdinary ,hare -olders, the surplus profits are distributed among the (reference ,hare holders and if such preference share holders also entitled to take part in the distribution of surplus in the $inding up of the Company, then they $ill be called as (articipating (reference ,hare -olders. )he general principle is that preference shares are presumed to be 1on-participating. )rdinary> 4?uity S#ares compared wit# Preference S#ares + 1. (reference ,hares, particularly Eedeemable (reference ,hares, are more like &ebentures than like ,hares. )hey are entitled to a fi6ed rate of dividend as &ebentures earn a fi6ed rate of interest. 2. )he Company may choose to pay them back, but +rdinary ,hareholders can not be paid back e6cept under a scheme involving reduction of capital. =. n ordinary shareholder is entitled to vote on all matters affecting the Company. ?ut a preference shareholder can vote only on resolutions $hich directly affect their rights. <. (reference shares offer a profitable and safe source of investment. Ghile the fi6ed rate of income is guaranteed, the risk involved is much less as compared to the risk undertaken by an +rdinary ,hareholder. Sweat Equity Shares : ,ection ;. of CoBs mendment ct, 1... has allo$ed Cos, to issue ,$eat *quity ,hares of a class of shares already issued. ,$eat *quity ,hares means equity shares issued by the Co. to employees or directors at a discount or for consideration other than cash for providing kno$-ho$ or making available rights in the nature of Intellectual (roperty Eights "I(Es#. ,$eat *quity shares can be issued on fulfilling the follo$ing conditions5 uthori@ed by special resolution passed in the Feneral 3eeting of the Co. Eesolution specifies the no. of shares, current market price, consideration, if any, particulars of employees / directors to $hom the shares are issued. ,$eat *quity ,hares can only be possible not less than 1 year from the date of commencement of business. )he ,$eat *quity shares should be listed on a recogni@ed stock e6change. !teration o" #apita! $ Sec. %4 & : limited company $ith a share capital can alter the Capital Clause of its 3emorandum of of the follo$ing $ays provided it is authori@ed by its rticles 5a# It may increase its capital by issuing ne$ shares > b# Consolidate its share capital into shares of larger amount > c# Convert shares into ,tock or vice-versa > e#,ub-divide its share capital into shares of smaller amount > d#Cancel those shares $hich have not been taken up. (rocedure involved5 -- (assing a resolution at a Feneral 3eeting > -- &o not required to be confirmed by the Court > -- Githin =D days of alteration ,a notice must be given to E+C > -- )o make necessary alteration in 3emorandum 8 rticles of ssociation. ssociation in any

Prof. Santanu Mitra

'e(uction o" #apita! $ Sec. 100 & :

Company Law

1=

- reduction of Capital is unla$ful e6cept $hen sanctioned by the Court> - Conservation of capital is one of the main principles of Company %a$> - Company may !/s 1DD> reduce its capital in any of the follo$ing $ay5- e6tinguish or reduce the liability on any of its shares> - rticles must authori@e such reduction> - special resolution to be passed at the Feneral 3eeting of the Company> - petition to the -igh Court to be made for an order confirming the reduction> - )he Court looks after the interest of the Creditors 8 the different classes of shareholders 8 also the public interests> )etho(s o" raisin* capita! "rom +u,!ic : 9ollo$ing are the three methods by $hich a Company may raise capital from the (ublic5 a# ?y issue of (rospectus5 !nder this the Co. $ill invite offers from members of the public to subscribe for its shares or debentures through the prospectus. n investor studies the prospectus and convinced about the prospect of the Co. and then only applies for shares. b# ?y an offer for sale or by deemed prospectus 5 )he Co. under this process allot shares at a price to a financial institution or an Issue -ouse for sale to the public. Issue -ouse publishes a document called an offer for sale $ith an application form attached offering to the public for sale at a price higher than $hat is paid for them or at par. )his document is deemed to be a prospectus by la$. +n receipt of applications from public, the Issue -ouse renounces the allotment of the number of shares applied by the applicant and $ho becomes a direct allottee of the shares. c# ?y placing of shares 5 !nder this method an !nder$riter or a ?roker finds persons $ho $ish to buy shares. -e acts as an agent and his function is to procure buyers for the shares, i.e. to place them. )here is no need to issue any prospectus for this, d# ?y issue of shares to e6isting shareholders 5 !/s M1 shares could be issued to the e6isting shareholders by $ay of Eights ,hares. In this case shares are allotted to e6isting shareholders in proportion to their original shareholding. *.g. 2 shares against every lot of / shares held by a member. --.T)E/T .0 S1 'ES : 2 Secs. 6% to 75 3 Ghen a public limited company issues a prospectus inviting public to subscribe to the share capital and people apply for them, $hen such applications are accepted by the public, it is termed allotment. llotment results in a binding contract bet$een company and prospective shareholders. 5enera! princip!es re&ardin& a!!otment + llotment by proper authority 2 the proper authority is ?oard of &irectors unless the rticles provide other$ise. Githin a reasonable time 2 allotment must be made $ithin a reasonable period of time. 3ust be communicated 2 the allotment, in order to be legally binding, must be communicated to the applicant. " -ousehold 9ire 8 Carriage ccident Insurance Co. 's. Frant #. bsolute 8 unconditional 2 allotment should be absolute and unconditional. 3rre&u!ar A!!otment ' its conse?uences +

Prof. Santanu Mitra

Company Law

1<
ct, then

If an allotment of shares is made in contravention of the provisions of ,ecs. 0., ;D or ;= of the Cos. the allotment is termed as irregular. n allotment $ill be considered irregular in the follo$ing cases5Ghere minimum subscription has not been received > Ghere (rospectus or a statement in lieu of prospectus has not been filed $ith E+C> Ghere the application money is not kept in a separate /c $ith the ,chedule ?ank> Ghere ,tock *6change has refused permission. Consequences of Irregular llotment 5

1 # gainst the Company 2 if shares are allotted in contravention of provisions of ,ec.0. 8 ;D, the allotment is voidable at the option of the applicant $ithin t$o months of holding of ,tatutory meeting or if the Co. is not required to hold statutory meeting , $ithin t$o months after the date of allotment. 2 # gainst the &irectors 2 if any director kno$ingly contravenes any of the rules of for valid allotment of shares, he shall be liable to compensate the Co. and the allottee respectively for any loss/damage incurred thereby. L3S/3N5 ) S1A:4S + )he term listing means that the shares of the Co., may be purchased or sold through stock brokers on a recogni@ed stock e6change on $hich the shares are listed. )he eligibility criteria for listing are 5minimum issued capital should be Es./ crores, and the minimum public offer should not be less than 2/J of the issued capital. )he ,* may refuse to list the securities " equity capital or debentures # of a Co. if, in its opinion the Co. fails to satisfy its listing requirements. S#are (arrants ; Sec. 11@, 115 = + - public Company has the right to convert its fully paid-up shares into ,hare Garrants, provided there is an authority to that effect in its rticles and the previous approval of the Central Fovernment has been obtained> - )he advantage of issuing ,hare Garrants is that transfer of $arrants become easy> - share $arrant issued by a Company has to be under its seal and must state that the bearer of the Garrant is entitled to the specified number of shares> - -e may transfer the shares comprised in the $arrant by simple delivery of the $arrant> - Eegistration of transfer $ith the Company is not necessary> - )he payment of dividend may be made by issuing coupons $ith $arrants or other$ise> - +n issue of the ,hare Garrant, the name of the member shall strike out from the CompanyBs Eegister of 3embers and the follo$ing particulars shall be entered in the Eegister5a. )he fact of the issue of the Garrant> b. statement of the shares specified in the $arrant, distinguishing each share by its number> c. )he date of issue of the $arrant. d.the bearer of a share $arrant has the right to surrender his $arrant for cancellation and to have his name entered in the Eegister of 3ember. %uy" %ack of S#ares ; Sec. AA"A = +

Prof. Santanu Mitra

Company Law

1/

!/s ;;- of the Companies " mendment# ct, 1..., a company may buy-back its $on shares sub7ect to the restrictions envisaged in the section> ,ub-section "1# indicates the fund out of $hich the e6ercise of buy-back is to be financed> )he sources allo$ed are the CompanyBs free reserves, securities premium account, proceeds of an earlier issue> ,ub-section "2# prescribes certain formalities $hich includes51. )he rticle should authori@e such buy-back > 2. special resolution at the general meeting of the shareholders must be passed> =. )he amount involved in the buy-back should be less than 2/J of the Companies total paid-up capital and free reserves> <. fter ?uy-back, the ration bet$een the debts o$ed by the company should not be more than t$ice the capital and the free reserves of the company> /. )he shares to be bought back should be fully paid> 0. )he ?uy-back should be in accordance $ith the regulations made by the ,*?I> ;.)he notice for convening the meeting of shareholders for passing a special resolution should carry the information prescribed by sub-section "=# > M.+ther important provisions relating to ?uy-back are 5a# (hysical destruction of securities> b# 9urther issue after ?uy-back >c# Eegister of ?ought-back securities >d# Eeturn of ?uy-back etc. SA1:4 C4:/3 3CA/4 + It is a document $hich contains the follo$ing5 - 1#name of the Co. > 2# serial no. of the ,h. Certificate > =# name of the shareholder > <# no. of shares held by him > /# distinctive no. of shares > 0# class of shares > ;# face value of shares and the amount paid > M# date of issue > ;# revenue stamp > M#common seal of the Co. > .# signature of t$o director and secretary or any other authority > )his document is prima facie evidence of the title of the member to the shares mentioned therein. !/ s 11= every person $hose name appears in Eegister of 3embers is entitled to receive the ,hare Certificate $ithin = months of the allotment of shares 2 months from transfer of shares. L34N )N S1A:4S + %ien means a right to retain something belonging to another until the claims of the person in possession of the things are discharged. It is a right of retention. )his right is not conferred by statute but by rticles of the Company. )he lien on shares means CompanyBs right over the share until the debts due to it are paid by the shareholder. Eegulation . of )able provides for lien on shares $hich are not fully paid-up. ,tock *6change Eegulations generally prohibit the e6ercise of right on lien on listed shares. Ghere a shareholder pledges his shares to a third party as security for a loan before he incurs any debt to the Company and the Company has notice of such pledge, the pledge shall have the priority over the lien of the Company.

&I99*E*1C* ?*)G**1 )E 1,9*E 1& )E 1,3I,,I+1 +9 ,- E*, 5 1. )ransfer is voluntary act of the member, $hereas transmission is the result of operation of la$ "involuntary#. 2. )ransfer involves adequate consideration, but in transmission there is no question of consideration. =. )ransfer is affected by duly e6ecuted transfer deed, $hereas for transmission no transfer deed is necessary. <. In case of transfer stamp duty is payable on its e6ecution $hile no stamp duty is payable in case of transmission. P1ote 2 ,tamp duty for transfer of shares is ./D( for every Es.1DD/- consideration as per Indian ,tamp ctQ.

Prof. Santanu Mitra

Company Law

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M4M%4:S13P+ &efine a member. &istinguish him from a shareholder. )he term member has been defined !/s <1 of the Companies ct, 1./0 as follo$s5)he subscribers of the 3emorandum of ssociation of a Co. shall be deemed to be the member > *very other person $ho agrees in $riting to become a member and $hose name is entered in Eegister of 3ember. bearer of a share $arrant of a Co. is not a member of a Co. 0istinction $etween mem$er ' s#are#o!der + 1. person $ho subscribes to 3emorandum of a Co. immediately becomes the member even though no shares are allotted to him, thus not a shareholder. 2. person $ho acquires the shares in open market may be shareholder but does not become the member automatically. =. In case of death of a member, his legal representative does not become members immediately> they are the shareholders but not the member. <. holder of a share $arrant is a shareholder of the Co. but not a member.

/. person $ho has transferred his shares to some other person shall continue to be treated as member till the transfer is registered. PCedernath gar$al 's. Hay *ngineering Gorks %td.Q. State t#e different ways a person may $ecome a mem$er of a Company. 9ollo$ing are methods to become a member of a Company51. ?y subscribing to 3emorandum of ssociation of the Company. 2. ?y agreement and registration. =. ?y agreeing to purchase qualification shares. <. ?y application and allotment. /. ?y transfer of shares. 0. ?y transmission of shares.

,tate $ith reasons $hether the follo$ing can become the member of a Company51. minor >2. (artnership firm >=. Company ><. -.!.9. >/. Eegistered trade union. ns. 1# minor 2 !/s 11 of Indian Contract ct, every person is competent to contract $ho is of the age of ma7ority and $ho is sound mind and $ho is also not disqualified under the la$ to enter into contract. 9rom this it is clear that a minor can not be a member of a Company because he is incompetent to contract. In case of transfer of partly paid shares to minor, the Co. may refuse to register him as a member. In case of fully paid shares, minorBs name may be entered on the register of members, if he happens to acquire the shares by $ay of transfer or transmission. P &evan ,ingh 's. 3inerva 9ilms %td. Q. 2# (artnership 9irm 2 partnership firm can not become a member of a Company because it has no separate legal status from the partners.-o$ever, partners either individually or in their 7oint names may hold shares in a Company as a part of partnership property. =# Company 2 Company being an artificial person, can become the member of another Company if authori@ed by rticles or 3emorandum. subsidiary company can not become member of its holding company.

Prof. Santanu Mitra

Company Law

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<# -!9 2 -!9 can not become a member in its o$n name since it is not a separate legal entity. -o$ever, investment can be made in the personal name of the Carta " manager# of the family. /# Eegistered )rade !nion 2 registered trade union is body corporate and thus can hold shares in its o$n name and can become the member of the Company. /A:NS 4: ) S1A:4S+ ,ec.M2 of the Co.Bs ct,1./0 empo$ers to transfer his shares in the manner laid do$n in rticles and as per the various provisions of the la$. private co. is statutorily obliged P!/s ="1#"iii#Q to place restrictions on the rights of its members to transfer shares. public co. may make some restrictions to transfer shares P Eegulation 21 of )able Q. (o$er of the ?oard of &irectors to refuse transfer of shares 5?oard may refuse if the rticle provide to register transfer of shares on the follo$ing grounds 5$hen a partly paid shares are being transferred in favor of a 3inor > $hen the call has been made 8 it has not been paid by the transferor > $hen the transferor is a debtor of the Co. 8 the Co. has a lien on shares > if the instrument of transfer is incomplete or is not properly stamped > for any other reason $hich is 7ust and equitable 8 $hich is in the best interest of the Co. +ther grounds for $hich refusal can be made !/s 1DM are 5prescribed transfer form is not used > the name, address etc. of the transferee has not been specified > the instrument of transfer is delivered $ithout the relevant share certificate.

BORROWINGS
In practice, all types companies, trading or non-trading, are given express power to borrow by their Articles which may fixed up the maximum amount which can be borrowed and give security. A power to borrow money includes the power to charge the assets of the Company as security to the lender. Section 1 !"1# of the Companies Act provides that in case of a $ublic %imited Company, borrowing powers are not exercisable until the Company is entitled to commence business. &he power of the Company to borrow is exercised by its directors, who who can not borrow more than the sum authori'ed. &he power to borrow money and to issue debentures can only be exercised by the directors at a duly convened meeting. $ursuant to Sec.(!( "1#"b# and "c# directors have to pass resolution at a duly convened )oard meeting to borrow moneys. &he power, can however, be delegated by a resolution passed at a duly convened meeting of the directors to a committee of directors, managing director, manager, or any other officer of the company. &he resolution must specify the total amount upto which the moneys may be borrowed by the delegates.

