1

Dear Reader,

These notes consist of a total of 82 pages. The notes are a compilation of the Companies
Act, the Slides given in class, ND Kapoor and Avtar Singh. Please note that whatever is
in bold has been taught in class by way of slides either has no legal basis (no basis was
found even in any of the text books) or has some sort of minor error, which has been
mentioned. Also, after the amendment to the Companies Act and introduction of the
NCLT as an authority in place of the CLB or the court, some confusion has been created.
Please note that the notes make a mention of the old authority (which must be followed as
the NCLT has not come into existence) and mention ‘NCLT’ in brackets showing that the
section mentions about the NCLT having the power. Further, please make note of any
comments made in any part of the notes (titled ‘note’). Please let me know in case you
have any further queries. Hope this helps. Best of luck and happy studying!

Regards,
Ankita

COMPANY LAW-II

Note: A public company shall be deemed to include a private company being a subsidiary
of a public company, except where mentioned otherwise. Similarly, a private company
shall be deemed to exclude a private company being a subsidiary of a public company,
except where mentioned otherwise.

Unit I Company Management

1.1. Directors, Number of Directors, Position of Directors

1. A director is an officer of the company, as has been stated under S.2 (30).
2. S.2 (13) defines a director as including any person occupying the position of a
director, by whatever name called.
3. Thus, what needs to be seen is the nature of the office of the person and the
duties he must carry out. It is not necessary that he be called a director.
4. Thus, any person who has control over the direction, management, conduct or
superintendence of a company is a director.
5. He can also be a person on who instructions/advice the board functions
provided that such advice is not given in a professional capacity.
6. As a company is an artificial person, it cannot act on its own. It can act only
through directors. (Ferguson Wilson)
7. Similarly, Viscount Haldane in Lennard’s Carrying Co. Ltd. V. Asiatic
Petroleum Co. Ltd stated that “a company is an abstraction…the directors
represent the directing mind and will of the company.”
8. As per Gower, the company has two primary organs- the general meeting and
the directorate.
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9. A company has also been compared to a democratic state where the

Memorandum (MoA) and the Companies Act serve as the constitution.
However, it may not be called perfectly democratic as there are certain powers
exercisable by the directorate which cannot be interfered with by the
members.
10. The members may however alter the articles of the company in order to
exercise control over the directors. They also have the power to appoint and
dismiss the directors.
11. Directors are not only officers and employees of the company, they are also its
agents and trustees.
12. In GE Railway v. Turner, it was stated that directors are mere trustees or
agents of the company, trustees of the company’s money and agents in the
transactions which they enter into on behalf of the company.
13. As per S.253, only individuals and not firms, associations of persons or bodies
corporate may become directors. This is done primarily so that a particular
person may be made accountable for the acts of the company and there is no
confusion in this regard.
14. The section also provides that a company may appoint or reappoint a director
only when he is allotted a Director Identification Number (DIN) in terms of
S.266B.
15. Where the articles of the company provide that the Board must act
collectively, no individual member may act on his own in this regard
except where power has been delegated upon such individual and the
delegation in this case is permissible.
16. Further, S.252 stipulates that every public company, other than a deemed
public company as under S.43A1 shall have a minimum of 3 directors.
17. It also states that in a company having a paid-up share capital of more than
Rs.5 crores and having at least 1000 small shareholders, a director may be
appointed by such small shareholders. As the term used here is ‘may’, it is not
compulsory to appoint a small shareholders director.
18. A small shareholder is one holding shares whose nominal value is Rs.20,000
or less in a company to which this provision applies, i.e. a public company,
not being a deemed public company under S.43A.
19. A company may elect a small shareholders director either suo moto or on
the notice of at least 1/10th of the total small shareholders in the company.
20. Such person whose name has been proposed must sign and file his consent to
act as such director.
21. In case of a listed company, a small shareholders director shall be
appointed by way of postal ballot.
22. A small shareholders director has a maximum term of 3 years. He may
again be appointed after the expiry of such period.
23. He shall be considered to be a director for all purposes, other than for
appointment as a whole-time director or managing director.

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S.43A has been repealed- check effect of repeal, private company which is a subsidiary of a public
company is now under the definition of a public company
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24. He cannot hold office as a small shareholders director in more than 2

companies.

25. For every other company (private companies, deemed public companies, etc.),
the minimum number of directors shall be 2. Where a private company is
converted into a public company, it must comply with the statutory
requirement as regards the minimum number of directors at all times.
26. However, a company may by ordinary resolution, in its general meeting,
increase or reduce the number of its directors, within the limits prescribed by
its articles (S.258). This is however subject to the provisions of Ss. 252, 255
and 259.
27. Article 75 of Table A of Schedule I of the Act provides that the continuing
director(s) may act where the number of directors is less than the quorum
fixed by the Act, only for increasing the number to fulfil such requirement of
quorum or to convene a general meeting of the company, and for no other
purpose.
28. S.259 provides that Central Government approval is required where the
number of directors of a public company needs to be increased, except where
the number of directors is to be increased to 12 or less than 12.
29. This provision is not applicable where the increase is within the limits
prescribed by the articles of the company. Articles here in case of a company
in existence on July 21, 1954 would mean the articles which were in existence
on such date and articles with respect to a company which came into existence
at a later date, would mean the articles as were first registered.
30. S.186- check slides and bareact
31. The office of director thus comes into existence when the company comes into
existence. It also ceases to exist when the company ceases to exist, i.e. it is
wound up.
32. In Re Union Accident Insurance Co. Ltd., it was upheld that a winding up
order terminates the appointment of a director, except for certain special
purposes. In such cases, powers of the directors are assumed by the Official
Liquidator.
33. In Anil Kumar Sachdeva v. Four ‘A’ Asbestos Pvt. Ltd., it was upheld that the
directors still retain some residuary powers in spite of the appointment of an
Official Liquidator.

1.2. Appointment/Reappointment of Directors, qualifications and disqualifications,

remuneration, removal, powers and duties, liabilities of director, contracts in
which directors are interested, disabilities of directors

1. S.254 provides that the subscribers to the memorandum shall be deemed to be

directors of the company until new directors are appointed in a general
meeting as under S.255. This shall be subject to the articles of the company.
2. Thus, generally the articles of the company fix the number and names of the
first directors.
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3. It has also been stated under Article 64 of Table A of Schedule I that the
subscribers to the memorandum or a majority of them, shall determine in
writing the number directors and the first directors of the company. This will
obviously be subject to S.254 and thus will be applicable only if the articles of
the company do not stipulate the number of directors and names of the first
directors.
4. S.255 is a mandatory statutory requirement which provides that two-thirds of
the directors of every public company shall retire by rotation. Such directors
are called rotational directors and they are to be appointed by shareholders in
the AGM.
5. If the total number of directors is not a multiple of 3, the number nearest to the
value of such 2/3rd of the total shall be considered.
6. This provision however is not applicable where the articles of the company
provide for retirement of all directors every AGM.
7. In case of the directors of a private company and the remaining one-third of
the directors of a public company, shall unless the articles provide otherwise,
be appointed by the shareholders in the AGM.
8. The articles of most companies provide for exclusion of the managing
director and whole-time director from the rule of retirement by rotation.
9. S.256 lays down the procedure as regards appointment of directors in an
AGM, in case of a public company. It provides the following rules-
(a) One-third of the rotational directors shall retire every AGM
(b) The directors who are to retire every AGM must be those holding
the longest tenure out of the rotational directors.
(c) When there arises a situation wherein the directors who are to
retire by rotation had been appointed on the same day and thus the
principle given in (b) is not applicable, such director(s) shall issue shall be
resolved by mutual agreement between the directors or by draw of lots
where there is no such agreement.
(d) Every retiring director is eligible for reappointment in the AGM.
Another person may also be appointed in his place.
(e) If the vacancy made is not filled and no resolution is passed not
to fill the vacancy, the meeting shall be adjourned to the same day in the
next week (where the same day is a public holiday, to the next subsequent
day which is not a public holiday).
(f) On such later date if the vacancy is not filled and no resolution
has been passed in the AGM not to fill the vacancy, the retiring director
shall be deemed to have been reappointed, unless-
i. A resolution for reappointment of the retiring director has been put to
vote and the same has been rejected.
ii. The retiring director expresses his unwillingness to continue as
director by a notice in writing addressed to the Company or the Board.
iii. The retiring director is not qualified or is disqualified from holding the
position of director.
iv. A special or ordinary resolution must be passed for his reappointment.
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v. Where the case falls under the proviso to S.263 (2). S.263 (2) provides
that a single resolution appointing more than one director shall be void
unless another resolution is passed in the AGM allowing such single
resolution. In such case, there shall be no automatic reappointment of a
retiring director in default of another appointment.

8. The provisions of Ss. 255 and 256 are not applicable to government
companies where the entire paid-up capital is held by one or more
governments, which may either be the Central Government or the State
Government.
9. S.257 (typo- S.157) deals with appointment of a new director in case of a
public company.
10. It provides that in such case, the person wishing to be appointed as a director
or any other member of the company proposing such person to be director,
shall give a notice in writing at the office of the company, at least 14 days
prior to the AGM and shall also deposit Rs.500. Such amount shall be
refunded if and when the person is appointed as director.
11. The company shall thereafter inform its shareholders as regards the same,
either by serving individual notices or by making an advertisement in at least
two newspapers, one English and one in a regional language, circulated in the
area where the registered office of the company is located. However, such
notice or advertisement must be made at least 7 days prior to the AGM.
12. S.264 requires that in case of a public company, every person signifying his
wish to be appointed as a director under S.257 and not being a person retiring
as director of the company, shall file his consent in writing with the company
to act as a director of such company. Further, he shall not act as director,
unless within 30 days of his appointment, he signs and files his consent to act
with the Registrar.
13. Further, a director retiring at an AGM, including an additional director shall
not continue in office after the last day on which the AGM ought to have been
held in the year expires. This is so that the directors cannot take advantage of
their position by not summoning for an AGM. (also opined by the
Department of Company Affairs)
14. Ss. 260, 262 and 313 provides for methods of appointment of directors by the
Board.
15. S. 260 provides for appointment of an additional director, who shall retire at
the next AGM. Where an AGM is not held, he shall retire after the expiry of
the last day in the year on which the AGM ought to have been held.
16. An additional director is generally appointed by the board for expert advice or
for any other specific purpose.
17. If the additional director holds the post of managing director, he shall cease to
be the managing director where he ceases to be the additional director of the
company.
18. Such additional director may be appointed as an ordinary director in the
AGM.
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19. Further, this provision is subject to the requirement that the total number of
directors, after the appointment of the additional director does not exceed the
maximum prescribed by the articles of the company.
20. S.262 provides for appointment of a director by the Board where a casual
vacancy is created before the expiry of the term of the original director, due to
death, resignation, disqualification or where such director is not able to accept
office for any reason other than retirement by rotation.
21. A person so appointed shall continue to remain in office till the term of the
original director comes to an end.
22. S.313 provides for appointment of an alternate director to act for an original
director when he leaves the state in which the meetings of the company are
generally held for a period of at least 3 months.
23. Such appointment shall be allowed only where it is sanctioned by the articles
of the company or by a resolution passed in the general meeting of the
company.
24. The alternate director shall vacate office when the original director returns or
when the term of office of the original director comes to an end. However, the
provisions relating to reappointment of the original director are not applicable
to the alternate director.
25. The articles of the company may also allow third parties such as debenture
holders, creditors, etc. to appoint directors on the board of the company. Such
directors are called nominee directors of the company.
26. The nominee directors of the company however cannot exceed one-third of
the total number of directors of the company.
27. The articles of a public company may also allow for appointment of directors
by way of proportional representation every 3 years as provided under S.265.
(not important)
28. S.408 allows for appointment of such number of persons as directors of the
company by the Central Government, as suggested by the tribunal where the
same is done in the interests of the company or its shareholders or of the
general public, for a period not more than 3 years. (Not important).
29. As per S.276, no person may be appointed director of more than 15
companies. Such companies shall not include the following companies
(S.278)-
(a) A private company
(b) An unlimited company
(c) A company not carrying on business for profit or that which prohibits
payment of dividend
(d) A company in which such person is only an alternate director.
(e) Foreign companies

30. If such person becomes the director of more than 15 companies, such office
shall be deemed to not have taken effect unless within 15 days from his
appointment, he does not vacate the office of director from any of the 15
companies in which he was a director.
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31. S.279 prescribes a fine of Rs.50, 000 for contravention of this provision,
which shall be levied each time the person assumes directorship of a company
beyond 15 companies.
32. The qualifications of directors are as follows-
(a) Must be an individual
(b) Must be competent to contract
(c) Must hold the requisite number of qualification shares where required by
the articles

33. S.270 deals with the qualification shares which a director of a public company
must hold. The person appointed to the post of director will be required to
comply with this provision only when it is required by the articles of the
company.
34. This section states that the director must obtain such qualification shares
within 2 months from the date of his appointment. When a person accepts his
appointment as director of a company, knowing that the articles prescribe a
particular number of qualification shares which must be held by him, he is
deemed to have contracted with the company that he will obtain such shares
within the stipulated period of 2 months.
35. He may acquire such shares either by transfer from the existing shareholders
or by directly purchasing them from the company. However, he cannot receive
such shares as gift from the promoters of the company as that would amount
as a breach of trust.
36. Further, the section also provides that the articles of the company cannot state
that the director must acquire such qualification shares before his appointment
or before the period of 2 months. Such a stipulation shall be treated as being
void.
37. The nominal value of the qualification shares cannot exceed Rs.5000 or where
the nominal value of one share is Rs.5000, it cannot exceed the nominal value
of one share of the company.
38. For the purpose of qualification shares, the bearer of a share warrant shall not
be deemed to be the holder of the shares which are represented by the warrant.
39. S.272 provides a penalty of upto Rs.500 per day from the date the period of 2
months expires till the time the contravention continues.
40. S.274 provides for the following disqualifications with respect to directorship-
(a) Where he is of unsound mind and a finding in this regard has been made
by a court of competent jurisdiction
(b) Where he is adjudged to be an undischarged insolvent
(c) Where he has applied to be adjudged an insolvent and such application is
pending
(d) Where he is convicted of an offence involving moral turpitude and the
punishment for which is imprisonment at least for 6 months and 5 years
have not elapsed after such sentence
(e) Where he has not paid any calls with respect to shares held by him, either
individually or jointly and 6 months have elapsed from the last date of
such payment
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(f) Where he is disqualified under S.203. This section primarily deals with the
court disqualifying fraudulent persons from managing the company
(g) Where he holds directorship of a public company which (i) has not filed
annual accounts and annual returns for a period of 3 consecutive financial
years, anytime after April 1, 1999 or (ii) which has not repaid its deposit or
interest on the same before the due date or has not redeemed its debentures
on the due date or has not paid dividend, where such contravention
continues for a period of one year or more.

If (g) is satisfied, the person holding directorship of the public company

mentioned above shall not be eligible to be a director in any public company
for a period of 5 years from the date from which the contravention first starts.

41. The disqualification under (d) or (e) may be removed by the Central
government by notification either generally or specifically as regards the
particular company/director.
42. Private companies may provide for any other disqualification in their articles
in addition to those mentioned in S.274.
43. Where a person is removed by the Central government from directorship, he
cannot be appointed as director for a period of 5 years from the date of
removal.
44. S.283 provides for the following circumstances in which a director may be
removed-
(a) He fails to acquire the requisite number of qualification shares as specified
in the articles, within the period of 2 months from his appointment.
(b) He is declared to be of unsound mind.
(c) He applies to be adjudged an insolvent.
(d) He is adjudged an insolvent.
(e) He is convicted of an offence involving moral turpitude, the punishment
for which is not less than 6 months.
(f) He fails to pay calls on shares, held by him either individually or jointly,
for more than 6 months from the last date of payment, except when such a
disqualification has been removed by the Central government.
(g) He absents himself from 3 consecutive meetings of the Board or of the
meetings of the board for more 3 consecutive months, without notice to
the Board.
(h) He, either on his own or for the benefit of or on account of another OR a
firm in which he is partner OR a private company in which he is director,
obtains a loan from the company (present company in question) without
the prior approval of the Central Government. (S.295)
(i) He fails to disclose any direct or indirect interest as regards the contracts
or arrangements with the company. (S.299)
(j) He is disqualified by the court due to an offence as regards the formation,
management or promotion of the company or for any other act involving
fraud or misfeasance as regards the company. (S.203)
(k) He is removed by a resolution under S.284.
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(l) He was occupying the position of director by virtue of holding a post in

the company and he ceases to hold such post.

45. As regards vacation of office where a director absents himself from the
meetings of the company, the vacation is automatic. This means that no
resolution needs to be passed and the director need not be given a chance to
show cause as to why he should not be removed.
46. However, such abstention must be voluntary or deliberate. If a director is
absent due to some illness or any other cause beyond his control, he cannot be
removed.
47. The section further provides that where a person is adjudged an insolvent or
where he is convicted of an offence involving moral turpitude or where he is
convicted of an offence under S.203, he shall not be removed from office till
30 days from the date of such adjudication.
48. If within this 30 day period, an appeal is preferred to such decision, he shall
not be removed until 7 days from the date of decision in such appeal.
49. Where there is further appeal, within the 7 day period, and there is a
possibility of removal of such disqualification after such appeal, he shall not
be removed till the appeal/petition is disposed off.
50. The section also provides a penalty of Rs.5000 per day where a director
knowing that he is disqualified under the provisions of the section to act as
director, continues to do so.
51. In case of a private company, a director may be removed from office for other
grounds as specified in its articles, in addition to the grounds mentioned in this
section.
52. Where a director commits an offence under S.209A, which deals with
inspection of books of accounts of the company, he shall be removed from
office and shall be disqualified to be director of any company for a period of 5
years from such removal.
53. A director may either be removed by the shareholders or by the Central
government or by the Company Law Board (now National Company Law
Tribunal (NCLT)).
54. S.284 provides for removal of a director by the shareholders by passing an
ordinary resolution.
55. This provision does not apply to the following cases-
(a) Where a director has been appointed by the Central government to prevent
oppression and mismanagement in accordance with S.408.
(b) Where the director in question is one appointed for life as director of a
private company prior to April 1, 1952.
(c) Where the company by its articles provides for appointment of two-thirds
of the directors by way of a system of proportional representation.
(d) Special directors appointed under SICA, 1985.
(e) Directors appointed by financial institutions under statutory powers.
(f) Nominee directors
(g) Directors appointed by the CLB (Now NCLT) under S.402.
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56. A special notice needs to be given in such case which must be given to the
director concerned. Such director shall have the right to be heard in this
regard.
57. The director may make representations either in a notice for a general meeting
or by sending notices to the members. Where he cannot make such
representation due to delay, he may require the representation to be read out in
the general meeting.
58. However, such representation need not be made where on the application of
the company or any other aggrieved person; the Central government is
satisfied that there has in fact been an abuse of this provision for a defamatory
purpose.
59. Where a director is removed under this provision, another director may be
appointed in his place in the same meeting, provided the same is specified in
the special notice. A director so appointed shall hold office till the time his
predecessor would have held office.
60. If no such appointment is made, the Board may appoint another person as
director as a casual vacancy being filled and the provisions of S.262 would
become applicable in such case. However, the director so removed cannot be
reappointed.
61. If a person is removed under this provision, the same does not deprive him of
compensation to be received by virtue of termination of appointment.
62. A director/managerial personnel may also be removed by the Central
Government on the recommendation of the CLB (now NCLT). After a case is
made out against the persons involved, it may refer the case to the CLB (now
NCLT). Where a person is so removed, he shall not be eligible to hold any
post relating to the management of the company for at least 5 years. This
period may be relaxed by the Centre with the prior concurrence of the CLB
(now NCLT). He shall not be eligible to receive any compensation in this
regard. (not important)
63. A director/managerial personnel may be removed by the CLB (now NCLT)
under S.402 on the grounds of oppression or mismanagement. In such case,
the CLB (now NCLT) may alter any agreement of the company with the
person concerned, leading to the termination of his appointment. He shall not
be appointed for a period of 5 years in any managerial capacity in the
company nor shall he be entitled to any compensation/damages except with
the leave of the CLB (now NCLT). (not important)
64. There is no procedure for resignation of a director under the Companies Act.
However, the articles of the company may provide for such procedure.
65. Ss.198 and 308 of the Companies Act deals with the remuneration of
directors.
66. S. 198 specifically states that such remuneration cannot exceed 11% of the net
profits.
67. S.308 provides that remuneration shall be paid to directors only if the same is
stated by the articles or by a resolution, either ordinary or special (as stated in
the articles) of the shareholders.
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68. This remuneration shall include remuneration for services provided by the
director in any other capacity, except when the same is provided in a
professional capacity and the Central Government certifies that the director
possesses the requisite qualifications to practice such profession.
69. A director may also be paid a fee for every meeting of the Board or any
committee of the Board that he attends.
70. A managing director or a whole-time director may also be paid a monthly fee
or a part of the net profits.
71. Any other director may be paid a monthly, quarterly or annual fee, with the
sanction of the Central Government or even a commission, as decided by
special resolution.
72. A director who receives a commission, and is a managing or a whole-time
director, cannot receive any remuneration from the company’s subsidiary.
73. This provision (S.308) is not applicable to a private company.
74. Remuneration also includes any other benefits provided by the company
such as rent free accommodation, expenditure for effecting any life
insurance, any other benefits/amenities for free or at concessional rates,
etc.
75. S.318 deals with compensation payable to directors for termination of office.
76. Such compensation is available ONLY to managers, managing directors or
whole-time directors as compensation for loss of office or consideration for
retirement.
77. However, compensation shall not be available in the following cases-
(a) Where the director resigns due to reconstruction or amalgamation of the
company and such director was to be appointed as director of the
reconstructed or amalgamated company.
(b) Where the director resigns for any other reason.
(c) Where he is removed from office by virtue of S.203 or S.283.
(d) Where he is removed from office due to winding up of the company by the
tribunal or voluntary winding up and such winding up is due to the
negligence or default of the director.
(e) Where he is guilty of fraud or breach of trust or gross negligence or gross
mismanagement of the affairs of the company or its subsidiary or holding
company.
(f) Where the director has instigated or taken part directly in the termination
of his appointment.