Prof. Santanu Mitra

Company Law

1M

*ften the power of the company to borrow is unrestricted, but the authority of the directors acting as its agents is limited to a certain extent. +or example, Sec.(!,"1# "d# of the Act prohibits the )oard of directors of a public company from borrowing a sum which exceeds the aggregate of the paid-up share capital of the company and its free reserves unless they have received the prior sanction of the company in general meeting. If the borrowing by the directors is ultra vires their powers, the directors, may, in certain circumstances, be personally liable for damages to the lender, on the ground of the implied warranty given by them, that they had power to borrow. If the borrowing is unauthori'ed, the company will be liable to repay, if it is shown that the money had gone into the company-s coffers. Unauthorized OR Ultra vires borrowing : .here a company borrows without the authority conferred on it by the Articles, it is an ultra vires borrowing. An act which is ultra vires the company is void. /ence, no debt is created and any security which may have been created in respect of the borrowing is also void. &he lender can not sue the company for the repayment of the loan. 0ltra vires borrowings cannot even be ratified by a resolution passed by the company in general meeting. /owever, in e1uity, the lender has the following remedies2 Injunction & recover : 0nder the e1uitable doctrine of restitution he can obtain an in3unction provided he can trace and identify the money lent and any property which the company has bought with it. Subrogation : .here the company of an ultra vires borrowing has been used to pay off lawful debts of the company, he would be subrogated to the position of the creditor paid off and to that extent have the right to recover his loan from the company. Subrogation is allowed for the simple reason that when a lawful debt has been paid off with an ultra vires loan, the total indebtedness of the company remains the same. Suit against directors 2 &he lender may be able to sue the directors for breach of warranty of authority, especially if the directors deliberately misrepresented their authority. Intra vires borrowing but outside the sco!e o" agent#s authorit : .here the borrowing is intra vires the company but outside the authority of the directors, such borrowing can be ratified by the company and become binding of the company.

Prof. Santanu Mitra

Company Law

1.

)ut if the company refuses to ratify the agent-s act, the position could be 2 i# where the borrowing is within the powers of the company, the lender will not be pre3udiced simply because its officer have applied the loan to unauthori'ed activities, if the lender has no 4nowledge of the intended misuse. 5 6.7.8.S.&. +irm 6s. *riental Investment &rust %td. 9 ii# .here the managing agent of a company who is not authori'ed to borrow, has borrowed money which is not necessary, neither bona fide, nor for the benefit of the company, the company is not liable for the amount borrowed. $ !es o" borrowing : A. %ong &erm )orrowings : +unds borrowed for a period ranging from ; years or more are termed as long-term borrowings. It can be made from All India +inancial Institutions " I<)I, ICICI, I+CI etc.# and )an4s. ). Short &erm )orrowings : +unds needed to be borrowed for a period up to one year or so are termed as short-term borrowings. It can be made from commercial ban4s for .or4ing Capital $urpose. C. =edium &erm )orrowings : .here the funds to be borrowed are for a period ranging from two to five years, such borrowings are termed as medium-term borrowing. It can be made from commercial ban4s for purchase of land, machinery etc. %ethods o" borrowings : =onies may be borrowed in one or more of the following methods 2 %oan from +inancial Institutions > )an4s? Issue of <ebentures? Issue of )onds? and $ublic <eposits. &ebentures : A debenture is a document given by a company under its seal as an evidence of a debt to the holder usually arising out of a loan and most commonly secured by a charge. It is an ac4nowledgement of "an instrument# a debt by a company to some person"s#. It does not carry any voting rights at any general meeting of the company " Sec.11@#. &he term AdebentureB has been defined 0Cs ("1(# of the Act, to include debenture stoc4, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not. 'haracteristics o" &ebentures:

Prof. Santanu Mitra

Company Law

2D

1# A debenture is usually in the form of a certificate " li4e a share certificate # issued under the common seal of the company. (# &he certificate is an ac4nowledgement by the company of its indebtedness to a holder, ,# A debenture usually provides for the payment of a specified principal sum at a specified date. # A debenture usually provides for the payment of interest until the principal sum is paid bac4.

;# A debenture is, as a rule, one of a series, although a single debenture is not uncommon. &here may a single debenture issued to one person. D# A debenture generally contains a charge on a underta4ing of the company or on some class of its assets. )ut it is not an essential element. A debenture which creates no such charge is perfectly valid. @# &he debentures carry no voting rights at any meeting of the company "Sec. 11@#. (inds o" &ebentures: <ebentures may of different 4inds which are as follows 21# 8edeemable <ebentures 2 &hese debentures are issued on the terms that the company is bound to repay the amount of the debenture, either at any fixed date or upon demand or after a notice or under a system of periodical drawings. 8edeemable debentures can be re-issued 0Cs 1(1 of the Act. (# $erpetual or Irredeemable <ebentures 2 A debenture in which no time is fixed for the company to pay bac4 the money, although it may pay bac4 at any time it chooses, is an irredeemable debenture. ,# 8egistered and )earer <ebentures 2 8egistered debentures are made out in the name of a particular person, whose name appears on the debenture certificate and who is registered by the company as holder on the 8egister of <ebenture holders. Such debentures are transferable in the same manner as shares by means of a proper instrument of transfer duly stamped and executed and satisfying the other re1uirements specified in section 1EF of the Act.

Prof. Santanu Mitra

Company Law

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)earer <ebentures, on the other hand, are made out to bearer, and are negotiable instruments, and so transferable by mere delivery li4e share warrants. &he person to whom a bearer debenture is transferred become a Aholder in due courseB and unless a contrary is shown, is entitled to receive and recover the principal and the interest accrued thereon.

# Secured C 0nsecured C Ga4ed <ebentures 2 .here debentures are secured by a mortgage or a charge on the property of the company, they are called secured debentures. .here they are not secured by any mortgage or charge on any property of the company they are said to be na4ed or unsecured debentures. ;# Convertible <ebentures 2 .here the debentures are convertible, partly or wholly, into the shares of a company after a specified time, either as a result of excise of option or in terms of the issue, they are called convertible debentures.

M4M):AN02M ) ASS)C3A/3)N ,M)A. 3eaning5 3+ is a primary document of a company. )he breach of memorandum is Ultra Vires and void. It regulates e6ternal affairs of the company. In the celebrated case of BAs#$ury :ai!ways Carria&e ' 3ron Co. Ltd. Cs. :ic#e, %ord Cairn observed5 O)he 3+ of a company is its charter and defines the limitations of the po$ers of the company RRR it contains in it both that is positive and that $hich is negative. Purpose of M)A + )he purpose of the ob7ect clause in the 3+ is t$o fold 5 first, the intending shareholder before making investment in the company should kno$ the field in $hich it is going to be used and $hat risk he is taking in making the investment. )he second purpose is that anyone dealing $ith the company $ill kno$ $ithout doubt $hat is permitted range of enterprise of the company PCotman 's. ?roughamQ. s per ,ection 12 to 2= of the ct 3+ should contain the follo$ing five important clauses5 1# 1ame Clause> 2# Eegistered +ffice Clause> =# +b7ects Clause> <# %iability Clause> /# Capital Clause and 0# ,ubscription 8 ssociation Clause. bove clauses are compulsory and are designated as :conditionsA prescribed by the ct. +roce(ure "or re*istration o" )emoran(um with '.#: 3 orm of Memorandum+ orm of M)A + ,ection 1< of the Companies ct, 1./0 provides the 3+ ct as may orm % + pplicable to pplicable to should be in any one of the 9orms specified in )ables ?,C,& and * of ,chedule I to the Companies be applicable in relation to the type of company proposed to be incorporated. Companies limited by shares> orm C + pplicable to Companies limited by guarantee and not having share capital> orm 0 +

Prof. Santanu Mitra

Company Law

22

Companies limited by guarantee and having share capital> orm 4 + pplicable to !nlimited Companies. %. Printin& and si&nature of Memorandum+ Section 1 provides that the memorandum shall - "a# be printed, "b# be divided into paragraphs numbered consecutively> and "c# be signed by each subscriber "$ho shall add his address, description and occupation, if any#, in the presence of at least one $itness $ho shall attest the signature and shall like$ise add his address, description and occupation, if any. C. Stamps ' :e&istration ee+ )he appropriate stamps shall be affi6ed on the 3emorandum of ssociation. Eegistration 9ee shall also liable to be paid according to ,chedule-N. 0. :e&istration+ Section !! imposes that the memorandum of association and articles of association must be registered $ith the Eegistrar of Companies. 4. 4ffect of :e&istration+ Section !" provides that the memorandum of association, articles of association and other documents shall be submitted and registered $ith the Eegistrar of the Companies. +n the registration of the memorandum of association of the company, the Eegistrar shall certify under his hand, and issue #Certificate of $ncorporation#% . %indin& orce+ Section !& provides that, after getting it registered, the memorandum and articles of association bind the company and the members thereof to the same e6tent as if they respectively had been signed by the company and by each member, and contained covenants on its and his part to observe all the provisions of the memorandum and of the articles. 5. Copies+ Sections !' and "( provide that the company shall, on being so required by a member, send copies of memorandum of association or articles of association or any other agreement, or to him $ithin seven days on payment of prescribed fee. 1. NAM4 CLA2S4+ ,ections 2D to 2/ and 1<; of the Companies ct, 1./0 e6plain about the S1ame ClauseSof 3emorandum of ssociation of a company. T company, being a legal person, must have a name to establish its identity. a. 2ndesira$!e names+ ,ection 2D imposes that the companies should not be registered $ith undesirable names $hich in the opinion of the Central Fovernment are undesirable. It prohibits a name $hich is identical $ith, or too nearly resembles, the name by $hich a company in e6istence has been previously registered. $. A-ai!a$i!ity of names+ )he intended parties/promoters should first inquire $hether the name on $hich they $ould like to establish a company is available $ith the Eegistrar of Companies, 9or kno$ing this, they have to file an application under 9orm-I $ith three suggested names, and shall also pay the requisite fee of Es. /DD/for the availability of name. c. C#arita$!e 3nstitutions+ Section ) provides that the Central Fovernment has the po$er to dispense $ith T%imitedT in the name of the charitable or other company, it provides that $here it is proved to the satisfaction of the Central Fovernment that an association - "a# is about to be formed as a limited company for promoting commerce, art, science, religion, charity or any other useful ob7ect> and "b# intends to apply its profits, if any, or other income in promoting its ob7ects, and to prohibit the payment of any dividend to its members. 2# :453S/4:40 ) 3C4 CLA2S4

Section 1! *b+ provides that the memorandum of association should state the ,tate in $hich the Eegistered +ffice of the company is to be situated. Section 1"& of the Companies ct, 1./0 imposes mandatory instructions that a company shall, as from the day on $hich it begins to carry on business, or as from the thirtieth day after the date of its incorporation $hichever is earlier, have a registered office to $hich all communications and notices may be addressed. It also imposes that notice of the situation of the registered office and of every change if any, shall he given $ithin =D days after the date of the incorporation of the company or after the date of the change, as the case may be, to the Eegistrar of the Companies, $ho shall record the same. *,orm -o% 1. is prescribed form.#

Prof. Santanu Mitra

=# )%D4C/S CLA2S4:

Company Law

2=

It is the third clause of memorandum of association of the company. )he function of the company is depended upon this ob7ect clause, for $hich purpose the company is to be established. )he ob7ects clause reveals the nature, purpose, motto and ob7ects of the company. Sections 1!/ 1&/ 10/ 1. 1 1' of the Companies ct, 1./0 e6plain the provisions about ob7ects clause, and its alteration. CI1&, +9 +?H*C),5 !/s 1=, the memorandum of every company shall state 5 "i# the main ob7ects of the company to be pursued by the company on its incorporation and ob7ects incidental or ancillary to the attainment of the main ob7ects> "ii# other ob7ects of the company not included in sub-clause. )hus the ob7ects are of three kinds51. 3ain ob7ects> 2. ncillary or incidental ob7ects> and =. +ther ob7ects. 0)C/:3N4 ) 4-T' 56'ES 3* 1I1F5 4!tra 7ires 2-atin3 I beyond the po$er> an act in e6cess of the authority conferred by la$, and therefore invalid. )he memorandum of association and the articles of association of a company should be registered $ith the Eegistrar of Companies. ?oth of these t$o documents are very important. )hey e6press the ob7ects of the company. )hey also confer certain po$ers to the directors, managers, and managing directors. )he ob7ects clause e6pressly provide about the ob7ects of that company. )hus the companySs po$ers are limited to carrying out of its ob7ects as set out in its memorandum of association, including anything incidental to or consequential upon those authori@ed ob7ects. ny contravention and breach of such ob7ects could not be rectified or ratified by 1DDJ ma7ority of shareholders. ,uch contravention and breach is called the 23octrine of Ultra Vires2% ,uch acts are held invalid in the interests of the company, its shareholders, creditors and outsiders. *N 3(%*5 )he ob7ects of a company are confined to finance the passenger cars. If the directors advanced loan to purchase houses, it $ould be held ultra vires% Case la$s5 ,-?!E4 E I%G 4 C EEI F* 8 IE+1 C+. %)&. ',. EIC-* 4 4C/S ) 4-T' 56'ES /:ANSAC/3)NS 1. 3n8unction+ )he ultra vires acts of a company can be restrained by any shareholder by getting an in7unction from the Court. E. Persona! Lia$i!ity of 0irectors+ If the directors do any ultra vires acts, they $ill personally be held liable. ny shareholder can bring an action against them to make good the loss. F. %reac# of warranty of aut#ority5 )he directors of the company are agents of that company. )here e6ists the relationship of (rincipal- gent bet$een them. If the agent e6ceeds his authority he $ill personally be held liable. @. Coid contracts+ ll ultra vires acts are void contracts. )herefore, they could not be enforced in the court of la$. 5. 4!tra 7ires ac?uired property+ If any property is acquired by the company by ultra vires means, such circumstances, the company $ould not loose such property. It can retain such property. 6. 4!tra 7ires in torts+ company is not liable for the torts committed by its agents or servants, if such torts are committed during the course of ultra vires transactions.

4GC4P/3)NS ) 4-T' 56'ES )he follo$ing are the e6ceptions for the &octrine of Ultra Vires% )he e6ceptions are based on public policy, equity and good conscience. 1. 6ntra 7ires8. 26ntra 7ires I $ithin the po$ers of#. If an act is ultra vires/ it is not valid in la$, and the company is not bound. If an act is intra vires/ the company can ratify such an act.

Prof. Santanu Mitra

Company Law

2<

E. A!teration+ If an act is found ultra vires/ the company may bring alteration in its memorandum and articles of association to bring validity for such type of acts in future. +f course the previous ultra vires acts done by the company cannot, be rectified or ratified. If an act is intra vires/ the shareholders could ratify them and set right its irregularity. F. Ac?uirin& Property+ If a company acquires property by ultra vires means, courts see such ultra vires acts leniently and try to give the 7udgments in favour of the company. @. 0e$ts+ If a company advances any loan to any person, $hich is ultra vires to the ob7ects, the courts favour company, not the debtor. )his $e have seen in hmed ,ail vs. ?ank 3ysore case. 5. 3ndependent :i&#ts+ Ghere the rights arise independently of the ultra vires acts, such rights are not affected by the doctrine of ultra vires% 6. 4!tra 7ires and intra 7ires !oans+ Ghere a company obtains loan ultra vires/ and consumes it to pay off intra vires loans, the creditor can recover "$ho has given loan ultra vires+ the loan from the company. A. %reac# of (arranty of Aut#ority+ Ghere the directors mislead the company to obtain loan or to have contracts ultra vires/ the company shall not be held liable, but the directors personally shall be responsible, and they are required to make good the loss caused to the outsiders. @. L3A%3L3/* CLA2S4 3* 1I1F5 24iability Clause2 is the fourth clause required for the memorandum of association of a company. !/s 2"2=#,#4imited company2 means a company limited by shares or by guarantee . !/s ="2#, the memorandum of a company limited by shares or by guarantee shall also state that the liability of its members is limited. /# CAP3/AL CLA2S4 3* 1I1F5 Capital I )he fund or corpus, the yield of $hich is profits or income. It bears the same relation to income as a tree does to its fruit. )he capital of a company is the amount of principal $ith $hich a company is formed to carry on business. )he memorandum of a company having a share capital must state its amount and the division into shares of a fi6ed amount. )he capital so stated and registered is the nominal capital. )he issued capital is the total amount of capital issued in shares to members. Gorking capital is the amount of money necessary for the company actually to trade or carry on business. Artic!es of Association L. Ghat is meant by Artic!es of AssociationU Ghat are its contentsU -o$ can it be a!teredU ANS(4:+ 3* 1I1F5 Artic!e I a separate part> a member a treaty clause> a piece of literary $ork> to bind by indenture> a thing. Artic!es of Association I )he rticles of ssociation are the rules, regulations and bye-la$s for the internal management or the internal arrangement of a company. +?H*C)5 3emorandum of ssociation is the most important document of the company. rticles of association stands ne6t to it. Ghile memorandum of association is the supreme, and it defines the scope of the activities of the company, or the area beyond $hich the company could not go, the articles of association are the subordinate to the memorandum, and these articles are the rules for carrying out the ob7ects of the company as set out in the memorandum. )he articles must be framed according to the memorandum. Ghere a conflict arises bet$een articles and memorandum, memorandum prevails. C)N/4N/S ) A:/3CL4S+ rticles of association regulate the internal management and internal arrangement of the company. Ghat are the internal affairsU )he follo$ing mentioned matters are dealt $ith internal affairs and management of a company. "a# ,hare capital, payment of commissions, issue of share certificates, lien on shares, calls on shares, transfer of shares, forfeiture of shares, $arrant of shares, alteration of capital, etc.> "b# Feneral meetings, ,pecial meetings, voting, pro6ies, etc.>

Prof. Santanu Mitra

Company Law

2/

"c# (o$ers delegated to ?oard of &irectors, managers, etc.> "d# &ividends and reserves, profits, accounts, etc.> "e# &ebentures, borro$ings, etc.> "f# Ginding up. M)04L ):M ) A:/3CL4S+ Schedule - $ anne6ed to the ct gives various model forms of 3emorandum of ssociation and rticles of ssociation of various types of companies. )he Sc#edu!e"! is divided into five )ables, i.e. /a$!e"A to /a$!e"4 giving various models for various companies. /a$!e"A+ Eegulations for management of a company limited by shares. /a$!e"%+ 3emorandum of ssociation of a company limited by shares /a$!e"C+ 3emorandum and rticles of ssociation of a company limited by guarantee and not having share capital. /a$!e"0+ 3emorandum and rticles of ssociation of a company limited by guarantee and having a share capital. > /a$!e"4+ 3emorandum and rticles of ssociation of an unlimited company. :452LA/3)NS+ Section )0 mentions the regulations. It provides that in the case of a private company having a share capital, the articles shall contain provisions $hich,V "a# restrict the right to transfer shares, "b# limit the number of its members upto /D "not including employees#, and "c# (rohibit any invitation to the public to subscribe for any shares in, or debentures of, the company. 8 "d# (rohibit to accept deposits from the public. A0)P/3)N ) /A%L4"A in Sc#edu!e"!+ Section E< provides that the articles of association of a company limited by shares may adopt all or any of the regulations contained in )able- in ,chedule-l. It may frame its o$n rticles and adopt a part of )able- . ):M AN0 S35NA/2:4+ Section !( provides that the articles shall "a# be printed> "b# be divided into paragraphs numbered consecutively> and "c# be signed by each subscriber of the memorandum of association "$ho shall add his address, description and occupation, if any#, in the presence of at least one $itness $ho shall attest the signature and shall like$ise add his address, description and occupation, if any. AL/4:A/3)N ) A:/3CL4S+ Section !1 provides that the articles may be altered by ,pecial Eesolution of the company. lteration of articles is easier than the alteration of memorandum of association. lteration of rticles does not require the confirmation and approval of Company %a$ ?oard. Company has $ide po$ers to alter its rticles. copy of every special resolution altering the rticles shall be filed $ith the Eegistrar $ithin =D days of its passing. )he original articles of association are public documents. ,imilarly, the altered articles also become as public documents. :43A/3)NS13P %4/(44N M4M):AN02M AN0 A:/3CL4S ) ASS)C3A/3)N ?oth these documents are very important for the formation and function of the company. )he 3emorandum of association is primary and supreme. )he rticles of ssociation are secondary and subordinate. )he memorandum and articles together are the constitutional frame-$ork of the company, )hey are the basis of a companySs function, policy, e6istence, etc. memorandum of association is a document $hich sets out the constitution of a company. )he rticles of ssociation are a document, $hich regulates the internal management and affairs of the company. P)3N/S ) S3M3LA:3/*+ ?oth these documents shall be prepared at the time of incorporation of a company. ?oth must be signed by the same persons. ?oth the documents must be attested by at least one $itness for each signatory.

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Company Law

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?oth must be printed, sub-divided into paragraphs, numbered consecutively and signed. ?oth documents have effects of a signed contract bet$een the company and every member of the company and also bet$een one member and another through the company. ?oth must be registered $ith the Eegistrar of Companies. s soon as they are registered, they become the public documents, and any person can have access of them, and also can have the certified copies of them from the Eegistrar of Companies, by paying prescribed fees. member of that company is entitled to get a copy of these documents on payment of nominal fee. )he Court may alter the contents of these documents through an order as legal remedy against oppression and mismanagement. )here are models in ,chedule-l for various companies giving the various models of memorandum and articles of association. ?oth these documents must be scribed in accordance $ith the provisions of Companies ct, 1,./0, Eules or any other la$ in force. 4ffect of :e&istration+ Section !" provides that as soon the memorandum of association and articles of association, and other documents of the company are filed before the Eegistrar of Companies, the Eegistrar inquires and after satisfying that the promoters fulfilled all the obligations imposed by the la$ in force, issues HCertificate of 3ncorporationH. )his certificate brings the company into e6istence, and recognition as a legal person. t the same time, the memorandum of association and articles of association become the public documents. ny person has the right to have access of such documents, and also can have the copies of those documents on payment of certain fees prescribed from the Eegistrar of Companies. Section ! provides that after registration, these documents become conclusive evidence and public documents. Sec. F6. 4ffect of memorandum and artic!es. V "1# ,ub7ect to the provisions of this ct, the memorandum and articles shall, $hen registered, bind the company and the members thereof to the same e6tent as if they respectively had been signed by the company and by each member, and contained covenants on its and his part to observe all the provisions of the memorandum and of the articles. "2# ll money payable by any member to the company under the memorandum or articles shall be a debt due from him to the company. 1. %3N03N5 M4M%4:S /) /14 C)MPAN*+ 25he members are bound to the company by the provisions of the articles 6ust as much as if they had all put their seals to them/ and had thus contracted to conform to them%2 )he articles of association constitute a contract not merely bet$een the shareholders and the company, but bet$een each individual shareholder and every other. )he doctrine is that the articles of a company form a contract bet$een the members and the company as a separate person and bet$een the members themselves. )his contract derives its bindings force not from a bargain struck bet$een the parties but from the terms of the Companies ct, 1./0. E. %3N03N5 C)MPAN* /) /14 M4M%4:S+ s members are bound to the company, similarly, the company is also bound to its members. 27ach member is entitled to say that there shall be no breach of the articles and he is entitled to an in6unction to prevent the breach%2 F. M4M%4:S 3N/4: S4+ 2$t is 8uite true that the articles constitute a contract between each member and the company/ and there is no contract in terms between the individual members of the company9 but the articles do not regulate their rights inter se. Such rights can only be enforced by or against a member through the company-or through the li8uidator/ representing the company9 but no member has/ as between himself and other members/ any right beyond that which the contract of the company gives%2

Prof. Santanu Mitra

Company Law

2;

@. C)MPAN* /) /14 )2/S304:S+ )here is no doubt that the memorandum of the company binds #outsiders# also. ?ut in case of articles, the articles do not constitute any binding contract bet$een a company and outsiders. +ur ,upreme Court e6pressed5 2: third person who purports to have rights against the company would be precluded from relying on the articles as a basis of his claim and must prove a special contract outside the articles%2 0)C/:3N4 ) C)NS/:2C/3C4 N)/3C4 M4AN3N5+ Constructive 1otice I Constructive notice means the kno$ledge of the fact is presumed or imputed by la$, i.e. "1# $here it $ould have come to the kno$ledge of a personSs agent as such if proper inquiries had been made> "2# $here in the same transaction it has come to the kno$ledge of a personSs counsel, solicitor, or other agent, as such, or $ould have done so if such inquiries and inspection had been made as ought reasonably to have been made> "=# $here it $ould have come to a personSs o$n kno$ledge if proper inquiries had been made as per la$. SC)P4+ Section &1( of the Companies ct, 1./0 empo$ers any person, $hether he is a shareholder or not, to inspect any document kept by the Eegistrar $hich have been registered as per the requirements of the provisions of the Companies ct, 1./0. )%D4C/+ It is a mandatory and statutory rule that every company shall register its 3emorandum of ssociation and rticles of ssociation $ith the Eegistrar of Companies, $ith required stamps and paying the requisite registration fees. Ghen once these are registered, they become public documents. )hey are open and accessible to all If any Causes are altered, they also get the authenticity from the Company %a$ ?oard and the Eegistrar of Companies as the case may be. nyone can inspect such documents, and can have copies of them by paying the prescribed fees to the Fovernment. )herefore, any outsider if $ants to contract $ith any company, he has to inspect these t$o important documents, and if essential he may obtain the copies of memorandum and articles of association. 1o statutory duty is imposed upon the company to provide the true copies of these t$o important public documents to every outsider $ho $ants to have contracts $ith the company. It is the duty of that outsider to obtain the copies of such documents from the Eegistrar of Companies, and carefully read them, and then only enter into contracts $ith conformity of the provisions of memorandum and articles of association. If a person enters into contract $ith a company, it is presumed that he has read the memorandum and articles of association of that company. )his is called H0octrine of Constructi-e NoticeH. )his doctrine is intended to protect the company against the outsider, giving no scope to him to lodge baseless allegations and e6ploit the company resources. )he &octrine of Constructive 1otice vs. )he &octrine of Indoor 3anagement )he doctrine of constructive notice is a negative rule imposing the liability upon the outsiders to refer the memorandum and articles of association to safeguard their o$n interests. )he doctrine of indoor management is a positive one to safeguard the innocent outsiders in certain special circumstances. 0)C/:3N4 ) 3N0)): MANA54M4N/>:2L4 ) /2:62AN0 ' 3/S 4GC4P/3)NS M4AN3N5+ )he ob7ects and the procedures of a company are given in its memorandum of association and

Prof. Santanu Mitra

Company Law

2M

articles of association, $hich have to be registered $ith the Eegistrar of Companies, as per the procedures laid do$n in the Companies ct and Eules. )he third parties and outsiders have to obtain information about the companySs memorandum and articles of association, $hich represent #outdoor management of the company#% It is called #3octrine of Constructive -otice#% ?ut every affair of the company is not open to public. )here are certain secrets, internal affairs, correspondences, etc. of each company. )hose are the #internal affairs# managed by its officers, vi;% managers, managing directors, directors, etc. )hese internal affairs are not open to public, and they are not seen in the documents registered $ith the Eegistrar of Companies. ,uch internal affairs of the company is called 2$ndoor <anagement of that company2/ and is kno$n as H0octrine of 3ndoor Mana&ementH and also kno$n as H/ur?uand :u!eH. )his doctrine is the rival doctrine of 23octrine of Constructive -otice2% 4GC4P/3)NS /) /14 0)C/:3N4 ) 3N0)): MANA54M4N/ )here are certain e6ceptions to the Eule $hich inter alia include5 1. IN)(L4054 ) 3::452LA:3/*+ #=nowledge of irregularity# is nothing $here the outsider is $ell kno$n about the irregularity and improper means $hich occurred in the indoor management of that company $hich he $anted to deal $ith, and kno$ingly all such matters, and having constructive notice of such illegal matter, again he entered into contracts $ith that company, then under such circumstances, he could not invoke the &octrine of Indoor 3anagement. E. S2SP3C3)N ) 3::452LA:3/* ): 1*F%IF*1C*5 Ghere the outsider has suspected about the irregularity in the indoor management of the company, and kno$ingly neglected it, and for$ards to have contracts $ith that company, then he could not invoke the &octrine of Indoor 3anagement. F. or&ery+ )he rule does not e6tent to transactions involving forgery or other$ise void or illegal ab initio. @. Inow!ed&e of Artic!es+ )he rule cannot be invoked in favour of a person $ho did not consult 3+ or + and does not rely on them.

Prof. Santanu Mitra

Company Law
*R$I',)S O+ *SSO'I*$ION

2.

%)%OR*N&U% O+ *SSO'I*$ION -.It is the fundamental document. ..It is the charter of the company. /0 It dictates external and internal affaires of the company. 1.It has effects on the members as well as the outsiders. 20 8atification2 Go act can be ratified which is done beyond the memorandum. &his is called as 3&octrine o" Ultra 4ires50 1EEH members of the company also cannot ratify such ultra vires acts. 60&he memorandum of association is bound to observe2 "a# the provisions of the Companies Act, 1!;D? "b# any other law in force. 70 Alteration2 It cannot be altered easily. It has to follow the strict rules, such as2 "a# +irstly, a Special 8esolution shall have to be passed by the company. "b#Secondly, confirmation for such alteration shall have to be obtained by the Company %aw )oard. "c# &hirdly, it has to be registered within the stipulated time, else it becomes void and useless. "d# Gotices shall be sent to creditors or any other interested person before alteration, and assent of such persons is also necessary . 80It is the supreme, among these two documents. 9.&he number of clauses is lesser than articles of association. -:0 &he Companies Act is specific about the clauses of the memorandum.

1.It is the subsidiary document. ..&hese are the regulations of the company /.It dictates only internal affairs > management of the company. 1.It has effects on the members > employees of company. 20 8atification 2 An act covered by articles of association can be ratified by ma3ority principle. It is called 3Indoor %anage;ent50 60&he articles of Association are bound to observe, "a# the provisions of the Companies Act,1!;D > 8ules? "b# any other law in force? > "c# the memorandum of association of the company. 70Alteration2 Alteration of articles is very easy. A special resolution of the company is sufficient. *f course, it has also to be registered with the 8.*.C. assent of third persons is not necessaryJ 80It is the subordinate memorandum. 9.&he number of clauses is more than memorandum. -:. &he Companies Act is not so specific about the clauses of articles of association. It leaves them to the members of the company to prepare themselves according to their needs. --.&here is no such classification in articles of association.

-.0 <ispute2 If any dispute or discrepancy arises between --0&he clauses in the memorandum are sometimes classified into condition memorandum and articles, memorandum shall prevail and clauses and article clauses. -.0<ispute2 If any dispute or articles should give the way to discrepancy arises between memorandum. memorandum articles, memorandum shall prevail. -/0 Articles of association need not be -/0Ivery company must prepare prepared by every company. memorandum. Ixample2 A public company limited by -10 +or reduction of share capital, shares need not prepare articles of there must be provision in the articles. association. Such provisions shall not be incorporated in memorandum. -10 Sometimes the articles may supersede the memorandum, vi'. reduction of share capital.