78. Similarly, S.319 prohibits provision of compensation to directors where they

have been removed in connection with transfer of any or the entire property or
undertaking of the company to any person. S.320 prohibits compensation to
directors when they have been removed in connection with transfer of any or
all the shares of the company to any person.
79. S.291 deals with the general powers of the board, which are co-extensive with
that of the company.
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80. However, such powers shall be exercised subject to the Companies Act and
any other statute, the memorandum and articles of the company, any other
regulations, including regulations made by the company in a general meeting.
81. However, the directors are not empowered to do that which is specifically
required to be done in the general meeting by the shareholders and as
stipulated in the memorandum or articles of the company.
82. S.292 provides that the board may exercise the following powers by passing a
resolution in a board meeting-
(a) It may make calls with respect to money unpaid by shareholders on shares.
(b) It can authorise a buy-back of shares under S.77-A.
(c) It can issue debentures.
(d) It can authorise borrowing of money by the company by any other manner
other than by way of debentures.
(e) It may invest in the funds of the company, subject to the provisions of
S.293 and S.372A.
(f) It may make loans, subject to the provisions of S.295 and S.372A.

83. It may even delegate its powers under (d),(e) and (f) mentioned above to any
committee, manager, managing director or other principal officer of the
company subject to the conditions provided in the section.
84. As regards S.25 companies, the board may borrow, invest or make loans
by way of circulation rather than holding a meeting.
85. Directors also have the following powers-
(a) The power to fill casual vacancies in the board. (S.261)
(b) The power to give consent to any contract or arrangement in which a
director or his relatives may be interested. (S.297)
(c) To receive disclosures about a director’s interest in a contract or
arrangement.
(d) To receive disclosure as regards a director’s shareholdings.
(e) To appoint as manager or managing director any person, who is already a
manager or managing director of a company. In such case the consent of
all the members present in the board meeting and entitled to vote must be
given. (Ss. 316 and 386)
(f) To invest in a company in the same group.
(g) The board may also make loans to any other body corporate. (S.372A) In
such case the consent of all the members present in the board meeting
and entitled to vote must be given.
(h) To decide the rate of dividend payable at the AGM subject to shareholder
approval.
(i) To make political contributions. (S.293A)

86. S.293 places restrictions on the powers of the board of a public company and
states that the board shall not exercise the following powers except with the
authorisation of the company in a general meeting-
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(a) It shall not sell, lease or otherwise dispose off the whole or substantially
the whole of the undertaking of the company.
(b) It shall not remit or otherwise give a time for payment of debt due by a
director to the company except where there is a renewal or continuance of
an advance made by a banking company to its director.
(c) It shall not invest the compensation received due to compulsory
acquisition of the property or undertaking of the company, except in trust
securities.
(d) It shall not borrow moneys where the money to be borrowed and the
money already borrowed exceeds the paid up capital and free reserves of
the company, except where temporary loans need to be raised by the
company from banks.
(e) It shall not contribute to any charitable or other funds not connected with
the business of the company or the welfare of its employees where such
contribution exceeds Rs.50, 000 in a financial year or 5% of the average
net profits of the 3 preceding financial years, whichever is higher.
However, it can make contributions of less than Rs.50, 000, even where
the company is making a loss.

87. S.293A deals with political contributions and states that contributions cannot
be made to any political party or for any other political purpose to any person,
by a government company or a company which has been in existence for less
than 3 years.
88. Such contribution must be authorised by a resolution of the Board and cannot
exceed 5% of the net profits of the company in a financial year.
89. Every such contribution made must be disclosed in the profit and loss account
of the company.
90. Where any provision of this section is contravened, the company shall be
liable to pay a fine equal to 3 times the contribution made and every such
officer in default shall be sentenced to imprisonment upto 3 years and fine.
91. Contribution herein means payment without any consideration.
92. Directors have the following duties-
(a) To discharge their functions honestly and in a bonafide manner.
(b) To not enter into such transactions as would lead to a conflict between
their duties and their personal interest. (Self-dealing rule- No one who has
a duty to perform shall place himself in a situation to have his interest
conflicting with that duty)
(c) To exercise due diligence, care and skill.
(d) To attend meetings of the board.
(e) Not to delegate their powers except as allowed under the Act.
(f) To disclose their interest.

93. S.297 deals with the Board’s sanction being required for contracts in which
the directors are interested.
94. It states that the following persons cannot enter into certain contracts with the
company without the consent of the Board-
 14

(a) The director of the company.

(b) The director’s relative
(c) A firm in which such director or relative is a partner
(d) Any other partner of such firm
(e) A private company in which the director is a director or member

95. Such persons cannot enter into the following contracts without the prior
approval of the Board-
(a) A contract for sale, purchase or supply of materials, goods and services
(b) A contract for underwriting the subscription to the shares of or the
debentures of the company, after the commencement of the Act.

96. Where the company has a paid-up capital of more than Rs.1 crore, the
approval of the Central Government is required for such contract.
97. However, there are certain exceptional circumstances, which are as follows-
(a) Where there is a contract for purchase from or sale to the company of
goods and materials at prevailing market rates.
(b) Where there is a contract for sale, purchase or supply of goods, materials
and services in which the company or the other party regularly trades in or
does business, provided the aggregate value of the same does not exceed
Rs.5000 in a given year in which the contract(s) subsists.
(c) In case of a banking or insurance company, where any such contract is
entered into in the ordinary course of business of such company.

97. But, where such contract is one of urgent necessity, it may be entered into
even without the consent of the Board, even where the aggregate amount
exceeds Rs.5000 in a given year. However, in such cases the permission of the
Board must be obtained within 3 months from the date of the contract.
98. Every such consent of the Board shall be given by way of a resolution passed
in a Board meeting and where such consent is not given, the contract shall
become voidable at the option of the Board.
99. S.299 as stated earlier deals with disclosure of interest by a director as regards
any interest in a contract or arrangement entered into by the company. S.300
prohibits an interested director to vote in the proceedings regarding the
contract/arrangement. Thus, Ss. 297, 299 and 300 are based on the fiduciary
relationship of the Board with the company.

Note: The following topics under 1.2 have not been taught in class but are part of the
syllabus.

Liabilities of Directors

1. Directors are liable to third parties in the following circumstances-

(a) Where the prospectus does not contain certain material particulars
required by statute or where there are material misrepresentations in the
prospectus.
 15

(b) Where there is no repayment of share application money where the

minimum subscription has not been subscribed.
(c) Where there is no repayment of share application money where an
application for securities to be dealt with in a recognised stock exchange
has not been made or has been refused.
(d) Where shares have been irregularly allotted.
(e) Where the company has not made payment as regards a bill of exchange
or a hundi or promissory note or other negotiable instrument.
(f) Where they have committed acts which are ultra vires the company.
(g) Where they have committed frauds and torts.

2. The liability of directors to the company may arise in the following

circumstances-
(a) For ultra vires acts
(b) Breach of trust
(c) Negligence
(d) Misfeasance

3. A director is not liable for the acts of his co-directors provided he had no
knowledge of the same and was not party to it.
4. If there is a fraud committed by a director, the other directors cannot be made
liable where there are no circumstances which could have aroused their
suspicion as regards the fraud.
5. However, where more than one director are found to have neglected their duty
of care, all of them shall be made liable.
6. S.322 provides that a director’s liability in a limited company may also be
unlimited where the memorandum provides that the liability of all or any of
the directors shall be unlimited. In such companies, the liability of a manager
may also be unlimited.
7. Further, in such a limited company, the directors, manager and the person who
proposes the name of another as appointment to the post of such unlimited
director must add a statement to the proposal for appointment that such other
person’s liability shall be unlimited.
8. The person to be appointed to such post shall also be given a notice that his
liability is unlimited.
9. If any person contravenes the provision of this section, he shall be liable to
pay a fine of Rs.10, 000 as well as any other compensation for loss caused to
the director with unlimited liability. However, this shall not affect the liability
of such director.
10. S.323 provides that where the memorandum of the company does not provide
for unlimited liability of certain persons, a special resolution may be passed
for alteration of the memorandum. Such liability shall become effective
against the person on the expiry of his existing term, unless he gives his
consent for the same.
11. Certain other statutory liabilities of the directors include-
(a) Criminal liability for misstatements in prospectus
 16

(b) Fraudulently inducing persons to invest in the company

(c) Purchase by a company of its own shares
(d) Concealment of names of creditors entitled to object to a reduction of
capital
(e) Not filing application with Registrar for registration of particulars of a
charge created by the company

12. However, the court under S.633 may at times excuse the director from liability
where it is of the opinion that such director has acted honestly, reasonably and
having regard to all the circumstances of the case, he ought to be excused.

Disabilities of Director-

1. One such disability is that any clause in the memorandum or any other
agreement relieving a director of his liability shall be void.
2. Further, an undischarged insolvent cannot become a director.
3. Thirdly, there are certain other restrictions placed on directors as under S.293.
4. Further, directors cannot enter into certain contracts without the consent of the
Board or the Central Government in specific cases under S.297.
5. No person can be a director of more than 15 companies.
6. Under S.295, a company shall not make a loan to the following persons,
without prior approval of the Central Government-
(a) A director of such lending company or of its holding company, or the
relative or partner of the director
(b) A firm in which the director or relative is a partner
(c) A private company in which the director is a director or member
(d) Any body corporate in which the director exercises 25% of voting power
in its general meeting
(e) Any body corporate whose board, manager or managing director are
accustomed to follow the instructions/directions of the Board or director(s)
of the lending company

7. Any assignment of his office by a director shall be deemed void.

Note: Points 8 to 15 have been taught in class

8. S.314 prohibits the following persons from holding an office or place of profit
in the company without obtaining consent by way of special resolution from
the company-
(a) A director of the company
(b) Any partner or relative of such director
(c) Any firm in which such director or relative is a partner
(d) Any private company in which such director is a director or member
 17

(e) A director or manager of such private company, where the total monthly
remuneration from such office or place of profit is Rs.10, 000.

9. However, such persons may hold an office or place of profit in the company
by being managing directors or managers or trustees or bankers for the
debenture-holders of the company under the (a) Company or (b) under any
subsidiary of the company where the remuneration received from the office of
profit is given to the company or its holding company.
10. Where the total monthly remuneration from the office or place of profit is not
less than Rs.20, 000, consent from the Central Government is required
alongwith the consent by way of special resolution, where the office or place
of profit is occupied by-
(a) A partner or relative of the director or manager
(b) A firm in which such director or manager or their relative is a partner
(c) A private company in which such director or manager or their relative is a
director or member

11. The special resolution according consent to the person holding an office or
place of profit may be passed even in a general meeting. Such meeting may
even be a meeting organised for the first time after the person occupies such
office or place.
12. Before his appointment to such place or office of profit, the person so
appointed must declare that he does not fall within the category of persons
prohibited from holding such office.
13. Where such office or place is held without special resolution or without prior
approval of the Central Government, as the case may be, the person holding
such office shall be liable to refund the amount received as remuneration by
him by way of holding such office. The company cannot waive the receipt of
such refund except with the prior permission of the government.
14. Such person will also be deemed to have vacated such office or place.
15. This provision is not applicable to such persons appointed by the Central
Government under S.408 to prevent oppression.

1.3. Managing directors- Appointment, disqualification

1. The Managing Director (MD) is the executive head of the company who
carries on the day to day functioning of the company under the control,
direction and superintendence of the Board. He is essentially a part of the
Board.
2. In G. Subba Rao v. Rasmi Die-casting, it was held that as an MD is an agent
of the company, he does not have all the powers to act for and on behalf of the
company.
3. S.269 provides that for a public company with a paid-up share capital of Rs.5
crore or more, it is mandatory that an MD or a manager or a whole-time
director be appointed.
 18

4. Such appointment requires the approval of the Central Government, unless it

is made in accordance with the conditions laid down in Schedule XIII of the
Act.
5. Such application for approval of the Central Government must be made within
90 days from the date of the appointment.
6. The Central Government may not give its approval in the following
circumstances-
(a) Where the person is not fit to be appointed to such post
(b) Where such appointment is derogatory to public interest
(c) Where the terms and conditions of the appointment are not reasonable

7. Such appointment shall be terminated on the day of receipt of information as

regards the same by the company from the Central Government. Where the
person continues to remain in office inspite of refusal by the Central
Government to grant its approval, he shall be liable for a fine of Rs.5000 per
day till the offence continues.
8. Where an appointment is made, not within the conditions specified under
Schedule XIII and without the approval of the Central Government, the
Central Government shall refer the matter to the CLB (now NCLT).
9. S.316 provides that a public company can have as its MD or manager, a
person who is an MD or manager of another company (which can also be a
private company), provided the Board passes a resolution to that effect, with
the consent of all the members of the Board. Specific notice of such board
meeting must be given to all board members.
10. Where however the Central Government is satisfied that it is necessary for
more than 2 companies to function as a single unit and under a single MD or
manager, it may by order allow such person to hold the post of MD or
manager in more than 2 companies.
11. S.317 states that the MD of a public company shall hold office for a period of
5 years. However, such person may be reappointed or his tenure may be
extended, provided the same is sanctioned at least 2 years before he is
reappointed or his tenure is extended.
12. Remuneration of MD- as discussed earlier
13. S.267 prescribes the following disqualifications for being an MD-
(a) Where a person is an undischarged insolvent or has at any time been
adjudged an undischarged insolvent
(b) Where he suspends or has at any time suspended payment to his creditors
OR he makes or has at any time made composition with them
(c) Where he is or has at any time been convicted of an offence involving
moral turpitude

14. The other disqualifications which are applicable to directors under S.274 also
apply to an MD.

1.4. Manager- Provisions of the Act regarding manager

 19

1. Only individuals may be appointed as MDs and not a body corporate or a firm
or an Association of Persons.
2. Unlike an MD, a manager need not be part of the board. He may be any other
person, whether or not under a contract of service.
3. The disqualifications for being an MD are as follows-
(a) Where he is an undischarged insolvent or has been adjudged one at any
time during the 5 years preceding his appointment
(b) Where he suspends or has at any time in the 5 years preceding his
appointment, suspended payment to creditors or makes or has made in
such period, composition with them
(c) Where he is or is at any time within the 5 years preceding his appointment,
convicted of an offence involving moral turpitude

3. These disqualifications may at any time be removed by the Central

Government by notification in the Official Gazette, either generally or
specifically for certain companies/persons.
4. Remuneration- as discussed earlier
5. Number of companies a person can be Manager of- same provision as that
applicable to MD
6. A manager can be appointed for a maximum period of 5 years at a time. The
appointment or reappointment of a manager requires approval of the Central
Government.
7. Increase in his remuneration requires the sanction of the Central Government.
8. He cannot assign his office to anyone.

1.5. Board Meetings- Check notes for meetings

1.6. Sole Selling Agents

1. A sole selling agent, though not defined in the act, is any individual, firm or
company who/which is given the exclusive right to sell the goods of a
company in a particular area.
2. In Nanavati and Co. Ltd. v. RC Dutt, it was held that ‘an agreement of sole
selling agency in the real sense of the term as understood in the commercial
world is only that contract where the agent alone has the right to sell the
goods.’
3. Agency has been defined under S.182 of the Contract Act. An agent in that
sense would mean a person who represents another in his dealings with third
parties and does any other act for such other.
4. S.294 deals with the appointment of sole selling agents.
5. It states that such agent may be appointed by the Board for an area, for a
period not exceeding 5 years. However, he may be reappointed for further
periods, not exceeding 5 years at a time.
6. Such appointment must be approved in a general meeting after the
appointment was first made. Where the shareholders do not approve the
 20

appointment in the general meeting, the appointment shall be terminated from

the date of the general meeting.
7. Where the Central Government has reasons to do so and is of the opinion that
the terms and conditions of appointment of the sole selling agent are
prejudicial to the interests of the company, it may call upon the company to
furnish such terms and conditions.
8. Where the company does not furnish the same, it shall appoint a person to
investigate into the matter. After such person gives the Government a report
on the terms and conditions of appointment of the sole selling agent, it shall
decide whether or not to vary/modify the same. Where it varies/modifies the
terms and conditions, the sole selling agent shall operate according to the new
terms and conditions as given by the Central Government.
9. Where there are more than one sole selling agents for a particular area(s), the
Central Government, if it has reason to do so, shall ask the company to furnish
the terms and conditions of appointment of all or any of the sole selling
agents.
10. Where the company refuses to do so, it shall appoint a person to investigate
the matter and where it comes to a conclusion having regard to the terms and
conditions of service and any other information, that such sole selling agent(s)
is in fact the sole selling agent for that particular area, it shall declare the same
by way of an order. It may also vary/modify the terms and conditions of
service of such sole selling agent(s).
11. Where any person is appointed by the Central Government, to investigate any
of the abovementioned matters, he must be furnished the required books,
papers, information, etc. by the company and must be provided assistance by
the company.
12. Where the company refuses to furnish any information to the Central
Government (before appointment of the investigating officer) or refuses to
furnish necessary books, papers, information to the officer or provide him
with necessary assistance, the company and every other officer of the
company in default shall be liable to pay a fine which may extend upto Rs.50,
000 and Rs.500 per day where it is a continuing offence.
13. S.294-A deals with payment of compensation to a sole selling agent for loss of
office. Such compensation shall not exceed the amount he would have been
paid for the remainder of his term or the remuneration payable to him for a
period of 3 years, whichever period is shorter.
14. He shall not be paid compensation in the following cases-
(a) Where he resigns on account of reconstruction or amalgamation of the
company and he is appointed as the sole selling agent of such
reconstructed or amalgamated company
(b) Where he resigns on his own will
(c) Where his appointment is not approved by the shareholders in the general
meeting
(d) Where he is guilty of fraud or breach of trust or gross negligence in the
conduct of his duty
(e) Where he has instigated or directly caused the termination of his office
 21

13. The sole selling agent shall be paid remuneration on a contractual basis,
subject to approval in a general meeting.
14. S.294-AA provides that in the following cases, the approval of the Central
Government is required before appointing a sole selling agent-
(a) Where the goods for which the sole selling agent has been appointed have
a greater demand than their supply or production in the concerned area and
thus it is not necessary to appoint a sole selling agent
(b) Where the individual, company or firm to be appointed has a substantial
interest in the company as a sole selling agent

15. It also provides that where the paid-up capital of a company is more than
Rs.50 lakhs, a special resolution of the shareholders as well as approval of the
Central Government shall be required (Application in Form I). Where the paid
up capital is not more than Rs.50 lakhs, an ordinary resolution is sufficient.
16. Three copies of the notice of the general meeting in which the sole selling
agent is to be appointed and a copy of the proceedings of the general
meeting shall be forwarded to the stock exchange on which the shares of
the company are listed.
17. If a sole selling agent is to be appointed in a foreign country, prior
approval of the RBI is required.
18. Where the appointment of the sole selling agent is not approved by way of a
special resolution, his office shall be terminated from the date of such general
meeting.
19. The company seeking government approval shall furnish the particulars as
may be prescribed.
20. The provisions of S.294-AA are also applicable to sole buying/purchasing
agents.
21. There shall no sole selling agents for Sugar and Vanaspati, Cement and
Paper and Drugs.