Prof. Santanu Mitra

%)%OR*N&U% O+ *SSO'I*$ION -20Bowen ,0 <: says2

Company Law
*R$I',)S O+ *SSO'I*$ION -20 J &he articles of association are internal regulations of the company.B -6. J inside that area the shareholders may ma4e such regulations for their own government as they thin4 fit.B -70 J &hough the articles cannot alter or control the memorandum, yet, if there is an ambiguity in the memorandum, the articles registered at the same time may be used to explain it, but not so as to extend the ob3ects.B

=D

A &here is an essential difference between the memorandum and the articles. &he memorandum contains the fundamental conditions upon which alone the company is allowed to be incorporated. &hey are conditions introduced for the benefit of the creditors, and the outside public as well as of the shareholdersJ. -6.,ords 'airns says2 A &he memorandum is, as it were, the area beyond which the action of the company can not goJ. -7.=al;er says2 A&he memorandum is the superior than the articlesB.

/:ANS 4: ) S1A:4S 1. )ransfer of shares means a voluntary act by the parties by $hich the o$nership of the shares is transferred from transferor to transferee. 2. Consideration is required for transfer of shares. =. )he transferor has to e6ecute a valid deed in favour of the transferee. <% >rescribed forms shall have to be submitted to the company. /. In certain circumstances the board of directors may refuse to effect the transfer. 0. s soon as the transfer is complete, the liability of the transferor ceases%

/:ANSM3SS3)N ) S1A:4S 1.)ransmission of shares means transfer of o$nership of shares by operation of law% 2.1o consideration is required for transmission of shares. =.1o such deed is necessary. <. 1o prescribed forms are necessary. Court order is sufficient. /.In the case of transmission of shares , the board of directors cannot refuse. 0. )he original liabilities continue.

Prof. Santanu Mitra

Company Law

=1

ACC*0G&S > A0<I&S K. What books of Accounts are required to be kept by a Company ?
U/S 209 of the Companies Act, 9!" e#ery Company is required to keep at its re$istered office proper books of accounts %ith respect to the fo&&o%in$ transactions ' a( a&& sa&es ) purchases of $oods by the Company b( the assets ) the &iabi&ities of the Company * c( a&& sums of money recei#ed and e+pended by the Company * d( in case of Company en$a$ed in production, processin$ or minin$ acti#ities, such particu&ars re&atin$ to uti&i,ation of materia&s or other items of costs as prescribed by the Centra& -o#ernment. Section 209 does not name the books of accounts %hich a Company shou&d keep but it pro#ides that the Company shou&d keep such books to record the abo#e transactions. Section 209/0( pro#ides that a Company sha&& not be deemed to had been kept proper books of accounts 1 /i( if the Company does not keep such books as are necessary to $i#e a true and fair #ie% of the state of affairs of the Company * if such books are not kept on accrua& basis and doub&e entry system of accounts.

/ii(

2. Who are the persons %ho can inspect books of accounts ? 3ooks of accounts can be inspected by 4 5555555555555555555555555555555555555555555555555555555555555555555555555555555555555555555 5555 4 4 4 4 6irector of 78C or S93: Auditors of the ;embers the Company authori,ed person Company /in specia& cases( . Sec. 209/<( pro#ides that books of accounts may be inspected by the directors durin$ %orkin$ hours * 2. U/s 209A, 78C or any authori,ed officer of Centra& -o#t. may inspect the books of accounts.

Prof. Santanu Mitra

Company Law

=2

:n 3 ; 3a=oria >s. Union of :ndia, the Court he&d that the po%er of inspection U/s 209A is different from an in#esti$ation U/s 20! ) 20?. 0. Sec.22?/ ( empo%ers the Auditors of the Company %ith the ri$ht of access at a&& times to the Company@s accounts %hether kept at Aead office or e&se%here. ;embers of a Company do not ha#e ari$ht of inspection of its accountin$ records / Batika 7a=ya Bakshmi >s. :ndian ;otors Co. Btd. (. Ao%e#er, under Cab&e A, Artic&e 9!, a member may be $i#en such a ri$ht by ordinary reso&ution of the members. Under Artic&e 9!, the director may authori,e a member to inspect accountin$ records persona&&y and throu$h an a$ent. 2. Can a 6irector make inspection of books of accounts ? U/s 209/<( the 6irector of a Company can inspect the books of accounts of the Company on any %orkin$ day durin$ business hours. :n >akharia >s. Supreme -enera& Di&m 9+chan$e Co. Btd., it %as he&d that a director is entit&ed to make inspection of accounts persona&&y or throu$h an a$ent pro#ided there is no reasonab&e ob=ection to the person chosen and the a$ent undertakes not to uti&i,e the information other than the purpose of his principa&. Che ri$ht of inspection can be refused if it is found that there is a chance to pass on the information to a ri#a& business of the Company. 2. 9+p&ain the &a% re&atin$ to '5 a( Authentication * b( Circu&ation * c( Adoption * d( Di&in$ of Annua& Accounts. Ans. a) Authentication of Annual Accounts :

U/s 2 ! the 3a&ance Sheet and the Erofit ) Boss Accounts must be appro#ed by the 3oard of 6irectors and si$ned by the directors before they are submitted to the auditors for their report. Che annua& accounts shou&d be si$ned by the Company Secretary if there is one. Ao%e#er, if the Company has no CS despite of &e$a& ob&i$ation, the accounts sha&& be deemed to be proper&y authenticated if they ha#e been si$ned by t%o directors inc&udin$ the ;ana$in$ 6irector, if any.

Prof. Santanu Mitra

Company Law

==

Che authentication by the Secretary is F on beha&f of the 3oard G and not in his persona& capacity. Che 3/S and E)B A/Cs may be si$ned on beha&f of the 386 by on&y one director in the case if other director is out of :ndia for the time bein$. :n that case a statement shou&d be $i#en to 78C e+p&ainin$ the reason for non5comp&iance of Sec.2 !. Che annua& accounts can not be authenticated by de&e$atin$ the po%er of the 3oard to a committee of directors. Che 3oard themse&#es shou&d consider and appro#e the annua& accounts. b( Circulation of Annual Accounts : Section 2 9 requires that a copy of '5 ( 2( 0( <( 3a&ance Sheet * E/B A/C * 6irector@s 7eport * Auditor@s 7eport and

e#ery other documents required to be anne+ed to the 3/S must be sent not &ess than 2 days before the A-; to 1 a( e#ery member of the Company * b( e#ery trustee for debenture ho&ders * and c( a&& other person %ho are entit&ed to ha#e notice of A-;. 9+p&anation ' Sec.2 9/ ( pro#ides that in case of &isted Companies, the Company must keep the aforesaid documents a#ai&ab&e for inspection at its re$istered office durin$ %orkin$ hours for 2 days before the A-; and sent to e#ery member, etc. on&y a statement containin$ the sa&ient features of the abo#e documents in prescribed form / Abrid$ed Annua& A/Cs (. :f the copies of documents are sent &ess than 2 days before the A-; date it can be done so if it is a$reed by a&& the members entit&ed to #ote at the meetin$. :f defau&t is made, the Company and e#ery officer in defau&t is punishab&e %ith fine upto 7s.!000/5. U/S 2 9/2( if any person demands a copy of annua& accounts %hich he is entit&ed, and if the Company does not comp&y %ith the demand %ithin ? days, the Company and e#ery officer in defau&t is punishab&e %ith fine upto 7s.!000/5.

Prof. Santanu Mitra

Company Law

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C( Adoption of Annual Accounts : Che Annua& Accounts are to be p&aced on&y at A-; and sha&& be adopted therein. Ao%e#er, the Company may ad=ourn the same to a subsequent date %hen the annua& accounts are e+pected to be ready. 6( Filing of Annual Accounts : Sec.220 requires e#ery Company to fi&e %ith 78C %ithin 00 days from the day on %hich the Annua& Accounts %ere &aid before the Company at the A-;, 0 copies of 3a&ance Sheet ) E/B A/Cs to$ether %ith 0 copies of other documents anne+ed thereto. A pri#ate company may fi&e 0 copies of 3/S and E/B A/Cs separate&y. :f A-; is not he&d then %ithin 00 days from the &atest day on %hich the A-; shou&d ha#e been he&d, 0 copies of 3/S and E/B A/Cs shou&d be fi&ed %ith 78C. :n case of defau&t, the Company and e#ery officer of the Company is punishab&e %ith fine upto 7s.!00/5 for e#ery day durin$ %hich the defau&t continues. 2. Ao% is the Dirst Auditor of a Company appointed ? Sec.22<A pro#ides that the first auditors are to be appointed by the 386 %ithin one month of the date of incorporation/ re$istration of the Company. :f the 3oard fai&s to appoint the first auditors %ithin one month of its incorporation, the Company in -enera& ;eetin$ may appoint the first auditors. Q. What are the disqualifications of an Auditor ? U/s 22"/0(, non of the fo&&o%in$ sha&& be qua&ified for appointment as an auditor of a company '5 ( a body corporate * 2( an officer/ an emp&oyee of the company * 0( a person %ho is a partner or %ho is in the emp&oyment of an officer of the company * <( a person %ho is indebted to the company for more than 7s. 000/5 * !( a person %ho is disqua&ified for an auditor of the Company@s subsidiary or ho&din$ company. As per the c&arification of 6CA / 6ept. of company affairs (, a statutory auditor can not act as interna& auditor of the company.

Prof. Santanu Mitra

Company Law

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Q. Can an Internal auditor act as a Statutory auditor ? Che dept. of Company affairs #ide their circu&ar no. !/?? dated H/</ 9?? has c&arified that a statutory auditor can not act as an interna& auditor of the Company. Statutory auditor is appointed by the members at the A-; and they are independent ) practicin$ C.A. Whereas an interna& auditor is appointed by the mana$ement of the company and perform the =obs specified by the Company.

Q. Write a short note on appointment of Cost Auditor ? Sec.209/ (/d( pro#ides that a Company en$a$ed in manufacturin$, processin$ or minin$ acti#ities shou&d keep proper books of accounts sho%in$ such particu&ars re&atin$ to uti&i,ation of materia&s, &abour, or other items of costs as may be prescribed by the Centra& -o#t. in this re$ard. When a company is required to inc&ude in its books of accounts the aforesaid particu&ars, Sec.2003 empo%ers the Centra& -o#t. to direct that an audit of cost accounts of the Company shou&d be conducted by a cost accountant %ithin the meanin$ of the Cost ) Works Accountants Act. Ao%e#er, if in the opinion of the Centra& -o#t., sufficient number of cost accountants are not a#ai&ab&e, the -o#t. may notify that a C.A. may be appointed to audit the cost accounts of the Company.

Q. State the pro isions of the Companies Act in respect to filling a casual acancy of auditor. Sec.22</"( pro#ides that the casua& #acancy in the office of the auditor may be fi&&ed by the 3oard. 3ut %here the #acancy is caused by resi$nation of auditors, such #acancy sha&& on&y be fi&&ed by the Co. in -enera& ;eetin$ / 9-; / A-; (. Che auditors appointed in the casua& #acancy ho&ds office ti&& the conc&usion of the ne+t A-;.

Prof. Santanu Mitra

Company Law

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6:>:S:3B9 E78D:CS AI6 6:>:69I6S

2. 6efine interim di#idend. 6istin$uish bet%een interim di#idend and fina& di#idend. 6i#idend is the return on the Share Capita& subscribed for and paid to a Company by its shareho&ders. 6i#idend cou&d be 1 a( :nterim di#idend* and b( Dina& di#idend Dina& 6i#idend' :t is recommended by the 3oard of 6irectors in its report to the shareho&ders %hich is attached to the Annua& Accounts of the financia& year / Sec.2 ?(. :t is dec&ared by the shareho&ders at the A-; / as an ordinary business out of four other ordinary business of A-; (. Che shareho&ders can not increase the rate or the amount of di#idend as recommended by the 3oard. Ao%e#er they can dec&are the di#idend at a rate &o%er than the one recommended by the 3oard. :nterim 6i#idend ' Sec.2 / <A( defines di#idend to inc&ude interim di#idend. Sec.20! as amended #ide Companies /Amendment ( Act, 2000 pro#ides a specific pro#ision for interim di#idend. Che 3oard may dec&are interim di#idend and the same can be paid bet%een t%o A-;s. Che 3oard shou&d comp&y the fo&&o%in$ '5 a( :t shou&d a&&ocate a prescribed rate of reser#e J may be hi$her than 5 U/s 20!/2A( L on its estimated profits* 0K

b( Sec.20! / C( empo%ers Centra& -o#t. to a&&o% any Company to dec&are or pay any di#idend for a financia& year %ithout pro#idin$ depreciation. Ao%e#er, the Company shou&d pro#ide depreciation in fu&& and thereafter decide to pay an interim di#idend to shareho&ders. A mere reso&ution dec&arin$ interim di#idend did not create any &iabi&ity and cou&d be rescinded at any time before actua& payment. Un&ike interim di#idend, a fina& di#idend once dec&ared by the Company in -enera& ;eetin$ %ou&d become a debt and %ou&d create an enforceab&e ob&i$ation. JIote' With the enactment of Companies /Amendment( Act, 2000 this position has chan$ed. :nterim di#idend stands on the same footin$ as that of the fina& di#idend. 3oth interim and fina& di#idend %hen dec&ared becomes debt and are payab&e %ithin 00 days of dec&arationL

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Company Law

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2. 9+p&ain the &a% re&atin$ to

( dec&aration and 2( payment of fina& di#idend.

. A di#idend %hen dec&ared becomes a debt and a shareho&der is entit&ed to sue for reco#ery of the same after e+piry of 00 days as prescribed U/s 20?. A di#idend %hen proposed does not become a debt but on&y become a debt %hen dec&ared. U/s 2 ?, the directors in their report are required to recommend di#idend, if any, payab&e by the Company. U/s 20!/ A(,the 3oard of directors is authori,ed to dec&are interim di#idend. A di#idend inc&udin$ interim di#idend once dec&ared becomes a debt and can not be re#oked, e+cept %ith the consent of the shareho&ders. 2. As per Sec. 20!/0(, di#idend can be paid on&y in cash not in kind. Che Artic&e may pro#ide that a Company in its meetin$ may pay di#idend by issue of paid5up shares. :n such case the market #a&ue of the shares on the date of the dec&aration of di#idend is to be taken as consideration for computin$ the income of the shareho&ders. U/s 20", di#idend is to be paid to the re$istered shareho&ders or to his bankers /%hen bank mandate is $i#en(. Co pay the di#idend, the Company c&oses the 7e$ister of ;embers U/s !< or fi+ a record date, for %hich ? days notice shou&d be $i#en in t%o ne%spapers '5 8ne in 9n$&ish dai&y and other in the &an$ua$e of the re$ion in %hich the re$istered office of the Company is situate. Sec.20"A pro#ides for ri$ht to 6i#idend, 7i$ht Shares, and 3onus Shares to be in abeyance pendin$ re$istration of transfer of shares. U/s 20?, di#idend is to be paid %ithin 00 days of dec&aration. 9+ceptions '5 a( %here di#idend cou&d not be paid due to operation of &a%, e.$. in case of non5 resident, if 73: does not permit %ithin 00 days* b( %here a shareho&der has $i#en direction to ho&d di#idend /Sec.20"A(* c( %here there is a dispute re$ardin$ ri$ht to recei#e di#idend.