1.7. Secretary- appointment, qualification

1. A company secretary (CS) (defined as a secretary under the Companies Act) is

a person who is a member of the Institute of Company Secretaries of India as
under S.2 (1) (c) of the Company Secretaries Act.
2. The definition under the Companies Act also includes any other person
possessing necessary qualifications for performing the duties of a secretary
under the Act or other such ministerial or administrative duties.
3. He is an officer of the company under S.2(30) of the Act.
4. A CS is generally appointed by the Board at its meeting.
5. He may also be appointed by way of the articles. However, in such case, his
appointment must be confirmed by the Board by way of a resolution in their
first meeting after his appointment.
6. A copy of the resolution appointing a CS must be furnished to the Registrar.
 22

7. Every company having a paid up share capital of more than Rs.5 crores
(slides: Rs.2 crore) shall have a whole-time secretary, who must be a member
of the Institute of Company Secretaries of India. Where the Board of the
company consists of only 2 directors, neither of them shall be the CS.
(S.383A)
8. Every company not required to have CS and having a paid up capital of at
least Rs.10 lakh must file a certificate from any secretary in whole-time
practice in the prescribed form stating that the company has complied with the
provisions of the Act. A copy of such certificate must also be attached to the
Board’s report.
9. Any person who fails to comply with the provisions of this section shall be
liable to pay a fine of upto Rs.500 till the day the default continues.

Note: The basis of the following points taken from the slides and ND Kapoor could not
be found or have not been taken from the Companies Act

1. Where the paid up capital of the company is less than Rs.50 lakhs (Rs. 2 crore
in slides), any other individual may be appointed by the company as the whole
time secretary, subject to fulfilment of certain conditions. (Read page 384 of
ND Kapoor for conditions)

2. Such conditions include the following (as per the slides)-

(a) Member of ICSI
(b) Pass in intermediate in ICSI
(c) Post Graduate in Commerce
(d) Degree in law
(e) Member of ICAI
(f) Member of ICWAI
(g) PG degree or diploma in management from any university or institution in
Ahmedabad, Bangalore, Calcutta or Luckhnow
(h) Diploma in corporate laws and management from ILI
(i) Membership of the association of secretaries and managers in Calcutta
(j) PG Diploma in Company law and Secretarial Practice from the University
of Udaipur

3. Where the paid up capital of the company is raised to what is

required under S.383A, the whole-time secretary of the company must
become a member of the ICSI within one year.
4. Other qualifications include the following-
(a) Sound general education
(b) Wide knowledge
(c) Proficiency in language
(d) Knowledge of company law
(e) Knowledge of other laws
(f) Knowledge of office organisation and methods
(g) Knowledge of banking economics and finance
 23

(h) Good personality

5. An exception shall be made to S.383A where even after reasonable efforts

being made a CS could not be appointed. In such a case, the company and its
officers shall not be punished.
6. They can even show that a CS cannot be appointed as the financial position of
the company is bad.
7. In practice, he influences the Board to a large extent, even though he works
under the control of the Board.
8. He is regarded as being part of the managerial personnel of the company.
9. He acts as a link between the company and the outside world and can bind the
company with his acts.
10. However, he has no role in formulation of policy.
11. He has both general as well as statutory duties.
12. His statutory duties include the following-
(a) To verify and sign documents relating to any proceedings of the company
which are required to be authenticated
(b) To deliver for registration, returns of allotment and any contract relating to
allotment of shares
(c) To deliver share certificates within 3 months from allotment and within 2
months from the registration of transfer
(d) To give notice to the registrar about the increase in share capital

13. Ss. 125-127, 147, 149, 160-163, 171, 192, 193, 196, 286, 307
14. Under the Income Tax Act, the CS has the following duties-
(a) To see to it that income tax is deducted at source from the salaries
(b) To see to it that certificates are issued for such deduction
(c) To see to it that the amount so deducted gets deposited in the government
treasury or the Bank

15. He also has the duty under the Stamp Act to ensure that all important
documents are properly stamped.
16. He also has other duties under the MRTP Act, FEMA, the SEBI Act, etc.

Unit II Audits and Accounts in Companies

Note: Certain parts of 2.1 have been discussed under 2.2 and vice-versa. This is primarily
due to the structure of the slides and the Companies Act. However, all the information
required has been given.

2.1. Accounts: Statutory books, forms and content of balance sheet, and profit
and loss accounts, disclosure of accounts of subsidiary companies, director’s
report and liability, auditors’ report, director’s responsibility, audit committees

1. S.209 provides that a company shall maintain books of accounts in its

registered office as regards the following particulars-
 24

(a) All the money received and expended by the company and all other
matters relating to such receipt or expenditure.
(b) All sales and purchases of goods made by the company.
(c) All assets and liabilities of the company.
(d) In case of a company engaged in production, processing, manufacturing or
mining activities, particulars relating to the cost of labour or material or
the cost of other items as may be prescribed by the Central Government.

2. Where the company has a branch office, books of accounts for transactions for
such office must be maintained by it and must be sent to the registered office
of the company within an interval of every three months. All the provisions of
S.209 (as mentioned above) must be duly complied with.
3. Books of accounts include journals, ledgers or supporting vouchers. It
includes original books and records used for recording a transaction.
4. Accounts consist of 2 sides, one to record the increases and the other to record
the decreases.
5. They may be kept in the form of ledgers or loose cards or even on a computer.
6. The major books of account include day books, cash books and the journal.
7. The books of accounts must not only present a true picture of the transactions
but must also record them at the right value.
8. The books of accounts and profit and loss account must be maintained in the
format as prescribed by Schedule VI and the accounting standards as laid
down in S.211 and provided by the Institute of Chartered Accountants of India
(typo: ICSI) must be adhered to.
9. The balance sheet may either be prepared in the vertical or in the horizontal
form, as prescribed by Schedule VI. However, no specific form has been
provided for Profit and Loss Accounts of the Company.
10. The Central Government may by notification in the gazette exempt certain
companies from compliance with Schedule VI.
11. S. 209 however does not provide as to what shall be taken to mean the ‘proper
books of account’ of a company.
12. Proper books of account as per S.209 shall be said to have been kept, if-
(a) They present a true and fair view of the state of affairs of the company/its
branch office and explain the transactions therein and
(b) If such books have been kept on an accrual basis and as per the double
entry system of accounting (debit and credit sides).

11. S.514(2) gives an idea as to what proper books of account are as follows-
(a) That which is necessary to explain the transactions of the company, the
financial position of its business and includes entries made depicting the
day to day business of the company, of all the cash paid and the cash
received.
(b) Where the company is engaged in dealings with goods, the annual stock
takings with respect to goods sold and purchased, indicating the goods,
sellers and buyers involved, except in case of goods sold or purchased in
retail trade.
 25

12. Accrual basis of accounts where income and expenditure are recorded by
depicting every item as earned or incurred, without actually showing the date
on which payment was received or made. However, this does not really show
a true and fair picture of the company’s transactions as there may be cases
where goods have been sold but have not been paid for or goods have been
purchased and payments have not been made.
13. In case of government companies engaged in the business of financing
industrial projects, the books of accounts need not be maintained on
accrual basis and they need not follow the double entry system.
14. The books of account must ordinarily be kept in the registered office of the
company. However, the board may decide (decision to keep them at any other
place in India) otherwise and within 7 days from the decision of the board, the
company must communicate such decision to the Registrar in writing.
15. The books of account shall be open to inspection by any director during
business hours. However, such right may be taken away by the articles of
the company.
16. They may even be inspected by the agent of such director, where there is no
reasonable objection made as regards the same and where the agent
undertakes not to utilise the information for any purpose other than that of the
principal/director.
17. Members are not permitted to inspect the books of account of the
company. However, the provision does not forbid conferring on the
members, the power to inspect the books of account by the company.
18. In S.25 companies, members are allowed to inspect such books of account
subject to reasonable restrictions as regards the time and manner.
19. Books of accounts and all vouchers relevant to the entries in such books of 8
years immediately preceding the current year must be preserved and kept in
good order.
20. Here, current year means the current financial year.
21. In case of a company formed less than 8 years before the current year, books
of accounts and vouchers relating to all such years preceding the current year
must be preserved.
22. In case of S.25 companies, the books of accounts and vouchers must be
preserved for 4 years immediately preceding the current year.
23. Books and papers of a company which has amalgamated with another or
whose shares have been acquired by another shall not be disposed off
without the prior approval of the Central government.
24. The following persons shall be made responsible for compliance with the
provisions of S.209-
(a) Where the company has a manager or MD, such manager or MD
(b) Where there is no such manager or MD, all the other directors of the
company
(c) Other officers and employees of the company
(d) Any other person charged with such duty by the Board by way of a
resolution or by the MD/manager by way of a memo or office order
 26

23. Where such abovementioned person does not take reasonable steps to comply
with the provisions of S.209 or commits a wilful default, he shall be liable for
a fine of Rs.10, 000 or for imprisonment for 6 months or both.
24. However, he must have committed such act wilfully.
25. S.209A provides that the books of account and other books of the company
may be inspected by the Registrar or any government officer who has been
authorised in this regard by the Central Government or any officer of the
Securities and Exchange Board of India (SEBI) who has been authorised by
the SEBI in this regard.
26. Such person need not give any notice to the company or to its officer(s) prior
to such inspection.
27. It shall be the duty of every director and officer or employee of the company
to furnish to such persons, the books of account and other necessary books
and such other information or explanation relating to the affairs of the
company as may be required by the inspecting officer from time to time.
28. All assistance shall be provided to such inspecting officer, who may even
cause to be made copies of such books of accounts, papers, etc. or put marks
of identification on such books, papers, etc.
29. The officer inspecting such documents shall have the same powers as that of a
civil court under the CPC.
30. He shall, after inspection, make a report to the Central government or the
SEBI as the case may be.
31. Any officer authorised by the Central government or SEBI shall have the
same powers as that of the Registrar as regards making enquiries.
32. Where any officer or employee of the company contravenes the provisions of
this section, he shall be liable to pay a fine of Rs.50, 000 and he shall be
imprisoned for a period not exceeding one year.
33. Every director or officer convicted of an offence under this provision shall be
deemed to have vacated his office from the date of such conviction and he
shall not hold the same office for a period of 5 years thereafter.
13. S.212 provides that the balance sheet of a holding company must also have the
following particulars attached to it-
(a) Balance sheet of the subsidiary
(b) Profit and loss account of the subsidiary
(c) Report of the subsidiary’s board of directors
(d) Report of the auditors of the subsidiary
(e) A statement pertaining to the interest of the holding company in the
subsidiary
34. There is no distinction between a local subsidiary and an overseas
subsidiary.
35. The auditors of the holding company do not have the duty of reporting on
the documents of the subsidiary which are attached.
36. Non-compliance with this provision attracts a penalty of Rs.10, 000 or 6
months imprisonment or both.
 27

37. Under S.215, the balance sheet and profit and loss account must be
authenticated and signed by the manager or secretary, if any and at least 2
directors, including the MD, where there is one.
38. The balance sheet and profit and loss account shall first be approved by the
Board and then signed and sent to the auditors for their report.
39. However, where all but one of the directors is in India at the time of signing,
such person shall sign the balance sheet and profit and loss account and shall
attach a statement thereto stating the reasons for non-compliance with the
general rule.
40. The power to approve the balance sheet and profit and loss account
cannot be delegated to any individual director or to a committee of
directors. It is not considered to be part of the ordinary day-to-day
working of the committee.
41. Listed companies must furnish their unaudited quarterly financial results
to the stock exchange (one month of the last financial quarter). Such
financial results are to be put on record by the Board once they are signed
by the MD or any other director.
42. There must not be a substantial difference between the audited and
unaudited accounts. Where there is a difference of more than 20%, the
company has to give reasons for the same to the stock exchange.
43. The profit and loss account as well as the auditor’s report shall be attached to
the balance sheet.
44. As per S.217, a board report must be attached to every balance sheet presented
before a general meeting of the company.
45. It should consist of the following particulars-
(a) The state of affairs of the company
(b) Amounts in the balance sheet which are proposed to be carried to the
company’s reserves
(c) Amounts proposed to be distributed by way of dividend
(d) Any material changes and commitments affecting the financial position of
the company, at the end of the financial year to which the balance sheet
relates.
(e) Conservation of energy, technology, absorption, foreign exchange earnings
and outgoings, etc. as may have been prescribed.

46. The board report shall also disclose the names of the employees who have
been in receipt of annual remuneration of more than Rs.24 lakhs in aggregate.
47. The report shall also contain a Director’s responsibility statement stating the
following-
(a) The directors had adhered to the necessary standards of accounting while
preparing the accounts.
(b) They had formed a judgment on the accounts reasonably and prudently so
as to present a true and fair view of the company.
(c) They had maintained all accounting records properly so that there is no
fraud committed and the assets of the company are protected.
(d) They had prepared the accounts on a going concern basis.
 28

48. The report shall also disclose about any Employees’ Stock Option Schemes.
49. The annual report (typo: board report) of the company shall also disclose the
composition of the audit committee under S.292A.
50. An annual report is not defined anywhere. It is ordinarily known as one that
contains the board report, the annual financial statements and the audit report.
51. S.218 provides a penalty of Rs.5000 where such accounts are not signed as
required before being issued, circulated or published or where the necessary
documents (board report, profit and loss account, and auditor’s report) are not
attached to the balance sheet before it is issued, circulated or published.
52. A copy of the balance sheet, auditor’s report, profit and loss account and the
board report must be sent to every member and every trustee of a debenture
holder at least 21 days before the AGM in which the same is to be approved is
held, whether or not such member or trustee is entitled to receive such notice.
(S.219)
53. In the following circumstances, a copy of the balance sheet with the necessary
documents attached need not be sent-
(a) In case of a company not having a share capital, copies of the documents
need not be sent to members and debenture trustees who are not entitled to
receive a notice for the meeting.
(b) In case of any company, copies of the documents need not be sent to
member and debenture trustee who are not entitled to receive the notice
and whose address is not known.
(c) In case of joint holders of shares or debentures, copies of the documents
need not be sent to more than one of such holders where none of them are
entitled to receive the notice.
(d) In case of joint holders of shares or debentures, copies of documents need
not be sent to those who are not entitled to receive the notice, where some
of such holders are entitled to receive the notice while some of them are
not entitled to receive the notice.
(e) In case of listed companies, where copies of the documents are made
available for inspection at the registered office of the company at least 21
days before the AGM and a statement containing the salient features of the
documents or copies of the documents as may be deemed fit by the
company, are sent to the members and debenture trustees at least 21 days
before the AGM.

54. Companies can even circulate their abridged financial statements.

55. The accounts shall be adopted at the AGM.
56. It is generally difficult to adjourn AGMs as can be seen from the provisions of
Ss. 159 (annual returns to be made by company having share capital), 166
(AGMs), 210 (annual accounts and balance sheet), 220 (three copies of annual
accounts to be filed with Registrar).
57. As per S.220, when the balance sheet and profit and loss accounts of the
company have been laid before an AGM, 3 copies of such balance sheet and
profit and loss account alongwith other documents required to be attached to
 29

the same shall be filed with the Registrar within 30 days from the date of the
meeting and where an AGM is not held in any year, within 30 days from the
last date on which the AGM should have been held.
58. A registrar can thus take a balance sheet and profit and loss account on record
even if it is not placed before an AGM. (Question)
59. It is also necessary to file the board’s report alongwith the balance sheet and
profit and loss account as it is a document required to be attached with the
same. (Question)
60. In case of any default in complying with the provisions of S.220, every officer
of the company responsible for the same shall be liable to a fine of Rs.500 for
every day the default continues.
61. A person who has ceased to be director at the time of default shall not be held
liable.

2.2. Auditors: Appointment, resignation and removal of auditors, rights, duties

and liabilities of auditors, powers of central government to direct special audit and
cost audit

1. Auditors are needed in a company primarily to detect frauds, technical errors

and errors of principle.
2. An auditor’s opinion helps in giving a true and fair picture of the financial
position and operating results of the company. However, it is not an assurance
as regards the future viability of a company and does not guarantee the
efficiency or effectiveness with which the management has managed the
affairs of the company.
3. An auditor is an agent of the company. However, the definition of an officer of
the company as under S.2(30) does not mention auditors.
4. S.226 provides for the qualifications and disqualifications of auditors.
5. It states that the following persons are qualified to be auditors of a company-
(a) Any person who is qualified to be a chartered accountant within the
meaning of the Chartered Accountants Act.
(b) Any auditing firm, where all the partners are qualified (as mentioned in
(a)). Such firm may be represented by any of the partners.

5. The appointments mentioned in point 4 are subject to the ethical conduct

contained in the Chartered Accountants Act.
6. The following persons are disqualified from being auditors-
(a) A body corporate
(b) Any officer or employee of the company (whose accounts are to be
audited)
(c) Any partner or employee of an officer or employee of the company
(d) Any person who is indebted to the company for an amount exceeding
Rs.1000 or any person who gives any guarantee or security as regards the
indebtedness of another person to the company for an amount exceeding
Rs.1000
 30

(e) Any person who holds any security having voting rights in the company

7. A body corporate which is disqualified under the conditions provided above

((a) to (e)) to be the auditor of any subsidiary or holding company of the
company concerned or of any other subsidiary of the holding company of the
company concerned, shall be disqualified from being the auditor of the
company as well.
8. The abovementioned disqualification (under point 6) shall be applicable even
where the body corporate is a company and is so disqualified.
9. If an auditor becomes disqualified after his appointment, he shall be deemed
to have vacated his office on the date he gets disqualified.
10. The first auditors are appointed by the Board within 1 month from the date of
registration of the company. Such person shall hold office till the first AGM,
unless reappointed. (S.224) Sometimes, it may so happen that the articles
of the company name the first auditor.
11. Where the company wishes to remove the first auditor and appoint another
person who has been nominated by a member, a notice of such nomination
must be given to the members at least 14 days before the AGM.
12. Where the board fails to appoint an auditor within a month from the date of
registration of the company, the company may appoint such first auditor in the
first AGM.
13. As per S.224, an auditor shall be appointed at every AGM. He shall
commence office from the date of the end of such AGM till the date the next
AGM ends.
14. Where an auditor is appointed in such AGM, the concerned auditor must be
intimated about his appointment within 7 days from the date of such
appointment.
15. The auditor shall within 30 days of such intimation inform the Registrar in
writing (in form 23B) of his decision either to accept or refuse such
appointment.
16. The restrictions on an auditor have been given as follows.

Note: Specified number of companies here means 20 companies where the paid up share
capital of not more than 10 such companies is more than Rs.25 lakhs.

15. Where an individual is appointed or reappointed as an auditor, he cannot be in

full-time employment as an auditor for the specified number of companies or
more than the specified number of companies. (General rule)
16. Where a firm is appointed or reappointed as an auditor, it cannot be in full-
time employment as an auditor for the specified number of companies or more
than such specified number. Here, the specified number of companies shall be
taken to mean the number specified for every partner of the firm who is not in
full-time employment elsewhere. (General rule)
17. Where any partner of the firm is in full-time employment in any other firm(s),
the aggregate of the number of companies that may be taken in this regard by
the firms concerned shall not exceed the specified number of companies.
 31

18. Where any partner of the firm is in full-time employment in an individual

capacity, the aggregate of the number of companies that may be taken in this
regard shall not exceed the specified number of companies.
19. The cap on the number of companies of which a firm or auditor can be an
auditor is not applicable to a private company.
20. Where an auditor is appointed or reappointed by the company, a written
certificate shall be obtained from such auditor that he is not in whole-time
employment as auditor for the specified number of companies or more than
the specified number of companies as the case may be.
21. For calculating such cap, the following shall not be included-
(a) Audits of private companies
(b) Branch audits
(c) Audits of foreign companies
(d) Audits of guarantee companies without a share capital
(e) Special audits, investigations and audits of corporations set up under
a separate Act

22. At every AGM, a retiring auditor shall be reappointed by whatsoever authority

he was appointed, subject to the cap as regards the number of companies he
may be auditor for.
23. However, he shall not be reappointed where-
(a) He is not qualified
(b) He expresses his unwillingness to be reappointed
(c) A resolution is passed appointing any other person in his place or where
his reappointment is expressly objected to by way of a resolution
(d) Where an intention is expressed as regards a resolution appointing another
person in his place and such person is disqualified or dies or does not have
the required capacity to be appointed and thus the resolution cannot be
proceeded with.
(e) Where he is an auditor for the specified number of companies or more on
the date of reappointment
(f) Where 25% of the subscribed capital of the company is held by financial
institutions, government companies, etc. or by a combination of them,
unless the retiring auditor is appointed by special resolution. (See S.224A)

23. Where no appointment or reappointment is made in an AGM and a vacancy is

created, the company must inform the Central Government within 7 days from
the date of creation of such vacancy and the Central Government shall appoint
a person to fill the vacant post.
24. Where the Central Government is not intimated within the prescribed time
period, the company and every officer of the company in default shall be
punishable with a fine which may extend to Rs.5000.
25. The Board may fill in a casual vacancy created in the post of auditors of the
company. However, such person shall hold office only till the conclusion of
the next AGM. Where however such casual vacancy continues, the remaining
auditors may act for the auditor whose post has been so vacated.
 32

26. Where a vacancy is created due to resignation of an auditor, an appointment to

the post shall be made only in the AGM.
27. However, an auditor may be removed from his post before expiry of his term
by the company in a general meeting with the prior approval of the Central
Government.
28. Where 25% or more of the subscribed capital of a company is held either by
(a) a financial institution or a government company or the Central
Government or a State Government OR (b) by a financial or other institution
established under a provincial/state Act, 51% subscribed capital of which is
held by the State Government OR (c) a nationalised bank or an insurance
company carrying on general insurance business, any auditor in such company
shall be appointed or reappointed by way of a special resolution passed in the
AGM. (S.224A)
29. Where such special resolution is passed, the post shall be deemed to be vacant
and the company will have to intimate the Central Government of the same
within 7 days from the date of vacancy. The Central Government shall
thereafter appoint a person to the post.
30. S.224 also provides for the remuneration of an auditor. It states that an auditor
shall be provided such remuneration as is decided by the company in its
general meeting or in such a manner as may be decided in the general
meeting. This is however subject to the provision that where the auditor is
appointed by the Central Government or the Board, the remuneration of the
auditor shall be fixed by the Central Government or the Board.
31. It is not necessary that the remuneration be fixed in the same meeting as the
auditor is appointed.
32. The remuneration includes any other expenses paid by the company for the
auditor or payments made for other services such as advising on tax matters,
etc.
33. The profit and loss account should make separate disclosures of such
remuneration.
34. Where the auditor is appointed by the Comptroller and Auditor General of
India, his remuneration shall be fixed by the company in its general meeting
or shall be fixed in a manner as decided in the general meeting.
35. Under S.619, the auditor of a government company shall be appointed by the
Comptroller and Auditor General of India (CAG) and the auditor shall submit
a copy of the audit report to the CAG.
36. S.225 provides that where a resolution is intended to be introduced in the
general meeting for replacement of the retiring auditor or expressly stating
that such retiring auditor shall not be reappointed, a special notice of the same
shall be sent out and the copy of the notice shall be sent to the concerned
auditor as well.
37. The retiring auditor has the following rights in such case-
(a) Right to notice of such resolution
(b) Right to make a representation in this regard and have the same notified to
the members
(c) Right to circulate his representation
 33

(d) Right to have his representation read out in the meeting, in a case where it
hasn’t been sent out to the members
(e) Right to be heard at the meeting

38. The general rights of auditors may be stated as follows-

(a) The right to receive the books, accounts and vouchers of the company as
may be required by him
(b) The right to obtain information and explanations as may be required from
the officers of the company
(c) The right to enter the branch office of the company and inspect its
accounts
(d) The right to get notices for the general meetings of the company and
attend such meetings (S.231)
(e) Right to receive remuneration
(f) Auditor’s lien

39. It shall be the duty of the auditor to ensure that an auditor’s report is made and
presented before the company depicting that on examination of the balance
sheet and all other necessary documents to be attached to the same and
according to the explanation and information received by him, such accounts
of the company present a true and fair picture of the affairs of the company
according to him.
40. He shall state the following in his report-
(a) Whether or not the balance sheet depicts the true state of affairs of the
company
(b) Whether or not the profit and loss account depict the profit and loss of the
company for that year
(c) Whether or not the information and explanation required by him for the
purpose of audit were provided to him
(d) Where the accounts of a branch office of the company have been dealt
with by another person, whether or not such report has been forwarded to
him and he must also state as to how he dealt with them
(e) Whether the company’s balance sheet and profit and loss account dealt
with by the report are in agreement with the books of account and returns
(f) Whether the relevant accounting standards (as mentioned earlier) have
been adhered to
(g) Whether any person is disqualified from being a director under S.274
(h) Whether the company has paid the necessary amount of cess required
under S.441 of the Act
(i) Any other comments as regards a factor which may have an adverse effect
on the functioning of the company. Such adverse comments must be stated
in thick type or italics.

41. An auditor is not to go into the management functions of the company.

42. The auditor must give a report on the accounts after duly verifying the same.
 34

43. The powers and duties of the auditors under S.227 cannot be limited by way
of the articles of the company or by any resolution. This is applicable even to
private companies.
44. Certain other duties of the auditor include-
(a) The auditor shall after the statutory report has been certified by at least 2
directors, certify such report where it relates to shares allotted by the
company, payments as regards such shares and receipts and payments of
the company. (except in case of private companies as they are not required
to hold statutory meetings)
(b) The auditor shall make a report on the profits and losses of the company,
dividend to be paid on the shares, assets and liabilities, etc. which shall be
mentioned in the prospectus of the company.
(c) The auditor shall assist an officer of the Central Government (as under
S.235) in investigation where such person requires the books of account
and other papers of the company or provide such person with assistance in
any other manner.

45. As a general rule, the auditors owe a duty only to the company and such
persons with whom they are in a contractual relationship. They do not owe a
duty to prospective investors of the company. (Caparo Industries v. Dickman)
46. S.292A provides that every public company having a paid up share capital of
at least Rs.5 crores shall have an audit committee which is part of its Board.
47. This committee shall consist of a minimum of 3 members.
48. It shall consist of as many members as may be determined by the board.
However, 2/3rd of the members of the committee shall be directors who are not
managers or whole-time directors of the company.
49. The annual report of the company shall disclose the composition of the audit
committee.
50. The committee shall elect a chairman from amongst themselves.
51. So that there is some objectivity, a manager or whole-time director shall
not be appointed as the chairman of the company.
52. The audit committee shall act in accordance with the terms of the reference as
specified by the board in writing. Mere recording of such terms in the
minutes of the board shall not be sufficient.
53. The auditors of the company, internal auditors, if any and the director in
charge of finance shall have the right to attend the meetings of the committee.
But, they shall not have the right to vote in such meetings.
54. The audit committee shall periodically discuss with the auditors as regards the
internal control systems and the scope of audit, including the observations of
the auditors.
55. They shall review the quarterly and annual reports before submissions to the
board and ensure compliance with the internal control systems.
56. They shall have access to all the records of the company as may be required
by them and may even seek external assistance.
 35

57. Their recommendations shall be binding on the Board. Where the Board does
not follow their recommendations, it shall state the reasons for the same and
such reasons shall be communicated to the shareholders.
58. The chairman of the committee shall attend the company’s general meetings
to issue clarifications, if required as regards the audits of the company.
59. Any person who contravenes the provisions of this section shall be liable to be
imprisoned for a period of upto 1 year or for a fine upto Rs.50, 000 or both.
60. The section is silent on the following important aspects-
(a) Quorum of the committee
(b) Frequency of its meetings
(c) Qualification for chairmanship
(d) Qualification for membership- as it is erroneous to have left the same
entirely upto the board

60. S.228 provides for audits of the accounts of the branch office of the company.
61. Generally speaking, such audits shall be done by the company’s auditor,
However, the company in its general meeting may decide to appoint any other
person duly qualified under S.226 to audit the accounts of the branch office or
where the branch office is located outside India, by a person competent to be
an auditor under the laws of such country.
62. The company’s auditor, where he is not the auditor for the branch office, shall
have the right to visit the branch office and inspect the accounts of such office
as and when he deems necessary.
63. The company’s auditor shall receive a report on the accounts of the branch
office as prepared by the auditor of such office. Thereafter the company’s
auditor shall deal with it as he deems necessary and include such information
in the auditor’s report.
64. The branch auditor shall receive such remuneration and shall be subject to
such terms and conditions of service as may be decided by the company in its
general meeting or by the Board where it is so authorised by the company in
its board meeting.
65. The Central Government however may make rules exempting a particular
branch office(s) from the provisions of this section.
66. Any person in default of the provisions of Ss.225 to 231 shall be liable to a
fine upto Rs.5000.
67. Under S.233A, the Central Government shall have the powers to direct special
audit of the company in the following cases-
(a) Where it is of the opinion that the affairs of the company are not being
conducted in accordance with sound business or commercial principles.
(b) Where it is of the opinion that the affairs of the company are being
conducted in a manner that can seriously damage the business or industry
or trade of which the company is a part
(c) Where it is of the opinion that the financial position of the company can
endanger its solvency
 36

68. In such case, it may by order either appoint a person qualified to be a

chartered accountant under the Chartered Accountants Act or the auditor of
the company to conduct the audit of the company’s accounts and submit a
report to it other than in the general meeting of the company. Such report may
even deal with matters specifically asked for by the Government rather than
just the accounts of the company.
69. The auditor so appointed shall have the same powers as the company’s auditor
under S.227.
70. The Central Government may even order any person to furnish necessary
documents to the auditor.
71. The Central Government shall thereafter proceed to take any action in terms
of such report. Where it does not take any action within 4 months from the
date of the report, it shall send a copy of the report or of extracts of the report
to the company which shall be circulated amongst the members.
72. S.233B empowers the Central Government to direct the audit of cost accounts
of the company where it deems necessary by a Cost Accountant appointed by
it under the Cost and Works Accountants Act and where it is of the opinion
that there aren’t many cost accountants in the country, by a Chartered
Accountant under the Chartered Accountants Act.
73. Such audit shall not be conducted by the company’s auditor and shall be in
addition to the company’s audits.
74. The appointment shall require the approval of the board and the person so
appointed shall certify that he is not in whole-time appointment of the
specified number of companies or more than the specified number of
companies.
75. After conducting such audit, such person shall submit a report to the
government. The government shall thereafter take action on the report
provided as well as any other information as may be provided by the
company. It may also require the report to be circulated amongst the members
of the company.

Unit III Company Meetings

3.1. Different kinds of meetings

1. Meeting is a gathering or assembly of two or more persons for transacting a

lawful business, entertainment etc.
2. Kinds of meetings in a company:
(a) Shareholder meetings
(b) Board meetings
(c) Meetings of the board sub committees
(d) Meetings of debenture holders
(e) Meetings of the creditors
(f) Meetings of contributories in winding up
 37

3. The shareholder meetings include:

(a) General meetings which include:
i. Statutory meetings
ii. Annual General Meetings (AGMs)
iii. Extraordinary meetings

(b) Class meetings of shareholders of different classes of shares.

4. Board meetings: directors of the company take decisions in these meetings.

5. Meetings of debenture holders and creditors take place during the lifetime of
the company and at the time of winding up of the company.
6. Requisites of a valid meeting:
(a) Must be duly convened by proper authority.
(b) A proper notice must be served in the prescribed manner.
(c) A quorum must be present and it must be properly constituted.
(d) A chairman must preside.
(e) It must be properly conducted.
(f) Minutes must be kept of the proceedings.

7. The proper authority to convene a general meeting of a company is:

(a) BODs:
i. Under AOA
ii. Common law right available
iii. On the request of the members

(b) Shareholders: Under certain circumstances can call for the extraordinary
general meeting
(c) Central government and Tribunal: When AGM is not held- suo moto or on
application of the members or directors of the company. (S.167) The tribunal
may call for a meeting other than an AGM under S.186.
Notice of Meeting:

1. Proper and adequate notice has to be given.

2. Notice should sufficiently convey the information enabling the persons to
attend the meeting and take part in the deliberations.
3. The date, time and venue should be specified. It must state the complete
agenda with the nature of the business to be transacted.
4. Notice should be served in accordance to the AOA and Co act.
5. It must be clear, explicit and unconditional.
6. Where meetings are fixed to be held on a specified date, time and venue, the
notice must take the form of reminders only or may be avoided.
7. S.53 states that where a notice for a meeting is sent by post to a member, it is
deemed to have been received within 48 hours from the time of post. Where
the notice is made by way of an advertisement in a newspaper circulated in the
neighbourhood where the registered office of the company is located, it is
deemed to have been received on the day of the advertisement.
 38

8. The notice should be served 21days before the meeting. (S.171)

9. Incase a notice is served for less than 21 days, it will be valid if all members
entitled to vote at the AGM give consent to the same. Incase of meetings other
than AGMs, it shall be valid incase consent is given by members holding 95%
paid up capital and voting rights.
10. Such consent for shorter notice period will be given either at or before the
meeting- form 22A.
11. The period of 21 days excludes day of serving of notice and day on which
meeting is being held.
12. The proportion of members eligible for voting shall be determined against
each item of the agenda where members with varying voting rights attend.
This means that where certain members who attend the meeting have the right
to vote only on certain matters in the agenda, they shall not have the right to
vote on other matters.
13. In Self Help Private Industries Estate Pvt . Ltd., held that post consent
validates a special resolution passed without proper notice.
14. A private company can provide for shorter notice period in its articles.
15. Proviso (c) to S.219 which deals with sending of the balance sheet to the
members, debenture trustees, etc. within less than 21 days before the meeting
is not in conflict with S.171.
16. Incase of joint holders, one of the joint holders can be served the notice.
(S.53) Such joint holder is generally one whose name is first mentioned in the
register.
17. The number of days in each case shall be 21 days+48 hours (time taken to
post).
18. Effect of shorter notice period:
(a) Resolution passed will not be effective unless ratified by all members
(entitled to vote?) in case of AGM and such members holding 95% voting
rights (and paid up share capital?) for other meetings.
(b) A person who is present and votes in the meeting cannot challenge the
resolution on grounds of invalidity of the notice.

19. Notice is to be served to:

(a) Every member of the company entitled to vote;
(b) Persons on whom shares of any deceased or insolvent member may have
devolved;
(c) The auditor or auditors of the company.

20. Deliberate omission to give notice even to a single member may invalidate the
meeting. An accidental omission or non-receipt of notice does not invalidate
the proceedings of the meeting.
21. The notice shall contain a statement of business to be transacted at the
meeting. This business may be ordinary or special business. (S.173) This is a
mandatory provision.
22. Ordinary business relates to:
 39

(a) Consideration of the accounts, balance sheets and reports of BODs and
auditors
(b) Declaration of dividend
(c) Appointment of director to replace retired ones
(d) Appointment of auditors and fix remuneration.

23. In all other cases, the business shall be deemed to be special. Special business
may include removal of directors, issue of rights or bonus shares and election
of person as director.
24. Where special business is to be transacted at the meeting, the notice must also
have attached to it such explanatory statement stating the material facts in
relation to the special business.
25. However, such statement need not be annexed where the notice is circulated
by way of advertisement. In such cases, it is sufficient to mention in the
advertisement that the explanatory statement has been sent to the members.
26. Where any item of business consists of according of approval to any
document by the meeting, the time and place where the document may be
inspected shall be mentioned in the statement.
27. Special business does not require a special resolution unless specifically stated
by the Act.
28. In Sunil Mills Ltd. v. Official Liquidator of Sri Ambika Mills Ltd., it was seen
that the explanatory statement did not mention about the Supreme Court
injunction not to alienate, create a charge on or encumber any assets of the
company.
29. If a meeting is adjourned bonafidely, it is deemed to be a continuation of the
meeting and the notice given for the first meeting holds good for all meetings
that follow. If the meeting is adjourned sine die then a fresh notice must be
given.
Quorum: (S. 174)
1. It is the minimum number of members who must be present at a meeting
required by law in order to constitute a valid meeting and transact business. It
is generally fixed by the articles.
2. If the articles do not provide for a larger quorum, the following rules apply:
(a) Public companies- 5 persons personally present
(b) Public companies- 2 persons personally present
(c) If within half an hour from the time appointed for holding the meeting a
quorum is not present, the meeting if called on the requisition of the
members shall stand dissolved
(d) In any other case, the meeting is adjourned to the same day, time and place
in the next week or to such other time and place as determined by BODs
(e) If no quorum present within half an hour at the adjourned meeting then the
members present will constitute the quorum

3. The articles cannot provide for a lesser quorum than the statutory minimum.
4. If 2 or more body corporates are represented by a single individual, each
of them will be treated personally present and the person carries more
 40

than one set of opinions on the resolution as he represents more than one
body corporate. (S.187- a body corporate may be represented by an
individual at such meeting who shall act on behalf of the body corporate)
5. Joint shareholders are treated as single members.
6. Preference shareholders and shareholders without voting rights present in the
meeting are not counted for quorum. Unless, the proposed business includes
any item directly affecting preference shareholders or have earned voting
rights.
7. Only members present in person and not proxies will be counted. S.176
provides that proxies are not allowed to speak in a meeting and they cannot
vote unless by poll.
8. If the total number of members of the company is less than the quorum fixed
by the articles, then the rule is satisfied if all members of the company attend
the meeting in person.
9. One man meetings: one person cannot constitute a meeting. The exceptions to
this rule;
(a) One person holds all the equity or preference shares of the company (case of
L. Opera Photographic Ltd.)
(b) Where there is a class meeting of shareholders where one person holds all
shares of the class
(c) Incase where the meeting is adjourned and at such adjourned meeting, there is
only one member present after half an hour
(d) CLB directs one person to represent the company in a meeting in case of an
AGM (S.167) or in any other meeting (S.186)
(e) Where the board of directors delegates a task to a committee and the
committee consists of only one member
10. The quorum must be available at the beginning of the meeting. It is not
necessary that the quorum be present throughout the meeting.
11. The articles of the company may at times provide that the requisite quorum
must be present at the time when the meeting proceeds to transact business.
This is also provided under Regulation 49(1) of Table A.
12. However, Regulation 41 of Table A of the Companies (Tables A to F)
Regulations, 1985 under the English Companies Act, 1985 provides that the
meeting shall be adjourned where at any point of time the requisite quorum is
not available.
13. The quorum shall be presumed unless it is questioned at the meeting or where
the records show otherwise.
14. Voting at the meeting shall take place by show of hands, by poll or by ballot.
Chairman of the Company:
1. The chairman is the presiding officer of the meeting who is elected or
designated under S. 175.
2. Such person is usually a member of the company and may be designated by
the articles. Incase there is no designation or chairman is absent then the
meeting itself elects the chairman by show of hands or poll, where the meeting
decides against electing the chairman by way of a show of hands.
 41

3. The board may decide elect a new chairman, unless the articles
specifically provide otherwise.
4. Powers of the chairman:
(a) To maintain order and decorum
(b) To give ruling on points of order
(c) To decide priority of speaker
(d) To maintain relevancy and order in debate
(e) To adjourn a meeting; to exercise the casting vote
(f) To ascertain the sense of a meeting and declare the result of voting.

5. Duties of the chairman:

(a) To see that the meeting is properly convened and duly constituted
(b) To see that the proceedings of the meeting are conducted in accordance with
the rules
(c) The business is discussed in the order set out in the agenda
(d) No discussion is allowed unless there is a specific motion
(e) To see that all members get an equal chance to express their opinion
(f) To exercise judicially his power of adjournment
(g) Act in bona fide interest of company
(h) Take care that rights of minorities are not ignored
Minutes of the Meeting:
1. Company shall keep record of all the proceedings of every meeting and this
should be done within 30 days of conclusion of the meeting. These records are
called minutes. (S.193)
2. There should be a separate book kept for the minutes of the meeting known as
the minutes book. It should provide fair and correct summary of the meeting.
3. The chairman has a right to exclude any defamatory or irrelevant matters or
such matters as are detrimental to the interests of the company. Each page
should be initialled or signed by the chairman of the meeting.
4. Where there are any appointments made, the minutes must mention the same.
5. The contents of the minutes in a board meeting shall be as follows-
(a) Names of all board members present
(b) Each resolution passed and name of each member dissenting the same or not
concurring with the same

6. Where the provisions of S.193 (as mentioned in points 1 to 5) are

contravened, every officer of the company in default shall be liable to pay a
fine of Rs.500.
7. Chief uses of minutes:
(a) Record of the business transacted and decisions at the meetings;
(b) Available for inspection by interested parties;
(c) They can be produced as evidence in the court.