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Company Law

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2. State the &e$a& pro#isions re&atin$ to disposa& of unc&aimed and unpaid di#idend. U/s 20!A if a di#idend dec&ared by a Company has not been paid or c&aimed %ithin 00 days of the dec&aration, the same sha&& %ithin ? days thereafter / i.e. ? days after the e+piry of 00 days from the date of dec&aration( ha#e to be transferred to a Specia& Account to be opened by the Company in any schedu&ed bank to be ca&&ed F Unpaid 6i#idend Account of MM Company Btd.G Accordin$ to Sec.20!A/!(, if amount remains unpaid or unc&aimed for a period of ? years from the date of such transfer, the amount so remainin$ Unpaid or Unc&aimed to$ether %ith any interest created thereto shou&d be transferred to F :n#estors 9ducation And Erotection Dund F. Che abo#e pro#isions sha&& equa&&y app&y to interim di#idend Account.

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Company Law

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Company Management
Meaning of Director: A director means any person occupying the position of a Director by whatever name called [Sec.2 ( !"#. Any person with whose directions$instructions the %oard of directors is accustomed to act is also deemed to be a Director [ Sec.!&!( "#.

+nly an individual can be appointed as a director. 1o body corporate, association or firm can be appointed director of a Company P ,ec.2/= Q. holding company can be deemed to be director u/s ; of the Companies ct,1./0 as ma7ority of directors of the subsidiary company are accustomed to act according to its directions. >osition of 3irector :
't is difficult to define the e(act position of the director of a company. )hey are described by as Agents* )rustees* or Managing +artners.

s agents 5
As the company can not act of its own* it can only act through directors and the ordinary rules of agency ( +rincipal , agent " will for any contract made by them on behalf of a company. %ut the directors shall be personally liable :-

1. 2. =. <.

$here they contract in their o$n names > $here they use companyBs name incorrectly > $here they e6ceed their authority > $here the contract is signed in such a $ay that it is not clear $hether it is the principal " the Company# or the agent $ho is signing.

s )rustees 5
A trustee is a person in whom the legal ownership is vested of the assets which he administers for the benefit of another or others. Directors are the trustees of the company.s assets and perform the duties in the interest of the /ompany [ 0amaswamy 'yenger 1s. %rahmayya and /o.#.

s 3anaging (artners 5 )he Company is considered as a large partnership and the directors are being charged $ith the responsibility of managing the affairs. Ghether the &irectors are *mployees 5 +rdinarily a director is elected by the shareholders in the general meeting and once so elected, he en7oys $ell-defined rights and po$ers under the ct or the rticles. *ven the shareholders $ho elect them can interfere $ith their rights or po$ers e6cepts under certain circumstances.

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Company Law

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n *mployee appointed by the company under a contract of service is a servant of the company . -e does not en7oy any po$ers other than those vested in him by the employer, $ho can al$ays direct the actions and interfere in his $ork. 5rue position : In fact the &irectors stand in a fiduciary position to$ards the company in respect of their po$ers and capital under their control. P ,orest of 3ean Coal <ining Co.Q
A++2'3)M43) 25 D'04/)20S

---------------------------------------------------------------------------------------------------------W W W W ppointment of ppointment ppointment by W 9irst &irectors at the Feneral 3eeting the ?oard W " ,ec.2/<# ",ec.2//,2/0,2/;,20<# W W W W W - !sually by the rticles or W W W the subscribers to the 3+ W W W W W W - the directors must be appointed by the W W Company in the general meeting- at least 2/=rd of total W W ,trength at every F3 is liable to determination by W W Eotation- 1/=rd can be given permanent appointment W W - !/s 2/; &irectors other than those retiring may be W W appointed by giving 1< days notice by proposing member W W to the Company along $ith Es./DD/- &/& 2 !/s 20< such W W director should file 9orm 2< $ith E+C for his consent W W to act as a director of the Company W W W W --------------------------------------------------------------W W W W W dditional &irector )o fill a casual vacancy lternate &irector W ",ec.20D# " ,ec.202# " ,ec.=1=# W to hold office up to in case of death/resign if absence not less W ne6t F3 three months from the ,tate W ---------------------------------------------------------------------------W W ppointment by ppointment by )hird (arties Central Fovernment " ?ank/9inancial Institute by loan agreement# " !/s <DM on an order passed by C%?#

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Company Law

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<inimum 1 <aximum number of 3irectors :

4very +ublic /ompany must have at least ! directors and every +rivate must have at least at least 2 directors ( Sec.262". Article may fi( any number complying Sec.262.

&irectors appointed !/s <DM by the Central Fovernment or !/s =.;/=.M by C%? are not to be counted $ithin the ma6imum limit fi6ed by the rticles. ?y +rdinary resolution in general meeting, a public company can increase / reduce the number of its directors $ithin the limits fi6ed by its rticles " ,ec.2/M#.If beyond the number as specified in rticle, Central Fovernment approval is necessary " ,ec.2/.#. ?ualification Shares : Ghere a share qualification for director is fi6ed by the rticles of a company, ,ec.2;D provides that 5i# it must be disclosed in the prospectus > ii# each director should take his qualification shares $ithin t$o months after his appointment. -umber of directorships : !/s 2;/ a person can not hold office at the same time as a director in more than 1/ companies. -o$ever, ,ec.2;M provides that in computing this number, the directorship of 5- "i# (rivate Companies > "ii# !nlimited Companies > "iii# 1on-profit associations > and "iv# alternate directorships $ill be omitted.

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Company Law

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@emoval of 3irectors : Eemoval of &irectors W -----------------------------------------------------------------------------------------------W W W ?y ,hareholders ?y Central Fovernment Company %a$ ?oard W W W P,ec.<D2"d#Q !/s 2M< by ordinary resolu. !/s =MM-? the C/F has the Ghere an application (assed in general meeting po$er to make a reference has been made to the C%? fter giving special notice to the C%? against any !/s =.; / =.M against Can remove a director managerial personnel oppression and mismanagement ?efore the e6piry of his 8 C%? after inquiry can of a companyBs affairs, the C%? )erm of office. Eecord its findings 8 may order for the termination )he C/F may by order of such delinquent director. Eemove such delinquent &irector.

Affice or >lace of >rofit:

4oan to 3irectors :

Disclosure of interest :

>owers of 3irectors :

Prof. Santanu Mitra 3uties of directors : 4iabilities of directors :

Company Law

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<anaging 3irector : Bhole-time director : <anagerial @emuneration : Sitting fee : Specimen @esolutions :

Company Meetin&s

Prof. Santanu Mitra

Company Law

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&he meetings of a company may be classified as2 1. General Meetings which IncludeL "1# Statutory meeting, "(# Annual Meneral =eetings "AM=#, and ",# Ixtraordinary Meneral =eetings "IM=#. &hese meetings are called general meetings of a company, as these are meetings of all the members of the company. (. Class meetings of shareholders of different classes of shares where a company has more than one class of shares. ,. Meetings of creditors and debenture-holders (a) during the lifetime of the company, and (b) at the time of winding up of the company. . Meetings of directors. 54N4:AL M44/3N5S ) S1A:41)L04:S 1. STATUTORY M T!"G #Sec. 1$%&

Ivery company limited by shares and every company limited by guarantee and having a share capital shall, 'ithin a (eriod of not less than one month nor more than si) months from the date at which the company is entitled to commence business, hold a general meeting of the members of the company. &his meeting is called the 'statutory meeting'. &his is the "irst ;eeting o" the shareholders of a (ublic com(an* and is held onl* once in the lifetime of a company. Statutor* re(ort+ &he )oard of directors shall, at least (1 days before the day on which the meeting is to be held, forward a report, called the Nstatutory reportN, to every member of the company. If the report is forwarded later than (1 days before the day of the meeting, it shall be deemed to have been duly forwarded if it is so agreed to by all the members entitled to attend and vote at the meeting. &he notice of the meeting shall mention that the meeting is a statutory meeting. ,. A""UA- G " RA- M T!"G #Sees. 1$$ and 1$.& / AGM 0

Ivery company shall in each year hold in addition to any other meetings a general meeting as its annual general meeting and shall specify the meeting as such in the notice calling it. &here shall not be an interval of more than 1; months between one annual general meeting of the company and the next. A company may hold its first annual general meeting within a period of 1F months from the date of its incorporation. In that event it is not necessary for the company to hold any annual general meeting in the year of its incorporation or in the next year. Oear means calendar year.

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Company Law

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&he 8egistrar may, for any special reason, extend the time for holding any annual general meeting by a period not exceeding , months. )ut no extension of time is granted for holding the first annual general meeting. &here should be at least one annual general meeting per year. Time and (lace of meeting+ Ivery annual general meeting shall be called during business hours on a day that is not a public holiday. It shall be held either at the registered office of the company or at some other place within the city, town or village in which the registered office of the company is situate. .- da s> notice ?Sec0 -7-@: A general meeting of a company may be called by giving not less than (1 clear days notice in writing. It may be called with a shorter notice if it is agreed to by all the members entitled to vote in the meeting. Conse1uences of failure to hold annual general meeting+ If a company fails to hold an annual general meetingL "1# any member can apply, under Sec. 1D@, to the Company %aw )oard " presently Gational Company %aw &ribunal # for calling the meeting. "(# the company and every officer who is in default shall be punishable with fine. !m(ortance of annual general meeting+ It is only at the annual general meeting of a company that the shareholders can exercise any control over the affairs of the company. &hey can confront the directors, their elected representatives, at least once a year. &hey also get an opportunity to discuss the affairs and review the wor4ing of the company. &hey can also ta4e the necessary steps for the protection of their interests. 2. 3TRAOR4!"ARY G " RA- M T!"G #Sec. 1$5& / GM 0

A statutory meeting and an annual general meeting of a company are called ordinary meetings. Any meeting other than these meetings is called an extraordinary general meeting. It is called for transacting some urgent or special business which cannot be postponed till the next annual general meeting. IM= may be convenedL "1# by the )oard of directors on its own or on the re1uisition of the members ? or "(# by the re1uisitionists themselves on the failure of the )oard of directors to call the meeting. #1& )traordinar* meeting con6ened b* the 7oard of directors+ &he )oard of directors may call an extraordinary general meetingL #a&On its o'n: &he )oard of directors may call an extraordinary general meeting whenever some special business is to be transacted, which in the opinion of )oard of directors cannot be postponed till the next annual general meeting. Some of the examples of such a business are 2

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Company Law

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"i# Issue of right shares "ii# increase in the remuneration of managing director, whole time director, etc. #b& On re1uisition of the members: &he re1uisite number of members of a company may also as4 for an extraordinary general meeting to be held. In such a case the )oard of directors shall proceed duly to call such a meeting of the company. &he re1uisition for such a meeting by the members shall be signedL "i# In the case of a co;!an having a share ca!ital, by holders of not less than IC1Eth of the paid-up capital of the company having the right of voting in regard to the matter of re1uisition ? or "ii# in the case of a co;!an not having a share ca!ital, by members representing not less than IC1Eth of the total voting power in regard to the matter of re1uisition. &he re1uisition shall set out the matters for the consideration of which the meeting is to be called. It shall be deposited at the registered office of the company. &he )oard shall proceed to call a meeting within (1 days from the dale of the deposit of a valid re1uisition. &he meeting shall be held within ; days from the date of the deposit of the re1uisition. #,& )traordinar* meeting con6ened b* the re1uisitionists: Ivery shareholder of a company has a right to re1uisition an extraordinary general meeting. /e is not bound to disclose the reasons for the resolutions to be proposed at the meeting [Life Insurance Corpn.of lndia Vs.. scorts Ltd 9. If the )oard of directors fails to call a meeting as re1uired by the re1uisition, the meeting may be called by the re1uisitionists themselves. &he meeting shall be called in the same manner as nearly as possible as that in which meetings are called by the )oard of directors but it shall not be held after the expiration of , months from the date of the deposit of re1uisition. 8o'er of Tribunal to order meeting #Sec. 19$& If for any reason it is impracticable for a company to call, hold or conduct an extraordinary general meeting, the &ribunal may call an extraordinary meeting either of its own motion or on the application of any director of the company, or of any member of the company who would be entitled to vote at the meeting. R :U!S!T S O; A <A-!4 M T!"G+

A meeting can validly transact any business if the following re1uirements are satisfied 2 1. 8ro(er authorit*

&he proper authority to convene a general meeting "whether statutory, annual general or extraordinary# of a company is the )oard of directors. &he )oard should pass a resolution to call the general meeting, at a duly convened meeting of the )oard. If the directors do not call the meeting, the members or the Company %aw )oard call the meeting. ,. "otice of meeting A proper notice of the meeting should be given to the members and all others who are entitled to attend the meeting. a& -ength of notice #Sec. 1.1&+

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Company Law

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A general meeting of a company may be called by giving not less that (1 daysN notice in writing to the members. A general meeting may be called by giving a notice of less than (1 days if it is so agreed as per the provisions of the law. b& "otice to 'hom+ Gotice of every meeting of a company shall be given toL "1# every member of the company entitled to vote ? "(# the persons on whom the shares of any deceased members may have devolved ? and ",# the auditors of the company. If notice of a meeting is not given to every person entitled to receive notice, any resolution passed at the meeting will be of no effect. c& Contents of notice+ Ivery notice of a company calling a meeting shall specify the place and the day and hour of the meeting. It shall also contain a statement of the business to be transacted at the meeting." i.e., the Agenda of the meeting #. d& Ordinar* business and s(ecial business #Sec. 1.2&+ &he notice shall contain a statement of the business to be transacted at the meeting. &he business may be ordinary business or special business. i& Ordinar* business+ In the case of an annual general meeting, the following business is deemed as ordinary business L a# Adoption of Annual Accounts and <irector-s > Auditor-s 8eport? b# <eclaration of <ividend? c# Appointment or re-appointment of <irectors? d# Appointment or re-appointment of Auditors and fixing their remuneration. ii& S(ecial business+ In the case of an annual general meeting, any business other than the ordinary business, and in the case of any other meeting, all business, is deemed special. Some of the examples of special business areL "1# 8emoval of a director, "(# Issue of rightsCbonus shares, ",# Ilection of a person "other than a retiring director# as director. e& )(lanator* statement+ .here any special business is to be transacted at a meeting of a company, the notice shall specify its nature. It should be annexed with an Ixplanatory Statement stating therein the purpose of such special business. 2. :uorum for meeting #Sec. 1.=&+