8. Minutes of the meetings are evidence of the proceedings of the meeting. They
should be kept in the registered office and open to inspection during business
hours for at least 2 hours in a day.
 42

9. Every member shall be furnished within a period of 7 days from the date of
request, a copy of the minutes.
10. Where a copy of the minutes is not furnished or where they are not provided
to the members for inspection, the company and every officer in default shall
be liable to a fine of Rs.5000.
3.2. Laws and procedures relating to various meetings

Statutory Meetings (S.165)

1. This provision is applicable to every public company which has a share
capital.
2. A statutory meeting is mandatory only for the public company, and not
applicable to the private and government companies.
3. Within a period of not less than 1 month and not more than 6 months from the
date on which business is to be commenced, company has to hold a general
meeting of the members of the company. This is called statutory meeting.
4. This is the first meeting of the company and is held only once in a lifetime of
the company. If not held the company may be wound up.
5. After 1980 the English law abolished the requirement of statutory
meeting.
6. A statutory report has to be sent to the members of the company within 21
days before the meeting and such report has to be signed and certified as
correct by atleast 2 members, 1 of whom is a managing director, where there
is one.
7. Contents of the statutory report:
(a) Total shares allotted including the number of shares which are fully paid up
and the number of shares which are partly paid up
(b) Cash received in respect of the shares allotted
(c) Abstract of receipts and payments of the company upto a date within 7 days of
the report
(d) The names, addresses and occupations of directors and auditors
(e) Contracts which may have been entered into by the company
(f) The extent to which an underwriting contract has not been carried out
(g) Arrears of calls on shares held by directors or the manager
(h) Commission and brokerage payable to any director in relation to issue or sale
of shares or debentures

8. The report has to be certified by the auditor where it deals with matters
relating to allotment of shares, cash received by virtue of such allotment and
receipts and payments of the company.
9. After copies of the report have been sent to the members of the company, it
shall be sent to the Registrar for registration.
10. At the beginning of the meeting, a list of the members of the company with
their addresses, occupations and shares held by them shall be made and the
same shall be open for inspection by the members at any time during the
continuance of the meeting.
 43

11. The meeting may discuss matters relating to the formation of the company or
any such other matters, even without giving a notice for the same. However,
where notice is not given, a resolution cannot be passed on the matter.
12. The meeting may be adjourned from time to time. Where notice is given as
regards a matter and a resolution was to be passed in a meeting that was
adjourned, it may be passed in the next meeting after adjournment which shall
have the same powers as the adjourned meeting.
13. Any contravention of the provisions of this section shall attract a penalty of
Rs.5000.
14. The object of the meeting is to put members in possession of all important
facts relating to the company, to provide members opportunity to meet and
discuss, and to approve any modifications of the terms of the contract.
Annual General Meetings: (Ss. 166 and 167)
1. Any company in addition to all other meetings each year has to hold a general
meeting as an AGM and shall specify the same in the notice.
2. The first AGM has to take place within the first 18 months from the date of
incorporation. There is no provision to provide for an extension of this time
period.
3. Where the first AGM is held within 18 months from the date of incorporation,
the company need not hold any further AGMs in the year of its incorporation
and in the year that follows. Thereafter, an AGM must be held every year.
4. The gap between two consecutive AGMs can be a maximum of 15 months.
The Registrar may for any special reason extend the time gap between the
AGMs by a maximum of 3 months. This however does not pertain to the first
AGM.
5. In Shree Minakshi Mills v. Asst. Registrar, Madurai, it was held that an AGM
must be held every year.
6. An AGM is a statutory requirement. It is called even when the company was
not functioning during the year. (Madan Gopal Dev v. State of West Bengal)
7. Unlike an EGM, an AGM cannot be held on a public holiday but during
business hours. Also it should be held at the registered office of the company
or some other place in the city, town or village where the registered office is
located.
8. Where a meeting was held at a different place than what was specified in the
notice, the meeting was held to be illegal. (Sikkim Bank Ltd. v. RS
Chowdharu)
9. The Central Government may however exempt a particular class of companies
from holding the meeting during business hours at its registered office or in
such place/area where its registered office is situated.
10. In case of a public company, the articles of the company may fix the time
within which the meeting may be conducted. Thereafter, even a resolution
passed at such AGM may fix the time for the subsequent meeting.
11. In case of a private company, its articles or a subsequent resolution may fix
the time and place for the AGMs.
12. There is a requirement that the meeting be held at the registered office even in
case of adjourned meetings. Adjourned meetings also should be held within
 44

time limit prescribed by the section. (Mundhra (MD) v. Asst. Registrar of

Company, West Bengal)
13. The meeting must be held irrespective of the fact that accounts have not been
prepared.
14. The power to extend the time within which the meeting may be held is upto
the Registrar and not the Central Government.
15. In holding of an AGM, no distinction is made between private and public
companies.
16. A 21 day notice has to be given for holding an AGM but a shorter notice is
will be allowed where the same is consented to by the members. (S.171)
17. An AGM convened for a date can be cancelled or postponed by the Board on
the day of the meeting if proper reasons are given (Rajpal Singh v. State of
Uttar Pradesh)
18. Under S.167, where an AGM is not convened as per the provisions of S.166,
the Central Government may call for an AGM by way of an order may also
give directions as regards certain other matters.
19. S.167 as per the slides (this provision was amended in 2002)- Where an
AGM is not convened as per the provisions S.166, the Company Law
Board, may on the application made by a member call for an AGM and
give other directions in this regard.
20. Default may be said to have been done only after the period mentioned in
S.166 expires.
21. CLB may exercise power of calling an AGM only on the application of a
member and not the company after the expiry of period given in the section.
This cannot be ratified by impeding a member subsequently. (Cannore Whole
Body CT Scan and Research Centre Pvt. Ltd. v. Saibunisa)
22. In Dinkar Rai Desai v. P. Bhasin, the Board failed to conduct the AGM despite
CLB directions and a new Board was elected. This Board cannot be held
responsible for failures of earlier Board.
23. Where there is a default in holding an AGM under 166 or failure to comply
with S. 167, the company and any officer in default shall be punishable with a
fine upto Rs. 50,000 and if continued to a further fine of 2500 per day of
default.
Extraordinary General Meeting: (S. 169)
1. AGM and statutory meetings are ordinary meetings, any other general
meetings are EGMs.
2. The meeting shall be called by the BODs of the company by requisition by
such shareholders-
(a) Where the company has a share capital, on the requisition of the
shareholders that hold not less than 1/10th in value of the paid up capital
and voting rights
(b) Where the company does not have a share capital, on the requisition of the
shareholders holding not less than 1/10th of the voting rights
 45

3. In Kuldip Singh Dhillon v. Paragon Utility, it was held that where any
member who has not paid calls is and is not entitled to vote, he cannot
requisition a meeting. If done then the proceedings will be invalid.
4. A requisition signed by one of the joint owner has same effect as that signed
by all.
5. The requisition sets out the matters of consideration for which meeting has
been called and must be signed by the requisitionists.
6. The board shall proceed to call a meeting within 21 days from the date of
deposit of a valid requisition. The meeting shall be held within 45 days from
the date of the deposit of the requisition.
7. If the board does not conduct the meeting, it may be called by the (a)
requisitionists themselves, (b) where the company has a share capital by such
of the requisitionists as hold 1/10th of the paid up capital and voting rights and
(c) where the company does not have a share capital, by such requisitionists as
hold 1/10th of the voting rights.
8. This meeting shall be held within 3 months from date of requisition and
reasonable expenses shall be repaid to the requisitionist by the company from
the remuneration receivable by the directors.
9. Where the meeting is duly commenced within the period of 3 months, it shall
be valid even where it is adjourned and held again after such period.
10. Institutional shareholders also hold same rights to requisition an EGM. The
same procedure shall be followed in such cases.
11. Refusal by the directors to call a meeting on requisition does not amount to an
offence as requisitionists have their own alternative. (Anantha Hegde v.
Captain TS Gopala Krishna)
12. An EGM can be held at any place unlike an AGM.
13. The CLB (now NCLT) can also order an EGM incase it is impractical for the
company to call hold or conduct it under S.186.
3.3. Voting- ordinary resolution, special resolution, resolution requiring special
notice, resolution by Postal Ballot

1. Voting rights of equity shareholders: (Ananthalaxmi v. HI & F Trust)

(a) Every equity shareholder shall have a right to vote
(b) This right cannot be prohibited on the ground that he has not held his
shares for a specified period before the meeting.

2. Grounds for denying equity shareholders right to vote:

(a) Non-payment of calls by a member;
(b) Other sums due against a member;
(c) Where the company has exercised the right of lien on his shares.

3. Preference shareholders will have a right to vote only on matters which

directly affect the rights attached to their shares
4. Voting rights are not affected by the fact that his shares have been attached or
pledged or receiver has been appointed. (Balkrishna Gupta v. Swadeshi
Polytex Ltd.)
 46

5. Voting can be done by:

(a) Show of hands
(b) By way of a poll

6. In case of voting by a show of hands, motions are decided by show of hands at

the first instance, the chairman has to count and declare the result and an entry
shall be made into the books without regard to the number of votes that a
member raising the hand possesses.
7. Voting by poll may be carried out in the following cases-
(a) Before or on declaration of result of show of hands on a resolution, a poll
may be ordered by the chairman on his own motion.
(b) It can also be taken by demand, incase of a public company having share
capital by any members who are present or are voting by proxy and holds-
i. Power to vote on the resolution and where such voting power is not
less than 1/10th of total voting power.
ii. Where the aggregate sum paid by such members as regards their
shares having voting rights with respect to the resolution is at least
Rs.50,000
(c) In case of private company having a share capital, the demand may be
made by one member present or voting by way of a proxy, if not more
than 7 members are personally present and by 2 members present or
voting by way of proxy if more than 7 members are personally present.
(d) For any other company, the demand may be made by any member present
or voting by way of proxy who holds 1/10th the total voting power with
respect to the resolution
(e) Where voting rights are to be exercised with respect to shares held in trust,
the demand may be made by the public trustee personally or through a
proxy.
(f) Voting by companies and government can be done through representative
elected by resolution of the BOD or governing body.

8. If in a poll a member is entitled to more than one vote, then he or his proxy
can cast vote in whatever manner and all do not need to be cast in the same
manner. He may not even cast all his votes.
Proxy:
1. A proxy is entitled to attend and vote at a meeting on behalf of the member. If
the articles do not otherwise provide-
(a) A proxy can vote only on a poll
(b) A member of a private company cannot appoint more than one proxy to
attend on the same occasion
(c) A member of a company not having share capital cannot appoint proxy.

2. The proxy cannot speak at the meeting.

3. The proxy must have been appointed by a written instrument signed by the
appointer or his duly authorised attorney. Where the appointer is a body
 47

corporate, such instrument must have the seal of such body corporate or must
be signed by an officer or attorney of the body corporate.
4. The form for the Instrument of proxy has been prescribed in Schedule IX.
5. Each meeting requires a separate proxy. Such person need not be a member.
6. The members have a right to inspect the proxy and 3 day notice is to be given
for the intention of inspection. The inspection shall be allowed during
business hours starting 24hours before the meeting till the conclusion of the
meeting.
7. Notice of the meeting should provide for right of member to appoint a proxy.
8. Where the notice does not provide for the same, a fine of Rs.5000 shall be
levied on every officer in default.
9. Proxy can be filed through a fax and has to be filed atleast 48hrs before the
meeting or within 48 hours before an adjourned meeting.
10. In case of joint trustees or joint members, all such persons have to sign the
proxy form.
11. Mistakes in the proxy which affect the exercise of the voting right in any way
will render it invalid if they are likely to mislead.
12. Creditors in the winding up of a company may vote by proxy.(S.500)
13. Stamp duty can be paid on proxy.
14. S.176 only allows a proxy to attend and vote in place of the member. Thus, a
Proxy cannot vote by post. (view held by Ramaiya) But Kunwar Brij Bhushan
v. Dehradun Tea Company, held the opposite.
15. Rights of insolvent and minor to vote. (chk)
Resolutions:
1. The questions that generally come for consideration at the general meeting of
the company are presented in the form of proposals called motions. This shall
be seconded by another member to be presented to the chairman. If the motion
is carried after the poll then it becomes a resolution.
2. Kinds of resolutions:
(a) Ordinary resolutions
(b) Special resolutions
(c) Resolutions requiring special notice.

3. An ordinary resolution is a resolution passed at the general meeting of a

company by a simple majority of votes, including the casting of the chairman,
wherever required. The notice to be given must be as required under the Act.
4. Ordinary resolution is enough unless a special resolution needs to be passed.
5. If the Companies act states certain resolutions to require special resolution or
resolution by notice then the Memorandum or Articles cannot validate
otherwise.
6. A special resolution is one which satisfies the following:
(a) The intention to propose the resolution as a special resolution has been duly
specified in the notice calling the general meeting.
(b) The notice has been duly given of the general meeting.
(c) The votes cast in favour of the resolution are not less than 3 times the votes
cast against it.
 48

(d) An explanatory statement setting out all material facts concerning subject
matter of the special resolution shall be annexed to the notice.
7. A copy of the special resolution together with the explanatory statement shall
within 30 days of passing of the resolution be filed with the registrar.
8. A resolution requiring special notice is not an independent class of resolution.
It is only a different kind of an ordinary resolution of which notice of intention
to move the notice shall be given atleast 14 days before the meeting at which
such resolution shall be moved to the company.
9. The Companies Act makes a mention of instances wherein such special notice
must be given.
10. After receipt of the notice within the 14 day period, the company shall
immediately notify its members about such a resolution in the ordinary
manner.
11. This may even be done by way of an advertisement in a newspaper having
appropriate circulation or by any other method as specified in the articles,
within 7 days before the meeting.
12. Certain instances in which a resolution requiring special notice may be given
include appointment of an auditor other than the one retiring, provision that a
retiring auditor cannot be reappointed, removal of a director before expiry of
his term, appointment of a director in place of a director so removed, etc.

3.4. Division of powers between board and general meetings

1. Board meetings must be held once in every three calendar months and at least
4 such board meetings in a year are required to be held.
2. ICSI through its secretarial standards suggests one Board meeting every 3
months with a maximum interval of 120 days interval between any two
meetings.
3. S 286 provides that a notice to be given in writing to every director for the
time being in India and at his usual address in India to every director who is
not in India for the time being. Notice by fax is adequate.
4. Where a notice is not sent out for such meeting, every officer in default shall
be liable to pay a fine of Rs.1000.
5. In Khemka v. Deccan Enterprises, it was held that the telephonic or oral
invitations cannot amount to notice.
6. No form of notice is specified and usually a week’s notice is considered
sufficient unless a specific period provided by the AOA. The notice should be
given to all directors including interested directors.
7. Proper authority to call a meeting rests with the Board.
8. Law does not require an agenda for the meeting of directors.
9. It is not required to be held in the registered office and can be held on a
public holiday.
10. The quorum shall be 1/3rd of the total strength or two directors, whichever is
higher or according to the AOA.
11. An interested director under S.300 shall not be counted for the purpose of
quorum.
 49

12. Where the number of interested directors is 2/3rd or more of the total strength,
the number of the directors not interested (being at least 2) shall form the
quorum.
13. A meeting may be adjourned for want of quorum till the same date in the next
week. Where such date in the next week is a public holiday, it shall be held on
the day after such holiday which is not a holiday.
14. A resolution shall not be deemed to have been passed unless it is sent to the
board members in India by post and to such members outside India, to their
usual address in India. The resolution must be approved by a majority of the
members.
15. The company must maintain an attendance register containing the names of
directors present in the meeting.
16. The minutes of the meeting must be recorded in the minutes book and each
page of such minutes must be initialled by the Chairman. Date when the
minutes were entered must also be recorded.
17. The minutes shall be circulated to the Board members within 7 days of the
conclusion of the meeting and they shall send in their comments within 15
days.
18. The minutes may be inspected only by the Board meeting.
19. Minutes of an earlier meeting must be noted in the subsequent meeting.

Extra points:

1. In Jain v. Delhi Flour Mills, held uncertainty about the constitution of the
board.
2. In Lothian Jute Mills Co. Ltd., held board divided into fractions.
3. In Baptist Church Association v. Members, rival groups holding meetings at
separate places and appointing separate sets of office bearers.

Unit IV Oppression and Mismanagement

4.1. Majority powers and minority rights

Majority rule:
1. The management of a company is based on the majority rule. The principle
that the will of the majority should prevail and bind the minority is known as
the principle of majority rule.
2. If a wrong is done to the company, the company has a right to institute a suit
but an individual member has no such right.
3. In Foss v. Harbottle,
(a) 2 minority shareholders of the company alleged that its directors were
guilty of buying their own land for the company’s use and paying higher
prices than the value, resulting in loss for the company.
 50

(b) Court dismissed the suit on grounds that the acts of the directors were
capable of confirmation by the majority. Also the company can act only
through its majority shareholders.
(c) They held two distinct but linked propositions:
i. Court will not interfere with the internal working or irregularities if
the company can ratify the issue.
ii. Where a wrong has been done to the company, then the right
plaintiff is the company itself and no one else.

(d) It is a logical extension of the principle that a company is a separate

distinct personality from its members. Therefore only the company may
sue.
(e) Principle laid down applies where a corporate right of a member is
infringed and does not apply where the individual rights of the member’s
are infringed. Members’ rights include the right to have one’s name
included in the register, the right to payment of dividend, if any, etc.
(f) The principle laid down in Foss v. Harbottle has been followed in the
Indian case of Bhajekar v. Shinkar.

4. On becoming a member of the company, the member agrees to submit to the

will of the majority of the members expressed in a general meeting and in
accordance with law and Memorandum and articles.
5. Advantages of rule in Foss v. Harbottle:
(a) Recognition of separate legal personality of the company.
(b) Need to preserve right of majority to decide affairs of the company.
Therefore, will of the majority should prevail.
(c) Multiplicity of futile suits avoided.
(d) Litigation at the suit of a minority is futile if the majority do not wish the
same.

6. Rule of majority is a derivative and representative action.

7. Exceptions to the rule of majority-
(a) Where the act done is ultra vires the company and is illegal. Eg; using
company funds to do activities not authorised by the AOA, any member
can institute a suit
(b) Breach of fiduciary duties by directors or majority shareholders
(c) Fraud or oppression against minority or where there is mismanagement.
(d) Inadequate notice of resolution passed at a meeting of the members
(e) Qualified majority
(f) Where personal rights of individuals have been infringed.
(g) Statutory exceptions- variation of class rights (S. 106), scheme of
reconstruction and amalgamation, oppression and mismanagement.
(h) Resolution is passed by a simple majority and by an ordinary resolution
when a special resolution is required.
(i) Act of company is inconsistent with articles.
MINORITY PROTECTION:
 51

1. The Companies Act attempts to maintain a proper balance between the rights
of the majority and minority shareholders.
2. Minority rights are protected by various rights of shareholders that related to:
(a) The variation of class rights (Ss. 106-107)
(b) Investigation by Central government (Ss. 235-250)
(c) Schemes of reconstruction and amalgamation (Ss. 391-395)
(d) Prevention of oppression and mismanagement (Ss. 397-398)

4.2. Provisions relating to oppression and mismanagement under the

Companies Act, 1956

The oppression and mismanagement of minority calls for remedial action. The
minority may apply to:
(a) The CLB (now NCLT) for winding up of the company
(b) The CLB (now NCLT) for appropriate relief short of winding up
(c) The Central government for appropriate relief

OPPRESSION:
1. Oppression means not keeping the general standards of honesty and fairness
and not having regard of the interests of shareholders.
2. It includes any act which harsh and burdensome and it may be caused either
by acting or not acting in a particular manner.
3. Unwise, inefficient and careless conduct of the director in the performance of
his duties does not give rise to relief under S. 397.
4. There is a presumption by the courts that the directors acted in the best interest
of the company.
5. In English law, the word ‘oppressive’ has been replaced by ‘unfairly
prejudicial’.
6. S. 397 provides that any member(s) of a company who complains that the
affairs of the company are being conducted in a manner prejudicial to the
public interest or in a manner oppressive to any member(s), may apply to CLB
(now NCLT) for relief.
7. Public interest means general social welfare and interest of the general public
and community. It emphasises the idea of the company functioning for the
public good or general welfare of the community.
8. Relief by CLB (actually NCLT) is given based on the following factors-
(a) That the company’s affairs are being conducted unfairly
i. in a manner prejudicial to public interest
ii. in a manner oppressive to any member(s)
 52

(b) That the facts justify the compulsory winding up order on just and
equitable grounds
(c) That to wind up the company would be unfairly prejudicial to applicants

9. Once a person’s name is entered as a member of the company in its register

for members, he is said to be a member. The shareholder of the company in
whose favour share certificates are issued can also exercise rights as members
of the company even if their names are omitted in the register.
10. Only the following persons shall be allowed to apply to the tribunal under
S.399-
(a) Where a company has a share capital, at least 100 members or 1/10th of the
total number of members, whichever is lesser OR by such member(s)
holding not less than 1/10th of the issued share capital of the company
(b) Where a company does not have a share capital, 1/5th of the total number
of members

11. Thus, the right to apply does not only lie with the minority.
12. The remedy under S. 397 is available to the members only in their capacity as
members of the company and not any other capacity. If the majority board of
directors override the minority directors it is outside the purview of the
section. (Re Bellador Silk Ltd.)
13. In Shanti Prasad v. Kalinga Tubes, the following principles were laid down-
(a) It is not enough to show that there are just and equitable reasons for
winding up of the company, though this shall form part of the preliminary
to an application under S.397
(b) The conduct of the majority shareholders must be oppressive upto the date
of the application. Such oppression must be a series of continuous acts.
Thus, a mere general allegation is not sufficient.
(c) It must involve acts which are harsh, burdensome and wrongful
(d) Mere lack of confidence between the minority and majority shareholders
shall not be sufficient, unless it involves oppression
(e) It must involve lack of probity or fair dealing with respect to proprietary
rights of the shareholders
(f) A petition for relief in case of oppression may include a prayer for relief of
winding up in the alternative

14. The terms ‘in a manner prejudicial to public interest’ were added in 1963 by
way of an amendment to enable the court or central government to interfere
where there are acts committed which are prejudicial to public interest.
15. Oppression is not said to be there where the majority carries on a competing
business except where they divert corporate opportunities or use corporate
facilities.
16. It is not necessary for oppression to be for obtaining pecuniary benefit. It
could be to retain power or it may be vindictive or may manifest itself in the
denial of rights.
17. Commercial misjudgments will not amount to oppression.
 53

18. In Needle Industries v. Needle Industries New India Ltd., it was held that an
act in contravention of the law per se shall amount to oppression.
19. The mere apprehension that an act shall lead to oppression of the minority
shareholders in the future does not amount to oppression.
20. Oppression does not cover private enimosity.
21. In Tea Brokers Pvt. Ltd. v. Hemlata Prasad Barooah, it was held that a single
act is sufficient to constitute oppression in certain cases like when a majority
was reduced to the position of minority by allotting new shares only to the
minority group.
22. In BR Kundra v. Motion Pictures Association, the Delhi High Court stated that
in exercising its jurisdiction it will consider the following-
(a) Need to maintain democratic rights of majority members within limits.
(b) Protect and safeguard minority rights.
(c) Limited interference by court in company affairs so that useful social
services provided by the company are not jeopardised.
(d) No exploitation or misuse of the provisions of the Act.