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Company Law

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NKuorumN means the minimum number of members who must be present in order to constitute a valid meeting and transact business thereat. &he 1uorum is generally fixed by the Articles. If the Articles of a company do not provide for a larger 1uorum, the following rules apply 2 "1# ; members personally present in the case of a public company and ( members in the case of any other company, shall be the 1uorum for a meeting of the company. &he representative of a body corporate appointed under Sec. 1F@ or the representative of the $resident of India or a Movernor of a State under Sec. 1F@-A is a member personally present for the purpose of a 1uorum. "(# If within half an hour a 1uorum is not present, the meeting, if called upon the re1uisition of members, shall stand dissolved. In any, other case, it shall stand ad3ourned to the same day, place and time in the next wee4. ",# If at the ad3ourned meeting also, a 1uorum is not present within half an hour, the members present shall be the 1uorum. a& The Articles ma* (ro6ide for a larger 1uorum: &he Articles cannot provide for a 1uorum smaller than the statutory minimum. +or the purposes of 1uorum, only members present in person and not by proxies are to be counted. b& >hen should 1uorum be (resent ? Article ! "1# of &able A re1uires the 1uorum to be present at the time when the meeting proceeds to transact business. It need not be present throughout or at the time of ta4ing vote on any resolution. c@ One (erson cannot constitute a meeting &he word NmeetingN prima facie means a coming together of more than one person. Strictly spea4ing, therefore, one shareholder cannot constitute a meeting. &his is 4nown as 8ule in !"arp v. #a$es. )ce(tions: In the following cases, one person may constitute a meeting 2 "1# .here there is a class meeting of shareholders and all the shares of that class "e.g. preference shares# are held by one person, he alone can constitute a meeting of the class and can pass a class resolution by signing it. "(# .here the &ribunal calls or directs the calling of an annual general meeting ",# 0nder Sec.1D@, it has the power to direct that one member present in person or by proxy shall be deemed to constitute a meeting. " # .here the &ribunal orders a meeting of a company "other than the annual general meeting# under Sec.1FD to be held, it may direct that even one member of the company present in person or by proxy shall be deemed to constitute a meeting. ";# .here the )oard of directors delegates, sub3ect to the provisions of the Act, any of its powers to a committee, the committee may consist of any one person "Article @@, &able A#. In such a case, the only member of the committee shall constitute the 1uorum. "D# .here a 1uorum is not present at a general meeting within half an hour of the meeting, the meeting shall stand ad3ourned to the same day in the next wee4 at the same time and place. If at the ad3ourned meeting also a 1uorum is not present within half an hour of

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Company Law

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the time of the meeting, the members present are the 1uorum. In such a case even one member may constitute the meeting "Sec. 1@ #. =. Chairman of the meeting #Sec. 1.%&+ 8residing officer of the meeting: A chairman is necessary to conduct a meeting. /e is the presiding officer of the meeting. 0nless the Articles of a company otherwise provide, the ;e;bers !ersonall !resent at the meeting shall elect one of themselves to be the chair;an of the meeting on a show o" hands0 I" a !oll is de;anded on the election of the chairman, it shall be ta4en forthwith. &he Articles may provide some other method of election of chairman. Conduct of the meeting: &he way in which a meeting is to be conducted is a matter for the chairman, with the assent of the persons properly present, to be determined in the light of the general law and the companyNs Articles of Association. %. Minutes of meeting #Sees. 152 to 15$&+ =inutes are a record of what the company and directors do in meetings. Minutes of (roceedings of meetings #Sec. 152&+

Ivery company shall 4eep a record of all !roceedings o" ever general ;eeting and of all !roceedings o" ever ;eeting o" its Board o" directors and of ever co;;ittee o" the Board. .ithin ,E days of the conclusion of every such meeting concerned, entries of the proceedings shou recorded in the boo4s 4ept for that purpose. &hese records are 4nown as ;inutes. Minutes boo@+ &he boo4 in which the record of the proceedings of a meeting is 4ept is 4nown as the minutes boo4. Separate minutes boo4s are re1uired to be 4ept for shareholdersN general meetings of the company and directorsN meetings and also for committee meetings of the )oard of directors. "umbering of (ages. &he pages of every minutes boo4 shall be consecutively numbered. In no case is the attaching or pasting of papers of proceedings of a meeting allowed in minutes boo4. Signing of minutes. Iach page of the minutes boo4 of a )oard meeting shall be initialed or signed by the chairman of the same meeting or the next succeeding meeting. &he last page of the record of proceedings of each meeting in the minutes boo4 shall be dated and signed. &his has to be doneL "a# in the case of a )oard or a committee meeting, by the chairman of the same or the next succeeding meeting, and "b# in the case of a general meeting, by the chairman of the same meeting within ,E days of the meeting, or in the event of the death or inability of that chairman within ,E days of the meeting, by the director duly authori'ed by the )oard for the purpose.

6identiar* 6alue of minutes #Sec. 15=&+ =inutes of meetings 4ept In accordance with

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the provisions of Sec.1!, shall be evidence of the proceedings recorded therein and shall be conclusive of the facts stated therein. 8RO3! S #Sec. 1.$& A member entitled to attend and vote at a meeting may vote either in !erson or b !roA . A proxy is an authority to represent and vote for another person at a meeting. It is also an instrument appointing a person as proxy. &he person so appointed is also called a proxy. If the Articles do not otherwise provide a proxy can vote only on a poll. 8ro)* to be in 'riting: &he instrument appointing a proxy shall be in writing and signed by the appointer or his attorney duly authori'ed in writing, 8ro)* to be de(osited =9 hours before the meeting: A proxy, in order to be effective, shall be deposited with the company within F hours before the meeting. 12)'37 A3D +288 &he motions proposed in a general meeting of a company are decided on the votes of the members of the company. A shareholderNs vote is a right of property, and prima facie may be exercised by him as he thin4s fit in his own interest. /e is not bound to exercise it in the best interests of the company. &he voting may be 2 1. by a show of hands, or (. by ta4ing a poll. 1.<oting b* a sho' of hands #Sees. 1.. and 1.9&+ At any general meeting, motions put to vote are in the first instance decided by a show of hands, unless a poll is demanded "Sec. 1@@#. In ta4ing a vote by show of hands, the duty of the Chairman is to count the hands raised and to declare the result accordingly, without regard to the number of votes that a member raising the hand possesses. $roxies cannot vote on a show of hands. ,. <oting b* (oll #Sec. 1.5&+ )efore or on the declaration of the result of voting on any motion on a show of hands, a !oll ;a be taBen b the chair;an of the meeting of his own accord. It may be ta4en on a de;and ;ade b the "ollowing !ersons2 "a# In the case of a !ublic co;!an having a share capital, a poll shall be ta4en on a demand by any member"s# present in person or by proxy and holding shares in the company not being less than IC1Eth of the total voting power in respect of the resolution, or on which an aggregate sum of not less than 8s.;E,EEE has been paid up. "b# In the case of a !rivate co;!an having a share capital, a poll shall be ta4en on demand by one member having the right to vote on the resolution and present in person or by proxy if not more than seven such members are personally present, and by two such members present in person or by proxy if more than seven such members are personally present. "c# In the case of an other co;!an , a poll shall be ta4en on demand by any member"s# present in person or by proxy and having not less than 1 C1Eth of the total voting power in respect of the resolution. /#e demand for a po!! may $e wit#drawn at any time $y t#e person,s. J

Prof. Santanu Mitra

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Company Law

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Time of ta@ing (oll #Sec. 19A&+ A poll demanded on a 1uestion of ad3ournment or the appointment of a chairman shall be ta4en forthwith. In any other case a poll shall be ta4en within F hours of the demand for poll. Manner of (oll and result thereof #Sec. 19%&+ &he chairman of the meeting has the power to regulate the manner in which a poll is to be ta4en. /owever the method usually followed is that of a ballot paper on which members record their decision, i.e.% NforN or NagainstN the motion. &he result of the poll shall be deemed to be the decision of the meeting on the motion on which the poll is ta4en. RESOLUTIONS &he 1uestions which generally come for consideration at the general meeting of a company are presented in the form of proposals called motions. & motion may be !ro!osed b the chairman of the meeting or by any other member of the company. )efore it is placed at the meeting by the chairman for discussion, it must be seconded b someone. &he motion, after the close of discussion, is formally put to vote by a show of hands. It may either be carried or re3ected. If a sufficient number of members demand, the motion may be put to poll. &he final result is declared after the poll is ta4en. I" a ;otion is carriedC it beco;es a >resolution>. =$-3S A, @7SA4U5$A-S+ /#ere are fo!!owin& t#ree kinds of reso!utions under t#e Companies Act, 1956+ 1. Ordinar* resolution /Sec. 195 #1&0 An ordinary resolution is a resolution passed at a general meeting of a company by a simple ma3ority of votes "i.e., votes cast in favour of the resolution exceed votes cast against it including the casting vote of the chairman, if any. &he votes may be cast by members in person or by proxy, where proxies are allowed. &he re1uired notice of the meeting should have been duly given. 0nless the Companies Act or the =emorandum or the Articles expressly re1uire a special resolution or resolution re1uiring special notice, an ordinary resolution is sufficient to carry out any matter. An ordinary resolution is necessary for the following among other purposes2

"a# Issue of shares at a discount 5Sec. @! "(#9. "b# Alteration of share capital 5Sec. ! "(#9 "c# Adoption of statutory report "Sec. 1D;#. . (d) $assing of annual accounts and balance sheet, along with reports of )oard of directors and aud "Sec. (1E#. (e) Appointment of auditors and fixation of their remuneration 5Sec. (( "1#9. (f) Appointment of managingCwhole-time director "Sec. (D!#. "g# 8emoval of a director and appointment of a director in his place 5Sec(F "1#9. "h# .inding up a company voluntarily in certain events 5Sec. F "1# "a#9.

,. S(ecial resolution /Sec. 195 #,&0+

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A special resolution is one which satisfies the following conditions2 "a# &he intention to propose the resolution as a special resolution has been duly specified in the notice calling the general meeting. "b# &he notice has been duty given of the general meeting. "c# &he votes cast in favour of the resolution by members entitled to vote are not less than , times the number of votes cast against the resolution by members so entitled and voting. "d# An explanatory statement setting out all material facts concerning the sub3ect-matter of the special resolution including, in particular, the nature of the concern or interest of every director shall be annexed to the notice of the meeting. A copy of every special resolution together with the copy of the explanatory statement shall, within ,E days of the passing of the resolution, be filed with the 8egistrar of Companies. &he ob3ect of re1uiring a ma3ority of ,C ths of the votes for a special resolution is to protect the minority interests in important matters relating to the companyNs affairs. A Special resolution is necessary for the following among other purposes2 a# Alteration of =emorandum for changing the place of registered office from one State to another 5 Sec.1@"1#9 b#for changing the ob3ects clause of the =emorandum.5Sec.1@"(#9 "c# Change of name of a company with the consent of the Central Movernment "Sec. (1#. "d# Alteration of the Articles of a company 5Sec. ,1 "1#9. (e) 6ariation of shareholdersN rights "Sec. 1ED#. "f# 7eeping registers and returns at a place other than the registered office 5Sec. 1D,"1#9. 2. Resolutions re1uiring a s(ecial notice #Sec. 15A&+ A resolution re1uiring a special notice is not an independent class of resolutions. It is only a different 4ind of an ordinary resolution of which notice of the intention to move a resolution has to be given to the company by the proposer. &he notice shall be given not less than 1 days before the meeting at which the resolution is to be moved exclusive of the day on which the notice is served and the day of the meeting. &he company shall, immediately after the notice of the intention to move any such resolution has been received by it, give its members notice of the resolution in the same manner as it gives notice of the meeting. If this is not practicable "i.e.% to give notice to the members individually#, the company shall give notice to the members by advertisement in a newspaper having an appropriate circulation or in any other mode allowed by the Articles. A special notice is re1uired for a resolution in the following cases 2 "1# Appointment of an auditor other than the retiring ones "Sec. ((;#. "(# $rovision that a retiring auditor shall not be re-appointed "Sec. ((;#. ",# 8emoval of a director before the expiry of his period "Sec. (F #. " # Appointment of a director in place of one who is removed "Sec. (F #. &he Articles of a company may provide for additional matters in respect of which special notice is re1uired. 8assing of resolutions b* (ostal ballot /Sec. 15,-A is inserted b*

Prof. Santanu Mitra

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the Com(anies #Amendment& ActB ,AAA0 A listed public company may, and in the case of resolutions relating to such business as the Central Movernment may, by notification, declare to be conducted only by postal ballot, shall get any resolution passed by means of a postal ballot, instead of transacting the business in general meeting of the company. Notice: .here a company decides to pass any resolution by resorting to postal ballot, it shall send a notice to all the shareholders, along with a draft resolution explaining the reasons therefore, and re1uesting them to send their assent or dissent in writing on a postal ballot within a period of ,E days from the date of posting of the ballot. If a resolution as assented to by a ma3ority of the shareholders by means of postal ballot, it shall be deemed to have been duly passed at a general meeting convened in that behalf. Company (indin& 2p
3* 1I1F +9 GI1&I1F !(

Ginding up or liquidation of a company represents the last stage in its life. It means a proceeding by $hich a company is dissolved. )he assets of the company are disposed of, the debts are paid off out of the reali@ed assets "or from contributions from its members#, and the surplus, if any, is then distributed among the members in proportion to their holdings in the company. )he t$o terms S$inding upS and liquidationS are used interchangeably. ccording to (rof. Fo$er, $inding up of a company is a process $hereby its life is ended and its property administered for the benefit of its creditors and members. n administrator, called liquidator, is appointed and he takes control of the company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance $ith their rights.
M)04S ) (3N03N5 2P

(indin& up $y t#e /ri$una! ,Secs.@FF to @<F.

Co!untary windin& up ,Secs. @<@ to 5E1.

Mem$ersK -o!untary windin& up

CreditorsK -o!untary windin& up

GI1&I1F !( ?4 )-* )EI?!1 % "also kno$n as compu!sory win(in* up3 FE+!1&, 9+E C+3(!%,+E4 GI1&I1F !( ",ec. <==#5 company may be $ound up by the )ribunal in the

follo$ing cases5

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1. Specia! reso!ution of t#e company ;Sec. @FF ,a.=+ Ginding up order under this head is not common because normally the members of a company prefer to $ind up the company voluntarily for in such a case they shall have a voice in its $inding up. 3oreover, a voluntary $inding up is far cheaper and speedier than a $inding up by the )ribunal. "i.e., 1C%)-1ational Company %a$ )ribunal#. 2. 0efau!t in de!i-erin& t#e statutory report to t#e :e&istrar or in #o!din& statutory meetin& ,Sec. @FF ,$.=+ petition on this ground can be made either by the Eegistrar or by a contributory. In the latter case the petition for $inding up can be filed only after the e6piry of 1< days from the day on $hich the statutory meeting ought to have been held P,ec. <=. ";#Q. )he )ribunal may, instead of making a $inding up order, direct that the statutory report be delivered or that a statutory meeting be held. )he )ribunal may order the costs to be paid by any persons $ho are responsible for the default. F. ai!ure to commence, or suspension of $usiness ;Sec. @FF ,c.=+ )he )ribunal e6ercises po$er in this case only if the company has no Intention of carrying on its business or if it is not possible for it to carry on its business. If a company has not begun to carry on business $ithin a year from its incorporation or suspends its business for a $hole year, the )ribunal $ill not $ind it up ifV "a# there are reasonable prospects of the company starting business $ithin a reasonable time, and "b# there are good reasons for the delay ,i.e., the suspension of business is satisfactorily accounted for and appears to be due to temporary causes. @. :eduction in mem$ers#ip ;Sec. @FF ,d.=+ If, at any time, the number of members of a company is reduced in the case of a public company, belo$ ; or in the case of a private company, belo$ 2, the company may be ordered to be $ound up by the )ribunal. 5. 3na$i!ity to pay its de$ts ;Sec. @FF ,e.=+ company may be $ound up by the )ribunal if it is unable to pay its debts. )he test is $hether the company has reached a stage $here it is commercially insolvent $hich means that its e6isting and probable assets $ould be insufficient to meet the e6isting liabilities. TCommercially insolventS means that the company is unable to pay debts or liabilities as they arise in the ordinary course of business. 6. Dust and e?uita$!e ;Sec. @FF ,f.=+ )he $ords S7ust and equitableS are of the $idest significance and do not limit the 7urisdiction of the )ribunal to any particular case. It depends upon the facts and circumstances of each case. (#at is K8ust and e?uita$!eK c!ause 7 It depends upon the facts of each case. )he )ribunal may order $inding up under the SHust and equitableS clause in the follo$ing cases 5 213 9hen the su,stratum o" a company is *one : )he substratum of a company can be said to have disappeared only $hen the ob7ect for $hich it $as incorporated has substantially failed, or $hen it is impossible to carry on the business of the company e6cept at a loss, or the e6isting and possible assets are insufficient to meet the e6isting liabilities. ,E. 9hen the mana*ement is carrie( on in such a way that the minority is (isre*ar(e( or oppresse(% +ppression of minority shareholders $ill be a S7ust and equitableS ground $here those $ho control the company abuse their po$er to such an e6tent as to seriously pre7udice the interest of minority shareholders. ,F. 9here there is a (ea(!oc: in the mana*ement o" the company: Ghen there is no possibility of smooth and efficient continuance of the company as a commercial concern. ,@. 9here pu,!ic interest is !i:e!y to ,e pre ;u(ice(: - !nder ,ections =.; and =.M dealing $ith prevention of oppression and mismanagement. ,5. 9hen the company was "orme( to carry out "rau(u!ent or i!!e*a! ,usiness or when the ,usiness o" the company ,ecomes i!!e*a!.