23. Thus, oppression is an equity relief left entirely upto the discretion of the
court.
24. The minority shareholder approaching the court must come with clean hands.

MISMANAGEMENT:
1. S. 398 deals with application to CLB for relief against mismanagement. Relief
provided if CLB feels that:
(a) Affairs of the company are conducted in a manner prejudicial to the
interests of the company or public interest.
(b) Any material change in the management or control of the company has
resulted or will result in the affairs being conducted in manner prejudicial
to the interests of the company or public interest.

2. The change in management or control of the company may be due to an

alteration in its BODs or manager or ownership of shares and where it does
not have a share capital, due to change in its membership.
3. The CLB shall accordingly pass an order in this regards.
4. There should be present and continuous mismanagement.

4.3. Role of Tribunal and Central Government

1. Ss. 397 and 398 are intended to avoid winding up of a company and at the
same time relieving the minority shareholders from the acts of oppression or
mismanagement or prevent affairs from being conducted in a manner
prejudicial to public interest.
2. Difference between ss.397 and 398 and Winding up

Ss. 397 and 396 Ss. 433(f)- winding up

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(a) Petition to be made to the Petition made to the tribunal

CLB (now NCLT). (actually court).
(b) Remedy is of preventive Results in civil death of the
nature and provides company.
continuity of company.
(c) Notice to central government No notice is required.
is necessary.
(d) Share qualification is No minimum share requirement
required for an application. is needed.
(e) The central government can The central government cannot,
also apply under the but the registrar can apply.
provisions.
(f) Nature of relief granted is Nature of relief is narrow.
much wider.
3. An article in the AOA to the effect of an arbitration in case of dispute between
members and the company will not lead to stay of petition under Ss. 397 and
398 by the CLB. (now NCLT)
4. The provisions give exclusive jurisdiction to the CLB (now NCLT) and
matters dealt with cannot be referred for arbitration.
5. The preference shareholders can also apply for appropriate relief under the
provisions.
6. Joint owners are to be treated as one member.
7. If the number of members filing petition is less than the requisite number then
they can apply where the Central Government authorises them in this regard.
8. Notice has to be given to the Central government for every application under
S. 400 and the CLB (now NCLT) shall take into consideration the
representations made by the Central Government in this regard. Also under S.
401 the Central government has discretionary power to apply to CLB (now
NCLT) for an order under Ss.397 and 398.
9. Powers of the CLB (now NCLT) include the following-
(a) The regulation of the conduct of the company’s affairs in the future.
(b) The purchase of shares of any members of the company by other members
or the company.
(c) Reduction in share capital, incase of purchase of shares.
(d) The termination, setting aside or modification of contract between
company and management or third party where such third party has
received a notice in this regard and he has consented to the same.
(e) Setting aside any transfer, delivery of goods, payment, etc. with respect to
any property within 3 months before the date of the application.
(f) Any other matter the provisions of which are just and equitable in the eyes
of the CLB (now NCLT).

10. The CLB (now NCLT) may even make an interim order on the application of
any party to the proceedings which is required to regulate the conduct of the
company. (S.403)
 55

11. Where any order of the CLB (now NCLT) has the effect of altering the
memorandum of the company, the company shall not change such alteration
made without the prior permission of the CLB (now NCLT). The altered
memorandum shall have the same affect as if the alteration had been duly
authorised by the company. (S.404)
12. S.404 also provides that where the order makes such an alteration or gives
leave to make such an alteration, a certified copy of the order must be
deposited with the Registrar within 30 days of the order and the Registrar
shall thereafter register the alteration.
13. The penalty for contravention of this provision is Rs.50, 000 which is payable
by the company and every officer in default.
14. As per S.405, where a manager or MD or any other director or any other
person applies to be impleaded as a respondent to the proceedings and the
CLB (now NCLT) deems the same fit, he shall be added as a respondent.
15. S. 407 provides that no compensation is payable for loss of office of
managerial personnel resulting from termination or setting aside of an
agreement due to an order under Ss. 397 and 398. Further, such person shall
not act for the company for 5 years thereafter, except by leave of the CLB
(now NCLT).
16. Where a person contravenes the provisions of S.407, a fine of Rs.50,000 shall
be levied on such person or such other person who is party to the
contravention.
17. The Central Government has the following powers under S. 408 to prevent
oppression or mismanagement-
(a) Where an application is made to the CLB (now NCLT) by at least 100
shareholders or shareholders holding 1/10th of the total voting power OR
on a reference made by the Central Government, the CLB (now NCLT)
shall after conducting due enquiry recommend the Central Government to
appoint such persons as directors of the company as it deems fit
(b) Such persons shall be appointed for a period of 3 years at a time
(c) The CLB (CLB) may even order the company to suitably amend its
articles to appoint new directors in place of making an order as mentioned
in (a)
(d) Where the CLB (now NCLT) passes an order asking the company to
amend its articles, it may recommend the Central Government to appoint
such additional directors for the time the new directors are not appointed
(e) The directors appointed under this provision, not being the new directors
elected by way of alteration in the articles shall not be taken into account
for the purposes of calculating any sort of majority of the Board members
required for passing a resolution, etc.
(f) The directors appointed under (a) or the additional directors appointed
under (d) need not hold any qualification shares
(g) Their office shall not be determined by way of rotation
(h) The Central Government may even require the removal of the auditors of
the company and appointment of new auditors in their place or alteration
of the articles of the company by virtue of this provision
 56

(i) The directors appointed by the Central Government may be required to

report to the Government as regards the affairs of the company

18. The CLB (now NCLT) has power to prevent change in the Board under S. 409
where such change may occur due to a change in the shareholding pattern of
the company. This is applicable only to a public company.
19. For the same, the directors may make an application to the CLB (now NCLT)
stating that such a change would prejudicially affect the affairs of the
company.
20. Where the CLB (now NCLT) is satisfied that such a change in the Board is not
desirable, it may make an order stating that no resolution passed or that which
may be passed and no action may be taken to affect a change in the Board,
unless the CLB (now NCLT) confirms the same.
21. Such an order shall be effective even if there is anything contrary in the Act or
the memorandum or articles or any resolution passed by the general meeting
or the Board.

Unit V Compromises, Arrangement, Reconstruction and Amalgamation

5.1. Statutory provisions

5.2. Court’s powers and discretion
5.3. Schemes to be presented
5.4. Trans-national mergers and amalgamation- not taught in class

1. A compromise is when there exists a dispute and such dispute is settled by

way of the compromise.
2. An arrangement on the other hand has a wider import and includes situations
which need not involve a dispute. It includes situations such as reorganisation
of the share capital, takeover of shares, etc. An arrangement should not be
taken to mean the same thing as a compromise.
3. An arrangement may even alter the rights of members or creditors of the
company. However, it will not be termed as an arrangement where the rights
of a member are taken away completely without adequately compensating
him.
4. A reconstruction or reorganisation or a scheme of arrangement generally
pertains to a single company where the rights of the members and/or creditors
are altered in some way or the other.

Note: S.391 states that the tribunal/NCLT shall have the required jurisdiction for dealing
with such cases. However, as the NCLT has not come into existence yet, such power lies
with the High Court. Thus, the term ‘High Court/Court’ has been used in place of NCLT
in the sections that follow.

5. S.391 is the broad provision which deals with such compromises and
arrangements.
 57

6. It deals with reorganisations where there has to be a consolidation of shares of

different classes or a division of such shares.
7. It also deals with an arrangement between the company and its shareholders as
regards distribution of surplus assets of the company by way of gift or
otherwise, where the memorandum of the company allows such distribution.
8. A scheme under the section cannot be regarded as an alternate mode of
liquidation. Further, where a scheme appears workable, feasible and consistent
with commercial morality, it should be preferred to a winding up order.
9. Where a reduction of the share capital of the company is possible within the
scheme under S.391, the provisions of the Act relating to the reduction of
share capital shall not apply in such case as the court can sanction such
reduction as part of the scheme.
10. A scheme under S.391 does not automatically attract proceedings under
Ss.397 and 398 which relate to oppression and mismanagement.
11. S.391 is thus very wide in its import and thus as will be seen from the points
as follow, it may even help the court rescue a company where a winding up
petition has been filed or a winding up order has been passed against the
company.
12. However, it has been held in General radio and Appliances Company Ltd. v.
MM A Khader, that an amalgamation cannot by-pass other statutes. In this
case, it was decided that a tenant could not sub-let a plot without prior
permission of the landlord. Herein, under a scheme of amalgamation, the plot
of land was transferred to the company by the tenant and the permission of the
landlord was not taken. Thus, the transferee company was held liable to be
evicted from the premises.
13. S.391 provides for the power to make arrangements or compromises by a
company with its members or class of members OR its creditors or class of
creditors.
14. In such case, an application shall be filed with the Court either by any member
or creditor, as the case may be or by the company or where the company is
being wound up, by the liquidator of the company.
15. In case of a liquidation of a company, the application may even be filed by
the creditor or a member.
16. The Court shall thereafter as it deems fit order that a meeting of the
members/class of members OR the creditors/class of creditors and the
company be held. Clubbing of different classes of persons for such purpose
is not permitted.
17. Further, unless a different sort of compromise or arrangement is ordered
for a sub-class of a class no such sub-class shall be entitled to have a
separate meeting.
18. Where in such a meeting, 3/4ths of the persons present and voting and where
proxies are allowed, persons voting by way of proxy are in favour of such
compromise or arrangement, the Court shall sanction the scheme if it deems
fit. Thereafter, the scheme of compromise or arrangement as sanctioned by the
Court shall be binding on all the members or creditors and the company.
 58

Where the company is being wound up, it shall be binding upon the liquidator
and the contributories.
19. However, the person who had in the first place filed an application for the
compromise or arrangement with the Court must furnish all necessary details
as regards the financial position of the company, the report of the auditor and
any pending investigation proceedings against the company under Ss.235 to
251. (investigation into the affairs of the company)
20. The Court must also make sure that all statutory requirements have been
complied with.
21. In Miheer H Mafatlal v. Mafatlal Industries, it was upheld that the Court must
look into the following matters as well, in addition to the matters specified in
points 19 and 20-
(a) Whether the scheme is supported by the requisite majority
(b) Whether the meeting has been properly convened and notices have been
duly sent
(c) Whether the scheme is violative of any law
(d) Whether the members and creditors acted bonafidely and in good faith
(e) Whether the scheme appears just and fair from the point of view of a
prudent man in business
(f) The court however shall not enquire into the commercial wisdom behind
such scheme

22. Further, Justice Ashbury had stated in re Anglo-Continental Supply Co. Ltd.,
that before sanctioning such a scheme the following must be kept in mind-
(a) The scheme should comply with the statutory provisions
(b) The concerned class is adequately represented in the meeting and the
statutory minimum acts in a bonafide manner and does not coerce the
minority
(c) The scheme may be approved by a man of reasonable prudence

23. In re Bhavnagar Vegetable Products Ltd., a firm having 40 years experience in

the textile business proposed a scheme to revive a textile mill which was
approved by all the parties. The only opposition was by a cooperative society
which lacked experience as regards the textile business. The court decided to
sanction such scheme.
24. In considering a scheme of arrangement or compromise, the court shall always
look into the welfare of the employees of the company. Such employees have
the option whether or not to join the new company formed as there is nothing
contained in any statute which provides for transfer of employees of an
undertaking alongwith assets, liabilities, etc. in such cases. In fact the
employees may even oppose the scheme where it affects their rights.
25. The court however cannot enquire into matters such as entitlement of
names, brands, trademarks, etc. Such issues shall be left to the civil court.
26. The arrangement or compromise however shall not take effect unless a
certified copy of the order of the tribunal is filed with the registrar. (Slides: A
 59

compromise or arrangement shall take effect from the date it is arrived at

subject to the sanction of the court)
27. A copy of the order shall be attached to a memorandum of the company made
after filing of the certified copy of the order with the registrar. Where a
memorandum has not been made, it shall be attached to the instrument
determining the constitution of the company.
28. Where there is default in complying with point 11, every officer of the
company responsible for the same shall be liable to pay a fine of Rs.100 per
copy of the order.
29. The Court may even stay a suit or proceeding against the company which has
been pending and an application has been filed under S.391 until such
application is disposed off. (Slides and Avtar Singh: The court has no right
under Ss.391-396 to stay any criminal or revenue proceedings against the
company)
30. The Court shall always be in favour of reviving a company rather than having
it wound up.
31. Where a court feels that the scheme is not feasible and a majority of the
creditors by value oppose it, it may not even convene the meeting under
S.391.
32. The court’s jurisdiction shall extend to foreign companies having an
office within its jurisdiction.
33. The court must be satisfied that the matter has been considered by an EGM as
required under S.391. The requirement of an EGM cannot be dispensed with
by stating that the scheme has been approved at an ordinary meeting. (Re
Southern Automative Corporation P. Ltd.)
34. There is no restriction as regards the type of company one may merge with.
35. It is the duty of the court to sanction a scheme which has been approved at the
statutory meeting, the scheme is fair and reasonable and not adverse to the
interests of the creditors, employees or to the interests of the company and all
other requirements have been complied with.
36. However, the court will not sanction the scheme simply because it has been
approved by the statutory meeting and recommended by the board.
37. The court must not concern itself with matters relating to success or
profitability of the scheme.
38. It must however pay attention to matters relating to valuation of assets. (MG
Investment and Industrial Co. Ltd. v. New Shorrock Spg and Mfg Co. Ltd.)
39. Where the High Court makes an order under S.391, it shall have the power to
supervise the carrying out of the compromise or arrangement. It may even
make directions as regards modifications in the compromise or arrangement.
(S. 392)
40. Where it is of the opinion that the scheme is unworkable, it may on its own
motion or on application made by any interested person, order that the
company be wound up. Such a winding up shall be deemed to be a winding up
by tribunal under S.433A. (S.392)
41. In SK Gupta v. KP Jain, it was upheld that a person interested in the affairs of
the company may make an application under S.392.
 60

42. The court cannot pass any directions under this section which do not related to
the scheme sanctioned or to the working of such scheme in relation to the
company. However, the court may even give directions to a third party
provided that such direction given is necessary for the compromise or
arrangement.
43. Where the scheme is workable, no winding up order shall be made.
44. The court while sanctioning a scheme has the following limitations-
(a) The court can sanction a scheme only where had the court not
sanctioned it and it would have been approved by a majority of the
members/creditors, it would still have been valid
(b) The court cannot sanction a scheme where the arrangement or
compromise must be made subject to certain conditions and the
company chooses to dispense with such conditions
(c) The court cannot sanction a scheme which may be effected under any
other provisions of the Act

39. According to the Miheer Mafatlal case, the court may even enquire into any
ancillary or incidental matters to ascertain whether the scheme has the support
of the requisite majority.
40. S.393 provides that the notice calling for the meeting of members or creditors
as under S.391 must also have a statement attached to it which shall state the
following-
(a) The terms of the compromise or arrangement
(b) Its effect
(c) Any material interests of any manager or director or MD in the capacity of
a member or creditor or otherwise
(d) The effect of such compromise/arrangement on such interest
(e) Where the rights of debenture holders are affected, information as regards
trustees for the deed for securing the issue of debentures (debenture
trustees)

41. The notice where given by way of an advertisement may even contain a
statement giving the details of the place from where and the time at which the
abovementioned statement may be obtained.
42. Where any member or creditor approaches such place to obtain the statement
within the time provided, he shall be given a copy of the statement, free of
cost.
43. Every director, manager, MD or debenture trustee shall give notice to the
company as regards matters relating to themselves and as are necessary for the
purposes of this provision. If they do not do so, they shall be liable to a fine of
upto Rs.5000.
44. Full disclosure is a matter of public policy and such disclosure may be
excused only where it is of a de minimis nature. The court may even
refuse to sanction a scheme where full disclosure is not made.
 61

45. The company shall also be intimated about the changes in interest from
the time of sending out the explanatory statement by the director or other
person till the time the class meetings are actually held.
46. The onus of showing that such change in interest shall not affect the
scheme shall be on the director or such other person making the
disclosure.
47. Where any default is made as regards complying with the provisions of this
section, every officer of the company (which includes a debenture trustee and
a liquidator) shall be liable for a fine upto Rs.50, 000 except where they show
that such default is caused as any manager or MD or director or debenture
trustee failed to disclose his material interest as regards the scheme. (General
penalty)
48. The notice for the meeting must also state the place for the meeting.
49. Where two amalgamating companies fall under the jurisdiction of
different High Courts, it is not necessary that they approach the same
court.
50. In fact where two amalgamating companies are situated within the
jurisdiction of different High Courts, it becomes necessary for both courts
to sanction the scheme so that there is no conflict.
51. The reconstruction or amalgamation of a company may take place by way of
sale of its undertaking or by sale of its shares or by a scheme of arrangement.
52. S.394 deals with instances where under a scheme of amalgamation or
reconstruction, the whole or part of the undertaking of a company, its property
and liabilities are being transferred to another company.
53. In such circumstances, the court alongwith sanctioning the scheme may also
make an order in respect of the following matters-
(a) That the whole or part of the undertaking of the transferor company, its
property and liabilities be transferred to the transferee company
(b) That the transferee company allot any shares, debentures, policies or other
similar interests to any person
(c) That the transferee company proceed with any legal proceedings instituted
by or against the transferor company
(d) It may even order the dissolution of the transferor company without
winding up
(e) It may make provision for any person dissenting to such scheme
(f) It may make any other order as regards matters that are incidental or
ancillary to the scheme

53. However, before sanctioning such a scheme where a company is being wound
up, the court shall receive a report from the Registrar or the Company Law
Board stating that the affairs of the company are not being conducted in a
manner that are prejudicial to the interests of the company.
54. In Union of India v. Ambalal Sarabhai Industries Ltd., it was upheld that the
court may not sanction the scheme for amalgamation where it is prejudicial to
public interest.
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55. In Oceanic Steam Navigation Company Ltd.’s case, it was upheld that a court
cannot sanction a scheme of amalgamation where it is ultra vires the
memorandum.
56. Similarly, the Calcutta High Court upheld in Harikrishan Lohia v.
Hoolungooree Tea Co. and in the case of United India Credit Co. Ltd., that the
court does not have the power to sanction an arrangement when the company
does not have the power to do so under the objects clause. The same was
upheld by the Bombay High Court in the case of Sir Mathrudas Vesanji
Foundation.
57. According to the courts, the power is vested in the courts by way of
statute and need not be derived from the object clause of the
memorandum. (??)
58. Where an order has been made for dissolution of the company, the scheme
shall not be sanctioned by the court, unless it receives a report from the
Official Liquidator that the affairs of the company are not being carried on in
a manner prejudicial to its interests.
59. Where an order under this provision provides for transfer of the property of
the company, such property shall be transferred to the transferor company.
Sometimes, the court may even free such property of any charge by way of the
scheme.
60. Where an order is passed under this provision, the companies with respect to
which such order is passed shall submit to the Registrar within 30 days, a
certified copy of the order. Where there is a contravention of this requirement,
a fine of Rs.500 shall be levied on every officer in default.
61. Property as under this section includes all the powers, rights and property of
every description and liabilities include every kind of duty.
62. Further, the transferee company includes only a company within the meaning
of the Act. However, the transferor company includes any body corporate
within the meaning of this Act.
63. Thus, a transferee company cannot be a foreign company as a foreign
company is not included within the definition of a company within the
meaning of the Act.
64. Interveners who are not creditors or shareholders of the transferee company
have no locus standi to be heard on the petition of such transferee company.
65. The creditors and shareholders of the transferor company may agitate on the
application of the transferor company.
66. No modification of the scheme submitted by the transferee company can
be done on the behest of the transferor company.
67. The power to amalgamate is a statutory power and it cannot be refused on the
grounds that the transferor and transferee company are in dissimilar business.
68. Legal proceedings being continued as regards the transferor company may
even be continued as regards the transferee company.
69. The material on the basis on which the valuation of the shares has been
arrived at in such case shall be placed before the court and shall also be
brought to the notice of shareholders.
 63

70. In re Bihari Mills Ltd. and CWT v. Mahadeo Jalan, it was upheld that the
following shall be taken into consideration while fixing the share valuation-
(a) The stock exchange prices of the shares of the 2 companies before
announcement of the bid or commencement of negotiations
(b) The dividend paid by the 2 companies
(c) The cover for such dividend of the 2 companies
(d) The growth prospects of the 2 companies
(e) The value of the net assets of the 2 companies
(f) The strength of the voting in the merged enterprise of the shareholders of
the 2 companies
(g) The past history of share prices of the 2 companies

71. Where there is an objection to such valuation, the court shall not interfere
unless the person who makes such an objection satisfies the court that the
valuation is grossly unfair.
72. The tribunal/court shall notify the Central government as regards all
applications under Ss.391 to 394 and shall consider the representations made
by the government while sanctioning any scheme. (S.394A)
73. Reconstruction or amalgamation by way of sale of shares of one company by
another does not require intervention by the court. It depends on a contract
between the transferor and transferee company.
74. Where certain shareholders dissent, S.395 provides for compulsory acquisition
by the transferee company of the shares of such minority shareholders on the
same terms as that of the majority shareholders.
75. S.395 provides that where an offer is made to acquire the shares of the
transferor company by the transferee company and within 4 months from the
date of the offer the transferee company has acquired 9/10th of the shares it
had offered to acquire, and this does not include the shares held on the date of
the offer by the transferee company or its nominee or subsidiary, it shall
within 2 months from the date of expiry of such 4 months give a notice to the
dissenting shareholder(s) that it wishes to acquire its shares.
76. The transferor company in such case shall when the notice is given acquire the
shares of the dissenting shareholder, unless the dissenting shareholder has
within 1 month from the date of the notice made an application to the
tribunal/court and the tribunal/court thinks fit otherwise.
77. Where the transferee company has given a notice and the dissenting
shareholder has not filed an application with the tribunal/court and the
tribunal/court has not decided otherwise within the period of 1 month or
where the dissenting shareholder has made an application and the same is
pending, and such application is disposed off, the transferee company shall
give to the transferor company the following-
(a) A copy of the notice sent
(b) An instrument executed on behalf of the dissenting shareholder by the
transferee company between such shareholder and the transferee company
for the acquisition of his shares. Such an instrument shall not be required
for a share whose share warrant is outstanding.
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(c) The transferee company shall also deposit the amount payable as
consideration for the shares acquired

78. Thereafter, the transferor company shall register the transferee company as
being the holder of such shares and within one month from the date of
registration, send a notice regarding the same to the dissenting shareholders as
well as the amount payable to them.
79. The acquisition shall be on such terms as have been specified in the same
contract or scheme as has been entered into with the approving shareholders.
80. Where the transferee company already holds more than 1/10th in value of a
class of shares in the transferor company, the abovementioned provisions
(points 75, 76, 77) shall not apply.
81. Where in pursuance to a scheme or contract, the transferee company or its
nominee acquires certain shares or class of shares of the transferor company
which together with the shares or class of shares held by the transferee
company in the transferor company previously form 9/10th of such shares, the
transferee company shall give a notice to the remaining shareholders within 1
months from the date of transfer, who have not assented to the scheme.
82. Any such dissenting shareholder may within 3 months require that the
transferee company acquire the shares held by him. Thereafter, the shares
shall be acquired at the same terms as that decided for the approving
shareholders or on such other terms as the court may order on application by
the dissenting shareholder or the transferee company.
83. In re Brooke Bond Lipton India Ltd., it was stated that the stake of the
objectors is very small and the interests of the majority shareholders must be
taken into consideration.
84. The consideration payable under this section shall be held in a separate bank
account and the company shall hold the same in trust for the shareholders who
are entitled to such consideration.
85. Every offer made or every circular containing the offer or every
recommendation to accept the offer by the directors to the members shall be
accompanied by such information as may be prescribed by the Central
government.
86. The transferee company shall also state the steps it has taken to ensure that the
necessary cash to be paid as consideration will be made available.
87. However, no circular containing a recommendation to accept the offer shall be
effective unless it is registered with the Registrar.
88. The Registrar may refuse to register the same where it is of the opinion that
necessary information as prescribed by the Central government has not been
mentioned or that the information mentioned in the circular is likely to give a
false impression. However, an appeal shall lie against such order of the
registrar to the court.
89. Where any person issues a circular which has not been registered, he shall be
liable to a fine upto Rs.500.
90. The acquisition of shares under S.395 does not imply dissolution of the
transferor company.
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91. Where the transferor company is taken over under this provision, its name
may be struck off under S.560.
92. However, till then the two companies shall function as holding and subsidiary
companies.
93. A voluntary winding up petition may be filed as well.
94. S.396 states that the Central government where it is of the opinion that two
companies should amalgamate, it may pass an order as regards the same,
irrespective of the provisions of Ss.394 and 395. Such order shall be notified
in the Official Gazette.
95. Every creditor or member of the two companies shall have the same rights and
interests in the amalgamated company, as far as possible. Where they do not
have such rights, they shall be paid adequate amount of compensation for the
same by the amalgamated company.
96. Where the creditor or member is of the opinion that such assessment is
incorrect, he may appeal to the court which shall look into the matter. Such
appeal must be made within 30 days from the date of publication of the
assessment in the Official Gazette.
97. The books and papers of the company which has been amalgamated with or
whose shares have been acquired (as under the entire chapter) shall not be
disposed off without the prior permission of the Central government.

Unit VI Winding Up

6.1. Modes of winding up

1. A company may be put to an end by 2 ways-

(a) By winding up
(b) By striking the name of the company from the Register by the Registrar
where it is a defunct company under S.560. A defunct company is one
which is not in operation or is not doing business.

2. S.425 provides that winding up may either be done by the court (section
mentions tribunal/NCLT- slides mention tribunal as well) or there may be a
voluntary winding up of the company.
3. Prior to the amendment in 2002, there was a third method by which a
company could be wound up which was under the supervision of the court.
4. A winding up order cannot be rescinded once it becomes final.
5. S.583 provides for the winding up of an unregistered company subject to the
provisions relating to winding up under the Act where it has ceased to carry on
its business or where it is unable to pay its debts or where the tribunal deems it
just and equitable to do so.
6. S.584 provides that where a foreign company carrying on business in India
ceases to carry on such business, it may be wound up as an unregistered
company irrespective of the fact that the company has been dissolved under
the laws of the country in which it was incorporated.
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7. With respect to banking companies, Parts III and IIIA of the Banking
Regulation Act will apply. The Companies Act shall apply only upto the extent
it does not conflict with the provisions of the Banking Regulation Act.
8. S.426 deals with liabilities of past and present members to the assets of the
company as contributories for the purpose of the debts and liabilities of the
company as well as the costs and expenses of the winding up. This shall be
subject to the following-
(a) A past member cannot be made liable where he ceases to be a member at
least a year before the winding up
(b) A past member cannot be made liable for debts and liabilities incurred
after he ceases to be a member
(c) A past member can be made liable only where it appears to the court
(tribunal as per the section) that the present members are unable to pay the
amount required
(d) Where a company is limited by shares, the past and present members shall
be liable to pay only such amount as remains unpaid by them on any
shares
(e) Where a company is limited by guarantee, the past and present members
shall be liable to pay such amounts as were undertaken by them to pay in
case the company was wound up and also such amounts as remain unpaid
by them on their shares as if the company was limited by shares
(f) Where a member is entitled to receive payments from the company in the
form of any dividend, etc., the same shall not be deemed to be a debt owed
by the company to the member where a claim has been made in that regard
by a creditor of the company, who does not act in the capacity of a
member of the company
(g) Such amount mentioned in (f) and due to the member however shall be
taken into account during the final adjustment of the rights of the
contributories

9. Before winding up, liabilities are measured by way of contractual obligation.

After winding up, shareholders become contributories as has been seen under
S.426.
10. In Re Laxmi Flour Mills, it was held that only members are regarded as being
contributories.
11. Where a person procures allotment of shares in favour of a minor, he shall be
made a contributory himself.
12. In case of a benamidar who holds the share, he will have to contribute
initially. However, he may later recover from the beneficial owner.
13. Liability to pay an interest on the call money may also arise from the date
fixed for payment of such call, once the call has been made by the liquidator.
14. Liability under S.426 is not affected by the status of previous calls. It remains
effective even where previous calls have become time barred.
15. The liquidator gets a fresh period of limitation from the date of his
appointment.
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16. The liability of a past member under this provision is the same whether he has
parted with the shares by transfer or by forfeiture.
17. S.41 defines a member as including subscribers to the memorandum of the
company, any person who agrees in writing to be a member and such persons
holding equity share capital of the company.
18. Courts are generally reluctant to order rectification of the register of members
on the commencement of winding up.
19. In Lakshmi R Naressa Reddy v. Official Receiver, Shree Films Ltd., the
person knew that his name was written wrongly in the register and stayed
silent for 3 years. He took no action till he received a notice from the Official
Liquidator. The case was dismissed on the basis of the doctrine of holding out.
20. The facts- entered in registered on the basis of insufficiency of funds or
membership on the basis of an allotment which could have been avoided
for misrepresentation in prospectus, etc- no ground (???)
21. S.428 defines a contributory as any person liable to contribute when a
company is being wound up and includes a shareholder who holds fully paid
up shares and such person who may be alleged to be a contributory.
22. S.429 states that the liability of a contributory shall create a debt accruing at
the time when his liability commenced. But, it shall be recoverable/payable as
per the time specified in the calls made on him which enforce the liability.
23. Thus, the liability of a shareholder is a statutory debt.
24. S.430 states that where a person dies before or after he was included in the list
of contributories, his legal representatives shall be liable to pay such debt.
However, such payment shall depend on the property of the deceased coming
into the hands of the legal representative.
25. In case there is a default on the part of the legal representatives, the estate of
the deceased may be administered.
26. S.432 provides that where a body corporate which is a contributory is being
wound up, such body corporate shall be represented by the Official Liquidator
who shall pay the amount on the calls already made and future calls from the
assets of the body corporate.

6.2. Winding up by the court

Note: The provision mentions ‘tribunal’ and not ‘court’. However, as the tribunal/NCLT
is not in existence, the term court shall be used.

1. Under S.433, a company may be wound up by the court under the following
circumstances-
(a) A special resolution is passed by the company in this regard
(b) The company fails to send the statutory report to the registrar or fails to
hold a statutory meeting- this is not applicable to a private company as
such company is not required to file a statutory report
(c) The company does not commence business within a year from the date of
incorporation or suspends business for a period of one year.- A winding up
in such cases must be resorted to only where is a clear indication that there
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is no intention of carrying on business and delay or suspension is not

accounted for. (Registrar of Companies v. Jaipur Stock Exchange)
(d) The company is unable to pay its debts
(e) The number of members of a company is reduced below 7 in case of a
public company and below 2 in case of a private company
(f) The company fails to file with the registrar, its balance sheet, profit and
loss account and annual returns for five consecutive years
(g) The court is of the opinion that it is just and equitable that the company be
wound up
(h) The court is of the opinion that the company should be wound up as per
the provisions of S.424G which deals with sick industrial companies
(i) The company has acted against the interests of the sovereignty and
integrity of India, the security of the state, friendly relations with foreign
nations, public order, morality and decency.

2. S.433 empowers the court to pass an order for winding up but does not give a
right to seek an order that the company be wound up.
3. However, the right to file a petition as regards the same is a statutory right and
shall not be taken away by way of the articles of the company.
4. A company may present a petition on its own for winding up showing any of
the reasons as specified in S.433.
5. In State of Madras v. Madras Electric Tramways Ltd., it was held that a
special resolution shall be required only in case of clause (a) of S.433.
6. In Swadeshi Mills of Ahmedbad v. Dye-Chem Corp, it was upheld that a
company will not be wound up merely because it is unable to repay its debts,
especially where there is a scheme for revival.
7. As regards clause (c), discontinuation of any one of many businesses does not
mean suspension. Suspension must thus be of the entire business and not of a
part of it.
8. Even where the work is suspended, it shall be open to the court to look into
whether it is possible for the company to continue business.
9. A winding up shall not be ordered where it is seen that the business started
abroad and an intention to continue the same in India was shown.
10. In Re Eastern Telegraph, it was held that where a company ceases to do
business but is the holding company of such subsidiaries as are doing the
same business as the company was doing, it will not be said that it has
suspended its business.
11. In Registrar of Companies v. Bihar Wire and Wire Products, the following
principles were laid down-
(a) The mere fact that the business has not been commenced or has been
suspended must not lead to winding up of the company
(b) What needs to be seen is whether there is a sufficient reason not to
commence or suspend the business
(c) The suspension of business is an indicator of the fact that there is no
intention to continue the business
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(d) It needs to be seen as to whether the substratum of the company has

disappeared
(e) The wish of the majority shareholders must be taken into account

12. In Haven Gold Mining Company, the company was wound up as the mine for
which the company was formed was not found.
13. In German Date Coffee Company, the company was wound up as the patent
which the company was to work was not granted.
14. In Diamond Fuel Company, the company was wound up as the bulk of its
property was sold and its liquidity and capital had been exhausted.
15. In Ramesh G Bhatia v. Gopala Gases Pvt. Ltd., the company was wound up as
it could not carry on business due to a deadlock in the management and there
were no prospects for revival.
16. A default in payment of debts would include a situation where there is a
default in payment of price for goods supplied and a petition filed in this
regard shall be fit for admission and shall not be an abuse of the process.
17. Where a dividend is declared, it is treated as a debt. Thus, a shareholder may
file a petition where it is not paid.
18. In Janbazar Manna Estate Ltd., it was held that a company may be wound up
where a debt became due before incorporation and one of the objects of the
company was to repay such date.
19. In Coimbatore Transport Ltd. v. Governor General in Council, it was held that
the Government may ask for compulsory winding up of a company where a
large amount has not been paid by the company by way of income tax.
20. In Amalgamated Commercial Traders Pvt. Ltd. v. Krishnaswami, and UCO
Bank v. Jagatia Paper Mills Pvt. Ltd., it was held that winding up cannot be
used for realisation of debts from a company.
21. In Trilokchand Jain v. Swastika Strips Pvt. Ltd., it was held that the incapacity
to pay debts by the company should be proved by the creditor.
22. The failure on the part of the company to pay the creditor or secure or
compound his claim would result in the presumption of insolvency against the
company.
23. In Arvind Investment Consultant v. Presto Finance, it was held that the
company must be wound up as not only had it not paid its debts, but it also did
not have the capacity to do so. All cheques had bounced due to insufficiency
of funds. Further, the stock exchange had taken steps against the company and
had warned the public against the company.
24. Where a debt is bonafidely disputed by the company and the court is satisfied
by the company’s defence, it shall not order a winding up.
25. Further, the court does not wind up a potentially growing company.
26. In case of debts, notice demanding payment should have been made and
should have been submitted at the registered office of the company.
27. Advertisement of winding up is required as it enables the creditors to attend
the court proceedings and bring to the notice of the court, any material facts
which shall help in determining whether or not the order should be passed.
28. It also warns the public as regards a petition being presented.
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29. In Pawan Kumar Kullar v. Kaushal Leather Board Ltd., it was held that where
the salary of an employee has not been paid, it shall not be taken to mean a
debt. Salary is considered to be remuneration.
30. However, the contrary was held by the Andhra Pradesh High Court in Captain
BS Damagary v. VIF Airways Ltd., where it was held that even salary is
recoverable as debt. This was also upheld in French Times Industries Ltd.
31. Where the liabilities of a company exceed its assets, it shall not be deemed to
be unable to pay its debts.
32. In G Claridge and Co. Ltd. v. Nav Bharat Investments Ltd., it was held that a
company shall be wound up where it admits to its liability but refuses to pay,
irrespective of its solvency.
33. Where the court wishes to wind up a company for just and equitable reasons,
it must ensure that not only is such winding up equitable but also that there is
no other alternative remedy.
34. This measure should be rarely resorted to as generally the company should be
left to itself and a decision should be taken by a majority.
35. Under S.439, the following persons may file a petition for winding up before
the court-
(a) The company
(b) The creditor(s), which includes the prospective and contingent creditors
(c) The contributory or contributories
(d) Collectively by persons mentioned in (a),(b) and (c)
(e) The Registrar
(f) By any person authorized by the Central Government in this regard where
the company has to be wound up because of oppression or
mismanagement
(g) Where the company has to be wound up as its acts are against the
sovereignty and integrity of India, security of the state, friendly relations
with foreign states, morality, decency and public order, by the Central
Government or State Government

36. The leave of the court shall be taken where a winding up petition is to be filed
by a prospective or contingent creditor (Slides: where petition is to be filed
by any person) and the same shall not be granted unless the court is of the
opinion that a prima facie case has been made and until such security for the
costs has been furnished as required by the court.
37. It is necessary for preserving the limited assets of the company in the best
way. ???
38. Under S.439A, a company is required to file alongwith the petition for
winding up, a statement of its affairs with the court. Such statement shall be
filed even where the company opposes a petition for its winding up.
39. The statement shall contain the following details-
(a) Last known addresses of all directors and the CS
(b) Details of all creditors and debtors and their addresses
(c) Location and value of the assets of the company
(d) Details of workmen and employees and any payment outstanding to them
 71

(e) Any other detail as may be required by the court

40. In case of rehabilitation or revival or protection of assets of a sick industrial

company, a cess of not less than 0.005% and not more than 0.1% shall be
levied on every company on the value of the annual turnover or the gross
annual receipts, whichever is higher and as decided by the Central
Government. (S.441A)
41. Such amount shall be payable to the Central Government within 3 months of
the close of the financial year.
42. This amount forms part of the Consolidated Fund of India. (S.441B)
43. Where the court passes an order for winding up, an Official Liquidator must
be appointed from a panel of professional firms of CA, advocates, CS, ICWA
or a firm having a combination of such persons which shall be constituted by
the Central Government.
44. The Official Liquidator shall be a part time or whole time officer who has
been approved by the central government.
45. The Official Liquidator shall conduct the winding up and perform such other
functions as may be imposed by the court.
46. The court may also appoint a provisional liquidator before the winding up
order is passed and before the company makes its representations.
47. The proceedings must be conducted in camera to protect the reputation of the
company.
48. A statement of the affairs of the company shall be submitted to the Official
Liquidator within 21 days from the date of the order or where the official
liquidator has been appointed as the provisional liquidator from the date of
such appointment. However, such time period cannot be extended to beyond
three months from the date where the Official Liquidator or the court may
allow under special circumstances.
49. The statement of affairs must state the following-
(a) The assets of the company including the cash in hand, in banks or cash
held by way of any negotiable instrument
(b) Debts and liabilities of the company
(c) Names, residences and occupations of the creditors and any securities with
respect to secured debts
(d) Names, residences and occupations of debtors and the debts owed by them
(e) Any other information as may be required by the Official Liquidator

50. The statement shall be verified by a director or manager or secretary or other

chief officer of the company or by such other person as the Official Liquidator
may require for verifying the statement as per the directions of the tribunal.
51. Where a winding up order has been passed, the Official Liquidator shall make
a report as soon as possible to the court. Such report must be made within a
maximum period of 6 months from the date of the order or within such
extended period as may be specified by the court.
52. The report shall consist of the following particulars-
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(a) The amount of issued, subscribed and paid up capital of the company and
the amount of assets and liabilities of the company
(b) Where the company has failed, the causes for such failure
(c) Whether any further enquiry is required into the promotion or formation or
failure of the company or into the conduct of its business

53. The Official Liquidator may also make further reports as regards the
formation or promotion of the company or as regards any fraud committed in
relation to its formation or promotion or by any officer of the company after
its formation.
54. Where a winding up order is made, the Official Liquidator or the provisional
liquidator shall take into his custody and under his control, the property,
effects and any actionable claims to which the company is entitled or appears
to be entitled.
55. The court shall have the following powers on hearing the winding up petition-
(a) Dismiss it with or without costs
(b) Adjourn the hearing conditionally or unconditionally
(c) Make any interim order as it deems fit
(d) Make an order for winding up of the company, with or without costs
(e) Make any other order as it deems fit

56. The consequences of a winding up order are as follows-

(a) Intimation of the order is sent to the Official Liquidator
(b) A copy of the order must be sent by the petitioner and the company within
30 days from the date of the order to the Registrar. Where there is any
default in complying with the same, a penalty of Rs.1000 shall be levied.
(c) The Registrar shall make a minute of the order in his books relating to the
company and issue a notification in the Official Gazette that such an order
has been passed.
(d) The order shall lead to discharge of all officers and employees of the
company except where the business of the company is carried on for
beneficial winding up.
(e) The order shall lead to stay of all actions and suits against the company
except where an appeal has been made to the Supreme Court or the High
Court. However, the court may grant leave to continue or commence
proceedings.