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Company Law

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,6. (#en the company is a mere ,u,,!e an( (oes not carry on any ,usiness or (oes not ha7e any property. ,A. Actin& a*ainst the interest o" the State: If the company has acted against the interests of the sovereignty and integrity of India, the security of the state, friendly relations $ith foreign states or morality. ,<. (indin& up o" a sic: company. If the tribunal is of the opinion that the company should be $ound up under the circumstances specified in ,ec. <2<F. )he last t$o clauses have been added by the Companies " mendment# ct, 2DD2. P4/3/3)N ,Sec. @F9.+ n application to the )ribunal for the $inding up of a company is made by a petition. petition for the $inding up of a company may be presented51.%y t#e company ;Sec. @F9 ,1. ,a .=+ after it has passed a special resolution. company may itself present a petition to the )ribunal for $inding up

E. %y any creditor or creditors ;Sec. @F9 ,1. ,$.=+ petition to the )ribunal for the $inding up of a company may be filed by any creditor"s# i.e., every person having a pecuniary claim against the company $hether actual or contingent. F. %y any contri$utory or contri$utories ;Sec. @F9 ,1. ,c.=5 contributory means a person liable to contribute to the assets of the company on the event of its being $ound up and includes the holder of shares $hich are fully paid-up. contri$utory can present a $inding up petition on the follo$ing 5rounds5a+ the membership is reduced belo$ the statutory minimum> or b# he is an original allottee of shares > or c# he has held his shares for any 0 out of the previous 1M months >or d# the shares have devolved on him through the death of a former holder. @. %y a!! or any of t#e prior parties w#et#er to&et#er or separate!y ;Sec. @F9 ,1. ,d. =+ petition for the $inding up of a company under ,ec. <== may be presented by all or any of the parties, namely, the company, the creditors or the contributories specified in ,ec. <== "a#, "b# and "c# $hether together or separately. 5. %y t#e :e&istrar ;Sec. @F9 ,!.,e.=5 )he Eegistrar can present a petition for $inding up a company on the follo$ing grounds only, vi;9 *a+ If default is made by the company in delivering the statutory report to the Eegistrar or in holding the statutory meeting. *b+ If the company does not commence its business $ithin a year from its incorporation, or suspends its business for a $hole year. *c+ If the number of members is reduced in the case of a public company belo$ ; and in the case of a private company belo$ 2. *d+ If the company is unable to pay its debts. "e# If the )ribunal is of opinion that it is 7ust and equitable that the company should be $ound up. 6./#e Centra! 5o-ernment ;Sec. @F9 ,1.5 !nder ,ec. 2<= the Central Fovernment may cause a petition for the $inding up of a company $here it appears from the report of Inspectors appointed to investigate the af fairs of the company under ,ec. 2=/ thatV the business of the company is being conducted $ith intent toV "a# defraud its creditors, members, or any other persons, or "b# other$ise for a fraudulent or unla$ful purpose, or *c+ in a manner oppressive of any of its members, or "d# that the company $as formed for any fraudulent or unla$ful purpose or 2. persons concerned in the formation of the company or the management of its affairs have been guilty of fraud, misfeasance or other misconduct to$ards the company or to$ards any of its members.

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Company Law

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C)MM4NC4M4N/ ) (3N03N5 2P ,Sec. @@1. Ghere, before the presentation of a petition for the $inding up of a company by the )ribunal, a resolution has been passed by the company for voluntary $inding up, the $inding up shall be deemed to commence from t#e date of t#e reso!ution. In all other cases the $inding up of the company by the Court "1C%)# shall be deemed to commence at t#e time of t#e presentation of t#e petition for the $inding up. Ad-ertisement of petition+ *very petition for $inding up a company shall be advertised 1< days before the hearing, stating the date on $hich the petition $as presented and the names and addresses of petitioners. t any time after the presentation of a $inding of petition and before a $inding up order has been made, the company, or any creditor or contributory may apply to the )ribunal for a stay of, or restraint of, further proceedings in the )ribunal.
P)(4:S ) /:3%2NAL + Power of /ri$una! to stay or restrain proceedin&s a&ainst co mpany ,Sec. @@E.+

Powers of Court > NCL/ on #earin& petition ",ec. <<=#5 +n hearing a $inding up petition, the )ribunal may V "a# dismiss it, $ith or $ithout costs > or "b# ad7ourn the hearing conditionally or unconditionally > or "c# make any interim order that it thinks fit > or "d# make an order for $inding up the company $ith or $ithout costs or any other order as it thinks fit. )he )ribunal shall not refuse to make a $inding up order merely because the assets have been fully mortgaged or because there are no assets at all. Ghere the petition is presented on the ground that it is 7ust and equitable that the company should be $ound up, the )ribunal may refuse to make a $inding up order if the petitioners are acting unreasonably in seeking to have the company $ound up instead of pursuing some other remedy available to them.
C+1,*L!*1C*, +9 GI1&I1F !( +E&*E

+nce the )ribunal makes an order for the $inding up of a company, its consequences date back to the commencement of $inding up. )he other consequences of $inding up by the )ribunal are as follo$s 5 1. )he Company should forth$ith intimate to )fficia! Li?uidator and :e&istrar $inding up order. ,Sec. @@@. regarding )ribunalBs

E. )he Company and the petitioner should fi!e a certified copy of t#e order of /ri$una! wit#in FL days of the said order wit# t#e :e&istrar of Companies ; Sec. @55 ,1., ,1"A. and ,E.=. F. )he order for $inding up shall be deemed to be notice of disc#ar&e of service to the officers and employees of the company, e6cept $hen the business of the company is continued $ Sec. @55 ,F. =.

@. Ghen an order of $inding up has been made by the tribunal, no suit or other legal proceeding s#a!! $e commenced a&ainst t#e company e6cept by leave of the )ribunal. ,imilarly pending suits shall not be proceeded e6cept $y !ea-e of t#e /ri$una!. ;Sec. @@6 ,1.=. 5. Powers of t#e /ri$una! ;Sec. @@6 ,E. and ,F.= + Ghere the )ribunal has made a $inding up order of a company, it shall have 7urisdiction to entertain ofV "a# any suit or proceeding by or against the company > "b# any claim made by or against the company > "c# any application made under ,ec.=.1 for compromise $ith creditors or members > 6. E""ect o" win(in* up or(er ,Sec. @@A.. n order for $inding up a company shall operate in favour of all the creditors and of all the contri$utories of the company as if it had been made on their 8oint petition. A. .""icia! -iqui(ator to ,e !iqui(ator ,Sec. @@9.+ +n a $inding up order being made in respect of a company,

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the +fficial %iquidator shall, by virtue of his office, become the liquidator of the company.
P:)C402:4 ) (3N03N5 2P %* /14 /:3%2NAL

)fficia! Li?uidator ;Sec. @@< as amended $y t#e Companies ,Second Amendment. Act ELLE=. 9or the purpose of $inding up of companies by the )ribunal, there may be appointed an official liquidator $hoV "a# may be appointed from a panel of professional firms of chartered accountants, advocates, company secretaries etc. "b# may be a body corporate consisting of such professionals as may be approved by the Central Fovernment from time to time. "c# may be a $hole-time or part-time office, approved by the Central Fovernment. Li?uidator ,Sec. @@9.+ +n a $inding up order being made in respect of a company, the +fficial %iquidator shall, by virtue of his office, become the liquidator of the company. Pro-isiona! !i?uidator ,Sec. @5L.+ t any time after the presentation of a $inding up petition and before the making of a $inding up order, the )ribunal may appoint the +fficial %iquidator to be the liquidator provisionally. ?efore appointing a provisional liquidator, the )ribunal shall give notice to the company and give a reasonable opportunity to it to make its representations. <uties o" !iqui(ator 1. +rocee(in*s in win(in* up ,Sec. @51 ,1. and ,F.1+ )he liquidator shall conduct the proceedings in $inding up the company and perform duties imposed by the )ribunal. E. 'eport ,Sec. @55 ,1.=5 )he +fficial %iquidator shall as soon as practicable after receipt of the statement of affairs of t#e company "to be submitted under ,ec. </<#, and not later than 0 months from the date of the order of $inding up, submit a pre!iminary report > additiona! report to t#e /ri$una!. F. /#e Li?uidator s#a!! #a-e t#e custo(y o" the company8s property ,Sec. @56.. @. /#e !i?uidator may summon &enera! meetin&s of t#e creditors or contri$utories w#ene-er #e t#inks fit for t#e purpose of ascertainin& t#eir wis#es. 5./#e !i?uidator may app!y to t#e /ri$una! for directions in re!ation to any particu!ar matter arisin& in windin& up. 6. /#e !i?uidator s#a!! keep proper $ooks for makin& entries or recordin& minutes of t#e proceedin&s at meetin&s and suc# ot#er matters as may $e prescri$ed. ,Sec. @61.. A. Audit o" accounts ,Sec. @6E.+)he liquidator shall, at such times as may be prescribed but at least t$ice each year during his tenure of office, present to the )ribunal an account of his receipts and payments as liquidator. <. )he )ribunal may at the time after making an order for the $inding up of a company, direct that there shall be appointed a committee of inspection to act $ith the liquidator. ",ec.<0<#. 9. +en(in* !iqui(ation ,Sec. 551.. )he liquidator shall, $ithin 2 months of the e6piry of each year from the commencement of $inding up, file a statement duly audited by a qualified auditor of the company, $ith respect to the proceedings in, and position of, the liquidation. )he statement shall be filedV "a# in the case of a $inding up by the )ribunal, in )ribunal > and, "b# in the case of a voluntary $inding up, $ith the Eegistrar.
Powers of !i?uidator ,Sec.@5A.

1.)he liquidator in a $inding up by the )ribunal shall have the follo$ing powers, wit# t#e sanction of t#e /ri$una!, P ,ec.</;"1# Q "1# )o institute or defend suits and other legal proceedings, civil or criminal, in the name and on behalf of the company. "2# )o carry on the business of the company so far as may be necessary for the beneficial $ inding up of the company. "=# )o sell the immovable and movable property and its actionable claims. "<# )o raise money on the security of the companySs assets. "/# )o do all such other things as may be necessary for $inding up the affairs of the company and distributing its assets. E.)he liquidator in a $inding up by the )ribunal shall have powers, wit#out t#e sanction of t#e /ri$una!, P,ec. </; "2#Q.

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"1# to do all acts and to e6ecute documents and deeds on behalf of the company under its seal > "2# to inspect the records and returns of the company or the files of the Eegistrar $ithout payment of any fee > "=# to dra$, accept, make and endorse any bill of e6change, hundi or promissory note on behalf of the company in the course of Its business > "<# to appoint an agent to do any business $hich he is unable to do himself. F. Powers e=ercisa,!e in case o" onerous contracts ,Sec. 5F5.. )he term SonerousB means a right to property. )he liquidator may, $ith the leave of the )ribunal, disclaim onerous contracts, and properties.
S/A/4M4N/ ) A A3:S

fter the liquidator has been appointed, a statement of the affairs of the Company is to be made to him in the prescribed form, verified by an affidavit, and containing particulars regarding the assets, debts, and liabilities, names and addresses of the creditors etc. )he statement shall be verified by a director and the manager, secretary or other chief officer of the company. )he statement of affairs is required in both Compulsory and 'oluntary Ginding up ",ecs.</< and /11 #. )he ,tatement of ffairs enables the liquidator to kno$ the position of the Company. )he )ribunal may dispense $ith the submission of the ,tatement of ffairs.
C)MM3//44 ) 3NSP4C/3)N ,Sees. @6@ and @65.

Appointment and composition of committee ,Sec. @6@.. )he )ribunal may, at the time of making an order for the $inding up of a company or at any time thereafter, direct that there shall be appointed a committee of inspection to act wit# t#e !i?uidator. )he liquidator shall then $ithin 2 months from the date of such direction convene a meetin& of t#e creditors of the company for the purpose of determining the membership of the committee. Githin 1< days of the creditorsS meeting, the liquidator shall call a meetin& of t#e contri$utories to consider the decision of the creditors $ith respect to the membership of the committee. If the contributories do not accept the decision of the creditors, the liquidator shall apply to the )ribunal for directions as to $hat shall be the composition of the committee and $ho shall be its members. Constitution and proceedin&s of t#e committee ,Sec. @65.+ )he committee of inspection shall not have more than 12 members. )he members shall be creditors and contributories of the company in such proportions as may be agreed on by the meetings of creditors and contributories. In case of difference of opinion bet$een creditors and contributories, the proportion shall be determined by the )ribunal. )he committee of inspection shall have the ri&#t to inspect t#e accounts of the liquidator at all reasonable times. )he liquidator or any member of the committee may also call its meeting as and $hen he thinks necessary. )he quorum of its meeting shall be l/=rd of the total number of the members or 2 $hichever is higher. It may act by a ma7ority of its members present at a meeting, but it shall not act unless a quorum is present.
54N4:AL P)(4:S ) /14 /:3%2NAL

)o facilitate the $inding up of a company by the /ri$una!, the Companies ct, 1./0 gives the follo$ing po$ers to the )ribunal. )hese po$ers are in addition to the po$ers conferred on the )ribunal by ,ec. <== on hearing the petition. 1.Stay o" win(in* up procee(in*s 2Sec. @66.. )he $inding up proceedings may be stayed either altogether or for a limited period if the )ribunal finds it necessary . E.List of Contri$utories , @6A, @69. )he )ribunal may settle the list of contributories $ho are liable to contribute to the assets of the company, $ith the po$er to rectify the register of members. )he )ribunal may also order any contributory to pay money, due by him to the company, apart from any call. 3. (;ustment o" ri*hts o" contri,utories ,Sec. @A5.. )he )ribunal shall ad7ust the rights of contributories among themselves and distribute any surplus among persons entitled thereto. 4.<e!i7ery o" property ,Sec. @6<. )he )ribunal may, at any time after making a $inding up order, direct

Prof. Santanu Mitra

Company Law

/.

delivery to the liquidator of any money, property or books and papers in the custody or control of any contributory, trustee, receiver, banker, agent, officer or other employee of the company, to $hich the company is prima facie entitled. 5.E=c!usion o" cre(itors ,Sec. @A@.. )he )ribunal may fi6 a time $ithin $hich creditors shall prove their debts or claims. 6..r(er as to costs ,Sec. @A6. In case of deficiency of assets to satisfy the liabilities, the )ribunal may give priority to the payment, out of the assets, of costs, charges and e6penses of the $inding up proceedings. 7. Summonin* o" persons suspecte( o" ha7in* property o" the company ,Sec. @AA.. )he )ribunal may, at any time after the making of a $inding up order, summon before it any officer of the company or person kno$n or suspected to have in his possession any property or books or papers of the company. It may also summon any person $ho is kno$n or suspected to be indebted to the company. )he )ribunal may also summon any person $hom the )ribunal considers capable of giving information concerning the promotion, formation, trade, dealings, property, books or papers, or affairs of the company. <.+u,!ic e=amination ,Sec. @A<.+ If in the opinion of the +fficial %iquidator a fraud has been committed by any person in the formation of the company, the )ribunal may direct that that person or officer shall attend before the )ribunal and be publicly e6amined as to the promotion or formation or the conduct of the business of the company. 9. rrest o" a,scon(in* contri,utory ,Sec. @A9.. If at any time either before or after making, a $inding up order, the )ribunal believes that a contributory is about to quit India or to abscond or to remove and conceal any property for the purpose of avoiding payment or avoiding e6amination, he may be arrested and the relevant books, papers and movable property may be sei@ed. 1L.)eetin* o" cre(itors or contri,utories ,See. 55A.. )he )ribunal may convene meetings of creditors or contributories for the purpose of ascertaining their $ishes.
03SS)L2/3)N ) C)MPAN* ,Sec. @<1.

&issolution puts an end to the e6istence of a company. company $hich has been dissolved no longer e6ists as a separate entity capable of holding property or of being sued in the )ribunal. 5rounds for disso!ution+ )he )ribunal shall make an order for the dissolution of a company V "1# $hen the affairs of the company have been completely $ound up, or "2# $hen the )ribunal is of opinion that the liquidator cannot proceed $ith the $inding up for $ant of funds and assets, or for any other reason. )he )ribunal shall make an order for the dissolution of the company only $hen it is 7ust and reasonable.
C)N/:3%2/):*+ &efinition ",ec. <2M#5 )he term ScontributoryS means every person liable to contribute to

the assets of a company in the event of its being $ound up and includes the holder of any shares $hich are fully paid up. List of contri$utories+ )he list of contributories shall be prepared in t$o parts, vi;%% List A and List %. List A shall include the present members of the company, i.e., members $hose names appear in the companySs register of members at the time of the $inding up of the company. -ist > shall include the past members of the company, i.e., members $ho ceased to be members $ithin one year preceding the commencement of the $inding up of the company. Lia$i!ity of contri$utores ,Sec. @E6.+ In the event of a company being $ound up every present and past member shall be liable to contribute to the assets of the company to an amount sufficientV "a# for payment of *$+ its debts and liabilities, and *ii+ costs, charges and e6penses of the $inding up, and "b# for the ad7ustment of the rights of the contributories among themselves. -ia,i!ity o" present mem,ers% )he liability of a present member "i.e., %ist contributory# shall be limitedV "1# in the case of a company limited by shares, to the amount remaining unpaid on the shares > and "2# in the case of a company limited by guarantee, to the amount undertaken to be contributed by him to the assets of the company in the event of its being $ound up.

Prof. Santanu Mitra

Company Law

0D

-ia,i!ity o" past mem,ers% past member "i.e.. %ist ? contributory# shall not be liable to contribute V "1# if he has ceased to be a member for 1 year or more before the commencement of the $inding up> "2# in respect of any debt or liability of the company contracted after he ceased to be a member > "=# if it appears to the )ribunal that the present members $ill be able to satisfy the contributions required to be made by them.
5.-4/T '? 96/<6/@ 4+ 2Sees. 484 to 5203

'oluntary $inding up means $inding up by the members or creditors of a company $ithout interference by the )ribunal. )he ob7ect of a voluntary $inding up is that the company, i.e., the members as $ell as the creditors, are left free to settle their affairs $ithout going to the )ribunal. Circumstances in w#ic# a company may ,e woun( up 7o!untari!y ,Sec. @<@.. company may be $ound up voluntarily V 1.%y passin* an or(inary reso!ution% Ghen the period, if any, fi6ed for the duration of a company by the rticles has e6pired, the company in general meeting may pass an ordinary resolution for its voluntary $inding up. )he company may also do so $hen the event, if any, on the occurrence of $hich the rticles provide that the company is to be dissolved, has occurred. 2.%y passin* a specia! reso!ution% : company may at any time pass a special resolution that it be $ound up voluntarily. 1o reasons need be given $here the members pass a special resolution for the voluntary $inding up of the company. *ven the rticles cannot prevent the e6ercise of this statutory right. #ommencement o" 7o!untary win(in* up ,Sec. @<6.. voluntary $inding up shall be deemed to commence at the time $hen the resolution "ordinary or special, as the case may be# for its voluntary $inding up is passed. (7ertisement o" reso!ution ,Sec. @<5.. Githin 1< days of the passing of the resolution for voluntary $inding up of the company, the company shall give notice of the resolution by advertisement in the +fficial Ca;ette/ and also in some ne$spaper circulating in the district of the registered office of the company. voluntary $inding up may be a "1# 3embersB voluntary $inding up, or "2# creditorsS voluntary $inding up.
/*P4S ) C)L2N/A:* (3N03N5 2P+ 1. M4M%4:SK C)L2N/A:* (3N03N5 2P

0ec!aration of so!-ency ,Sec. @<<.. In a voluntary $inding up of a company if a declaration of its solvency is made in accordance $ith the provisions of ,ec. <MM, it is a membersS voluntary winding up% )he declaration shall be made by a ma7ority of the directors at a meeting of the ?oard that the company has no debts or that it $ill be able to pay its debts in full $ithin = years from the commencement of the $inding up. )he declaration shall be verified by an affidavit. "oath before an +ath Commissioner / 3agistrate stating the truth of declaration#.)he declaration shall have effect only $hen it is D "a# made $ithin five $eeks Immediately before the date of the resolution, and delivered to the Eegistrar for registration before that date > and "b# accompanied by a copy of the report of the auditors of the company on 5"i+ the profit and loss account of the company from the date of the last profit and loss account to the latest practicable date Immediately before the declaration of solvency, "ii# the balance sheet of the company, and "iii# a statement of the companySs assets and liabilities as on the last mentioned date. Sees. @9L to @9< shall apply in relation to a membersS voluntary $inding up. )he provisions of these ,ections are as follo$s 5 1. ppointment an( remuneration o" !iqui(ators ,Sec. @9L.. )he company in general meeting shall appoint one or more liquidators for the purpose of $inding up its affairs and distributing its assets. It shall also fi6 the remuneration, if any, to be paid to the liquidator or liquidators. E. >oar(8s powers to cease on appointment o" a !iqui(ator ,Sec. @91.. +n the appointment of a liquidator, all the po$ers of the ?oard of directors, the managing or $hole-time directors, and manager, shall cease e6cept $hen the company in general meeting or the liquidator may sanction them to continue. F. +ower to "i!! 7acancy in o""ice a !iqui(ator ,Sec. @9E.. If a vacancy occurs by death, resignation or other$ise

Prof. Santanu Mitra

Company Law

01

in the office of any liquidator appointed by the company, the company in general meeting may fill the vacancy. @. /otice o" appointment o" !iqui(ator to ,e *i7en to 'e*istrar ,Sec. @9F#. )he company shall give notice to the Eegistrar of the appointment of a liquidator or liquidators. 5. <uty o" !iqui(ator to ca!! cre(itors8 meetin* in case o" inso!7ency ,Sec. @95.. If the liquidator is at any time of opinion that the company $ill not be able to pay its debts in full $ithin the period stated in the declaration, he shall forth$ith summon a meeting of the creditors. -e shall lay before the meeting a statement of the assets and liabilities of the company. )hereafter the $inding up shall $ecome creditorsK -o!untary windin& up. 6. 0uty to ca!! &enera! meetin& at t#e end o" each year 2Sec. @96.. In the event of the $inding up continuing for more than 1 year, the liquidator shall call a general meeting of the company at the end of the first year from the commencement of the $inding up. %ike$ise, he shall call a general meeting at the end of each succeeding year. A. ina! meetin* an( (isso!ution ,Sec. @9A.. s soon as the affairs of the company are fully $ound up, the liquidator shall make up an account of the $inding up, sho$ing ho$ the $inding up has been conducted and ho$ the property of the company has been disposed of. -e shall then call a general meeting of the company and lay before it the accounts sho$ing ho$ the $inding up has been conducted. Githin one $eek after the meeting, the liquidator shall send to the Eegistrar and the +fficial %iquidator a copy each of the account and shall make a return to each of them of the holding of the meeting and of the late thereof <. Pro-isions as to annua! and 0ina! meetin* in case o" inso!7ency ,Sec. @9<.. If in the case of a membersS voluntary $inding up, the liquidator finds that the company is insolvent. ,ees. /DM and /D. shall apply as if the $inding up $ere a creditorsS voluntary $inding up and not a membersS voluntary $inding up.
E. C:403/):SK C)L2N/A:* (3N03N5 2P

voluntary $inding up of a company in $hich a declaration of its solvency is not made is referred to as a creditorsS voluntary winding up% Pro-isions app!ica$!e to creditorsK -o!untary windin& up Sees. 5L) to 5L9 shall apply in relation to a creditorsS voluntary $inding up. )he provisions of these ,ections are as follo$s 5 1.)eetin* o" cre(itors ,Sec. 5LL.. )he company shall call a meeting of the creditors of the company on the day on $hich there is to be held the general meeting of the company at $hich the resolution for voluntary $ inding up is to be proposed, or on the ne6t day. )he ?oard of directors of the company shall cause a full statement of the position of the companySs affairs together $ith a list of the creditors and the estimated amount of their claims to be laid before the meeting. 2./otice o" reso!ution to ,e *i7en to 'e*istrar 2Sec. 5L1.. 1otice of any resolution passed at a creditorsS meeting shall be given by the company to the Eegistrar $ithin 1D days of the passing thereof. =.Appointment o" !iqui(ator ,Sec. 5LE.. )he creditors and the members at their respective meetings may nominate a liquidator. If no person is nominated by the creditors, the person nominated by the members shall be the liquidator. <.Appointment o" committee o" inspection ,Sec. 5LF.. )he creditors at their meeting may appoint a committee of inspection consisting of not more than / persons. If such a committee is appointed, the company may also at a general meeting appoint not more than / members to the committee. If the creditors and members do not agree on a common list, the )ribunal may constitute a committee of inspection. 5. -iqui(ator8s remuneration ,Sec. 5L@.. )he committee of inspection may fi6 the remuneration of the liquidator. 6. %oardKs powers to cease on appointment o" !iqui(ator ,Sec. 5L5.. +n the appointment of a liquidator, all the po$ers of the ?oard of directors shall cease. ?ut the committee of inspection, may sanction the continuance of the ?oard. A. +ower to "i!! 7acancy in o""ice o" !iqui(ator ,Sec. 5L6.. If a vacancy occurs by death, resignation or other$ise, in the office of a liquidator "other than a liquidator appointed by the )ribunal#, the creditors in general meeting may fill the vacancy. <. 0uty of !i?uidator to ca!! meetin& at t#e end o" each year ,Sec. 5L<.. )he liquidator shall call a general meeting of the company and a meeting of the creditors every year, $ithin = months from the close of every year. -e shall lay before the meeting an account of his acts and dealings and of the conduct of $inding up during the preceding year and position of the $inding up. .. ina! meetin& and disso!ution ,Sec. 5L9.. s soon as the affairs of the company are fully $ound up, the liquidator shall make up an account of the $inding up sho$ing ho$ the $inding up has been conducted and ho$ the property of the company has been disposed of. -e shall then call a general meet ing of the company and

Prof. Santanu Mitra

Company Law

02

a meeting of the creditors for the purpose of laying the account before the meeting and giving e6planation thereof. Mem$ersK and creditorsK -o!untary windin& up compared 1. 0ec!aration of so!-ency+ In case of a membersS voluntary $inding up, there is declaration of solvency. In case of a creditorsS voluntary $inding up, there is no such declaration. E. Contro! of windin& up+ In a membersS voluntary $inding up, the members control the $inding up of the company and the creditors do not participate as the company makes a declaration of solvency. In a creditorsS voluntary $inding up, the creditors control the $inding up of the company as the company is deemed to be insolvent. F. Meetin&s+ In a membersS voluntary $inding up, there is no meeting of creditors. In a creditorsS voluntary $inding up, $henever there is a meeting of contributories, there is a corresponding meeting of creditors. @. Appointment o" !iqui(ator: In a membersS voluntary $inding up, the liquidator is appointed by the company and his remuneration is fi6ed by the company. In a creditorsS voluntary $inding up, he is appointed by the creditors and his remuneration is fi6ed by the committee of Inspection or by the creditors. 5. Committee of inspection5 )here is no committee of inspection in a membersS voluntary $inding up> in a creditorsS voluntary $inding up the creditors may appoint a committee of inspection. M6. Powers of !i?uidator+ In a membersS voluntary $inding up, the liquidator can e6ercise certain po$ers $ith the sanction of a special resolution of the company>in a creditorsS voluntary $inding up, he can do so $ith the sanction of the )ribunal or the committee of inspection..
C)NS4624NC4S ) (3N03N5 2P

1. Conse?uences as to s#are#o!ders> mem$ers+ In a company limited by shares, a shareholder is liable to pay the full amount up to the face value of the shares held by him. -is liab ility continues even after the company goes into liquidation, but he is then described as a contributory. contributory may be present or past.. In a company limited by guarantee, the members are liable to contribute up to the amount guaranteed by them. E. Conse?uences as to creditors "1# 9here the company is so! 7ent ,Sec. 5E<.. Ghere a company is being $ound up, all debts payable shall be admissible to proof against the company. 7ust estimate of the value of such debts shall be made. Ghere a solvent company is $ound up, all claims of creditors, $hen proved, are fully met. "2# 9here the company is inso!7ent ,Sec. 5E9.. Ghere a company is insolvent and is $ound up, the same rules shall prevail as in the case of insolvency. Preferentia! payments ",ec. /=D#. In a $inding up, some unsecured debts are paid, sub7ect to the provisions of ,ec. /2.- , in priority to other unsecured debts. )hese payments are kno$n as Spreferential paymentsS. F. Conse?uences as to ser-ants and officers $inding up order shall be deemed to be a notice of discharge to the officers and employees of the company, e6cept $hen the business of the company is continued. @. Conse?uences as to proceedi&s a&ainst t#e company Ghen a $inding up order has been made or the +fficial %iquidator has been appointed as provisional liquidator, no suit or other legal proceeding against the company shall be commenced e6cept by leave of the )ribunal. ,imilarly if a suit is pending against the company at the date of the $inding up order, it shall not be proceeded $ith against the company, e6cept by leave of the )ribunal. 5. Conse?uences as to costs If assets are insufficient to satisfy liabilities, the )ribunal may order for payment of the costs, charges and e6penses of the $inding up out of the assets of the company. company is a said to be SdefunctS $hen it is not carrying on business or $hen it is not in operation. ,ec. /0D deals $ith defunct companies. If a company has ceased to carry on business, the Eegistrar may strike it off the Eegister as a defunct company in accordance $ith ,ec. /0D.
04 2NC/ C)MPAN*+

:estoration of companyKs name Ghere the Eegistrar has struck the name of a company off the Eegister as a defunct company, the po$er of the )ribunal to order the name of the company to be restored to the Eegister lasts for 2D years.