57. A suit or proceeding pending in any other court shall be transferred to the
court where the winding up of the company is proceeding. (S.466)
58. In Official Liquidator v. Dharti Dhan, it was held that a stay order is not
mandatory and may not be granted if the object of the same is to delay
adjudication and due to which justice is defeated.
59. The order for winding up operates in the interests of all creditors and
contributories no matter who asked for it. (S.447)
60. On commencement of winding up, the limitation remains suspended in favour
of the company till one year after the winding up order is made.
 73

61. Any disposition of property or attachment or sale made during this period
without the leave of the court shall be void.
62. S.464 provides for the appointment of a committee of inspection who shall
assist the liquidator in the winding up.
63. Where the court makes an order in this regard, the liquidator shall within 2
months from the date of the order convene a meeting of creditors to decide the
members of the committee.
64. Within 14 days of such meeting, the liquidator shall convene a meeting of
contributories to confirm the appointments made in the creditors’ meeting.
65. Except where the meeting of contributories accepts the composition of the
committee as proposed by the creditors’ meeting, the liquidator shall seek
directions from the court as regards the composition of the committee.
66. The total number of members of the committee shall not exceed 12 and shall
consist of creditors and contributories or attorneys of such persons, in such
proportion as may have been decided by the creditors’ and the contributories’
meetings.
67. The quorum of the meeting shall be fixed at 1/3rd members or 2, whichever is
higher.
68. The committee shall have the right to inspect the accounts of the liquidator at
all reasonable times.
69. They shall act by way of a majority but not without the required quorum.
70. A vacancy may be created in the committee in the following manner-
(a) By resignation of a member by giving a notice in writing to the liquidator
(b) If a member is adjudged an insolvent or compounds or arranges with his
creditors
(c) If a member fails to attend five consecutive meetings without the leave of
the members
(d) Where a member is removed by a meeting of creditors or contributories,
as the case may be, by giving a notice of 7 days

71. Where a vacancy is created, the liquidator shall again call for a meeting of
creditors or contributories, as the case may be for filling up such vacancy.
72. The liquidator may even recommend to the court that the vacancy need not be
filled. In such a situation, the court may make an order that such vacancy need
not be filled or that it may be filled in such circumstances as are specified in
the order.
73. The continuing members, where they are not less than 2 may act even when
there is a vacancy.
74. Does the board become defunctus officio when the company is ordered to be
wound up?

General Powers of the Court:

1. S.466 provides that the court may stay a winding up where after it passes an
order for winding up, an application for stay is made by the Official
 74

Liquidator or creditor or contributory. It must also be proved to the

satisfaction of the court that all the proceedings must be stayed.
2. Where an application is made under this provision to the court, it may require
the Official Liquidator to furnish a report of the facts and matters as it feels
are relevant to the application.
3. A copy of the order made shall be submitted to the Registrar who shall make a
minute of the same in his books.
4. In VB Purohit v. Gadag and Janbukeshwara and Official Liquidator, it was
held that the court may exercise such powers even where there is a voluntary
winding up.
5. In the case of National Transport and General Co. Pvt. Ltd., it was held that
generally the court orders a stay so that the company may come up with a
scheme of reconstruction or amalgamation or arrangement.
6. In KD Maheshwari v. Titagarh Plc, it was held that the winding up of a
company may be stayed on showing the credit worthiness of the company.
7. However, staying of the proceedings will not affect other pending suits.
(Central Bank of India v. Atlas Works Pvt. Ltd.)
8. Under S.467, the court shall have the power to settle the list of contributories
that shall be liable to contribute. The court may even rectify the register of
members where necessary.
9. While settling such list, the court shall distinguish between contributories in
their own right and contributories on behalf of others or those who are liable
for the debts of others.
10. The court may under S.468 require any contributory or trustee or receiver or
banker or agent or officer or other agent of the company to deliver any
property, money, books, papers in his custody to the Official Liquidator to
which the company is prima facie entitled.
11. This is so that there is quick allocation of the company’s assets without any
expensive and dilatory litigation.
12. Under S.479, where the court either before or after making an order for
winding up is of the opinion that a contributory is likely to leave India or to
abscond or conceal his property to evade any calls that may be made later on
him, the court may order that such person be arrested and kept safely till such
time as it may order. The court may even order that the books, papers and
movable property of such person be kept safely.
13. S.469 provides for the right of set off to be allowed by the court in the
following cases-
(a) In case of an unlimited company, a contributory may set off his debt
against any money due to him from the company on any independent
dealing or contract with the company. But, this is not allowed as regards
money due to him by way of any dividend or other profit payable.
(b) In case of a limited company, a director with unlimited liability shall have
the same right as mentioned in (a).
(c) Where there is a limited or unlimited company in which all the creditors
have been paid in full, any money due to any contributory may be payable
by way of set off against any subsequent call.
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1. The court also has the power to institute any proceedings against a
contributory or debtor of the company.
2. It also has the power to make calls.
3. It has the power to publicly examine any promoters or directors.
4. It has the power to order the money to be deposited with the RBI rather than
the Official Liquidator.
5. It has the power to adjust the claims of the contributories.

6.3. Voluntary winding up

1. Voluntary winding up is where a company is wound up by agreement between

the members and the creditors, without interference of the court. However, the
directions of the court may be taken when necessary.
2. A voluntary winding up may be carried out under S.484 by passing an
ordinary resolution where the time for which the company was created, the
same being mentioned in the articles has expired or where the event which is
mentioned in the article as one on whose occurrence the company shall be
wound up has occurred.
3. A special resolution may also help in voluntary winding up of the company.
No special reasons need to be given for the same.
4. The special resolution is a statutory requirement and cannot be invalidated by
way of the articles.
5. The winding up shall be deemed to have commenced when the resolution is
passed.
6. Once such a resolution is passed, within 14 days from the date of passing, the
company shall notify the same in the Official Gazette and shall cause an
advertisement to be published in a newspaper circulated in the district where
the registered office of the company is located.
7. Where there is a default in complying with the abovementioned provision, a
fine of Rs.500 shall be levied for every day the default continues.
8. Where a company is voluntarily wound up, it shall cease to carry on all
business except where the same is required to secure a beneficial winding up
although the corporate status and corporate powers of the company shall
continue till dissolution.
9. Most of the powers of the Board and the MD shall cease when a liquidator is
appointed.
10. All transfers and alterations in the status of members after commencement of
a voluntary winding up shall be deemed to be void.
11. In Dharmesh Chandrakant Patel v. Official Liquidator, Suraj Co. Ltd., it was
held that where an agreement to sell land of the company has been entered
into before winding up and the same has not been enforced for a very long
time, the buyer does not have any preference when actually sale starts as part
of liquidation.
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12. A resolution for voluntary winding up operates as a discharge to all employees

except when the liquidation is only to bring about a reconstruction or where
the business is continued by the liquidator for the beneficial winding up of the
company.
13. Voluntary winding up may be carried on by the members or creditors.
14. S.488 provides that where a resolution for voluntary winding up is to be
passed, the directors shall within 5 weeks before the date of the resolution
make a declaration on affidavit that they have formed an opinion as regards
the affairs of the company and that the company has no debts or that such
debts, if any shall be paid within a period of 3 years from the commencement
of winding up.
15. The declaration shall be delivered to the Registrar for registration before the
date of the resolution.
16. It shall be accompanied by the auditor’s report on the profit and loss accounts
of the company for the period between the last time such accounts were made
and the present period.
17. A director who makes a declaration without any reasonable grounds that the
company shall pay its debts within the time period specified shall be
punishable with imprisonment upto 6 months or a fine of Rs.50, 000 or both.
(Slides: directors shall be personally liable to pay debts)
18. As per S.490, the company in a general meeting shall fix the liquidators for
the company and also specify the remuneration payable to them. Such
remuneration fixed cannot be increased at any time without the sanction of the
court.
19. S.491 provides that where a liquidator is appointed, the powers of the
directors, MD, any whole-time directors and manager shall cease except as
regards giving notice of such appointment to the Registrar.
20. Another exception to this rule is where continuance of the office of such
persons is consented to in a general meeting or by the liquidator.
21. Under S.494, where in the course of being wound up, the business or property
of the company is being transferred to another, the liquidator after being
sanctioned by the general meeting in this regard shall receive any
compensation payable in this regard.
22. In case of insolvency, it is the duty of the liquidator to call for a creditors’
meeting. He shall lay before such meeting, a statement of assets and liabilities
of the company. (S.495)
23. The liquidator also has the duty to inform the income tax officer.
24. Under S.496, where the winding up of the company extends beyond a year,
the liquidator shall be required to call a general meeting of the company every
year.
25. Once a company has been wound up, the liquidator shall prepare accounts of
such winding up and present the same before a final meeting of the company.
(S.497)
26. On dissolution, the liquidator also becomes functus officio.
27. Liquidation means determination of liabilities and apportionment of assets
towards discharging indebtedness.
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28. Winding up means to settle the accounts and liquidate the assets of partnership
or corporation for the purpose of making distribution and dissolving the
corporation.
29. Creditor’s voluntary winding up is carried out when the company is insolvent.
30. A meeting of the creditors needs to be called, the notice for which must be
advertised in the Official Gazette and two newspapers circulated in the district
where the company has its registered office or principal place of business.
31. The appointment of liquidator shall be made by the company and the creditors
at their respective meeting. Where they have different choices, the official
liquidator shall be such person as is chosen by the creditor.
32. There is a distinction between voluntary shareholders’ winding up and
creditor’s winding up. ???
33. S.529A and S.530 provide for the priority which shall be followed while
satisfying claims under a winding up as follows-
(a) All revenues, taxes, etc due to any government or local authority
(b) Workmen’s dues
(c) All holiday remuneration payable to an employee by virtue of the
termination of his office before or on winding up
(d) All amounts payable as contributions under the ESI Act during 12 months
before winding up
(e) All amounts payable as compensation under the Workmen’s
Compensation Act for death or disability of a workman
(f) Any provident fund amounts
(g) Expenses for investigations held in pursuance of S.235 or S.237
(h) Secured creditors
(i) Unsecured creditors
(j) Claims of shareholders

34. S.541 provides that where proper books of account of a company are not kept
for 2 years preceding the winding up or for the period between the
incorporation of the company and its winding up, whichever is shorter, every
officer in default, unless he shows that he acted honestly shall be punishable
with imprisonment which may extend to one year.
35. S.542 provides that where in the course of winding up, it is discovered that the
business of any company is being carried on with the intent to defraud
creditors or any other person or for fraudulent purposes, the court on the
application of the liquidator or Official liquidator or a creditor or contributory
may declare that the person who was knowingly party to such acts shall be
liable to pay all or any debts or liabilities of the company.
36. S.543 provides that where in the course of winding up, it is discovered that
any person responsible for the formation or promotion of the company or any
director, liquidator, manager or officer of the company is liable for any money
or property of the company or where such person is guilty of misfeasance or
breach of trust, the court may on the application of the liquidator or Official
liquidator or creditor or contributory order that such person repay or restore
the money or property with interest.
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6.4. Liquidator’s role in winding up

1. The liquidator shall conduct the proceedings of winding up.

2. The remuneration payable to a liquidator shall be fixed by the Central
Government where he is a whole-time or part-time officer appointed by the
Government. In all other cases, his remuneration shall be fixed by the court.
(Slides: Remuneration shall be fixed by the Central Government)
3. The acts of the liquidator shall be valid notwithstanding any defect that
may be later discovered in his appointment or qualification.
4. The liquidator shall perform the following functions with the sanction of the
court, except where the court specifies that it need not get the sanction of the
court or that the court will not interfere as regards such matters-
(a) To defend or prosecute any suit, proceeding, etc. on behalf of the company
(b) To carry on the business of the company in case of a beneficial winding up
(c) To sell the movable or immovable property or actionable claims of the
company by way of public auction or private contract to any person, either
in part or in whole
(d) To sell the undertaking of the company, either in part or in whole
(e) To raise money or securities from the company’s assets
(f) To appoint any lawyer to assist him as regards performance of his duties
before the court
(g) To compromise calls, debts or other present or pecuniary liabilities with
contributories or debtors
(h) To make payment to any class of creditors in full
(i) To do such other acts as may be required for the winding up

5. He may perform the following functions without the sanction of the court-
(a) To do all acts and execute in the name and on behalf of the company all
deeds, receipts and other documents and use the seal of the company
where necessary
(b) To inspect the records and returns of the company in the files of the
Registrar without payment of any fee
(c) To prove, rank and claim in the insolvency of any contributory for any
balance against the estate and to receive dividends in the insolvency
(d) To draw, accept or endorse any promissory note or bill of exchange or
hundi in the name of the company or in its behalf
(e) To take out, in his official capacity, letters of administration to any
deceased contributory and do any act in his official name to obtain any
payment due from a contributory in his estate which cannot be done in the
name of the company
(f) To appoint any agent to do such business as he is unable to do himself
(g) To appoint security guards to protect the property of the company
(h) To appoint a valuer or CA or Chartered surveyor to assess the value of the
company’s assets within 15 days after taking into custody, the assets of the
company, its property, etc
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(i) To give advertisements for bids for sale of its assets

Unit VII Indian Capital Market and SEBI

7.1. Growth of Securities market in India

7.2. Need for regulation
7.3. SEBI Act, 1992
7.4. Insider Trading Regulation

1. A capital market is a market for securities, debt or equity where business

enterprises and governments can raise long term funds. It is a market in which
money is provided for more than a year.
2. The capital market includes the stock market for equity securities and the
bond market for debt securities.
3. The money market is a component of the financial markets in which there
may be short term lending and borrowing of assets with original maturity of
one year or for a shorter time period.
4. Trading in the money market includes treasury bills, banker’s acceptances,
short lived mortgages, asset backed securities, federal funds, commercial
papers and certificates of deposit.
5. The regulatory authorities in various countries ensure that there is investor
protection in the securities market and there is no fraud. Some of such
regulators include the SEBI in India, the Securities Exchange Commission in
the United States and the Financial Services Authority in the UK.
6. Capital markets may either be primary markets or secondary markets.
7. Primary markets involve selling of new stock or bond to investors while the
secondary markets involve the selling and buying of existing securities among
investors, traders, etc. which are usually on a securities exchange and are over
the counter.
8. Before the SEBI, the Controller of Capital Issues used to be the designated
regulatory authority which derived authority from the Capital Issues (Control)
Act, 1947.
9. In those days, many factors restricted the expansion of equity trading.
10. Issue of fresh capital was controlled by the Capital Issues (Control) Act and
there was no transparency in trading. There were several issues of insider
trading.
11. The SEBI was originally established in 1988. However, it gained statutory
status as an apex regulatory authority after the passing of the SEBI Act in
1992.
12. The SEBI has to respond to the needs of the issuers of securities, the investors
and the market intermediaries in a securities market.
13. The SEBI makes regulations and thus works in a quasi-legislative capacity. It
also passes ruling and orders and thus acts in a quasi-judicial capacity. Further,
it conducts investigation and carries out enforcement action and thus has
quasi-executive functions.
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14. Securities has been defined under the Securities Contracts (Regulation) Act
under S.2 as including the following-
(a) Shares, scrips, stocks, bonds, debentures, debenture stock or other
marketable securities of an incorporated company or body corporate
(b) Derivative
(c) Any unit or instrument under a collective investment scheme issued to an
investor in such scheme
(d) Any unit or instrument issued to an investor under a mutual funds scheme
(e) Any security receipt under the SARFAESI Act
(f) Government securities
(g) Such other instrument as may be declared by the Central Government as
being a security
(h) Any interests and rights in such securities

15. The SEBI is a body corporate with common seal and having perpetual
succession. It may hold or dispose off property as per the provisions of the Act
and may sue and be sued in its name.
16. Its head office is in Mumbai.
17. The SEBI shall constitute of the following persons, who are to be appointed
by the Central Government-
(a) A chairman
(b) Two members from amongst officials of the Central Government dealing
with finance or administration of the Companies Act
(c) One member from amongst officials of the RBI
(d) Five other members, at least three of whom shall be whole-time members

18. The general superintendence and management of the affairs of the board rests
with the Board members who have the powers to do all acts that may be done
by the Board. Such power rests with the chairman as well, provided the same
is not restricted by any regulation.
19. The Central Government may remove a member on the following grounds-
(a) He is or at any time has been adjudged an insolvent
(b) He is found to be of unsound mind by a competent court
(c) He is convicted of an offence which according to the Central Government
involves moral turpitude
(d) He has abused his office in a manner that his continuation in such office
shall be detrimental to public interest

20. Further, where any member of the Board is a director of a company and has a
direct or indirect pecuniary interest in any matter that has come before the
board, he shall disclose the same before the board.
21. Such disclosure shall be recorded in the proceedings of the board and the
member shall not be permitted to participate in any deliberation or decision of
the board in such matters.
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22. The SEBI has the primary function of developing and regulating the securities
market and protecting investors, for which it may take up the following
measures (S.11)-
(a) Regulating the business in stock exchanges and other securities market
(b) Registering and regulating intermediaries like stock brokers, brokers,
merchant bankers, portfolio managers, bankers to an issue, underwriters,
etc.
(c) Registering and regulating intermediaries such as depositories, custodians
of securities, Foreign Institutional Investors (FIIs), etc.
(d) Registering and regulating the working of venture capital funds and other
collective investment schemes such as mutual fund schemes
(e) Promoting and regulating the working of self regulatory organisations
(f) Prohibiting fraud and unfair trade practices in the securities market
(g) Prohibition of insider trading
(h) Regulating the substantial acquisition of shares and takeover of companies
(i) Promoting investor education and training of intermediaries
(j) Calling for information from, conducting enquiries into the affairs of,
conducting audits for, etc. for intermediaries and self regulatory
organisations
(k) Calling for information and records from any bank or any other authority
established under any State or Provincial Act as regards a securities
transaction
(l) Performing any other function under the Securities Contracts (Regulation)
Act
(m)Levying fees or other charges for carrying out such functions

23. The SEBI also has the power to inspect any book or register or other
document or a record of any listed public company or any other public
company, which wishes to be listed on any recognised stock exchange, not
being an intermediary, where it has reason to believe that such company has
been indulging in practices of fraud or insider trading or unfair trade practices.
24. The SEBI may also pass an order after recording reasons, on the following
matters in the interests of the investors and the securities market where either
an investigation in a matter is pending or on completion of such investigation-
(a) That trading of a particular security in the market be suspended
(b) Prohibition on certain persons to access the securities market and
restraining certain persons from buying or selling or dealing with
securities
(c) Removal of an office bearer of any stock exchange or self regulatory
organisation
(d) Impounding and retaining the proceeds of any securities transaction which
is under investigation
(e) Attaching any bank account or account, the proceeds of which have been
involved in a transaction under investigation for a period not exceeding
one month where an order has been passed to that effect and an application
has been made to the Judicial Magistrate First Class for his approval
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(f) Direct any intermediary or any other person not to dispose off any asset
which is involved in a transaction under investigation

25. The SEBI has successfully and aggressively introduced reforms in the
securities market. It has increased the number of disclosures required to be
made by corporates.
26. As a result of the meltdown, it has liberalised the takeover code. In one such
move it has increased the application limit for retail investors to Rs.2 lakh
from Rs.1 lakh.
27. Some of the Committees of the SEBI include Technical Market Advisory
Committee, Takeover Regulations Advisory Committee, Primary Market
Advisory Committee, Secondary Market Advisory Committee, Mutual Fund
Advisory Committee, etc.